SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
December 31, 1999
Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934--N/A
Commission File No. 0-24205
FACTUAL DATA CORP.
(Exact name of Small Business Issuer in its charter)
Colorado 84-1449911
---------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5200 Hahns Peak Drive, Loveland, Colorado 80538
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(Address of principal executive offices) (Zip code)
(970) 663-5700
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None.
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock
and
Warrants to Purchase Common Stock
(Title of Classes)
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The aggregate market value of the voting common equity held by non-affiliates of
the Registrant on March 27, 2000, was approximately $15,765,420 based upon the
reported closing sale price of such shares on the Nasdaq National Market for
that date. As of March 27, 2000, there were 5,380,103 shares outstanding of
which 1,910,960 are held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE: -NONE-
The exhibit index appears on page E-1.
<PAGE>
FACTUAL DATA CORP.
1999 Annual Report on Form 10-KSB
Table of Contents
Item Description Page
---- ---------------------------------------- ----
Item 1. Description of Business 1
Item 2. Description of Properties 14
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 16
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7. Financial Statements 25
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 25
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 26
Item 10. Executive Compensation 30
Item 11. Security Ownership of Certain Beneficial Owners and
Management 35
Item 12. Certain Relationships and Related Transactions 37
Item 13. Exhibits and Reports on Form 8-K 38
<PAGE>
Item 1. Description of Business.
A short history of Factual Data Corp.
Factual Data Corp. was formed in 1985 to provide customized credit reports
to mortgage lenders. In the past fifteen years, we have greatly expanded our
business by developing a wide range of information services and sophisticated
technology to deliver those services. We were among the pioneers in delivering
business-to-business information services via electronic commerce. For over
seven years, our customers have been able to reap the benefits of our
information services by way of electronic order and delivery with the touch of a
few buttons from their PC. Today, nearly all of our customers receive our
customized reports by modem or network delivery directly to their computers.
As we headed into 1999, Factual Data's portfolio of services included
fully automated consumer credit reports, employee screening, resident screening,
and similar information services for businesses and government-sponsored
enterprises. But 1999 was a year of dramatic transition. Our expanded team of
programming, information, and marketing specialists focused intently on making
Factual Data's proprietary technology useful for a wider variety of purposes. As
a result of that effort, we can now give our customers in any industry the facts
they need, in a format they can use, to make their business decisions. We can
manipulate our information gathering and analysis platform in an endless variety
of ways. For example, we can generate reports to help commercial lenders, home
equity lenders, and credit unions make lending decisions; to help franchisers
assess prospective franchisees; and to help businesses evaluate prospective
customers, vendors, and venture partners.
Factual Data is based in Loveland, Colorado. Our Web site, which is the
principal gateway to all of our services, is at www.factualdata.com.
Factual Data became a public traded company in 1998. Our common stock
trades on Nasdaq under the symbol "FDCC," and our warrants trade under the
symbol "FDCCW."
For more information about:
Factual Data's expanded capabilities, please see "Factual Data's
emergence as a provider of diverse information services"
Factual Data's specific products and services, please see "Products
and services"
Factual Data's common stock and warrants, please see Item 5
Terminology
There are several instances in this Report where we use language that is
unique to Factual Data or to our industry. For your convenience, we'd like to
explain a few of those phrases here.
A consumer report is any communication of information by a "consumer
reporting agency" that bears on a consumer's credit worthiness, credit
standing, credit capacity, character, general reputation, or personal
characteristics and that contributes to a decision about the
consumer's eligibility for credit, insurance, or employment.
The Credit Repositories are Equifax, Inc., Experian, Inc., and
TransUnion Corporation. These three firms are the leading domestic
suppliers of consumer credit data.
The FCRA is the Fair Credit Reporting Act, a federal statute that
governs the collection, use and sale of consumer reports and regulates
consumer reporting agencies--entities like Factual Data that engage in
the business of compiling and selling consumer reports.
Freddie Mac and Fannie Mae are government-sponsored enterprises that
purchase the majority of mortgages originated in the United States and
package them as securities.
An MCR is a mortgage credit report, which is a detailed summary of a
prospective borrower's credit history. Lenders typically require MCRs
before making new mortgage loans, as do entities that buy packages of
mortgage loans from the original lenders.
