Filed pursuant to Rule 424(b)(3)
Registration No. 333-47051
FACTUAL DATA CORP.
We are offering 1,620,000 shares of our common stock to holders electing to
exercise warrants and options issued as part of our initial public offering in
May 1998. We will receive all the proceeds from this offering. The 1,380,000
warrants sold to the public in our offering are exercisable at $7.15 per share.
We issued an option to the underwriter of our initial public offering to
purchase 120,000 shares of our common stock for $7.04 per share and 120,000
warrants for $.128 per warrant. These warrants allow the underwriter to purchase
an additional 120,000 shares of our common stock for $9.15 per share. The
underwriter will receive all of the proceeds from the sale of these options and
warrants if they are sold rather than exercised by it. See "Selling
Securityholder."
Our common stock and public warrants trade on the Nasdaq National Market under
the symbols FDCC and FDCCW.
-------------------------
You should carefully consider the risk factors beginning on page 4 before
purchasing any of the securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-------------------------
The date of this prospectus is August 2, 1999
<PAGE>
ABOUT FACTUAL DATA CORP.
Factual Data Corp. is an information services provider to the mortgage and
consumer lending industries, employers, landlords, and other business customers
located throughout the United States. We specialize in preparing mortgage credit
reports (MCRs) that we format and customize for each mortgage lender's
requirements and then transmit to these lenders via modem, network or facsimile.
We market our services nationally through 44 combined locations, including our
own offices and through our franchisees and licensees. Our franchisees and
licensees are collectively referred to as system affiliates. We are implementing
a consolidation plan in the mortgage credit report industry.
Credit data provided directly from the three national major credit repositories,
Equifax, Inc., Experian, Inc., and TransUnion Corporation, are often
inconsistent, are not presented in a customized or consolidated format, and may
be relatively difficult to interpret. As such, our services are valuable to the
lending industry since MCR users can obtain credit reports from us which contain
verified credit information upon which such lenders can readily rely and users
can more easily interpret the credit data since we format and customize such
data.
With the expertise we have developed in mortgage credit reporting, we have
expanded our services to include employment screening services and tenant
screening services. Our MCR and other products and services are fully automated,
thereby allowing us to deliver our reports very quickly to our customers'
computers.
We were incorporated in Colorado in 1985. Our executive offices are located at
5200 Hahns Peak Drive, Loveland, Colorado 80538. Our telephone number is (970)
663-5700. We maintain a site on the World Wide Web at
HTTP://WWW.FACTUALDATA.COM. However, the information on our website is not part
of this prospectus.
- 1 -
<PAGE>
(in thousands, except per share data)
Statement of Income Data:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
---------------------- ---------------------
1997 1998 1998 1999
---------- --------- --------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue ..................... $ 3,520 $ 9,944 $ 1,585 $ 5,353
Operating expenses .......... 2,724 7,590 839 4,493
Net income .................. 503 1,577 464 509
Basic earnings per share .... .28 .59 .26 .14
Weighted average number of
shares outstanding--basic . 1,800 2,681 1,800 3,597
Diluted earnings per share .. .28 .57 .26 .13
Weighted average number of
shares outstanding--diluted 1,800 2,769 1,800 3,790
Other Statistical Data:(1)
Information services MCRs ... 1,432 2,800 639 848
Gross system billings ....... $31,318 $48,800 $11,317 $12,053
</TABLE>
Balance Sheet Data: December 31, 1998 March 31, 1999
----------------- --------------
(unaudited)
Working capital $ 1,786 $12,734
Total assets................. 18,177 34,611
Long term debt, including
current portion............. 3,798 5,033
Shareholders' equity......... 10,836 24,876
(1) Represents the aggregate number of MCRs generated through our system for
our own accounts, and for our system affiliates, and the gross system
billings by us and our system affiliates.
- 2 -
<PAGE>
Summary of the Offering
Securities offered by us....... 1,620,000 shares of common stock issuable
upon exercise of warrants and an option.
Warrants to purchase 1,380,000 shares are
held by the public and are exercisable at
$7.15 per share at any time prior to May
12, 2001.
Securities offered by a
selling securityholder (1)..... 120,000 options to purchase common stock at
$7.04 per share and 120,000 warrants to
purchase common stock at $9.15 per share,
both at any time prior to May 13, 2001.
Common stock outstanding ...... 5,463,897 shares.
Common stock to be outstanding if
all warrants exercised......... 7,083,897 shares.(2)
Warrant Terms:
Exercise price............... $7.15 per share.(3)
Expiration date.............. May 12, 2001
Redemption .................. We may redeem the warrants upon 30 days'
prior written notice at a price of $.05 per
warrant if the closing high bid price of
our common stock equals or exceeds $10.73
for 20 consecutive trading days immediately
preceding the date we mail a notice of
redemption.
Use of proceeds................ We will use the net proceeds from the
exercise of warrants, if any, for
acquisitions, general corporate purposes
and working capital. See "Use of Proceeds."
Nasdaq symbols
Common stock................. FDCC
Warrants..................... FDCCW
Risk factors................... Our securities involve a high degree of
risk and immediate dilution. Warrant
holders should carefully consider the
factors set forth under the captions "Risk
Factors" and "Dilution" before exercising
their warrants to purchase common stock.
- ------------------
(1) There is no trading market for the selling securityholder's options or
warrants and none is expected to develop.
(2) Assumes all warrants and the selling securityholder's options are
exercised.
(3) Options to purchase 120,000 shares and warrants to purchase 120,000 shares
held by the selling securityholder are exercisable at $7.04 and $9.15 per
share, respectively.
- 3 -
<PAGE>
RISK FACTORS
To inform investors of our future plans and objectives, this prospectus (and
other reports and statements issued by us and our officers from time to time)
contain certain statements concerning our future performance, intentions,
objectives, plans and expectations that are or may be deemed to be
"forward-looking statements." Our ability to do this has been fostered by the
Private Securities Litigation Reform Act of 1995, which provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information so long as those statements are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. Such risks and
uncertainties include but are not limited to the following:
A decrease in demand for mortgage credit reports will likely decrease our
earnings.
Our primary service is our mortgage credit report ("MCR"). The use of this
service is driven largely by consumer demand for credit for new home mortgages
and refinancings and, to a lesser extent, lenders' efforts to develop new, and
monitor existing, credit relationships. Consumer demand for mortgage credit
tends to vary due to interest rate fluctuations and general economic conditions.
We have found that MCR demand tends to increase during periods of economic
expansion or when interest rates are declining. Our expenses consist largely of
labor, repository and communication charges, and our ability to quickly control
these costs is critical if the demand for MCRs slackens. Also, our lack of
significant diversification in other services hinders our ability to withstand
the negative impact of a downturn in demand for MCRs.
Our consolidation plan includes operational and financial risks which may
negatively affect our earnings.
In mid-1998, we implemented a consolidation plan to acquire certain
of our system affiliates and competitors engaged in providing MCR
services that either complement or will expand our business. This
plan involves a number of risks including:
o ability to retain acquired customers
o diversion of management time
o use of our financial resources in reviewing acquisition
candidates
o operational assimilation of the acquired companies
o amortization charges of acquired intangible assets
There are over 30 system affiliates that have exclusive territory rights which
expire at various times through the year 2005. We cannot compete or license
others in those areas. We will be required to purchase a system affiliate, or
wait until the expiration of the applicable agreement with the system affiliate,
before expanding into, or acquiring a competitor in, the same territory. The
success of our consolidation plan, both long-term and short-term, remains
unknown.
- 4 -
<PAGE>
We may be unable to manage our recent and continued growth, which could
negatively affect our earnings.
Since mid-1998, we have made over 20 acquisitions and employees have grown from
about 37 to over 250. Our ability to manage these acquisitions, our new
employees and the increased business activity while continuing to make
additional acquisitions is critical to our success. Also critical in our
acquisitions is our ability to:
o attract and keep mid-level employees and other managers
o implement internal cost controls, operating policies and
procedures
o implement our sales and marketing techniques
We may not be successful in implementing our business strategy due to the
significant competition we face.
The MCR industry is highly fragmented. We believe there are approximately 1,400
competitors in the United States providing MCR services. We face both direct and
indirect competition for our services. There are large numbers of companies
engaged in the sale of one or more of the services we offer. 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. Several
large companies have far greater financial resources than we do, including
Equifax Credit Information Services, Inc., The First American Financial Corp.
and Trans Union Corporation. We face intense competition in MCR services from
these entities, and as to our other services, from companies engaged in
employment and tenant application verification activities.
Significant governmental regulation, privacy issues and other legal
considerations increase our operating costs.
Our business involves collecting consumer and business credit data and other
information and distributing this information to lenders and businesses making
credit and other decisions. Concerns about individual privacy and the
collection, distribution and use of information about individuals have led to
substantial governmental regulation of the credit reporting industry. The
industry is regulated under the federal Fair Credit Reporting Act and by
legislation in many states. The industry has recently been subject to increased
legislative attention. There can be no assurance that pending or additional
federal or state consumer-oriented legislation will not significantly limit
demand for, or increase the costs of, our services. Under general legal concepts
and, in some instances, under specific federal and state statutes, we could be
held liable to customers or to the subjects of credit reports prepared by us for
inaccurate information or misuse of information. No assurance can be given that
we can successfully defend any claims made against us, that insurance will cover
these claims or that uninsured losses from these claims might arise thereby
negatively impacting our operations and financial condition.
- 5 -
<PAGE>
We are dependent upon the services of our President and Chief Executive Officer.
We are highly dependent on the services of our President and Chief Executive
Officer, J.H. H. Donnan, who is subject to an employment agreement which expires
on July 1, 2000. To the extent that Mr. Donnan's services become unavailable, we
may not be able to promote existing personnel or employ qualified persons on
favorable terms. We own a $1 million Key Man term life insurance policy on the
life of Mr. Donnan.
Our reseller agreements can be cancelled on short notice and they expose us to
claims or liabilities from the use of inaccurate information.
We do not maintain our own consumer credit database. Instead, we obtain consumer
credit data from large, national credit repositories such as Experian, Inc.,
TransUnion Corporation and Equifax, Inc. under reseller agreements with these
entities. Generally, the reseller agreements are terminable without cause by
either party within a short period of time upon written notice. Also, the
agreements can be terminated if we were to use the information in violation of
the Fair Credit Reporting Act or other applicable laws, or in violation of the
reseller agreement. The reseller agreements typically do not provide any
warranties as to the accuracy or correctness of the information contained in the
databases maintained by credit repositories, and further provide that we will
hold the repositories harmless and indemnify them from claims or liabilities
arising from the use of inaccurate information contained in the databases.
Our success partly depends upon our ability to protect our technology from
misappropriation or infringement.
We rely on a combination of trademark, servicemark, copyright, trade secret and
contract protection to establish and protect our proprietary rights in our
services and technology. Because there is little in the design, development or
delivery of our services that is protectable under law, competitors can
replicate our services. We generally enter into confidentiality agreements with
customers and limit access to and distribution of our proprietary information.
These steps may not be adequate to deter misappropriation or infringement of our
proprietary technologies and costly litigation may ensue. Although we believe
that our intellectual property and technologies do not infringe any proprietary
rights of others, third parties may assert claims of infringement in the future.
- 6 -
<PAGE>
We may not be able to meet the automated level of performance required by some
of our larger customers.
Fannie Mae and Freddie Mac provide a secondary market for residential mortgages.
Both entities require that any mortgage purchased be supported by a credit
report on the mortgagee and be prepared by an entity, such as us, independent
from the lender. We are aware that these and other entities are increasingly
using automated credit reporting techniques that require credit report providers
to render almost instantaneous responses, often within 60 seconds or less. We
may not be able to continue to provide the level of performance required by
these or other large institutional lenders. Additionally, we may not be able to
match the level of technological service provided, or developed in the future,
by competitors.
A loss of operations in our data centers could negatively impact our earnings.
Our operations depend on our ability to protect our data centers against damage
from fire, power loss, telecommunications failure, natural disasters or similar
events. We moved into a new facility in Loveland, Colorado in April 1998, that
is outfitted with backup power and duplicate telecommunication facilities;
nonetheless, in the event we experience a natural disaster, hardware or software
malfunction or other interruption of our data centers operations, our business
could be hurt. Extended interruptions in our services could be particularly
detrimental, and our insurance may not be adequate to compensate us for
resulting losses that may occur.
We will bring our second data center on line in Denver, in July 1999. This data
center brings additional availability to our customers in the unlikely event of
a facilities disaster. The Denver data center has redundant cooling, power, and
telecom to protect itself. Additionally, the Denver data center has telecom
route diversity from the Loveland facility to further the redundancy.
Potentially, there could still be a natural disaster that would encompass both
the Denver data center as well as the Loveland data center. Additionally, if
Sprint would have a sufficiently large disaster within its systems, thiscould
adversely affect our ability to communicate with our customers and/or vendors.
If our computer systems, or the computer systems of our suppliers and customers
are not year 2000 compliant, our financial condition and business may be
adversely affected.
We face a serious business issue because many computer programs use only two
digits to identify a year in a date field. We have reviewed our products and key
financial operational systems, and where required, have developed plans to
ensure that our products and computer systems continue to function properly. If
we fail to develop the necessary plans for our computer systems to continue to
function properly, our business, financial condition and results of operations
may be seriously affected. The Year 2000 date issue could also negatively impact
our financial condition and business if our suppliers, customers and other
businesses fail to address this issue successfully.
- 7 -
<PAGE>
Impediments to takeover attempts and removal of directors may depress the price
of our common stock.
Our Articles of Incorporation and Bylaws contain provisions that may discourage
or make it more difficult for a third party to acquire us. These provisions
include:
o the ability of our Board of Directors to issue authorized but
unissued common and preferred stock without action by our
shareholders, although issuances are subject to approval by the
majority of our independent directors;
o the election of directors for three-year terms, with approximately
one-third of the Board of Directors standing for election each year;
o limitations on alteration of the staggered board provisions and the
ability of shareholders to remove directors; and
o the affirmative vote of the holders of at least two-thirds of our
capital stock entitled to vote to approve a merger, dissolution or
sale of all or substantially all of our assets.
We intend not to declare dividends.
We have not declared nor paid, and we intend not to declare or pay, any cash or
other dividends in the foreseeable future. Earnings, if any, will be retained to
finance our operations and growth.
Sales of outstanding shares may hurt our stock price.
The market price of our common stock could fall substantially if our
shareholders sell large amounts of our common stock. The possibility of such
sales in the public market may also hurt the market price of our securities.
Potential future sales of our common stock include the following:
o 1,912,451 shares which we have registered for resale in connection
with our $15.5 million private placements in March and April, 1999
o Warrants to purchase 55,641 shares of our common stock at $8.08 per
share issued to our placement agent in connection with the private
placements
o 351,116 shares which we have registered for resale in connection with
two of our acquisitions made in 1998
o 31,500 options outstanding as of May 31, 1999, subject to vesting
provisions, issued under our 1997 Stock Incentive Plan
- 8 -
<PAGE>
Exercise of outstanding warrants and options may dilute current shareholders.
The following warrants and options to purchase our common stock are outstanding:
o 1,380,000 warrants to purchase our common stock issued in our initial
public offering with an exercise price of $7.15 per share
o warrants and options to purchase 240,000 shares of our common stock
with an exercise price of $9.15 per share regarding 120,000 warrants
and $7.04 per share regarding 120,000 options, both issued to the
underwriter of our 1998 initial public offering
DILUTION
The net tangible book value of our common stock as of March 31, 1999 was
approximately $12,946,000, or $2.43 per share. Without taking into account any
other changes in tangible book value after March 31, 1999, except to give pro
forma effect to the exercise of 1,620,000 warrants, our pro forma net tangible
book value at March 31, 1999 would have been approximately $24,686,000 or $3.55
per share. This represents an immediate increase in net tangible book value of
$1.12 per share to existing holders of common stock and an immediate dilution of
$3.74 per share (51%) to purchasers of common stock who exercise warrants, as
illustrated in the following table:
Average weighted exercise price per share(1) $7.29
Net tangible book value per share
before any exercise.................. $2.43
Increase per share attributable to new purchasers 1.12
-----
Pro forma net tangible book value per share
assuming full exercise............... 3.55
-----
Dilution per share to new purchasers... $3.74
=====
Dilution as a percent of exercise price per share 51%
=====
- ------------------
(1) The exercise prices are:
o $7.15 for 1,380,000 public warrants issued in our initial public offering
o $7.04 for 120,000 options issued to the underwriter of our initial public
offering
o $9.15 for 120,000 warrants issued to the underwriter of our initial public
offering
USE OF PROCEEDS
If all warrants and options were exercised, we would receive about $11.7 million
net of legal, accounting, printing and other offering costs.