Factual Data Corp. provides services nationally through 44 locations.
Approximately 30 of these Factual Data offices are independently owned
franchises or simply license our technology to service their
customers. We refer to these firms as System Affiliates.
Factual Data's emergence as a provider of diverse information services
Factual Data has over fifteen years of experience in the field of
gathering and analyzing data and presenting it in the manner that best informs
our customers. During 1999, we devoted substantial resources to upgrading our
Technology Centers, refining our proprietary software, and expanding our team of
experienced managers, programmers, and customer service staff. Now, Factual Data
is poised to offer one of the most diverse and comprehensive directories of
business information solutions in the industry.
Business managers make dozens of choices every week about matters like who
to hire, who to finance, and whose wares to buy. Firms in some industries, like
consumer and mortgage lenders, make thousands of decisions each day--often based
on automated formulae or scores. Factual Data can arm decision makers (or their
decision-making software) with the facts they need to make informed choices
efficiently. We view each problem on three levels.
First, what is the universe of information that could possibly be useful
in making a business decision? There is an enormous amount of data about
people--such as credit history, tax records, criminal records, court filings,
driving records, academic records, and employment history--that is available for
use under suitable business circumstances. Commercial enterprises generate a
similar body of information, and (to a lesser extent) so do buildings and
parcels of land. Few companies can afford to have experienced researchers on
staff to mine the available sources of data, but Factual Data has instant
electronic access to many of them.
Second, what type of information is most useful for each particular
category of decision? For example, a property manager understandably cares about
a prospective resident's credit history, but is less interested in knowing how
many speeding tickets the resident has collected. Prospective employers want to
confirm applicants' claims about their academic credentials and employment
history, but may not care to know about an applicant's legal dispute with his or
her plumber, and are prohibited from considering the details of an applicant's
recent bankruptcy. Factual Data's proprietary technology enables us to sort
through the universe of raw data to deliver only what is relevant to the
inquiry.
Third, and most important, what information does the customer want, and
what delivery method and format would make that information most useful? With
Factual Data's expertise and enhanced proprietary Web application software, we
can:
Deliver a written report about a particular person, business, or
property containing data obtained from our third party sources, neatly
consolidated and organized according to the customer's specifications.
Integrate information we uncover from our third party sources with
details a customer has obtained (perhaps from the application of a
prospective borrower, resident, or employee), reconcile any
differences, assign the applicant a score based on the customer's
predetermined criteria, and feed the results directly into the
customer's computer system.
Use our third party sources and personal interviews to confirm
information that an applicant has self-reported.
Scan a portfolio of files (perhaps all of a lender's new loans for the
month, or all of a company's recent hires) and generate a report
summarizing selected data.
Unless restricted by law, regardless of what a customer needs to know and
how they want to receive the information, Factual Data can accommodate the
inquiry. To learn more about our specific products and services for lenders,
employers, property managers, and business owners, please see the next section,
entitled "Products and services."
Products and services
Factual Data specializes in gathering data from a wide range of sources,
and then adding value by analyzing that information and presenting and
delivering it in the manner that best suits each customer's decision-making
process. Although we have the expertise and flexibility to serve customers with
informational needs that we haven't yet considered, naturally there are some
products and services that we provide with great frequency and that form the
foundation of our business.
Lender services
Mortgage credit reports or MCRs. Credit data provided directly from the
three Credit Repositories is often inconsistent, is not presented in a
customized or consolidated format, and may be difficult to interpret. Lenders
also may need to have credit information independently verified, or need more
information than the Credit Repositories can provide.
Factual Data offers customized MCR products to satisfy a range of needs.
Each Factual Data MCR meet all government and industry standards.
Factual Data's Bureau Express Report, which offers merged information from
the Credit Repositories in a customer-designed format, is our most popular MCR.
We can resolve inconsistencies in the Credit Repositories' results, and, at the
customer's option, Factual Data will also generate industry standard credit
scores, which help lenders quickly assess prospective borrowers and make
objective, impartial lending decisions. Our customer service staff will quickly
verify and update any item required by the lender.
Customers can obtain Bureau Express Reports in several ways, including
visiting Factual Data's Web site. These MCRs are compiled by our proprietary
computer and telecommunications systems in seconds.