We intend to use any proceeds received from the exercise of our warrants and
options for acquisitions, general corporate purposes and working capital. See
"Business."
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<PAGE>
Pending the uses described above, we will invest the proceeds in short-term,
government, government guaranteed or investment grade securities.
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999. The
table should be read in conjunction with our Consolidated Financial Statements
and Notes thereto appearing elsewhere in this prospectus.
March 31,
1999
---------
(in
thousands)
Long-term debt, including current maturities $ 5,033
Shareholders' equity:
Preferred stock, 1,000,000 shares
authorized; none issued or outstanding -
Common stock, 10,000,000 shares
authorized; 5,327,729 shares issued and
outstanding(1) 22,146
Retained earnings 2,730
-------
Total shareholders' equity 24,876
-------
Total capitalization $29,909
=======
- ------------------
(1) Does not include up to:
o 31,500 shares of common stock issuable upon exercise of options
issued to employees and directors under our 1997 Stock Incentive Plan
which have an exercise prices ranging from $5.50 to $6.50 per share
o 1,675,641 shares of common stock issuable upon full exercise of other
all outstanding warrants and options at prices ranging from $7.04 to
$9.15 per share.
DIVIDEND POLICY
We have not paid any cash dividends on our common stock. It is our current
policy not to pay cash dividends on our common stock. Any payment of cash
dividends in the future will be dependent upon our financial condition, results
of operations, current and anticipated cash requirements, restrictions on the
payment of dividends under the terms of any future financing arrangements and
our plans for expansion, as well as other factors that our Board of Directors
deems relevant.
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<PAGE>
SELECTED FINANCIAL DATA
The following consolidated selected financial data should be read in conjunction
with our Consolidated Financial Statements and Notes thereto appearing elsewhere
in this prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The consolidated statements of income data
for the years ended December 31, 1997 and 1998 and the balance sheet data as of
December 31, 1998 are derived from our consolidated financial statements which
have been audited by Ehrhardt Keefe Steiner & Hottman PC, our independent
auditors, as indicated in their report included herein. The data as of and for
the three months ended March 31, 1998 and 1999 have been derived from our
unaudited financial statements which, in our opinion, contain all normal,
recurring adjustments needed for the fair presentation of results for such
periods. With respect to the unaudited interim consolidated financial
information for the three months ended March 31, 1998 and 1999 included herein,
the independent certified public accountants have not audited or reviewed such
consolidated financial information and have not expressed an opinion or any
other form of assurance with respect to such consolidated financial information.
The selected financial data provided below is not necessarily indicative of our
future results of operations or financial performance.
<TABLE>
<CAPTION>
For the Year Ended For the Month Ended
December 31, March 31,
---------------------- ----------------------
1997 1998 1998 1999
--------- -------- --------- ---------
(unaudited)
Statements of Income Data: (in thousands, except (in thousands, except
per share data) per share data)
<S> <C> <C> <C> <C>
Revenue
Information services .............. $ 606 $ 6,236 $ 568 $ 4,391
Ancillary income .................. 651 1,451 429 478
System affiliates ................. 1,429 2,198 587 484
Proceeds from the sale of our
operated territories ............ 714 -- -- --
Training, license and other ....... 120 59 1 --
------- ------- ------- -------
Total revenue ........................ 3,520 9,944 1,585 5,353
------- ------- ------- -------
Operating Expenses
Costs of services provided ........ 1,301 4,986 447 3,200
Costs of our operated territories . 506 -- -- --
Selling, general and administrative 917 2,604 392 1,293
------- ------- ------- -------
Total operating expenses ........ 2,724 7,590 839 4,493
------- ------- ------- -------
Income from operations ............... 796 2,354 746 860
Other income ......................... 29 185 10 60
Interest expense ..................... (78) (152) (19) (86)
Income before income taxes ........... 747 2,387 737 834
Income tax expense (benefit) ......... (244) (810) (273) (325)
Net income ........................... 503 1,577 464 509
Basic earnings per share ............. .28 .59 .26 .14
Weighted average shares
outstanding--basic .................. 1,800 2,681 1,800 3,597
Diluted earnings per share ........... .28 .57 .26 .13
Weighted average shares
outstanding-diluted ................ 1,800 2,769 1,800 3,790
</TABLE>
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<PAGE>
Balance Sheet Data: December 31, 1998 March 31, 1999
----------------- --------------
(unaudited)
Working capital................ $ 1,785 $12,734
Total assets................... 18,177 34,611
Total liabilities.............. 7,341 9,735
Shareholders' equity........... 10,836 24,876
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains certain forward-looking statements within the meaning
of the Securities Act of 1933 and the Securities Exchange Act of 1934 and we
intend that such forward-looking statements be subject to the safe harbors
created thereby. These forward-looking statements include our plans and
objectives for future operations, including plans and objectives relating to the
services we offer and our future economic performance.
The forward-looking statements included herein are based on current expectations
that involve a number of risks and uncertainties that might adversely affect our
business in the future in a material way. Such risks and uncertainties include
but are not limited to the following:
o interest rate fluctuations
o effects of national and regional economic and market conditions
o seasonal housing market fluctuations
o labor and marketing costs
o operating costs such as telephone and repositories costs
o intensity of competition
o success of our consolidation plan
o our ability to manage growth
o legal claims
o contingencies associated with year 2000 compliance
Overview
We specialize in preparing mortgage credit reports that are customized to meet
each lender's individual needs. We also provide a broad range of credit,
employment and other information services to mortgage lenders, consumer lenders,
employers, landlords, and other businesses.
We provide our services in two different ways. First, we sell services directly
to third party customers such as mortgage lenders, financial institutions,
private enterprises, and individuals which we refer to as information services.
Secondly, we sell services through our system affiliates. We currently have 32
system affiliates. The system affiliates provide information services to
customers using our technology and pay royalty, license and other fees to us. We
do not intend to license or franchise territories to third parties in the
foreseeable future.
- 12 -
<PAGE>
During 1997 and 1998, our primary emphasis, in addition to expanding our market,
was the completion and expansion of our technology center. This center was
necessary for us to provide our Bureau Express reports and other on-line
services to both third party users and system affiliates. We funded these
expenditures principally from the proceeds from the sale of territories we
previously operated and income from operations.
In order to expand information services, we devised a consolidation plan whereby
we have identified both competitors and system affiliates as potential
acquisition candidates. As we implement this consolidation plan, we expect
information services revenue and gross profit to increase and system affiliates
revenue to decrease as system affiliates are either acquired or if their
agreements with us expire.
Results of Operations
The following table sets forth for the periods indicated, as a percentage of
total revenues, those items included in our Consolidated Statements of Income:
Year Ended Three Months Ended
December 31, March 31,
------------------ -----------------
1997 1998 1998 1999
-------- -------- ------- -------
Revenue
Information services.......... 17.2% 62.7% 35.8% 82.1%
Ancillary income.............. 18.5 14.6 27.1 8.9
System affiliates............. 40.6 22.1 37.0 9.0
Proceeds from the sale of
our operated territories.... 20.3 -- -- --
Training, license and other... 3.4 .6 0.1 --
----- ----- ----- -----
Total revenue............ 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating expenses
Costs of services provided.... 37.0 50.1 28.2 59.7
Costs of our operated territories 14.4 -- -- --
Selling, general and administrative 26.0 26.2 24.7 24.2
----- ----- ----- -----
Total operating expenses. 77.4 76.3 52.9 83.9
----- ----- ----- -----
Income from operations........... 22.6 23.7 47.1 16.1
Other income..................... .8 1.8 .6 1.1
Interest expense................. (2.2) (1.5) (1.2) (1.6)
----- ----- ----- -----
Income before income taxes....... 21.2 24.0 46.5 15.6
----- ----- ----- -----
Income tax (expense) benefit..... (6.9) 8.1 (17.2) (6.1)
----- ----- ----- -----
Net income ...................... 14.3% 15.9% 29.3% 9.5%
===== ===== ===== =====
Comparison of Operating Results for Years Ended December 31, 1997 and 1998
- 13 -
<PAGE>
Information services revenue increased $5.63 million, or 929% from $606,000 in
1997 to $6.24 million in 1998. The increase was primarily a result of our third
and fourth quarter acquisitions. See Note 2 to our consolidated financial
statements. These acquisitions produced a total of $5.7 million in revenues for
the year ended December 31, 1998. Increased volume of credit reports generated
and additional service offerings accounted for the remaining increase.
Ancillary income represents fees paid by system affiliates for various
additional products and services provided to them. Ancillary income increased by
$800,000 or 123%, from $651,000 in 1997 to $1.45 million in 1998. The increase
primarily results from our provision of additional services to our system
affiliates for a full year in 1998 compared to only two months in 1997.
System affiliates revenues increased $770,000 or 54%, from $1.43 million in 1997
to $2.2 million in 1998. The increase is due to additional billing volume by
system affiliates and resultant royalty, license and other fees.
We did not sell any self-operated territories during 1998; thus we did not
generate any proceeds from the sale of self operated territories during 1998
compared to proceeds of $714,000 in 1997.
Training, license and other revenue decreased $61,000 or 51%, from $120,000 in
1997 to $59,000 in 1998. The majority of this decrease was due to a one-time
charge made by us for a marketing software interface in 1997.
Costs of services increased $3.69 million or 284%, from $1.3 million in 1997 to
$4.99 million in 1998. The increase in costs of services is directly related to
our acquisitions during the third and fourth quarters of 1998 which resulted in
an overall decrease in margins from 52% in 1997 to 50% in 1998. Margins for the
nine months ended September 30, 1998 had increased over 1997 to 58%, however,
during the last three months of the year eight acquisitions which we made during
the third and fourth quarters of 1998 were not fully integrated into our
operations. It generally takes between 60 and 180 days to reduce duplicate
personnel costs, integrate the acquisitions credit reporting systems into our
technology center where necessary, incur training costs to ensure our quality
standards, and to eliminate other duplications in costs. Our margins are also
impacted by the seasonality of home buying which is traditionally slower in
November and December.
Selling, general and administrative expenses increased $1.7 million, or 185%,
from $917,000 in 1997 to $2.60 million in 1998. This increase is related to
costs associated with our growth in 1998, including increased personnel costs,
rents, and depreciation and amortization.
Total operating costs increased $4.87 million, or 179%, from $2.72 million in
1997 to $7.59 million in 1998 with a resulting increase in operating income of
$1.55 million, or 195%, from $796,000 in 1997 to $2.35 million in 1998.
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Interest expense increased $75,000, or 97% from $77,000 in 1997 to $152,000 in
1998. This increase is due to additional notes payable issued in connection with
our acquisitions in the third and fourth quarters of 1998.
Income taxes increased $566,000, or 232%, from $244,000 in 1997 to $810,000 in
1998. Our effective tax rate remained at approximately 34%.
As a result of the foregoing factors, our net income increased $1.07million, or
214%, from $503,000 in 1997 to $1.58 million in 1998.
Comparison of Operating Results for the Three Months Ended March 31, 1998 and
1999
Information services revenue increased $3.82 million, or 673% from $568,000 in
the first quarter 1998 to $4.39 million in the first quarter 1999. The increase
was primarily a result of our acquisition program. Three acquisitions were
closed on January 1, 1999, contributing revenues of $512,000 to the first
quarter 1999. Two additional acquisitions were closed on March 31, 1999 and
therefore did not contribute to the first quarter of 1999. Same location sales
growth increased by $181,000, or 32%, from the first quarter 1998 to the first
quarter 1999. We continue to see growth in our Freddie Mac affiliation with a
$77,000 increase, or 89%, from $86,000 in the first quarter 1998 to $162,000 in
the first quarter 1999.
Ancillary income represents fees paid by system affiliates for various
additional products and services provided to them. Ancillary income increased by
$48,000, from $429,000 in 1998 to $478,000 in 1999. The increase is primarily a
result of our providing additional services to our system affiliates.
System affiliates revenues decreased $103,000 or 18%, from $587,000 in the first
quarter 1998 to $484,000 in the first quarter 1999. This decrease is due to the
acquisition of six system affiliates as part of our acquisition program.
Costs of services increased $2.75 million or 616%, from $447,000 in the first
quarter 1998 to $3.2 million in the first quarter 1999. The increase in cost of
services is directly related to our acquisitions which resulted in an overall
decrease in operating margins from 72% in the first quarter 1998 to 40% in the
first quarter 1999. This decrease in operating margin is directly related to the
following three areas:
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o Salaries - As a result of acquisitions from the third quarter 1998 and in
the first quarter 1999 the number of employees whose costs are included in
costs of services has increased by 200. Employee costs allocated to costs
of services include operation managers, marketing representatives and
processing personnel. As acquisitions are made, we generally incur a
duplication of personnel until the acquisition is completely converted to
our software and operating system. Due to the inefficiencies of many
acquired companies' processing systems and their dependence on
non-automated mortgage credit reports, these increased labor and other
operational costs tend to negatively impact our operating margin during the
conversion process.
o Bureau costs - Due to volume pricing, we purchase credit information at a
more favorable price than the small independent competitors we are
acquiring. Converting an acquisition from its existing price structure, to
ours takes approximately 30 to 60 days. Part of the conversion process
includes installing software at each lenders location. With most small
independents being on a competitive system, royalties must also be paid
until the office is completely converted to our system.
o Telecommunication costs - As telecommunication costs are also volume
driven, we strive to convert the telecommunication of each acquisition to
our selected carrier. The conversion from one phone carrier to another can
include installing new software at each client's location and setting up an
Internet provider. The timeline for the phone conversion may take between
60 and 120 days.
Selling, general and administrative expenses increased $901,000, or 229%, from
$393,000 in the first quarter 1998 to $1.29 million in the first quarter 1999.
This increase is related to costs associated with our growth in the last two
quarters of 1998, and in the first quarter 1999. As a percentage of sales,
selling, general and administrative costs decreased slightly from 24.8% for the
first quarter 1998 to 24.2% for the first quarter 1999.
Total operating costs increased $3.65 million, or 435%, from $839,000 in the
first quarter 1998 to $4.49 million in the first quarter 1999 with a resulting
increase in operating income of $114,000 or 15%, from $746,000 in the first
quarter 1998 to $860,000 in the first quarter 1999.
Interest expense increased $67,000, or 352% from $19,000 in the first quarter
1998 to $86,000 in the first quarter 1999. This increase is due to additional
notes payable issued in connection with our acquisition program.
Income taxes increased $53,000, or 19%, from $273,000 in the first quarter 1998
to $325,000 in the first quarter 1999. Our effective tax rate is approximately
37%.
As a result of the foregoing factors, our net income increased $44,000, or 10%,
from $464,000 in the first quarter 1998 to $509,000 in the first quarter 1999.
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For the first quarter 1998 we had 1,800,000 diluted weighted average shares
outstanding as compared to 3,790,037 diluted weighted average shares outstanding
for the first quarter 1999. As a result of our private placements completed in
March and April 1999, there will be an additional 1,912,451 shares outstanding
for our second and subsequent fiscal quarters.
Diluted earnings per share decreased by $0.13 per share, or 50%, from $0.26 per
share for the first quarter of 1998 to $0.13 per share for the first quarter of
1999. This decrease was primarily due to the issuance of 1,380,000 shares of our
common stock in our initial public offering in May 1998 and the related lag time
in investing the proceeds into operating assets, such as acquisitions. As
discussed above, we incur certain operational inefficiencies and duplication of
certain costs for approximately 60 to 180 days after making an acquisition, the
effect of which will reduce earnings per share while the acquisition is being
converted into our operational systems.
Liquidity and Capital Resources
We had cash balances of $1.1 million and short-term investments of $2.2 million
at December 31, 1998. We were able to manage the net impact of accounts
receivable, accounts payable and accrued expenses on cash flows from operations,
which with net income of $1.6 million and depreciation and amortization of
$776,094 resulted in cash flow provided from operations of $2.65 million.
We used cash of $712,000 and $893,000 of capital lease and notes payable
financing to purchase additional equipment and furniture to furnish our Loveland
offices and to renovate certain branch locations acquired in 1998. We also used
cash to fund $495,000 of additions to capitalized software development costs in
1998. We successfully completed our initial public offering in May of 1998 which
resulted in cash of $6.3 million, net of offering costs of $1.4 million. We
invested a portion of the offering proceeds in high quality corporate and
government debt securities which resulted in an increase to short term
investments of $2.2 million. The offering proceeds allowed us to close on eight
acquisitions which were funded by paying cash of $3.6 million, issuance of notes
payable of $2.9 million and restricted common stock of $2.4 million. In
connection with these acquisitions, we acquired primarily fixed assets and
intangibles in addition to access to certain key operating markets.
We continue to meet our capital requirements through cash flows provided by
operations, the sale of short-term investments and proceeds from institutional
private placements in March and April 1999. The total cash and cash equivalents
increased $9.5 million in the three months ended March 31, 1999.
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For the three months ended March 31, 1999 net cash provided by operating
activities was $108,000. Net cash used in investing activities was $163,000 and
net cash provided by financing activities was $9.5 million. The purchase of
property and equipment accounted for $681,000 and cash used for acquisitions was
$1.7 million, which was funded by the sale of short-term investments. Cash used
for the repayment of long-term debt amounted to $481,000. The private placements
raised $15 million in gross proceeds of which $10 million was funded in late
March 1999 and the remaining $5 million in early April 1999.
We believe that our anticipated cash requirements for the immediate future will
be met from internally generated funds and the proceeds from the private
placements. We will continue to invest the proceeds in short-term securities
with maturities being met to continue the use of these proceeds fro our
acquisition program. Liquidity may also be augmented if our warrants are
exercised.
Inflation
Although we cannot accurately anticipate the effect of inflation on our
operations, we do not believe that inflation has had, or is likely in the
foreseeable future to have, a material effect on our results of operations or
financial condition.
Year 2000 Compliance
We utilize a significant number of computer systems and services that use
computer chips across our entire organization. Therefore we must assess those
systems Year 2000 compliance and then correct or replace systems or services as
needed. We have completed our Year 2000 assessment for compliance. Software for
customer use has the highest priority, followed by internal systems critical to
operations. Modification of our internally generated software for Year 2000
compliance is complete. Modification of current hardware and low-level system
software for Year 2000 compliance is complete, with operating system patches or
upgrades being applied, as they become available. Updates of vendor supplied
systems with either Year 2000 compliant patches or upgrades are in progress. All
vendors are being queried as to their compliance, and testing is arranged when
applicable. We have completed testing with our critical vendors and have no
outstanding issues. All new software developed by us is Year 2000 compliant to
the standards set forth by Microsoft Corporation's published guidelines. All of
our customers will be required to upgrade to Year 2000 compliant software by
December 31, 1999. We are currently testing Year 2000 compliance with key
information vendors and customers in an industry-wide effort sponsored by
Freddie Mac. Vendors for facilities such as telephone and electricity have
indicated that they will be Year 2000 compliant by the end of August 1999. Our
results of operations and financial condition could be negatively affected by
the failure of outside vendors to achieve Year 2000 compliance in a timely
manner.
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Costs for Year 2000 compliance are estimated at $200,000, of which approximately
$80,000 was incurred in 1998, and $14,000 was incurred through the end of March,
1999. Although we have appropriate contingency plans to lessen (to the extent
possible) the effects of any significant Year 2000 noncompliance, such plans may
not be adequate and the cost of Year 2000 compliance may be higher than
$200,000.
Our development of new Windows software for systems that are now running DOS or
older Windows software is currently scheduled for completion fourth quarter of
1999. The new software is being developed in order to move our systems to a
Windows NT Server only platform, and away from our current Windows NT Server and
Novell Server mix, and is not being developed specifically for Year 2000 issues.
The use of the new internally generated Windows software is considered a
contingency plan for the failure of the existing DOS or Windows software that is
currently running with Year 2000 modifications. Contingency plans for vendor
supplied systems involve alternate vendors and interpretation of non-compliant
data via windowing techniques.
With the exception of software installed at customer sites, all of our
internally generated software is available to our programming staff for
immediate modification and update. Our customer software has a capability for
the customer to automatically download and put in place an update for the
software should any problems be found after the software is installed at the
customer site. In the worst case of a Year 2000 software problem found on or
after January 1, 2000, we would immediately modify or replace software that is
not functioning correctly from our headquarters, and, if necessary, make new
customer software available for immediate download as well.
All of our hardware used in the servicing of customer requests, customer
billing, accounting, and payroll have all been upgraded or replaced to meet Year
2000 requirements, and have completed internal compliance testing. All newly
purchased hardware is being implemented meeting Year 2000 requirements. Most of
the employee desktop machines have been either upgraded or replaced to meet Year
2000 requirements, and the remaining employee desktop machines that have not
already been upgraded or replaced are scheduled to be either upgraded or
replaced by July of 1999. Our systems consist primarily of readily available
off-the-shelf hardware, and a supply of hardware will be purchased in advance of
January 1, 2000 to be used in the case of hardware that has missed compliance
testing or incorrectly tested as compliant. Those systems that are not readily
available off-the-shelf have been tested for compliance, and a certification of
compliance has been received from the manufacturer.
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We have looked at our plans for business continuity and contingency plans in the
event of a catastrophic incident at our corporate headquarters in order to
address our facilities Year 2000 issues, as some of the problems to be solved
are similar. Addressing facilities systems involve redundancy and replacement.
In order for us to maintain our ability to service its customers, certain
systems are critical, such as A/C power and telecommunications. We have a
Technology Center at our headquarters in Loveland, Colorado, and we are opening
a new Technology Center in Denver, Colorado in July of 1999. Each of these
technology centers will be used for normal production traffic. Each has the
capacity for handling all of the traffic normally shared between the two, should
one of the two be inoperable for some reason. Each center has backup
Uninterruptable Power Supplies (UPSs) for temporary power, and natural gas or
diesel powered generators for additional electrical backup. Once the Denver site
is opened, we will utilize five different telecommunications providers to our
Denver and Loveland Technology Centers. Customer access is available via local
number dialup access, 800-number dialup access, X.25 dialup access, and TCP/IP
access. Our client software can be configured to move from one communications
methodology to another as a backup. Our Technology Centers will maintain four
different Internet Service Providers (ISPs). Fully redundant E-mail and DNS
servers will be maintained at the each Technology Center.
Our results of operations and financial condition could be negatively affected
by the failure of both original and contingency plans to achieve Year 2000
compliance in a timely manner.
BUSINESS
General
We provide a broad range of information services to mortgage and consumer
lenders, employers, landlords and other business customers located throughout
the United States. We specialize in preparing mortgage credit reports (MCRs)
that we format and customize for each mortgage lender's requirements and then
transmit to these lenders via the Internet, modem or facsimile. Our larger
customers include, among others:
o NationsBanc/Boatmen's National
o Chase Manhattan Residential
o U.S. Home Mortgage
o CoreStates Mortgage
o CTX Mortgage
In 1996, we were selected to be one of five approved information vendors for
Freddie Mac's automated underwriting system. We also expect to become one of
twelve approved vendors for Fannie Mae's automated system in the third quarter
of 1999. Based on publicly reported information concerning mortgage loans
originated and refinanced in the United States, we believe we and our system
affiliates are one of the leading suppliers of MCRs in the United States.
Combined with our system affiliates, we delivered approximately 1.43 million and
2.8 million MCRs representing gross system billings of approximately $31.3
million and $48.8 million in 1997 and 1998.
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Our MCRs generally fall in three categories:
o residential mortgage credit reports (RMCRs) under which we verify credit,
employment and other information and conduct in-person or telephone
interviews with loan applicants;
o residential mortgage credit reports that do not encompass applicant
interviews (RMCR Jrs.);
o Bureau Express reports, which provide only the merged credit information
from the three primary credit repositories in the United States without the
verification performed in RMCRs or RMCR Jrs.
With expertise developed in our mortgage credit reporting, we have expanded our
services to include EMPfacts, an employment screening service, QUICKpeek
Identifier, an instant employment screening service, QUICKpeek Tenant, a credit
and employment screening service for use by leasing agents and landlords, and
Corpdata, a credit reporting service on businesses.
In August 1998, we began to implement our consolidation plan in the MCR
industry. We believe a favorable environment exists for acquisitions because of
the highly fragmented nature of the industry and the increased cost of new
technologies that generally cannot be afforded by smaller participants in the
market. Our consolidation plan has included the purchase of unaffiliated
companies active in the MCR market as well as some of our system affiliates. Our
consolidation plan is designed to expand our existing business and take
advantage of our core competencies discussed more fully below.
Industry
We believe the mortgage credit reporting industry is highly fragmented and
consists of approximately 1,400 providers in the United States. As our primary
service is MCRs, our business is directly related to the mortgage lending
industry.
The mortgage lending industry enjoyed near record years in 1997 and 1998 due to
low interest rates and a robust economy. According to the Mortgage Bankers
Association of America ("MBAA"), first mortgages comprised of purchases and
refinancings are estimated to have totaled approximately $870 billion in 1997
and $1.4 trillion in 1998. This loan activity equated to the generation of an
estimated 11 million MCRs in 1997 and 20 million MCRs in 1998.
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According to the MBAA, the outlook for 1999 appears relatively stable due to
demographics, particularly the impact of the aging of the baby boom generation,
which is entering its peak earnings period. As of the date of this prospectus,
home ownership rates are approximately 66.5%. For 1999, the MBAA projects
interest rates to remain at or below 1998 levels and mortgage originations to
total approximately $1.2 trillion. In regard to a longer outlook, although
population growth and household formation rates are projected to slow during the
next 10 years, population growth within the top earning groups, ages 45-to-54
and 55-to-64, is projected to increase. Assuming the foregoing home ownership
and interest rate trends continue, strong demand for MCRs should continue,
although no assurances are given.
The mortgage credit reporting industry provides a valuable service to the
lending industry due to its report formatting and verification services.
Millions of pieces of credit data are furnished to the three major credit
repositories from lenders and creditors worldwide. Due to the volume of
information, significant inaccuracies of information can occur in an
individual's credit file which must be verified and accurately reported.
Historically, mortgage credit reporting entities have performed these services
by manual verification in the form of calling creditors, lenders, employers,
landlords, and other businesses directly to verify information, and reviewing
public files and other information sources. However, the industry has been
undergoing significant change in terms of how services are requested, how
information is delivered, and the format in which the data is returned. These
changes have been driven by advances in computer software and hardware, along
with advances in communications technology. The mortgage lending industry, along
with other users of credit information, expects quick turnaround of accurate
reports in a customized format in order to facilitate their lending decisions.
Thus, we believe that entities involved in mortgage credit reporting must
continually develop and maintain sophisticated computer and communication
technology to compete. Due to the costs and technical competence required to
keep abreast of technological advances in the industry, we believe that the
credit reporting industry will consolidate, and that the market may be dominated
by a handful of companies that have proven technological capabilities and more
diversified product lines.
Business Strategy
We intend to expand our present business operations and to develop new
opportunities by, among other things, pursuing the following strategies:
Acquire system affiliates and competitors to expand business.
We intend to expand our business operations by continuing to purchase certain of
our system affiliates as well as purchasing competing business. We have
completed the acquisition of over 20 mortgage credit reporting businesses since
the closing of our initial public offering in May 1998. We believe our
consolidation plan will result in substantial savings in accounting,
administrative and technology expenses, and that marketing of our ancillary
services can be accelerated through acquisitions.
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Capitalize on sophisticated technology.
We believe our technology is state-of-the-art, and to preserve this advantage,
we employ 30 technical persons, 16 of whom are software developers, to
continually upgrade our electronic capabilities and develop new applications. We
believe that speed and accuracy of service, which are directly related to our
technical ability, are critical to our growth and success.
Accelerate market penetration.
We intend to accelerate our market penetration throughout the United States by
expanding and refining sales and marketing techniques we have used over the past
several years, including
o face-to-face selling with prospective customers, consisting
primarily of larger companies
o in-house telemarketing to existing and prospective customers who
have shown an interest in purchasing our services
o public relations efforts
o participation in trade shows and seminars
o advertising in trade publications
o maintaining a web page on the Internet
o mailing of quarterly news releases to existing and prospective
customers
Increase revenue and customer convenience by offering additional services.
We intend to increase revenue and customer convenience by providing one-stop
shopping for our customers through expanded services. We have begun to
accomplish this by "bundling" with our MCRs the services of third party vendors
that provide appraisals, title insurance, flood certification and title
searches. Our strategy is to receive a commission or discount on such services
in order to enhance revenues while better serving our customers.
Increase quality customer service and support.
We intend to expand and enhance our customer service and support program by:
o providing customer service representatives on-call for 12 hours
a day Monday through Friday
o performing additional in-house training of all franchisees,
licensees and customer service representatives with
regard to our services
o enhancing quality control checks on our services
o revising, when appropriate, minimum acceptable performance
guidelines for employees
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In addition, we realize the importance of employees to the success of our
operations and, therefore, we strive to provide a positive work environment and
benefit package for employees.
Acquisition Developments
We have commenced the implementation of a consolidation plan in the MCR business
that is designed to expand our existing business and to take advantage of our
core competencies, including, among other things:
o our highly developed customer services program
o our use of sophisticated technology to achieve efficiencies in the MCR
market
o our development of close working relationships with mortgage lenders
o our knowledge of the MCR market
o our experienced management team
We believe that there are approximately 1,400 providers in the domestic mortgage
credit reporting industry, of which approximately 70% are small independent
organizations and less than 10% generate more than $5.0 million of annual
revenues. Virtually all the small independent agencies are susceptible to
acquisition since they are not agency-approved nor have the capital to invest in
the requisite technology needed to garner agency approval. We believe that a
large number of these small independent providers are therefore concerned about
their ability to survive in the industry as it increasingly moves toward
automated underwriting.
We focus on the purchase of unaffiliated companies active in the MCR market, as
well as companies that are presently our system affiliates, and attempt to
structure acquisitions that are accretive. Targeted acquisition candidates are
those companies that:
o immediately add to our customer and revenue base
o offer economies of scale through the consolidation or elimination of their
accounting departments, administration costs, technology costs and owner
salaries
o recognize the need to associate with an agency-approved, technologically
sophisticated MCR provider in order to remain competitive
We have consummated over 20 acquisitions of mortgage credit reporting businesses
from August 1998 through June 11, 1999 for an aggregate purchase price of $20
million. Eight of the acquisitions were system affiliates. In addition, as of
the date of this prospectus, we are in negotiations to acquire the businesses of
several other companies, although there are no definitive agreements with any
persons or entities as to any acquisition and no assurances are given that any
additional acquisitions will be completed.
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The acquisitions were generally asset purchases which included customer lists,
customer agreements, computer equipment, and office furniture. We obtained
non-competition and confidentiality agreements from appropriate persons in all
acquisitions and we entered into employment agreements in some acquisitions. The
consideration we paid included an aggregate of approximately $11.1 million cash,
$6.5 million in promissory notes and $2.4 million in our common stock value. The
notes vary but are generally payable over three to five years and bear interest
of up to 8% per annum. See Note 7 to the Consolidated Financial Statements.
Mortgage Credit Reports
We specialize in preparing MCRs that are customized to each mortgage lender's
requirements and transmitted to lenders via the Internet, modem or facsimile.
Our MCRs generally fall in three categories:
o RMCRs, under which we verify credit, employment and other information and
conduct in-person or telephone interviews with loan applicants
o RMCR Jrs., which do not encompass applicant interviews
o Bureau Express Reports, which provide only the merged credit information in
a user-friendly integrated report from the three primary national credit
repositories in the United States without our verification as performed for
RMCRs and RMCR Jrs.
Bureau Express Reports are typically compiled by our proprietary system in less
than 60 seconds, free of duplication. The system also provides a means to
resolve inconsistencies between the credit repositories' information.
Our MCR services are fully automated. Mortgage lenders submit credit
applications to us via facsimile or computer modem. Depending on the type of MCR
requested, applications are assigned to credit investigators who poll the three
credit repositories for credit reports, verify credit information, residence
history and employment history for the last two years, check or verify legal
proceedings and tax liens and conduct an interview with the applicant regarding
all the information obtained. If any discrepancies are uncovered during the
investigation, we contact the applicant and conduct a conference call with the
reporting entity to clear up the matter.
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Once the report is completed, we deliver the report directly to the mortgage
lender's computer or by transmission via facsimile. In the future, we hope to
receive most applications into our computer system via a secure network. This
technology has been implemented on a limited basis to date, but we believe most
mortgage lenders will eventually use the Internet for most, if not all, of their
communication needs. All report forms are customized according to each lender's
requirements and generated by our proprietary and non-proprietary computer
system, thereby eliminating the need for a stockpile of forms and effectively
reducing overhead costs. Credit reports are printed using state-of-the-art laser
technology. Lenders can choose to interface directly with us using their own
mortgage origination or processing software. We can also remotely laser print
completed credit reports in the lender's office. We provide our customers with
proprietary software which allows electronic ordering and retrieval of reports.