Factual Data and its System Affiliates delivered approximately 3.45
million MCRs in 1999. Over 90% of these were ordered and received via
e-commerce.
Flood determination certificates, and bundled MCR and flood determination
certificates. In 1998, Factual Data introduced the first, multi-vendor
integrated software providing both credit information and flood determinations
for the mortgage industry. Our customers can obtain credit and flood-related
information in a single report by submitting requests over a network or modem
directly to Factual Data's upgraded Technology Centers. Results are returned
on-line, usually within seconds. We also offer flood determination certificates
as a standalone product.
In 1999, U.S. mortgage lenders obtained over 9 million flood
certifications from a variety of sources. Factual Data and its System Affiliates
serviced 17,452 of those requests. In nearly all of these cases, the customer
also required credit information. Factual Data's management believes that we can
dramatically increase our share of the profitable flood certificate market by
offering lenders the convenience of a merged credit and flood determination
report.
Tax record search. Factual Data can deliver tax information obtained
directly from IRS records to help lenders verify an applicant's income and
social security number.
Automated property valuation model. This tool uses both public and
proprietary data to derive the fair market value of land and buildings that
lenders may consider financing or accepting as collateral.
QuickScore(TM). Automated underwriting systems, as well as human
underwriters, typically rely on standardized credit scoring systems to evaluate
prospective borrowers. Many lenders retain Factual Data to separately confirm
and update prospective borrowers' credit histories and calculate credit scores
based on current information to ensure their customers are not jeopardized by
outdated or inaccurate data.
Third party originator review. Many wholesale lenders work with multiple
independent loan originators, such as mortgage brokers and correspondent
lenders, who administer loan applications, educate borrowers about their
options, and arrange for financing. Loan originators typically must be licensed
and meet other requirements that vary from state to state. Lenders wishing to
confirm that they are dealing only with qualified, licensed, and reputable loan
originators retain Factual Data to check originators' license information,
criminal records, credit history, and other pertinent information.
Credit Scan(TM) pre-funding credit research. Factual Data's Credit Scan
services help mortgage lenders detect and avoid problems like early payment
defaults, foreclosures, repurchases, indemnification requests, and outright
fraud, before funding a loan.
Post-closing audit. After a loan is funded, lenders' quality assurance
personnel rely on this service to quickly evaluate loans for compliance audits.
Portfolio review. Factual Data can analyze large groups of loan files and
generate a report that summarizes or compares underlying data. For example, a
portfolio review will quickly determine how many loans a lender financed in a
particular geographic area, how many loans are outstanding in various dollar
ranges, or what the average credit score is among a lender's current borrowers.
Employer services
Factual Data's Web based employee screening services help employers verify
job applications and make informed hiring decisions. We offer two types of
reports to meet employers' unique requirements.
EMPfacts is a state-of-the-art, accurate background check that verifies an
applicant's professional, educational, and personal history. A Factual Data
EMPfacts Report can include, at the customer's option:
results of substance abuse testing
driving records
worker's compensation history
public records information (such as judgments and tax liens)
fraud searches
criminal records
educational background
financial reports
address verification
employment history
social security number search
professional license verification
psychological testing
The Empfacts Quick I.D. is an instant employment screening report,
delivered to customers via Factual Data's Web site in seconds. Using an
applicant's name, address and social security number, Quick I.D. can generate
employment information, a public records search, a fraud search, financial
summaries, and residence information. Once an applicant has been pre-qualified
based on the instant Quick I.D., customers can order more detailed Empfacts
information over the Web.
Factual Data and its System Affiliates delivered 88,223 EMPfacts Reports
during 1999.
Property management services
Factual Data designed Resident Qualifier specifically for property
managers. A Resident Qualifier Report contains verified information regarding a
proposed resident based on Credit Repository data, employment history, public
records, residence history, payment habits, criminal background, and eviction
data. Resident Qualifier is unique in that it provides a customizable scoring
system to help property managers impartially screen applicants as required by
fair housing standards and regulations mandating nondiscriminatory rental
practices.
Factual Data and its System Affiliates delivered 147,445 Resident
Qualifier Reports via electronic commerce during 1999.
Business information services
Factual Data's CorpData Reports provide credit profiles on businesses of
all sizes and their owners. Our customers use these reports, which are based on
objective third party accounts of payment history and other information, to
evaluate prospective clients, vendors, franchisees, licensees, and venture
partners.