We effectively provide lenders with all report forms because the reports are
generated by the computer system. We also adapt our computer generated forms and
reports to comply with different state requirements. We certify to lenders that
our MCRs meet standards required by Freddie Mac, Fannie Mae, the Veterans
Administration, the Federal Housing Administration, and the Rural Housing
Service.
To capture more of the market and to provide one-stop shopping for our
customers, we are expanding our service line to include other services required
by mortgage lenders such as appraisals, title insurance, flood certification and
title searches, which we call "bundled services." Also, we often provide such
bundled services through third party providers, and we receive revenue by way of
a commission or the spread between the retail price paid by the customer and a
wholesale price which we pay.
We have developed a program to assist lenders to low and moderate income
applicants with our Form 1003 Supplement. Determining such a borrower's
creditworthiness involves developing his/her credit history. However, many low
to moderate income borrowers do not always use the types of credit traditionally
reported to the credit repositories. Through the use of our Affordable Housing
1003 Supplement Form, the gap between traditional and non-traditional credit is
bridged. Credit history is developed through verifying non-traditional credit
such as utilities, car insurance, child care, furniture rental, loans from
employers, payments to savings accounts, and automatic deductions from
paychecks.
Other Services
Although MCRs are, and are expected to remain, our principal business activity,
we are developing additional services which we intend to aggressively market in
the future. The following describes the more important of these services.
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Employment Screening Services. Employment screening services assist employers in
determining a job applicant's productivity potential, tendencies towards theft
and excessive worker's compensation claims. Our EMPfacts employment screening
service offers state-of-the-art, accurate background checks that verify an
applicant's professional, educational and personal history. EMPfacts offers
individual or bundled screening services in the following areas:
o Substance abuse testing o Financial reports
o Motor vehicle record o Property search
o Worker's compensation history o Employment verification
o Public records information o Social Security number search
o Fraud searches o Professional license verification
o Criminal history o Psychological testing
o Education verification
We also offer a QUICKpeek Identifier employment screening service. QUICKpeek
Identifier enables our customers to receive an instant employment screening
report, via Windows compatible software in 60 seconds or less, which can be
viewed on screen or printed. By entering a persons' name, address and social
security number, QUICKpeek Identifier provides employment information, a public
records search, a fraud search, financial summaries and residence information.
For the twelve months ended December 31, 1998, we and our system affiliates
delivered approximately 75,700 EMPfacts reports and 10,800 QUICKpeek Identifier
reports. In December 1998, the average prices of our EMPfacts reports and
QUICKpeek Identifier reports were $25.62 and $10.25.
Tenant Screening Services. In July 1998, we introduced Tenant Qualifier, a
tenant screening service designed specifically for leasing agents and landlords
that verifies and reports information regarding a proposed tenant through credit
repository inquiries, employment history, public records, residence history,
payment habits, and criminal and eviction data. Tenant Qualifier is unique in
that it provides a customizable scoring system to help a landlord or leasing
agent impartially screen applicants and, therefore, comply with fair housing
standards and nondiscriminatory rental practices. For the twelve months ended
December 31, 1998, we and our system affiliates delivered approximately 34,350
Tenant screening reports. In December 1998, the average price of our Tenant
Qualifier reports was $11.92.
We believe, based on government reports and internal information, the rental
industry in 1998 was composed of over 29 million single and multi-family
properties and had an annual turnover of approximately 65%. This resulted in
over 65 million credit checks and other verifications. Assuming these trends
continue, this market should continue to offer opportunities for us to expand
our tenant information and verification business.
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System Affiliates
From 1989 to 1993, we pursued a strategy of franchising our MCR system. We earn
fees based on each franchisee's use of our system to generate reports for the
franchisees' customers. In 1993, we terminated our franchise program and began
entering into licensing agreements whereby licensees utilize our system to
service their customers in return for paying us a percentage of their gross
billings. We presently market our services through 12 of our own offices and 32
system affiliates, which collectively provide services to lenders in all 50
states. We do not intend to sell either franchises or licenses in the future.
Our system affiliates currently provide significant revenue to us. For the years
ended December 31, 1997 and 1998, system affiliates, including their ancillary
income, provided 40.6% and 22.1%, respectively, of our gross revenues. This
percentage is expected to become smaller as our consolidation plan continues.
Franchises
We have a standard franchise agreement that we have entered into with our
franchisees. While all agreements may not be completely uniform due to
modifications made pursuant to negotiations with each franchisee, in general,
the franchise agreements include the following provisions:
o franchisees are permitted to use our trademarks in a specified territory
for the purpose of providing MCRs
o franchisees are provided with an operational manual and ongoing training in
connection with mortgage credit reporting
o the term of the franchise agreement is generally 10 years and is
automatically extended unless (i) the franchisee declines to extend in
writing, or (ii) we decline to extend due to the franchisee failing to
comply with the franchise agreement, subject to a 30 day cure period; in
addition, the franchise agreement may also be terminated by us upon notice
if the franchisee becomes insolvent, bankrupt or makes an assignment for
the benefit of creditors, or if the franchisee is in default under the
franchise agreement
o the franchise agreements sometimes required an initial fee based on the
population of the franchisee's territory. Franchisees are also required to
pay a monthly royalty fee based on business volumes
Also, franchisees are required to pay monthly fees as follows:
o 3% of all gross billings in connection with any out-sourced "bundled
services" provided by us
o a communication fee to cover communication costs incurred by us
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<PAGE>
o typically, franchisees may not transfer or assign the franchise agreement
and related rights without our written consent. The franchise agreement
generally provides for a right of first refusal in our favor when a
franchisee receives a bona-fide offer to purchase its business
Licenses
We have a standard license agreement that we enter into with our licensees.
While all licenses may not be completely uniform due to modifications made
pursuant to negotiations with each licensee, in general, the license agreements
include the following provisions:
o licensees are permitted to use our trademarks in a specified territory for
the purpose of providing MCRs and other services
o licensees are provided with an operational manual and approximately a week
of training in connection with using our software and systems
o the term of the license agreement is generally three years unless earlier
terminated and is automatically extended for another three years unless
terminated by either party upon at least 60 days advance written notice. In
addition, we have the right to: (i) to suspend services if the licensee
fails to pay any amounts due pursuant to the license agreement within 30
days, (ii) immediately terminate the license if the licensee utilizes any
other mortgage credit reporting software, and (iii) compete with the
licensee or grant other licenses in the licensee's territory if the
licensee breaches any material term of the license agreement
o the license agreements can require an initial fee based on the population
of the licensee's territory, although such fee is waived in many instances.
In addition to fees based on billings, licensees are required to pay
monthly fees as follows:
-- 3% of all gross billings in connection with any
out-sourced "bundled services" provided by us
-- a communication fee to cover communication costs
incurred by us
As to both franchisees and licensees, for a shared expense fee we provide access
to our technology center, updates to our software, hardware and software
support, training and marketing support, and the right to use the Factual Data
trademark and trade name. Some franchisees and licensees service states outside
of their office location.
In connection with our consolidation plan, some system affiliate's exclusive
territory rights could be a hindrance to the plan since we will be required to
purchase a system affiliate, or wait until the expiration of the applicable
agreement with the system affiliate, before expanding into, or acquiring a
competitor in, the same territory.
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<PAGE>
We presently operate 12 of our own offices located in Colorado, Texas,
Massachusetts, Illinois, Minnesota, Washington and Wisconsin. Between our own
offices and system affiliates, we believe we provides service to lenders in all
states in the continental United States.
Suppliers
We do not maintain our own consumer credit database. Instead, we obtain consumer
credit data from large, national credit repositories such as Experian, Inc.,
TransUnion Corporation, and Equifax, Inc. pursuant to reseller agreements with
these entities. Generally, the reseller agreements are terminable without cause
by either party within a short period of time upon written notice. While we
believe our relationships with the credit repositories are good, there can be no
assurance that its reseller agreements with the credit repositories will not be
terminated for any reason. Each repository credit file contains the following
information which we access by computer modem:
o Identifying information -- name, address, former address, social security
number and employment
o Credit history -- balances and payment history of credit cards, finance
companies, banks, mortgage loans, accounts referred for collection and
accounts written off
o Public records -- tax liens, civil judgments, bankruptcies, foreclosures
o Inquiries -- credit grantors or authorized parties are listed as inquiries
when they have requested a copy of a credit file
We also obtain other information, such as criminal and motor vehicle history,
from other third party suppliers from time to time. We pay each repository a fee
per completed inquiry.
Automated Underwriting and Technology Center
We believe that the credit reporting industry will continue to move to automated
operations driven by comprehensive computer software, hardware and
communications programs and equipment. We are committed to maintaining and
developing leading technology to increase our customer service.
We are one of five approved information vendors for Freddie Mac's automated
underwriting system; and, in December 1998, we were selected as a direct MCR
provider for Fannie Mae's automated underwriting system, making us one of only
12 such Fannie Mae-approved credit agencies. Our system interfaces with Fannie
Mae are expected to be complete by the third quarter of 1999. As of the date of
this prospectus, more than 750 lenders are using Fannie Mae's automated
underwriting system network to process more than 30,000 loan submissions per
day. Fannie Mae's recent announcement that loans approved by its automated
underwriting system will qualify for lower private mortgage insurance premiums
is expected to cause an increase in submissions to its system, other factors
remaining equal.
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<PAGE>
As the mortgage lending industry continues to move toward automated
underwriting, our relationships with Freddie Mac and Fannie Mae will be a key
factor in our growth since third-party lenders utilizing the agencies' automated
underwriting systems are required to use approved credit reporting agencies,
such as us. As such:
o large mortgage originators and lenders who do not portfolio their
loans and therefore want to sell them in the secondary market will
not produce MCRs in-house
o many small credit reporting agencies who do not have the size and
resources to invest in technology to become agency-approved may have
extreme difficulty remaining competitive
This latter point has assisted, and should continue to assist us in our
consolidation strategy.
Our MCR and other information services integrate data obtained from national
credit repositories, criminal records, motor vehicle records and other public
information databases. The integration of this information, and delivery of our
services, is performed from our technology centers located in Denver and
Loveland, Colorado. We have invested over $2 million in our technology centers,
which utilize proprietary computer software and state-of-the-art hardware and
communication systems. Our information, processing and telecommunications
systems are scalable and we believe our systems have sufficient back-up and
disaster recovery capability. We have experienced little downtime.
Each data center can pull up to 18,000 bureau files an hour and has a call
capacity greater than 30,000 calls per day. The technology centers processed
approximately 225,000 reports per month in 1998 and we believe it has an
infrastructure to support three times that volume. In addition, we believe that
the excess capacity we have built into our systems and operations can readily
accommodate even greater growth. We credit our success to our technological
sophistication and we employ 30 persons, 16 of whom are software developers,
assigned to the continued development and maintenance of our technology center.
The technology center has enabled us:
o to become an agency-approved credit reporting agency
o to provide our customers with strong support and service
o to implement our consolidation plan
We are committed to maintaining our technological competitive advantage, and we
intend to continue to devote resources to this effort.
We use proprietary software developed in-house over the past 13 years. We
believe our proprietary software allows us to remain competitive in an
increasingly competitive marketplace. Our software was originally written in
1986, and began full production use in 1987. From 1987 through 1997, we
significantly developed and expanded our software capability including our
ability to completely customize reporting forms to the various requirements of
each customer. We have moved to Microsoft Visual Studio for the majority of our
new programs.
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<PAGE>
Systems in both data centers are non-proprietary Windows 98 or Windows NT based
Intel platforms. Each system has at least one backup, and can be repaired or
replaced easily and cheaply. The server platform is Windows NT with a mirrored
server that can replace the primary server in minutes if necessary. Backup power
is available to the servers to ensure up to 45 minutes of uninterrupted power.
Networking is achieved through port aggregation of 12 100Base-TX backbone
Ethernet connections to seven stacked Intel 510 Switches giving 1.2 Gbit
effective network bandwidth.
Our operations are dependent upon our ability to protect our technology centers
against damage from fire, power loss, telecommunications failure, natural
disasters or a similar event. If one data center experiences a disaster of some
kind, the other data center will automatically cover the traffic originally
destined for the failed data center. In the event that both data centers
experience a failure simultaneously, such could be significantly detrimental,
and our insurance may not be adequate to compensate us for all resulting losses
that may occur.
Our business is also dependent upon various computer software programs and
operating systems that utilize dates and process data beyond the year 1999. If
the actions taken by us to mitigate our risks associated with year 2000 are
inadequate, there could be a material adverse effect on our financial condition
and business. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Competitive Factors
The mortgage credit reporting industry is highly fragmented. We face both direct
and indirect competition for our services from a large number of companies. A
significant number of these competitors are small companies operating on a local
scale, while a limited number are large companies operating on a national scale.
We believe that there are approximately 1,400 companies in the United States
providing MCR services, of which approximately 70% are small independent
organizations and of which less than 10% have revenues in excess of $5.0
million.
While the majority of our competitors are small, certain competitors, including
The First American Financial Corp., TransUnion Corporation, and Equifax Credit
Information Services, Inc., are significantly larger and have greater financial
and marketing resources than us. We believe that we and our system affiliates
combined account for about 15% of national MCRs delivered annually. We also face
intense competition from various companies engaged in employment and tenant
information and verification services.
The primary competitive factors in the MCR industry, and in most of our other
existing and contemplated related service areas, are
o customer services
o accuracy
o readability of reports
o technological sophistication
o delivery speed
o price
o name recognition
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<PAGE>
Historically, mortgage credit reporting entities have performed their services
by manual verification in the form of calling creditors, lenders, employers,
landlords, and other businesses directly to verify information, and reviewing
public files and other information sources. However, the industry has been
undergoing significant change in terms of how services are requested, how
information is delivered, and the format in which the data is returned. These
changes have been driven by advances in computer software and hardware, along
with advances in communications technology. Since the mortgage lending industry,
along with other users of credit information, continually expect quick
turnaround of accurate reports in a customized format in order to facilitate its
lending decisions, we believe that entities involved in mortgage credit
reporting must continually develop and maintain sophisticated computer and
communication technology to compete.
Due to the costs and technical competence required to keep abreast of
technological advances in the industry, we believe that the credit reporting
industry will consolidate, and that the market may be dominated by a handful of
companies that have proven technological capabilities and diversified product
lines. We believe that one of our most significant advantages is our software
and communications technology which allows us to compete favorably.
Government Regulation and Privacy Issues
We are a consumer reporting agency and are subject to the provisions of the Fair
Credit Reporting Act. We are regulated by the Federal Trade Commission. Under
the provisions of the FCRA, a consumer reporting agency may furnish a consumer
report in response to the order of a court having jurisdiction or in accordance
with written instructions of the consumer. Such information may also be
furnished to a person we have reason to believe intends to use the information:
o in connection with a credit transaction
o for employment purposes
o in connection with the underwriting of insurance
o in connection with a determination of a consumer's eligibility for a
license or other benefit granted by a governmental instrumentality required
by law
o as a potential investor or servicer or current insurer, in connection with
a valuation of, or an assessment of the credit or prepayment risks
associated with, an existing obligation
o to a person who otherwise has a legitimate business need for the
information
The FCRA prohibits disclosure of obsolete information concerning a consumer.
Obsolete information generally means information which is more than seven years
old.
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<PAGE>
The FCRA provides that an investigative consumer report may not be prepared on
any consumer unless:
o 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
o or the report is to be used for employment purposes for which the consumer
has specifically applied
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 a preponderance of the evidence that at the time of the violation such
agency maintained reasonable procedures to assure compliance with those
provisions. Of our current services, employment and reference checks may be
investigative consumer reports for purposes of the FCRA.
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.
Under general legal concepts and, in some instances, by specific federal or
state statute, we could be held liable to customers and/or to the subjects of
reports for inaccurate information prepared by us, which is not corrected after
proper notice, or for 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 provided on such consumer
under the provisions of the FCRA.
We have developed and implemented internal policies designed to help ensure that
background information retrieved by us concerning a consumer is accurate and
that we otherwise comply with the provisions of the FCRA. In addition, each of
our customers is required to sign an agreement, wherein such customer agrees to
accept responsibility for using information provided by us in accordance with
the provisions of the FCRA and the Americans with Disabilities Act. We also have
internal checks in place regarding access and release of such information.