Industry overview, competition, and how Factual Data intends to keep
growing
The primary competitive factors in the information services industry are:
responsiveness and reliability of customer service personnel
accuracy and thoroughness of reports
readability of reports--both by human personnel and by decision-making
software
technological sophistication
turnaround time
price
name recognition
security
Factual Data is distinguishable from its competitors in virtually all of
these areas, but our strength derives primarily from our technological
sophistication. Factual Data's advanced proprietary software enables us to
deliver thorough, accurate reports that meet our customers' formatting
specifications with both speed and economy. We also go to great lengths to
ensure the security of information that we receive and reports that we generate.
To management's knowledge, Factual Data is the only U.S. information services
provider that requires every employee to be certified under the FCRA. Moreover,
Factual Data voluntarily submits to regular audits by ICSA, a leading
independent e-commerce security firm. For more information about confidentiality
and security measures, please see "Government regulation and privacy issues"
below.
When Factual Data was formed in 1985, companies offering background checks
and credit information had no choice but to perform their services manually. We
contacted creditors, lenders, employers, landlords, and other businesses by
telephone, and we personally sorted through public files and other data sources
to discover and verify information.
In the past decade, the industry has experienced significant change in
terms of how services are requested, how information is obtained and confirmed,
and how data is formatted and delivered to the customer. These changes have been
driven by advances in computer systems and communications technology, as well as
increasing customer demands for more information delivered fast. Now,
information service providers must maintain--and continually
enhance--sophisticated technology, and must hire and train staff to use that
technology effectively. Factual Data was among the first in the industry to
recognize the potential of electronic commerce and to develop the systems and
expertise required to exploit that potential.
Because it is both difficult and expensive to keep abreast of
technological advances, we believe that the information services industry will
consolidate, and that the market may become dominated by a handful of companies
that have proven technological capabilities and diversified product lines. As
the industry becomes increasingly automated and customized, we believe that
Factual Data's state-of-the-art Technology Centers and comprehensive menu of
information services will allow us to continue to compete aggressively. For more
information about Factual Data's Technology Centers, please see "Description of
Properties" below.
The lender services industry. Approximately 1,400 companies provide
mortgage credit reporting and other lender information services in the United
States. A significant number of Factual Data's competitors are small companies
operating on a local scale. Only a limited number are large organizations or
companies with the technological capabilities to service customers
electronically. Similarly, few provide more than mortgage credit reports. In
contrast, Factual Data offers a range of services designed to meet all of a
lender's informational requirements. See "Products and services" above.
In addition to offering a comprehensive array of lender services, Factual
Data derives market strength from our relationship with Fannie Mae and Freddie
Mac. As the two largest sources for capital for the mortgage industry, these
government-sponsored enterprises have developed numerous programs to simplify
the underwriting process and lower the overall costs for both borrowers and
lenders. To protect the integrity of their automated underwriting systems, both
entities limit the number of directly approved service providers. Factual Data
is one of only five direct credit providers approved on both the Fannie Mae
Desktop Underwriter and Freddie Mac Loan Prospector systems. Because they rely
on sound empirical data, these two automated systems have proven to be reliable
and cost-effective for mortgage lenders. The expertise Factual Data has gained
in developing alliances with Fannie Mae and Freddie Mac gives us significant
credibility, as well as a strong market position as automated decision engines
become more prominent in the credit industry.
The mortgage credit reporting business is directly influenced by the
mortgage lending environment. The mortgage originations industry contracted in
1999; although the number of new loans remained relatively stable, fewer people
refinanced existing loans because of the uptick in interest rates. According to
the Mortgage Bankers Association of America, approximately $1.2 trillion in
mortgage loans were extended in 1999, compared to more than $1.4 trillion in
1998. This loan activity fueled requests for an estimated 17.5 million MCRs and
over 9 million flood determination certificates in 1999, compared to
approximately 20 million MCRs and 10 million flood determination certificates in
1998.
Our primary competitors in the lender services industry are The First
American Financial Corp., CBC Companies, Inc., TransUnion Corporation, Experian,
Inc., and Equifax Credit Information Services, Inc. Many of these companies are
significantly larger than Factual Data and have greater financial and marketing
resources. Our larger customers include The Money Store, North American Mortgage
Company, NationsBanc/Boatmans National, Chase Manhattan Residential, U.S. Home
Mortgage, Core States Mortgage, and CTX Mortgage. No individual customer
accounted for more than 10% of our business in 1999.
The resident qualifier services industry. Although Factual Data's
technological sophistication has quickly earned us market share in the short
time since we introduced resident qualifier services, we still face intense
competition in this business, primarily from companies like Resident Data, Rent
Grow, and First American Financial.
We believe the market for resident information and verification services
will remain strong and will continue to offer opportunities for Factual Data as
property managers demand increasing automation and efficiency. In 1999, the
rental industry was composed of over 27.5 million single and multi-family
properties. We believe this represents a potential market of nearly 27 million
credit checks and other verifications of prospective residents.
The employer information services industry. The employer information
services industry is estimated at a $1.5 billion market. Today's need for highly
productive workers, the increase in "negligent hiring" lawsuits, and the growing
reluctance among companies to provide forthright performance and character
references for their former employees, have driven a rapid expansion of the
industry. We believe the market for the types of employer services Factual Data
offers will continue to expand and offer us substantial opportunities. Some of
the competitors we face in this industry include ChoicePoint, Inc., Avert, Inc.,
and TransUnion Corporation.
The market for other business information services. Factual Data has only
recently entered the market for commercial credit reports, offering credit
profiles on businesses and business owners. We believe this new service will be
particularly appealing to the estimated 10+ million small businesses in the
United States, which often have difficulty gauging the credit risk of new
customers, vendors, and venture partners. Although there are other firms that
offer similar services, our market research indicates that most concentrate
their marketing efforts on large clients, and most are unable to provide
information on approximately 40% of all commercial entities. We believe that
Factual Data's more extensive information-gathering techniques, including on
demand personal inquiries of creditors and current business partners, enable us
to fill a substantial void in the market.
Acquisitions. Factual Data has an aggressive growth strategy, particularly
in the mortgage credit reporting business. The linchpin of this strategy is our
status in that market. Factual Data is one of only five information services
vendors producing an MCR that satisfies the requirements of both Freddie Mac's
Loan Prospector and Fannie Mae's Desktop Underwriter.
Because of Factual Data's size and credentials, we are uniquely positioned
to expand by acquiring other mortgage credit reporting firms. Our research
indicates that approximately 70% of the approximately 1,400 domestic providers
of mortgage credit information services are small independent organizations,
most of which generate less than $5.0 million of annual revenues. None of the
small independent agencies are directly approved credit information vendors for
Freddie Mac and Fannie Mae's automated underwriting systems, nor do they have
the capital to invest in the technology and staff required to garner that
approval. As the industry increasingly moves toward automated underwriting, we
believe that owners of smaller firms will become receptive to the opportunity to
join a more established enterprise like Factual Data.
We focus our acquisition efforts on unaffiliated companies that are active
in the credit reporting market and on companies that are already System
Affiliates. Likely acquisition candidates are those companies that:
would immediately add to our customer and revenue base;
would immediately offer significant economies of scale because we can
consolidate their facilities, research efforts, and administrative
functions with ours and eliminate duplicative costs and expenses; and
need to associate with a technologically sophisticated information
services provider in order to remain competitive.
We acquired 19 businesses in 1999, four of which were System Affiliates.
The total purchase price for all of these firms was $21.28 million.
Approximately $13.81 million of this amount was paid in cash, most of which we
generated with a private placement of common stock in March and April 1999. The
remaining $7.46 million was in promissory notes. The notes vary, but are
generally payable over three to five years and bear annual interest of up to 8%.
For more information about Factual Data's outstanding debt, please see note 6 to
the Consolidated Financial Statements. For more information about Factual Data's
private placement and our need for additional financing to support our growth
strategy, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
All of Factual Data's 1999 acquisitions were asset purchases--meaning we
bought customer lists, customer agreements, computer equipment, and office
furniture. We typically require non-competition and confidentiality agreements
from significant selling shareholders and key personnel in all acquisitions. In
many cases we secure the continued benefits of key employees' expertise by
offering those individuals employment agreements.