Additionally, we require that all employees sign a written acknowledgment
covering the proper procedures for handling confidential information.
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<PAGE>
State laws also impact our business. There are a number of states which have
laws similar to the FCRA, and some states which have human rights laws much like
the Americans with Disabilities Act ("ADA"). In addition, to our knowledge, at
least four states require companies engaged in investigative reporting, such as
EMPfacts, to be licensed in order to conduct business within those states.
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.
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. Existing federal and/or state laws, future modifications thereto,
or laws enacted in the future regulating consumer reporting agencies or access
and use of personal information, in particular, and privacy and civil rights, in
general, could hurt our business.
The nature of our business requires us to have certain licenses and
qualifications to do business in various states. We believe we have all material
licenses, permits and qualifications necessary to the conduct of our business.
Software Development Costs
We incur research and development costs associated with the development and
improvement of software utilized in our credit information and delivery system.
In 1996, software development costs associated with internally developed
software used to support system affiliate revenues and information service sales
were expensed as incurred. See Note 3 to the Consolidated Financial Statements
for information concerning our accounting policies for software costs.
Intellectual Property
We have not yet adopted a formal intellectual property protection program, and
currently rely on a combination of trademark, servicemark, copyright, trade
secret and licenses to establish and protect our proprietary rights in our
services and technology. There can be no assurance that such measures will
provide meaningful protection to us. We currently maintain approximately 43
trademarks, servicemarks and copyrights all of which we believe are properly
filed and recorded. We do not have any knowledge of infringement of our
proprietary rights.
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<PAGE>
Insurance
We maintain commercial general liability and property insurance. The policy
provides a general liability aggregate limit of $2 million but includes $5
million umbrella coverage. In addition, the policy also provides
products/completed operations, business auto and personal property coverage.
Employees
At June 11, 1999, we employed about 270 persons. There are no union or
collective bargaining agreements between us and our employees and we believe our
relations with employees are good.
Facilities
We relocated our corporate office to a new building in Loveland, Colorado on
April 3, 1998 and commenced a 20 year operating lease at that facility. The
lease calls for annual lease payments of $281,790 during the first five year
term of the lease subject to increases of 15% every five years for the duration
of the lease. We have signed a lease to occupy 16,000 square feet of a building
adjacent to our main office commencing in November 1999. The lease requires
annual base lease payments of $18,000, increasing 15% every five years over a 20
year term.
In connection with our acquisitions described above, we assumed several leases,
and now have offices at 12 branch locations. See Note 11 to the Consolidated
Financial Statements.
Legal Proceedings
Other than routine matters in the ordinary course of business, none of which is
material, we are not involved in any litigation.
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<PAGE>
Market for Our Securities and Related Stockholder Matters
Our common stock and warrants were quoted on the Nasdaq SmallCap Market under
the symbols FDCC and FDCCW since completion of our initial public offering on
May 13, 1998. The following table sets forth for the periods indicated the high
and low bid prices of our common stock and warrants as reported on the Nasdaq
SmallCap Market:
Common Stock Warrants
1998 Bid Price Bid Price
--------- ------------- --------------
High Low High Low
Second Quarter (from May 13) $9-5/8 $5-1/2 $3-5/8 $0-1/2
Third Quarter 9-1/2 6-1/2 3-3/8 1-3/8
Fourth Quarter 8-3/8 6-3/8 2-13/16 1-1/4
1999
---------
First Quarter $9-1/4 $7-1/4 $3-1/16 $1-1/2
We were approved for listing on the Nasdaq National Market on June 22, 1999. On
July 19, 1999, the closing price of our common stock and warrants reported on
the Nasdaq National Market was $10-1/2 per share and $3-1/2 per warrant. As of
July 19, 1999, we had only a few holders of record of our common stock and
warrants because most of our shares and warrants are held by a depository. We
estimate, based upon information provided by brokers and repositories, that we
have more than 600 beneficial owners of our common stock and more than 600
beneficial owners of our warrants.
Dividends
We have not paid or declared cash distributions or dividends on our common stock
and we do not intend to pay cash dividends in the foreseeable future. Future
cash dividends will be determined by our Board of Directors based on our
earnings, financial condition, capital requirements and other relevant factors.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors are as follows:
Name Age Position
J. H. Donnan 53 Chairman of the Board, Chief
Executive Officer and President
Marcia R. Donnan 54 Executive Vice President
Todd A. Neiberger 34 Chief Financial Officer and
a Director
Russell E. Donnan 34 Vice President
James N. Donnan 27 Vice President and a Director
Robert J. Terry 58 Director
Abdul H. Rajput 51 Director
Daniel G. Helle 37 Director
Our Articles of Incorporation provide for a Board of Directors, the size of
which is set by the Board of Directors. The current Board of Directors consists
of six members. All directors hold office until our next annual meeting of
shareholders, or until their successors have been elected. Officers serve at the
discretion of the Board of Directors, except for J.H. H. Donnan and Marcia R.
Donnan who are employed pursuant to employment agreements.
J. H. Donnan, Chairman of the Board, Chief Executive Officer and President, has
been with us since our incorporation in January 1985. He is responsible for
oversight of corporate development and services, and is responsible for
operations, technical development and policies and procedures. Mr. Donnan's
early career experience includes 15 years with Avco Financial Services, Inc.
where he was responsible for lending and collecting a multi-hundred million
dollar portfolio and managing geographically diverse branches with many
employees. Mr. Donnan was a founding member and past president of the National
Credit Reporting Association, a trade association founded to promote ethical
standards and fair competition within the credit reporting industry.
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<PAGE>
Marcia R. Donnan, Executive Vice President, has been with us since our
incorporation in January 1985. She is responsible for compliance with the FCRA
and all other federal, state and local laws as they apply to the gathering,
processing and distribution of credit information. Staff training and education
are also areas of her primary responsibility. Ms. Donnan spent 15 years in
credit reporting with Credit Information Systems (formerly Credit Bureau of
Council Bluffs, Inc.) as operations manager, prior to co-founding Factual Data
Corp. in 1985. Ms. Donnan is active in Associated Credit Bureaus, Inc., a credit
reporting association, and she concluded a second term as director in January
1997.
Todd A. Neiberger, Chief Financial Officer and a Director, joined us in March
1995. Mr. Neiberger graduated from the University of Northern Colorado in 1987
with a degree in accounting. Mr. Neiberger has 10 years experience in staff,
senior and management level positions with various public accounting firms. From
1994 through 1995, he served as the audit manager of Rickards & Co. P.C., and
from 1991 through 1993 he served as the tax manager for Krutchen & Co., both
Fort Collins, Colorado based certified public accounting firms. From 1988
through 1990 he was employed with Lemke, Feis & Co., P.C., a certified public
accounting firm, as a staff and senior level accountant in the audit and tax
department. Mr. Neiberger is a Certified Public Accountant and a member of the
Colorado Society of Certified Public Accountants and the American Institute of
Certified Public Accountants.
Russell E. Donnan, Vice President, has been employed by us since August 1993. He
is responsible for technical project management for software and support
services. Before joining us, he was a senior design engineer at Apple Computer
in the Power Book division from February 1992 to August 1993. He is experienced
in the super computer field and was previously employed by Convex Computer
(1990-1992) and as a founding member and employee of Key Computer (1988-1990),
now a subsidiary of Amdahl Corporation. Mr. Donnan graduated from Ohio State
University in 1987 with a degree in electrical engineering.
James N. Donnan, Vice President and a Director, has been employed by us on a
full-time basis since 1994, and prior to that, on a part-time basis since 1986.
He is responsible for management of our internally operated mortgage credit
reporting production offices and EMPfacts employment screening operations. His
duties also include overall sales, growth and customer service development. Mr.
Donnan graduated from Colorado State University in 1994 with a degree in
history.
Robert J. Terry has been a Director since February 1998. From February 1994 to
his retirement in January 1998, Mr. Terry served as a director, president and
chief operating officer of Mail-Well, Inc., a publicly traded envelope
manufacturer and printing company. From January 1992 to February 1994, Mr. Terry
served as executive vice president of Mail-Well Envelope, a subsidiary of
Georgia Pacific. From June 1989 to December 1991, Mr. Terry served as regional
vice president for Butler Paper in Englewood, Colorado. Mr. Terry obtained a
Bachelor of Science degree in Business from DePaul University in 1963 and
attended the Executive Program at the University of Michigan in 1988.
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<PAGE>
Abdul H. Rajput has been a Director since February 1998. From 1991 to September
1998, Mr. Rajput was employed in San Diego, California, by Bank of America, a
federal savings bank and a subsidiary of Bank America Corp., where he held the
position of executive vice president, administrative services. Presently, Mr.
Rajput is executive vice president of national operations of GreenPoint Credit
Corp. From 1990 and until its acquisition by us in August, 1998, Mr. Rajput
owned and operated Factual Data Minnesota, Inc., one of our now former
franchises which operates in Minnesota and Iowa. From 1980 to 1989, Mr. Rajput
was employed by Green Tree Financial Corp., St. Paul, Minnesota, initially as
vice president and then senior vice president for administration. Mr. Rajput
also serves on the board of directors of GreenPoint Credit Corp. Mr. Rajput
obtained a Bachelor of Science degree in Mathematics and a Master of Science
degree in Statistics from the University of Sind, Pakistan, in 1968 and 1970,
respectively.
Daniel G. Helle has been a Director since March 1999. Since 1992, Mr. Helle has
been a Managing Director of CIVC Partners and its predecessor, Continental
Illinois Venture Corporation, a private equity investment subsidiary of Bank of
America. From 1989 to 1992, Mr. Helle was a vice president of Continental
Illinois Venture Corporation. Mr. Helle is also a director of several private
companies, including First Franklin Financial Corporation, a mortgage banking
company based in San Jose, California. Mr. Helle obtained a Bachelor of Science
degree from Western Illinois University in 1982 and a Master of Science degree
in Finance from the University of Illinois in 1984.
Russell and James Donnan are sons of J.H. and Marcia Donnan who are husband and
wife.
Director Compensation
Our directors who are also employees do not receive any fixed compensation for
their services as directors while non-employee directors presently receive
compensation of $7,500 annually plus a $500 travel allowance per calendar
quarter.
Board Committees
We have two Committees, an Audit Committee and Compensation Committee. Messrs.
Terry and Rajput, the two independent directors, serve on each committee. Mr.
J.H. Donnan, President, also serves on each committee.
The primary function of our Compensation Committee is to review and make
recommendations to the Board with respect to the compensation, including
bonuses, of our officers and to administer our Stock Incentive Plan. The
function of our Audit Committee is to review and approve the scope of audit
procedures employed by our independent auditors, to review and approve the audit
reports rendered by our independent auditors and to approve their audit fees.
The Audit Committee reports to the Board of Directors with respect to such
matters and recommends the selection of independent auditors.
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<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Based on a review of the record, we believe that all reports required to be
filed by our officers, directors and principal shareholders under Section 16(a)
of the Securities Exchange Act of 1934 have been timely filed.
Executive Compensation
The following table sets forth compensation we have paid to J. H. Donnan, our
Chief Executive Officer and President, and Marcia R. Donnan, our Executive Vice
President, for services rendered during fiscal 1996, 1997 and 1998. No other
persons serving as an executive officer during the reported years received
compensation in excess of $100,000 during any of those years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
---------------------------------
Annual Compensation Awards Payouts
----------------------------- ---------------------- --------
Other
Annual Restricted Securities
Compen- Stock Underlying LTIP Compen-
Name and Principal Fiscal Salary Bonus sation Award(s) Options/ Payouts sation
Position Year ($) ($) ($) ($) SARs ($) ($)
- ------------------ ---------- ---------- ------- ------- ------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jerald H. Donnan 1998 105,100 9,300 -- -- -- -- 3,061
President, Chief 1997 82,445 -- -- -- -- -- 10,265
Executive Officer 1996 48,031 -- -- -- -- -- 10,220
Marcia R. Donnan 1998 105,100 9,300 -- -- -- -- 4,107
Executive Vice 1997 93,773 -- -- -- -- -- 6,093
President 1996 89,217 -- -- -- -- -- 8,137
- ------------------
</TABLE>
* Consists of certain health and accident insurance benefits and automobile
expense reimbursements.
Employment Agreements
J. H. Donnan and Marcia R. Donnan are parties to three year employment
agreements with us effective July 1, 1997. Each of Mr. and Ms. Donnan is
entitled to health and accident insurance benefits and certain automobile
reimbursements. Both employment agreements also provide that if the employee is
terminated due to a change in control of the company, then they are entitled to
severance pay equal to the product of 2.99 times the previous year's pay
including bonuses. The employment agreements contain customary provisions as to
death, disability and termination for cause.
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<PAGE>
Stock Incentive Plan
In April 1997, we adopted the 1997 Stock Incentive Plan. The purpose of the plan
is to provide continuing incentives to our key employees, which may include
officers and members of the Board of Directors. The Stock Incentive Plan
provides for 200,000 shares of common stock available for grant under the plan.
The plan is administered by the Compensation Committee of our Board of Directors
composed of at least one disinterested member. Subject to the terms of the plan,
the Compensation Committee determines:
o the persons to whom awards are granted
o the type of award granted
o the number of shares granted
o the vesting schedule
o employment requirements or performance goals relating to restricted stock
awards
o the type of consideration to be paid upon exercise of options
o the terms of any option, which cannot exceed ten years
The exercise price may be paid in cash, in shares of our common stock valued at
fair market value at the date of exercise by delivery of a promissory note or by
a combination of such means of payment, as may be determined by our Compensation
Committee.
As of June 11, 1999, options to purchase 31,500 shares of common stock had been
granted to several of our employees and two non-executive directors at an
exercise price of $5.50 per share for 26,500 shares and $6.50 per share for
5,000 shares.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of June 11, 1999 by:
o each person who is known by us to own beneficially more than 5% of our
outstanding common stock
o each of our executive officers and directors
o all of our executive officers and directors as a group
Common stock not outstanding but deemed beneficially owned by virtue of the
right of an individual to acquire shares within 60 days are treated as
outstanding only when determining the amount and percentage of common stock
owned by such individual. Each person has sole voting and sole investment power
with respect to the shares shown except as noted.
- 42 -
<PAGE>
Shares beneficially
owned
---------------------
Percent of
Number outstanding
-------- -----------
Executive officers and directors(1)
J. H. Donnan................................ 630,000 11.5%
Marcia R. Donnan............................ 630,000 11.5
Russell E. Donnan........................... 270,000 4.9
James N. Donnan............................. 270,000 4.9
Todd A. Neiberger(2)........................ 5,000 --
Robert J. Terry(3).......................... 5,000 --
Abdul H. Rajput(3).......................... 5,000 --
Daniel G. Helle(4).......................... 1,112,829 20.4
All officers and directors as a group
(eight persons)............................ 2,927,829 53.6
Other beneficial owners
Continental Illinois Venture Corporation.... 1,112,829 20.4
BCI Growth V, L.P........................... 545,286 9.9
- ------------------
(1) The address for each of the Donnans and Mr. Neiberger is 5200 Hahns Peak
Drive, Loveland, Colorado 80538; for Mr. Terry it is 5402 South Cottonwood
Court, Greenwood Village, Colorado 80121; for Mr. Rajput it is Post Office
Box 8310, Rancho Santa Fe, California 82067; for Continental Illinois
Venture Corporation it is 231 South LaSalle Street 7L, Chicago, Illinois
60697; and for BCI Growth V, L.P. it is c/o BCI Advisors, Inc., Glenpointe
Centre West, Teaneck, New Jersey 07666.
(2) Represents options to purchase shares of common stock at $6.50 per share
which are presently exercisable.
(3) Represents options to purchase shares of common stock at $5.50 per share
which are presently exercisable.
(4) Mr. Helle is a managing director of Continental Illinois Venture
Corporation, hence he is deemed to be a beneficial owner of its shares.
Certain Relationships and Related Transactions
J. H. Donnan and Marcia R. Donnan personally guaranteed a $500,000 loan we had
taken from a financial institution in 1995. No separate consideration was paid
for such guarantee. The balance of the loan of $435,000 was paid using a portion
of the proceeds from our initial public offering completed May 13, 1998.
- 43 -
<PAGE>
On September 16,1998, we closed our acquisition of the assets of Factual Data
Minnesota, Inc. Since 1990, FD Minnesota had been one of our franchisees located
in the Saint Paul, Minnesota area and operating in Minnesota and Iowa. We
acquired the fixed assets, contract rights, intellectual property rights to
trade names and computer software, personnel files, books and records, deposits,
prepaid assets and the goodwill of FD Minnesota in exchange for $353,243 cash
and a non-interest bearing promissory note in the principal amount of $353,243
payable in twenty-four equal monthly installments commencing September 1, 1998.
The note is secured by a lien on all of the assets purchased. We also assumed
the lease obligations on the FD Minnesota facility and continue operations of FD
Minnesota at such facility. In connection with the purchase, we obtained two
year non-competition agreements with the two shareholders of FD Minnesota.
Abdul Rajput, one of the shareholders of FD Minnesota, has been one of our
directors since February 1998. Mr. Rajput disclosed all of the material facts as
to his relationship and interest in FD Minnesota and abstained from voting on
the acquisition. The acquisition was approved by all of our other remaining
directors and the acquisition was made on terms believed by the Board to be no
less favorable than could have been obtained from an unaffiliated party. We
retained an independent firm of certified public accountants to appraise the
fair market value of the operating assets, excluding cash and accounts
receivable, of FD Minnesota. Based on such firm's study and analytical review
procedures it concluded that a reasonable estimate of the fair market value of
the operating assets, excluding cash and accounts receivable, of FD Minnesota as
of May 31, 1998 was $720,000.
On March 26, 1999, we entered into a stock purchase and sale agreement with four
institutional investors, including Continental Illinois Venture Corporation. Mr.
Helle is a managing director of that company which purchased $10 million of the
placement at $8.08 per share. As part of the placement, Mr. Helle became one of
our directors and the four members of the Donnan family agreed to vote for
Continental Illinois' nominee as a director so long as it owns a number of
shares equal to or greater than 5% of our then outstanding shares.
We have adopted a policy that all transactions between us and our officers,
directors and 5% or more shareholders are subject to approval by a majority of
the disinterested independent directors. Any such transactions will be on terms
believed to be no less favorable than could be obtained from unaffiliated
parties.
SELLING SECURITYHOLDER
The following table sets forth information regarding the beneficial ownership of
our securities by the selling securityholder. All information contained in the
table below is based upon beneficial ownership as of June 1, 1999.
- 44 -
<PAGE>
The selling securityholder was the underwriter of our initial public offering
completed in May 1998. As part of its compensation in the offering, the
underwriter received options to purchase:
o 120,000 shares of our common stock at $7.04 per share
o warrants to purchase 120,000 shares of our common stock at $9.15 per share
We agreed to register these options, warrants and underlying shares in order to
permit the selling securityholders to sell these securities from time to time in
the public market or in privately-negotiated transactions. We agreed to prepare
and file amendments and supplements to the initial registration statement
necessary to keep the registration of the shares effective until the earlier of
(i) May 13, 2003; or (ii) the date on which all of the securities have been
sold. We have also agreed to pay for all expenses of this offering other than
underwriting discounts and commissions and brokerage commissions and fees.
This table assumes that all securities owned by the selling securityholders are
being sold. The selling securityholders may offer and sell less than the number
of securities indicated. The selling securityholders are not making any
representation that any securities will or will not be offered for sale.
<TABLE>
<CAPTION>
Securities Beneficially Owned
Prior to the Offering
------------------------------------------- Securities
Options Warrants Securities Beneficially
Name and Address ----------------------- ------------------ Offered Owned After
of Selling Securityholder Number Percent Number Percent Hereby the Offering
- ------------------------------ ----------- ---------- -------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Schneider Securities, Inc. 120,000 100% 120,000 100% all -0-
1120 Lincoln Street, Suite 900
Denver, Colorado 80203
</TABLE>
PLAN OF DISTRIBUTION
This offering is self-underwritten; we have not employed an underwriter for the
issuance of common stock upon the exercise of the warrants and we will bear all
expenses of the offering.
Upon any solicited exercise of the warrants, we agreed to pay to the underwriter
of our initial public offering a fee of 5% of the aggregate exercise price of
warrant exercises if
o the market price of our common stock on the date the warrant is
exercised was greater than the then exercise price of the warrant
o the exercise of the warrant was solicited by a member of the National
Association of Securities Dealers, Inc. as designated in writing on
the warrant certificate subscription form (provided that any request
for exercise is presumed to be unsolicited unless the customer states
in writing that the transaction was solicited and designates the
broker-dealer to receive compensation)
o the warrant was not held in a discretionary account
- 45 -
<PAGE>
o disclosure of compensation arrangements was made both at the time
of the offering and at the time of exercise of the warrant
o the solicitation of exercise of the warrant was not in violation of
Regulation M promulgated under the 1934 Act
Regulation M under the 1934 Act, as amended, will prohibit the underwriter from
engaging in any market making activities with regard to our securities during
the period commencing as of the date on which the underwriter becomes a
participant in the solicitation of the exercise of warrants until the
termination of such solicitation activity. As a result, the underwriter may be
unable to make a market in our securities during certain periods while the
warrants are exercisable.
The warrants may be exercised by the delivery to American Securities Transfer &
Trust, Incorporated, 938 Quail Street, Suite 101, Lakewood, Colorado 80215 of
your warrant certificate accompanied by an election of exercise and payment of
the warrant exercise price for each share of your common stock purchased in
accordance with the terms of the warrant. Payment must be made in the form of
cash or a cashier's or certified check payable to the order of Factual Data
Corp. Delivery of the certificates representing the common stock will be made
upon receipt of the warrant certificate duly executed for transfer together with
payment for the exercise price and our acceptance of your tender for exercise.
If you exercise fewer than all your warrants, a new warrant certificate
evidencing warrants remaining unexercised will be issued to you.
DESCRIPTION OF SECURITIES
The following describes the attributes of our authorized and our outstanding
securities.
Common Stock
We are authorized to issue 10,000,000 shares of common stock, of which 5,463,897
shares were issued and outstanding on June 11, 1999. Holders of shares of common
stock are entitled to dividends as and when declared by our Board of Directors
from funds legally available therefor, and if we liquidate, dissolve or wind up,
common stockholders will share ratably in all assets remaining after payment our
liabilities. We have not paid any dividends to date nor do we anticipate paying
any dividends in the foreseeable future. It is our present policy to retain
earnings, if any, for use in the development and expansion of our business. The
holders of shares of our common stock are entitled to one vote for each share
held of record, and holders do not have the right to cumulate their votes for
election of directors. The holders of shares of common stock do not have
preemptive rights.
- 46 -
<PAGE>
Preferred Stock
We are also authorized to issue up to 1,000,000 shares of preferred stock with
such designations, rights and preferences as may be determined from time to time
by our Board of Directors. Accordingly, our Board of Directors is empowered,
without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights that could aversely affect the
voting power or other rights of the holders of our common stock. In the event of
issuance, the preferred stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in management and in
our control. We have no present intention to issue any shares of preferred
stock, and no shares of preferred stock are currently outstanding.
Warrants
One warrant entitles the holder to purchase one share of our common stock at an
exercise price of $7.15 until May 12, 2001, subject to our redemption rights
described below. The warrants were issued pursuant to the terms of a warrant
agreement between us and American Securities Transfer & Trust, Incorporated.
The warrant exercise price and the number of shares of common stock purchasable
upon exercise of the warrants are subject to adjustment in the event of, among
other events, a stock dividend on, or a subdivision, recapitalization or
reorganization of, the common stock, or if we merge or consolidate with or into
another corporation or business entity.
We may, in our discretion redeem outstanding warrants, in whole but not in part,
upon not less than 30 days' notice, at a price of $.05 per warrant, provided
that the closing bid price of our common stock equals or exceeds $10.73 (150% of
the warrant exercise price) for 20 consecutive trading days. The redemption
notice must be provided not more than five business days after conclusion of the
20 consecutive trading days in which the closing bid price of our common stock
equals or exceeds $10.73 per share. In the event we exercise our right to redeem
the warrants, the warrants will be exercisable until the close of business on
the date fixed for redemption in such notice. If any warrant called for
redemption is not exercised by such time, it will cease to be exercisable and
the holder will be entitled only to the redemption price of $0.05 per warrant.
We must have on file a current registration statement with the Securities and
Exchange Commission pertaining to the common stock underlying the warrants in
order for a holder to exercise the warrants or in order for us to redeem the
warrants. Shares underlying the warrants must also be registered or qualified
for sale under the securities laws of states in which the warrant holders
reside.
The warrants to purchase 120,000 shares of our common stock held by the selling
securityholder are identical in all respects (except as to redemption) to the
public warrants described above, EXCEPT THAT THE EXERCISE PRICE IS $9.15 PER
SHARE.
- 47 -
<PAGE>
Underwriter's Options
In connection with our May 1998 initial public offering, we issued options to
our underwriter who is referred to herein as the selling securityholder. The
options gave the underwriter the right to acquire:
o 120,000 shares of our common stock for $7.04 per share at any time prior
to May 13, 2003
o 120,000 warrants to acquire 120,000 shares of our common stock for $9.15
per share at any time prior to May 13, 2001
Listing
Our common stock and warrants trade on The Nasdaq National Market under the
symbols FDCC and FDCCW. There is no market for the selling securityholder's
options or warrants and none is expected to develop.
Transfer Agent, Warrant Agent and Registrar
Our transfer agent, warrant agent and registrar for our common stock and
warrants is American Securities Transfer & Trust, Incorporated, 1825 Lawrence
Street, Suite 444, Denver, Colorado 80202.
SHARES ELIGIBLE FOR FUTURE SALE
We have outstanding 5,463,897 shares of common stock, assuming no exercise of
the warrants, the selling securityholder's options or any other options or
warrants. Of these shares, the 1,380,000 shares of common stock sold in our
initial public offering are freely tradeable without restriction under the
Securities Act. We sold the remaining 4,083,897 shares of outstanding common
stock in private transactions and/or in reliance upon exemptions from
registration under the Securities Act. Those shares may be sold only pursuant to
an effective registration statement filed under the Securities Act, or an
applicable exemption, including the exemption contained in Rule 144 of the
Securities Act. We have filed registration statements on Form S-3 covering
2,263,567 of these shares.
In general, under Rule 144, our shareholders, including our affiliates, may sell
shares of restricted common stock after at least one year has elapsed since such
shares were acquired. The number of shares of common stock which may be sold
within any three-month period is limited to the greater of one percent of the
then outstanding common stock or the average weekly trading volume in our common
stock during the four calender weeks preceding the date on which notice of such
sale was filed under Rule 144. Other requirements of Rule 144 concerning
availability of public information, manner of sale and notice of sale must also
be satisfied. In addition, shareholders who are not affiliates (and who have not
been affiliates for 90 days prior to the sale) and who have beneficially owned
our restricted shares for over two years may resell the shares without
compliance with the foregoing requirements under Rule 144.
- 48 -
<PAGE>
No predictions can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of our common stock or warrants prevailing from time to time.
Nevertheless, sales of substantial amounts of our common stock or warrants, or
the perception that such sales may occur, could have a material adverse effect
on prevailing market prices.
LEGAL MATTERS
The validity under Colorado law of the shares will be passed upon for us by
Jones & Keller, P.C., Denver, Colorado. Members of that law firm own about 7,000
shares of our common stock.
EXPERTS
Our consolidated balance sheet at December 31, 1998, and the consolidated
statements of income, shareholders' equity and cash flows for each of the years
ended December 31, 1997 and 1998 included in this prospectus have been included
herein in reliance on the report of Ehrhardt Keefe Steiner & Hottman PC,
independent certified public accountants, given on the authority of that firm as
experts in accounting and auditing. With respect to the unaudited interim
consolidated financial information for the three months ended March 31, 1998 and
1999 included herein, the independent certified public accountants have not
audited or reviewed such consolidated financial information and have not
expressed an opinion or any other form of assurance with respect to such
consolidated financial information.
- 49 -
<PAGE>
=======================================================================
We have not authorized any dealer, salesperson or other person to give any
information or to make any representation not contained in this prospectus. This
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, any offer or solicitation by anyone in any jurisdiction not authorized,
or in which the person making such an offer or solicitation is not qualified to
do so or to any person to whom it is unlawful to make such an offer or
solicitation. By delivery of this prospectus we do not imply that there has been
no change in our affairs or that the information in this prospectus is correct
as of any time subsequent to its date.
---------------
TABLE OF CONTENTS
Page
Prospectus Summary....... 1
Risk Factors............. 4
Dilution................. 9
Use of Proceeds.......... 9
Capitalization........... 10
Dividend Policy.......... 10
Selected Financial Data.. 11
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 12
Business ................ 20
Management............... 38
Selling Securityholder... 44
Plan of Distribution..... 45
Description of Securities 46
Shares Eligible for Future Sale 48
Legal Matters............ 49
Experts.................. 49
Index to Financial Statements F-1
<PAGE>
FACTUAL DATA CORP.
----------------
PROSPECTUS
----------------
August 2, 1999
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Factual Data Corp. - Audited Financial Statements December 31, 1998
Independent Auditors' Report......................................F - 1
Financial Statements
Consolidated Balance Sheet....................................F - 2
Consolidated Statements of Income.............................F - 3
Consolidated Statement of Changes in Shareholders' Equity.....F - 4
Consolidated Statements of Cash Flows.........................F - 5
Notes to Consolidated Financial Statements........................F - 6
Factual Data Corp. - Unaudited Interim Financial Statements March 31,
1999
Financial Statements
Consolidated Balance Sheet...................................F - 24
Consolidated Statements of Income............................F - 25
Consolidated Statements of Cash Flows........................F - 26
Notes to Consolidated Financial Statements.......................F - 27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Factual Data Corp.
Fort Collins, Colorado
We have audited the accompanying consolidated balance sheet of Factual Data
Corp. and Subsidiaries as of December 31, 1998, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years ended December 31, 1997 and 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 Factual Data Corp.
and Subsidiaries as of December 31, 1998 and the results of their operations and
their cash flows for the years ended December 31, 1997 and 1998 in conformity
with generally accepted accounting principles.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
February 10, 1999
Denver, Colorado
<PAGE>
FACTUAL DATA CORP.
Consolidated Balance Sheet
December 31, 1998
Assets
Current assets
Cash ................................................. $ 1,093,295
Short-term investments (Note 4) ...................... 2,212,386
Prepaid expenses and other ........................... 105,964
Accounts receivable, net (Note 7) .................... 2,919,578
-----------
Total current assets .............................. 6,331,223
Property and equipment, net (Notes 5 and 7) ............ 2,976,419
Other assets (Notes 2 and 6) ........................... 8,869,259
-----------
$18,176,901
===========
Liabilities and Shareholders' Equity
Current liabilities
Current portion of long-term debt (Note 7) ........... $ 1,304,953
Accounts payable ..................................... 2,225,685
Accrued payroll and expenses ......................... 431,441
Income taxes payable ................................. 524,186
Deferred income taxes (Note 10) ...................... 59,291
-----------
Total current liabilities ......................... 4,545,556
-----------
Long-term debt (Note 7) ................................ 2,492,571
Deferred income taxes (Note 10) ........................ 302,762
Commitments and contingency (Note 11)
Shareholders' equity (Note 8)
Preferred stock, 1,000,000 shares authorized;
none issued and outstanding ......................... --
Common stock, 10,000,000 shares authorized;
3,551,346 issued and outstanding .................... 8,614,705
Retained earnings .................................... 2,221,307
-----------
Total shareholders' equity ........................ 10,836,012
-----------
$18,176,901
===========
See notes to consolidated financial statements.
F - 2
<PAGE>
FACTUAL DATA CORP.
Consolidated Statements of Income
For the Years Ended
December 31,
-----------------------------
1997 1998
----------- ------------
Revenue
Information services ..................... $ 606,211 $ 6,235,604
Ancillary income ......................... 650,592 1,451,104
System affiliates ........................ 1,428,811 2,198,260
Proceeds from the sale of Company operated
territories (Note 12) ................... 714,365 --
Training, license and other .............. 119,692 58,578
----------- -----------
Total revenue ......................... 3,519,671 9,943,546
----------- -----------
Operating Expenses
Costs of services provided ............... 1,301,085 4,986,064
Costs of Company operated territories sold 506,101 --
Selling, general and administrative ...... 916,521 2,603,589
----------- -----------
Total operating expenses .............. 2,723,707 7,589,653
----------- -----------
Income from operations ..................... 795,964 2,353,893
Other income (expense)
Other income ............................. 28,806 185,262
Interest expense ......................... (77,497) (152,421)
----------- -----------
Total other expense ................... (48,691) 32,841
----------- -----------
Income before income taxes ................. 747,273 2,386,734
Income tax expense (Note 10) ............... 244,339 810,000
----------- -----------
Net income ................................. $ 502,934 $ 1,576,734
=========== ===========
Basic earnings per share ................... $ .28 $ .59
=========== ===========
Basic weighted average shares outstanding
(Note 13) ................................. 1,800,000 2,680,753
=========== ===========
Diluted earnings per share ................. $ .28 $ .57
=========== ===========
Diluted weighted average shares outstanding
(Note 13) ................................. 1,800,000 2,769,214
=========== ===========
See notes to consolidated financial statements.