As of March 31, 2000, we are negotiating to acquire other companies, but
no definitive agreements are pending. Although management hopes to continue
acquiring companies, we cannot predict how many acquisitions we will complete in
2000, if any.
Marketing channels. As of December 31, 1999, we marketed our services
through 44 locations across the country and on our interactive Web site,
www.factualdata.com. Factual Data owned 14 of those 44 locations and we had 30
System Affiliates.
Government regulation and privacy issues
For some of its services, Factual Data is regulated as a "consumer
reporting agency" under the Fair Credit Report Act, or FCRA. We also must comply
with the laws of all fifty states since our business is national. Finally, there
is increasing pressure--from regulators, legislators, and the private
sector--for firms engaged in electronic commerce to restrict the type of
information they collect, to adopt controls on how they use and share
information, and to ensure that their databases of sensitive information are
secure.
Management believes that Factual Data complies in all material respects
with the laws and regulations that govern our business. We also have voluntarily
adopted some of the most rigorous privacy and security measures in the industry.
Nevertheless, new or changed laws affecting consumer reporting agencies, or
private sector initiatives that impose new and unanticipated obligations, could
have a material adverse effect on our business.
Fair Credit Reporting Act. The FCRA governs consumer reporting agencies
and the methods they use to produce and sell consumer reports. For example, the
FCRA prohibits disclosure of "obsolete" information--generally anything more
than seven years old--concerning a consumer.
The primary goal of the FCRA is to ensure that consumer information is not
available to a broader audience than necessary. The statute permits consumer
reporting agencies to furnish a consumer report only when requested or
authorized by the subject consumer, or when requested by a person or business
that the agency believes intends to use the information for legitimate business
purposes, such as:
To make decisions about new credit transactions, and to monitor risk
and compliance with the terms of existing credit relationships.
To make hiring decisions.
To make decisions about new insurance transactions, and to monitor
risk and compliance with the terms of existing insurance
relationships.
To make decisions about new investments, and to monitor risk and
compliance with the terms of existing business relationships.
The FCRA permits an injured consumer to hold a reporting agency liable if
the agency willfully or negligently failed to comply with the statute. Officers
and directors of consumer reporting agencies that knowingly and willfully
disclose consumer information to unauthorized people may suffer criminal
penalties.
State laws. Factual Data must comply with the relevant laws of each state
in which it does business. Although there is some uniformity among the states,
many states have at least one unique statute or regulation that affects the
information services industry. For example:
A number of states have laws similar, but not identical, to the FCRA.
Several states require companies engaged in investigative reporting
(a term that includes some of the techniques we use to generate
certain types of reports), to be licensed.
A large number of states regulate the type of information that can be
made available to the public, or impose conditions to the release of
information. For example, some state laws prohibit access to workers'
compensation histories. Others require a signed release from the
subject of the report before personal information can be collected.
Privacy and security concerns. Many privacy and consumer advocates and
federal regulators have become increasingly concerned about how personal
information is collected, used, shared, and maintained--particularly by
e-commerce companies. It is possible that state and federal legislators or
regulators will impose measures to address these concerns. At the same time,
groups representing a variety of interests (from consumer watchdogs to Internet
retailers) are negotiating voluntary initiatives in an effort to either
supplement, or stave off, expected government intervention.
Factual Data cannot predict how or when this flurry of activity will end,
and how, if at all, the end result will affect our business. However, we can
offer some insight into our commitment to consumer privacy and security.
First, all Factual Data staff members must obtain FCRA certification from
Associated Credit Bureaus, Inc. If we acquire a business whose employees are not
certified, we offer continued employment to those individuals, but they must
become FCRA certified promptly. We believe this requirement accomplishes two
objectives. It sends a message to our employees and our customers about how
seriously we view our corporate responsibilities, and it makes every Factual
Data employee fully aware of his or her personal duty to manage consumer
information with care.
Second, Factual Data's Technology Centers, Web site, and computer systems
undergo rigorous testing by ICSA, an independent e-commerce security firm, at
least four times each year. Although recent "denial of service" attacks against
prominent Internet sites demonstrated that no amount of testing can guarantee
security, these voluntary audits help reduce Factual Data's exposure to menaces
like viruses, hackers, common theft, and system failures.