F - 3
<PAGE>
FACTUAL DATA CORP.
Consolidated Statement of Changes in Shareholders' Equity
For the Years Ended December 31, 1997 and 1998
<TABLE>
<CAPTION>
Common Stock Stock Total
--------------------------- Subscriptions Retained Shareholders'
Shares Amount Receivable Earnings Equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 .......... 1,800,000 $ 2,500 $ (500) $ 141,639 $ 143,639
Collection of stock subscription ...... -- -- 500 -- 500
Net income for the year ended
December 31, 1997 .................... -- -- -- 502,934 502,934
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 .......... 1,800,000 2,500 -- 644,573 647,073
Net proceeds of initial public offering
(net of offering costs of $1,474,795) 1,380,000 6,253,205 -- -- 6,253,205
Common stock issued in connection with
business acquisitions (Note 2) ....... 371,346 2,359,000 -- -- 2,359,000
Net income for the year ended
December 31, 1998 .................... -- -- -- 1,576,734 1,576,734
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 .......... 3,551,346 $ 8,614,705 $ -- $ 2,221,307 $10,836,012
=========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
FACTUAL DATA CORP.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended
December 31,
----------------------------
1997 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net income ................................... $ 502,934 $ 1,576,734
----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization .............. 355,084 776,094
Loss on sale of fixed assets ............... -- 25,454
Deferred income taxes ...................... 128,867 240,276
Basis of non-current assets of territories . 391,330 --
sold
Changes in operating assets and liabilities
Accounts receivable ...................... (325,503) (1,920,392)
Prepaid expenses and other ............... 10,217 (67,089)
Other assets ............................. (23,460) (37,604)
Accounts payable ......................... 111,590 1,323,142
Accrued payroll, payroll taxes and ....... 24,275 125,973
expenses
Accrued taxes and other .................. 30,017 615,987
----------- -----------
702,417 1,081,841
----------- -----------
Net cash provided by operating
activities............................. 1,205,351 2,658,575
----------- -----------
Cash flows from investing activities
Purchases of property and equipment .......... (592,868) (1,206,424)
Purchases of short-term investments .......... -- (2,212,386)
Proceeds from sale of property and equipment . 29,504 --
Purchase of intangibles ...................... -- (123,809)
Payments received on note receivable ......... 185,000 45,000
Increase in note receivable .................. (72,160) --
Net cash used in the acquisition of businesses (50,000) (3,604,900)
----------- -----------
Net cash used in investing activities .. (500,524) (7,102,519)
----------- -----------
Cash flows from financing activities
Line-of-credit, net .......................... (66,000) --
Principal payments on long-term debt ......... (255,078) (1,149,209)
Collection of common stock subscription ...... 500 --
Deferred offering costs incurred net of
accounts payable ............................ (36,491) --
Net proceeds in initial public offering (net
of offering expenses paid of $1,438,304) .... -- 6,289,696
Net cash (used in) provided by ......... (357,069) 5,140,487
financing activities
Net increase in cash and cash equivalents ...... 347,758 696,543
Cash and cash equivalents, at beginning
of period ..................................... 48,994 396,752
----------- -----------
Cash and cash equivalents, at end of period .... $ 396,752 $ 1,093,295
=========== ===========
</TABLE>
Supplemental disclosure of cash flow information:
Interest paid on borrowings for the years ended December 31, 1997 and 1998
was $108,919 and $131,731, respectively.
Cash paid for income taxes for the years ended December 31, 1997 and 1998
was $36,516 and $155,138, respectively.
Supplemental disclosure of non-cash investing and financing activities:
During 1997 and 1998, the Company financed fixed assets purchases totaling
$50,918 and $892,579, respectively, with notes payable and capital leases.
During 1997, the Company incurred $61,739 in offering costs that were
included in accounts payable.
During 1997, the Company acquired a business for $50,000 cash and a note
payable of $469,419 (Note 2). During 1998, the Company acquired eight
companies for $3,604,900 cash, notes payable of $2,899,790 and the
issuance of restricted stock of $2,359,000 (Note 2).
See notes to consolidated financial statements.
F - 5
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies
Organization
Factual Data Corp was incorporated in the state of Colorado in 1985. The company
was established for the purpose of providing information services nationally to
financial lending institutions primarily in the mortgage lending industry. In
April of 1997, the shareholders of Factual Data Corp and Lenders Resources,
Incorporated exchanged all of their outstanding shares of common stock in
exchange for 1.8 million shares of common stock in a newly formed holding
company called Factual Data Corp. (the Company).
The Company provides information services to lenders from its Company operated
offices and 54 franchised and licensed offices. Franchised and licensed offices
of the Company are referred to as system affiliates and related revenue derived
from such system affiliates is referred to as system affiliate revenues.
In exchange for system affiliate revenue from its system affiliates, the Company
provides certain on-going services that include sophisticated technology
systems, training, marketing/sales assistance, management, techniques, and
policy and procedure manuals.
The Company's sophisticated technology platforms used to develop new products
and services allowed the Company to begin providing employee background
information under EMPfactsSM QuickPeek IdentifierSM, and Tenant Qualifer reports
for employers and landlords.
Principles of Consolidation
The Company's consolidated financial statements include the accounts of Lenders
Resources Incorporated, FDC Group, Inc. and FDC Acquisition, Inc. All
intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers highly liquid
short-term investments with an original maturity of three months or less to be
cash equivalents. As of the balance sheet date, balances of cash and cash
equivalents at financial banking institutions exceeded the federally insured
limit by approximately $627,000. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant credit risk on
cash and cash equivalents.
Accounts Receivable
In the normal course of business, the Company extends unsecured credit to
virtually all of its customers and system affiliates related to providing
information services. The Company's customers and system affiliates are located
throughout the United States.
Because of the credit risks involved, management has provided an allowance for
doubtful accounts of approximately $25,000 which reflects its opinion of amounts
which will eventually become uncollectible. In the event of a complete default
by the Company's customers or system affiliates, the maximum exposure to the
Company is the outstanding accounts receivable balance at the date of default.
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 three to 39 years.
Intangible Assets
Intangible assets are stated at cost, and consist of goodwill, customer lists,
covenants not-to-compete and deferred acquisition costs. Goodwill and customer
lists are amortized using the straight-line method over fifteen years. Covenants
not-to-compete are amortized over the life of the agreements, which extend up to
five years.
Deferred acquisition costs consist of costs associated with the Company's
investigation of potential future acquisitions. These costs will be capitalized
upon completion of the acquisition or charged to expense if the acquisition is
unsuccessful.
Software Development Costs
The Company adopted the provisions of Statement of Position 98-1, "Accounting
for Costs of Computer Software Developed for Internal Use." Direct costs
incurred in the development of software are capitalized once the preliminary
project stage is completed, management has committed to funding the project and
completion and use of the software for its intended purpose are probable. The
Company ceases capitalization of development costs once the software has been
substantially completed and is ready for its intended use. Software development
costs are amortized over their estimated useful lives of three years. Costs
associated with upgrades and enhancements that result in additional
functionality are capitalized.
Income Taxes
Deferred income taxes result from temporary timing differences. Temporary timing
differences are differences between the tax basis of assets and liabilities and
their reported amounts in the financial statements that will result in taxable
or deductible amounts in future years. The Company's temporary differences
result primarily from depreciation of fixed assets, amortization of intangibles
and accrued vacation.
Revenue Recognition
Information Services
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. The services represent
revenue earned through Company owned locations.
Ancillary Income
Ancillary income consists of fees charged to licenses and franchises for
additional products and services provided to them.
System Affiliate
Pursuant to the various franchise and license agreements, system affiliates are
required to pay the Company royalties based on a percentage of sales. In
addition, system affiliates providing EMPfactsSM services are required to pay
$100 per month for national advertising conducted by the Company.
Royalties as allowed by the franchise and license agreements are accrued based
on the percentage of adjusted gross billings, as reported by system affiliates
and are included in accounts receivable.
Advertising fees paid to the Company are included in the Company's balance
sheet. At December 31, 1998, the Company had collected fees in excess of the
amount expended for advertising by approximately $24,000.
Software License Fees
The Company recognizes revenue from the licensing of computer software when the
customer accepts the configured master. Subsequent to customer acceptance, the
Company has no significant post contract support obligations.
Advertising Costs
The Company expenses advertising and promotional expenses as incurred.
Valuation of Long-Lived Assets
The Company assesses valuation of long-lived assets in accordance with Statement
of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be disposed of. The Company
periodically evaluates the carrying value of long-lived assets to be held and
used, including goodwill and other intangible assets, when events and
circumstances warrant such a review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow from such asset
is separately identifiable and is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved.
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 and cash
equivalents, receivables, prepaid expenses, accounts payable and accrued
expenses approximate their fair values as of December 31, 1998 because of the
relatively short maturity of these instruments.
The carrying amounts of notes payable and debt outstanding also approximate
their fair values as of December 31, 1998 because interest rates on these
instruments approximate the interest rate on debt with similar terms available
to the Company.
Earnings Per Share
The Company computes earnings per share in accordance with Statement of
Financial Accounting Standard No. 128. Basic earnings per share is computed
based on the weighted average number of common shares outstanding. Diluted
earnings per share is computed based on the weighted average number of common
shares plus potential dilutive common shares outstanding which includes common
stock options granted under the Company's stock option plan and warrants issued
in connection with the Company's IPO.
Short-Term Investments
The Company follows Statement of Financial Accounting Standards No. 115 (SFAS
115) to account for investments. Under SFAS No. 115, equity securities which
have readily determinable fair values and all investments in debt securities are
classified into three categories and accounted for as follows:
o Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and reported at
amortized cost.
o Debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings.
o Debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale
securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of
stockholders' equity net of deferred income taxes.
The Company classifies its investments in corporate debt securities with
original maturities in excess of three months as short-term investments
available for sale. The Company has the ability and intent to sell these
securities as needed.
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.
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.
Reclassifications
Certain amounts in the 1997 financial statements haven been reclassified to
conform with the 1998 presentation.
Note 2 - Acquisition of Assets
During the third and forth quarters of 1998, the Company purchased the assets of
seven businesses and acquired another Company in a merger transaction through
its wholly owned subsidiary FDC Acquisition, Inc. These transactions have been
accounted for as purchases. Amortization of acquired covenants not to compete
are over the life of the agreements of two to five years. Customer lists
acquired are amortized over fifteen years. Subsequent to December 31, 1998, the
Company acquired the assets of three businesses.
The aggregate purchase price of the Company's 1998 acquisitions has been
allocated to the assets purchased based on the fair market values on the date of
acquisition, as follows:
Accounts receivable ...................... $ 366,169
Computer equipment, furniture and fixtures 463,150
Prepaid expenses and other assets ........ 45,942
Non-compete agreements ................... 450,000
Customer lists ........................... 7,924,744
Liabilities assumed ...................... (386,315)
-----------
Subtotal ............................. 8,863,690
Notes payable less imputed discount ...... (2,899,790)
Common stock issued ...................... (2,359,000)
-----------
Cash paid, net ........................... $ 3,604,900
===========
The following table depicts the unaudited pro forma results of the Company
giving effect to its 1998 and January 1999 acquisitions as if they occurred on
January 1, 1997. The unaudited pro forma information is not necessarily
indicative of the results of operations of the Company had these acquisitions
occurred at the beginning of the years presented, nor is it necessarily
indicative of future results.
Year Ended
December 31,
-------------------------
1997 1998
----------- -----------
Revenue..................... $17,422,753 $23,970,038
=========== ===========
Net income after taxes...... $ 373,146 $ 2,993,917
=========== ===========
Basic earnings per share.... $ .18 $ 1.02
=========== ===========
Diluted earnings per share.. $ .18 $ .99
=========== ===========
The Company pays an entity owned by a stockholder a commission on all
successfully completed business acquisitions in which the entity is actively
involved. During the year ended December 31, 1998, the Company paid related
commissions on successful business acquisitions of approximately $70,000.
Note 3 - Employee Benefit Plan
The Company adopted a 401(k) plan effective November 1, 1998. Participation is
voluntary and employees are eligible to participate at age 21 and after one
month of employment with the Company. The Company matches 50% of the employees
contribution up to 4% of the employee's salary.
A participant's vested benefits if fairly distributed upon death or disability
and is distributed upon termination of employment according to the following
vesting schedule:
Years of Service Percentage
1 20%
2 40%
3 60%
4 80%
5 100%
The Company contributed $9,031 to the Plan for the year ended December 31, 1998.
Note 4 - Investment Securities
Due to the types of investments, the fair market values approximate the carrying
value as of December 31, 1998, therefore, no unrealized gain or loss has been
recorded.
The Company's investments are classified as available-for-sale and include the
following:
Corporate debt securities $ 743,688
U.S. Government debt securities 1,468,698
----------
$2,212,386
==========
Note 5 - Property and Equipment
Property and equipment consists of the following:
December 31,
1998
------------
Computer equipment and software $ 1,895,551
Furniture and fixtures ......... 1,853,048
Software development costs ..... 947,477
Leasehold improvements ......... 198,402
Vehicles ....................... 149,626
-----------
5,044,104
Less accumulated depreciation (2,067,685)
-----------
$2,976,419
==========
Note 6 - Other Assets
Other assets consist of the following:
December 31,
1998
------------
Deposits and other................................. $ 91,385
Customer lists (Note 2)............................ 8,370,673
Goodwill........................................... 8,771
Covenants not to compete (Note 2).................. 498,750
License agreement.................................. 75,000
Deferred acquisition costs and other............... 48,810
---------
9,093,389
Less accumulated amortization................... (224,130)
---------
$8,869,259
=========
Note 7 - Long-Term Debt
Long-Term Obligations
December 31,
1998
------------
Long-term debt obligations consist of the following:
Unsecured note payable to a corporation incurred in the
acquisition of a business. Note is payable in monthly
installments of $9,667. Note is non interest bearing and $155,042
matures May 2000......................................
Unsecured note payable to a corporation, monthly principal
and interest payments of $6,000 through November 1999. 90,655
Interest at 9.5%......................................
Unsecured note payable to a individual, monthly principal
payments are the greater of $750 or 5% of gross billable
revenue of a certain corporate-owned franchise with the 57,640
balance due August 31, 2002. Interest at 8.5%........
Various notes payable to financial institutions. Monthly
principal and interest payments ranging from $394 to
$855. Interest rates vary from 7.7% to 8.15%. Notes
mature at various times ranging from May 2001 to October
2003. Notes are collateralized by certain fixed assets 65,039
and automobiles.......................................
Note payable to a corporation incurred in an acquisition of
a business. Quarterly principal and interest payments of
$95,450 through June 2003. Interest at 8%. Note is
collateralized by a security agreement and assets acquired 1,430,991
in the acquisition....................................
Notes payable to two individuals and a related corporation
incurred in the acquisition of a business. The Notes are
payable by the following terms: lump sum payment due
January 1, 1999 in the amount of $61,500 and monthly
principal payments of $12,501 through August 2000. Notes
are non-interest bearing and are secured by a security 343,135
agreement and assets acquired in the acquisition......
Various notes payable to corporations incurred in
several acquisitions. Quarterly principal payments
totaling $52,500. Notes are non interest bearing
and are beginning September 2000 to October 2000.
Notes are secured by a 382,691 security agreement and assets
acquired in the acquisitions.......................... 382,691
<PAGE>
Note 7- Long-Term Debt (continued)
December 31,
1998
-----------
Notes payable to a corporation incurred in acquisitions.
Monthly principal payments totaling $9,027. Notes are non
interest bearing and expires September 2000.
Collateralized by security agreement and assets acquired 456,029
in the acquisition....................................
Various capital leases with monthly payments totaling
$18,285, including interest and expiring through December
2003. Collateralized by office furniture and equipment.
The net book value at December 31, 1998 for the fixed assets
leased amounted to $811,795........................... 816,302
----------
3,797,524
Less current portion (1,304,953)
----------
$2,492,571
==========
As of December 31, 1998, future maturities of long-term obligations are as
follows:
Long-term Capital
Year ending December 31, Debt Leases Total
------------ ----------- ------------
1999............. $1,165,510 $ 216,194 $1,381,704
2000............. 884,035 219,961 1,103,996
2001............. 341,399 219,961 561,360
2002............. 360,705 219,961 580,666
2003............. 216,933 159,874 376,807
Thereafter....... 12,640 - 12,640
---------- ---------- ----------
2,981,222 1,035,951 4,017,173
Less amount
representing interest. - (219,649) (219,649)
---------- ---------- ----------
Total principal.. 2,981,222 816,302 3,797,524
Less current portion (1,165,510) (139,443) (1,304,953)
---------- ---------- ----------
$1,815,712 $ 676,859 $2,492,571
========== ========== ==========
Note 8 - Shareholders' Equity
Warrants
The Company has reserved (i) 1.5 million shares of Common Stock for issuance on
exercise of 1.5 million warrants issued with respect to its initial public
offering, (ii) 120,000 shares of Common Stock for issuance on exercise of
options granted to the Company's underwriters of its initial public offering,
and (iii) 200,000 shares of Common Stock for issuance on exercise of options
issued under the Company's 1997 Stock Incentive Plan (the "ISOs"), of which
options to purchase 31,500 shares had been granted as of December 31, 1998. With
respect to the Warrants, (a) 1.38 million have an exercise price of $7.15 per
share and do not expire until May 13, 2001 (the "Redeemable Warrants"); and (b)
120,000 have an exercise price of $9.15 per share and do not expire until May
13, 2002. Commencing on May 13, 1999, the Redeemable Warrants may be redeemed by
the Company, in whole but not in part, at a price of $.05 per Redeemable Warrant
at such time as the closing bid price of the Common Stock equals or exceeds
$10.73 (150% of the exercise price) for 20 consecutive trading days. The
Underwriter Options have an exercise price of $7.04 per share and do not expire
until May 13, 2004.
Stock Option Plan
Management of the Company has adopted a stock option plan whereby the Board of
Directors can issue both tax qualified and nonqualified options to officers,
employees, consultants and others. Under the plan, 200,000 shares of the
Company's stock is reserved for options to be issued in the future. The Company
issued 22,000 shares to employees under the plan in connection with its IPO of
which 21,500 shares were outstanding at December 31, 1998. These shares vest
equally over three years from the date of grant. The following summarizes the
activity under the Company's stock option plan:
<TABLE>
<CAPTION>
Number of Exercise
Shares Price Expiration
----------- ------------ ---------------------
<S> <C> <C> <C>
Balance at January 1, 1997
and 1998 - -
Stock options granted 32,000 $5.50 - 6.50 May 2001 - June 2001
Stock options cancelled (500) 5.50 May 2001
-------- ------------
Balance at December 31, 1998 31,500 $5.50 - 6.50 May 2001 - June 2001
======== ============
</TABLE>
The weighted average exercise price at December 31, 1998 was $5.74 and the
weighted average remaining contractual life of the Company's options was 2.42
years.
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
123). Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, there would not be a
material effect on 1998 net income. The fair value of each grant option is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions used for grants: dividend yield of
0%; expected volatility of 35%; discount rate of 5.5% and expected lives of 3
years.
Note 9 - Business Segments
Operating results and other financial data are presented for the principal
business segments of the Company for the years ended December 31, 1997 and 1998.
Total revenue in one business segment includes information services which
represent sales by Company operated territories, in another segment, ancillary
revenues, the third segment consists of system affiliate revenue and training,
license, and other revenues with the fourth segment being sales of Company
operated territories, as reported in the Company's consolidated financial
statements.
Identifiable assets by business segment are those assets used in the Company's
operation of each segment.
<TABLE>
<CAPTION>
System
Affiliates Sales of
and License, Company
Information Ancillary Training and Operated
Services Income Other Territories Totals
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1997
Net sales ............ $ 606,211 $ 650,592 $1,548,503 $ 714,365 $ 3,519,671
Cost of services and
territory sales ..... $ 236,640 $ -- $1,064,445 $ 506,101 $ 1,807,186
Gross profit ......... $ 369,571 $ 650,592 $ 484,058 $ 208,264 $ 1,712,485
Total assets ......... $1,364,049 $ -- $1,500,036 $ -- $ 2,864,085
Depreciation and
amortization ........ $ 111,100 $ -- $ 214,824 $ 29,160 $ 355,084
Capital expenditures . $ 2,069 $ -- $ 590,799 $ -- $ 592,868
December 31, 1998
Net sales............. $6,235,604 $1,451,104 $2,256,838 $ - $ 9,943,546
Cost of services and $3,988,948 $ - $997,116 $ - $ 4,986,064
territory sales........
Gross profit ......... $2,246,656 $1,451,104 $1,259,722 $ - $ 4,957,482
Total assets.......... $17,006,221 $ - $1,170,680 $ - $18,176,904
Depreciation and
amortization......... $671,484 $ - $104,610 $ - $ 776,094
Capital expenditures.. $1,833,284 $ - $265,719 $ - $ 2,099,003
</TABLE>
Note 10 - Income Taxes
Deferred tax liabilities and assets are determined based on the difference
between the financial statement assets and liabilities and tax basis assets and
liabilities using the tax rates in effect for the year in which the differences
occur. The measurement of deferred tax assets is reduced, if necessary, by the
amount of any tax benefits that based on available evidence, are not expected to
be realized.
The components of the provision for income tax expense for the year ended
December 31, 1997 and 1998 are as follows:
December 31,
-----------------------
1997 1998
----------- ---------
Current................................. $115,472 $661,236
Deferred................................ 128,867 148,764
-------- --------
$244,339 $810,000
======== ========
The deferred income tax assets and liabilities result primarily from differing
depreciation and amortization periods of certain assets, research and
development credits, and the recognition of certain expenses for financial
statement purposes and not for tax purposes.
The net current and long-term deferred tax liabilities in the accompanying
balance sheet include the following items:
December 31,
1998
------------
Current deferred tax asset.............. $ 48,090
Current deferred tax liability.......... (107,381)
----------
$ (59,291)
==========
Long-term deferred tax asset............ $ 30,529
Long-term deferred tax liability........ (333,291)
----------
$ (302,762)
==========
Rate Reconciliation
The reconciliation of income tax expense by applying the Federal statutory tax
rates to the Company's effective income tax rate is as follows:
December 31,
----------------------
1997 1998
--------- ----------
Federal statutory rate..................... 34.0% 34.0%
State tax on income, net of federal income tax 3.3 3.3
benefit..................................
Research tax credits....................... (3.6) (1.0)
Other, net................................. (1.0) (2.4)
--------- --------
32.7% 33.9%
========= =========
Note 11 - Commitments
During 1998, the Company relocated its corporate office and began a new 20 year
lease. The lease is an operating lease agreement which provides for the monthly
payment of $23,483 and expires March 2018. Rent expense under this operating
lease and the previous corporate office lease totaled $147,452 and $276,053 for
the years ended December 31, 1997 and 1998, respectively.
The Company assumed various other operating leases for equipment and office
space in connection with its business acquisitions described in Note 2. The
leases have expiration dates ranging from 1999 to 2003. Payments on these leases
totaled $139,222 in 1998. In addition, the Company signed two new leases in 1998
for office space to consolidate several acquired offices within the same cities.
These leases expire in 2008 and 2009. Payments on these leases totaled $21,658
in 1998.
Future minimum annual lease payments are as follows:
Year Ended December 31,
1999.......................... $1,026,585
2000.......................... 887,348
2001.......................... 871,129
2002.......................... 850,934
2003.......................... 793,341
Thereafter.................... 7,715,507
----------
$12,144,844
==========
The Company is subject from time to time to legal proceedings and claims which
arise in the ordinary course of its business. The Company believes that the
final disposition of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.
The Company maintains a self-insured medical insurance program for its
employees. The Company reimburses employees for qualified medical services up to
$10,000 per employee per plan year. The reimbursement owed to employees as of
December 31, 1998 amounted to approximately $42,000.
Note 12 - Sale of Territories
In January 1997, the Company sold its Texas territories which were reacquired by
the Company from certain franchisees from 1990 to 1995. The sales price was
$714,000 which was paid in cash. The purchaser acquired accounts receivable of
$115,000, net intangibles of $276,000, and net fixed assets of $115,000. In the
third quarter of 1998, the Company repurchased these territories for
approximately $1,600,000 (Note 2).
<PAGE>
Note 13 - Earnings Per Share
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share (EPS) computations:
For the Year Ended December 31, 1998
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $1,576,734
Basic EPS
Weighted average beginning
shares outstanding - 1,800,000
Weighted average IPO shares issued - 850,220
Weighted average shares issued
in business acquisitions - 30,534
----------- ----------
Income available to common 1,576,734 2,680,753 $ .59
stockholders ============
Effect of Dilutive Common Stock
Options 11,897
Warrants - 76,564
Diluted EPS
Income available to common
stockholders plus assumed
conversions $1,576,734 2,769,214 $ .57
=========== ========== ============
<PAGE>
FACTUAL DATA CORP.
Consolidated Balance Sheets
March 31, 1999 (Unaudited)
Assets
Current assets
Cash and cash equivalents ............................. $10,607,214
Short-term investments ................................ --
Prepaid expenses and other ............................ 292,821
Accounts receivable, net .............................. 3,603,521
Stock subscription receivable (paid in full - ......... 4,500,000
-----------
April 1999)
Total current assets ................................. 19,003,556
Property and equipment, net ............................. 3,551,917
Intangibles and other assets ............................ 12,055,224
-----------
$34,610,697
===========
Liabilities and Shareholders' Equity
Current liabilities
Current portion of long-term debt ..................... $ 1,879,942
Accounts payable ...................................... 3,704,223
Accrued payroll and expenses .......................... 447,202
Income taxes payable .................................. 179,221
Deferred income taxes ................................. 59,291
-----------
Total current liabilities ............................ 6,269,879
-----------
Long-term debt .......................................... 3,153,496
Deferred income taxes ................................... 311,749
Commitments and contingency
Shareholders' equity
Preferred stock, 1,000,000 shares authorized;
none issued and outstanding ........................... --
Common stock, 10,000,000 shares authorized;
5,327,729 issued and outstanding ...................... 22,145,733
Retained earnings ....................................... 2,729,840
-----------
Total shareholders' equity ........................... 24,875,573
$34,610,697
===========
See accompanying notes to the unaudited consolidated financial statements
which are an integral part of these consolidated financial statements.
<PAGE>
FACTUAL DATA CORP.
Consolidated Statements of Income
For the Three Months Ended
March 31,
----------------------------
1998 1999
----------- -----------
(Unaudited)
Revenue
Information services .................... $ 568,196 $ 4,391,299
Ancillary income ........................ 429,320 477,714
System affiliates ....................... 586,555 483,869
Training, license and other ............. 1,005 --
----------- -----------
Total revenue .......................... 1,585,076 5,352,882
Operating Expenses
Costs of services provided .............. 446,713 3,199,662
Selling, general and administrative ..... 392,686 1,293,407
----------- -----------
Total operating expenses ............... 839,399 4,493,069
----------- -----------
Income from operations .................... 745,677 859,813
Other income (expense)
Other income ............................ 10,236 59,797
Interest expense ........................ (18,969) (85,854)
----------- -----------
Total other expense .................... (8,733) (26,057)
----------- -----------
Income before income taxes ................ 736,944 833,756
Income tax expense ........................ 272,669 325,223
----------- -----------
Net income and comprehensive income ....... $ 464,275 $ 508,533
=========== ===========
Basic earnings per share .................. $ .26 $ .14
=========== ===========
Basic weighted average shares outstanding . 1,800,000 3,596,663
=========== ===========
Diluted earnings per share ................ $ .26 $ .13
=========== ===========
Diluted weighted average shares outstanding 1,800,000 3,790,037
=========== ===========
See accompanying notes to the unaudited consolidated financial statements
which are an integral part of these consolidated financial statements.
<PAGE>
FACTUAL DATA CORP.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------------
1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income ................................... $ 464,275 $ 508,533
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization ............... 108,822 434,233
Deferred income taxes ....................... 25,611 8,988
Changes in operating assets and liabilities
Accounts receivable ........................ (552,617) (683,943)
Prepaid expenses ........................... (15,598) (186,857)
Other assets ............................... 10,301 (78,399)
Accounts payable ........................... 472,369 434,353
Accrued payroll, payroll taxes and expenses (62,173) 15,761
Accrued taxes and other .................... 214,123 (344,965)
------------ ------------
200,838 (400,829)
------------ ------------
Net cash provided by operating activities 665,113 107,704
------------ ------------
Cash flow from investing activities
Purchase of property and equipment ........... (292,056) (681,083)
Increase in note receivable .................. (3,263) --
Net cash used in the acquisition of businesses -- (1,693,820)
Sales of short-term investments .............. -- 2,212,386
------------ ------------
Net cash used in investing activities .... (295,319) (162,517)
------------ ------------
Cash flows from financing activities ........... (100,050) (480,981)
Principal payments on long-term debt ......... (109,946) --
Net proceeds in private placement offering
(net of offering expenses paid of $450,287) .. -- 10,049,713
------------ ------------
Net cash provided by (used in) financing
activities .............................. (209,996) 9,568,732
------------ ------------
Net increase in cash and cash equivalents ...... 159,798 9,513,919
Cash and cash equivalents, at beginning of
period ........................................ 396,752 1,093,295
------------ ------------
Cash and cash equivalents, at end of period .... $ 556,550 $ 10,607,214
============ ============
</TABLE>
Supplemental disclosure of cash flow information: Interest paid on borrowings
for the three months ended March 31, 1998 and 1999 was $18,969 and $85,854,
respectively.
Supplemental disclosure of non-cash investing and financing activities: During
the three months ended March 31, 1998 and 1999, the Company financed
fixed assets purchases totaling $80,846 and $60,870, respectively, with
notes payable and capital leases.
During the three months ended March 31, 1998 and 1999, the Company incurred
$56,785 and $1,018,685, respectively, in offering costs that were included
in accounts payable.
During the three months ended March 31, 1999, the Company acquired five
companies for $1,693,820 cash and notes payable and other liabilities of
$1,470,811. (See Note 2)
During the three months ended March 31, 1999, the company assumed other
liabilities with prior acquisitions totaling $210,714.
See accompanying notes to the unaudited consolidated financial statements
which are an integral part of these consolidated financial 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 audited financial statements for the
years ended December 31, 1997 and 1998 included elsewhere in this document. The
results of operations for the three months ended March 31, 1999, may not be
indicative of the results of operations for the year ended December 31, 1999.
The Company invested in short-term government, government guaranteed and
investment grade securities. As of March 31, 1999 there were no unrealized gains
or losses on the Company's investments in marketable debt securities as fair
market value approximated amortized cost.
The Company's diluted earnings per share takes into account warrants issued in
the Company's IPO and other outstanding stock options.
Note 2: Business Acquisitions
The Company consummated five acquisitions in the first quarter 1999. The
acquisitions have been accounted for using the purchase method and the results
of operations are reflected in the consolidated financial statements from the
dates of acquisition. The assets were allocated as follows:
Non-Cash Consideration Purchase Price Allocation
- ------------------------------------- -------------------------------
Notes payable $1,445,311 Property and equipment $ 61,900
Holdback payable 25,500 Other assets 8,171
---------- Intangibles 3,094,560
1,470,811 ---------
Cash payment 1,635,016 Total $3,164,631
==========
Acquisition costs 58,804
----------
1,693,820
----------
Total consideration $3,164,631
==========
The amortization periods of the intangibles, which are customer lists and
non-compete agreements, are fifteen years and two to five years, respectively.
Note 3 - Private Equity Offering
In March 1999, the Company completed a private equity offering of 1,854,714
shares of common stock to certain institutional investors. The Company raised
$15 million in gross offering proceeds, and after offering expenses netted
approximately $13.5 million. The Company collected all but $4.5 million as of
March 31, 1999 and the balance was received in early April of 1999. In
connection with the private equity offering, the Company issued a warrant to the
underwriter to purchase 55,641 shares of the Company's common stock at an
exercise price of $8.08 per share expiring on April 1, 2004. The Company intends
to use the proceeds to continue to pursue its consolidation strategy and for
general working capital purposes as needed.