System Affiliates
From 1989 to 1993, we franchised our MCR system. Franchisees pay us fees
to use our name and our methods to generate reports. In 1993, we terminated our
franchise program in favor of licensing agreements that permit licensees to use
our systems to service their own customers in return for a percentage of their
gross billings. We stopped executing license agreements in 1995. We will honor
our existing contractual obligations, but we do not intend to offer new
franchises or licenses in the future.
In 1999, System Affiliates provided 6.2% of our gross revenues, compared
to 22.1% in 1998. We expect revenues from System Affiliates to decline over time
since the number of System Affiliates will not increase, and may in fact
decline.
Suppliers
We do not maintain our own informational databases. Instead, we obtain all
of our information from third party sources.
Consumer credit data is maintained by large national credit repositories
such as Experian, Inc., TransUnion Corporation, and Equifax, Inc. These entities
grant access to their databases pursuant to "reseller" agreements. Generally,
either party can terminate a reseller agreement for any (or no) reason with
little notice. While we believe our relationships with the Credit Repositories
are good, we cannot guarantee that our reseller agreements will continue
indefinitely. The loss of any data source, particularly a Credit Repository,
would be detrimental to our business.
Intellectual Property
Factual Data relies on a combination of trademark, servicemark, copyright,
trade secret and contract protection (like licenses) to establish and protect
our proprietary rights in our services and technology. We currently maintain 141
registered trademarks, servicemarks and copyrights--all of which management
believes are properly filed and recorded. Management is not aware of any
infringement of our proprietary rights.
Facilities
Factual Data's corporate offices are located in two buildings in Loveland,
Colorado. We hold 20-year operating leases that entitle us to 23,347 square feet
of space in one building and 15,882 square feet in the other.
The lease on our larger space calls for annual payments of $281,796
through 2003. These payments may increase up to 15% every five years thereafter
until the lease expires in 2018. Our second lease requires annual payments of
$220,596 through 2004, with 15% increases every five years thereafter until
2019. We anticipate the two spaces will be adequate to meet our office
requirements for the foreseeable future.
In connection with our acquisitions we assumed several leases, most of
which are not material and none of which have terms exceeding ten years. See
Note 10 to the Consolidated Financial Statements.
Insurance
We maintain commercial general liability and property insurance. The
policy provides for a general liability aggregate limit of $2 million, and $5
million annual aggregate umbrella coverage. We also carry an errors and
omissions policy covering our various service lines.
Employees
At March 31, 2000, we employed 217 people full-time and 19 people on a
part-time basis. There are no union or collective bargaining agreements between
Factual Data and our employees. Management considers employee relations to be
good.
<PAGE>
Item 2. Description of Properties.
Factual Data collects, integrates, analyzes, and delivers information from
our Technology Centers in Loveland, Colorado and Denver, Colorado. These two
centers work in tandem, sharing the burden of Factual Data's processing demands.
We rely on load balancing and fail-over services from Sprint, as well as
redundant routing services within our own network, to ensure that all work is
handled expeditiously. Each Technology Center is capable of independently
handling all of Factual Data's current production traffic.
We have invested over $3.5 million in our technology, which utilizes
proprietary computer software and state-of-the-art hardware and communication
systems. Our information, processing, and telecommunications systems are
scalable; we can expand our customer base and our portfolio of services without
jeopardizing our efficiency or committing substantial additional funds.
Each Factual Data Technology Center and has a call capacity exceeding
30,000 calls per day. We processed approximately 350,000 reports per month in
1999, and management believes we have an infrastructure to support three times
that volume. In addition, management believes that the excess capacity we have
built into our systems and operations can be readily and economically augmented
to accommodate even more growth.
Twenty-three Factual Data employees, including ten software developers,
are responsible for the continued development and maintenance of Factual Data's
technology. We are committed to maintaining our technological competitive
advantage, and we intend to continue to devote resources to this effort.
We service our customers with proprietary software developed in-house over
the past 15 years. Operating systems in the Technology Centers are
non-proprietary Windows NT or Linux 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 based. Our redundant servers can assume all production in
minutes if necessary. Backup power is available to the servers to ensure up to
45 minutes of uninterrupted power. Networking is achieved through a
multi-Gigabit redundant backbone using Intel Network switches. Each server
delivers up to 800 Mbits directly to the backbone network.
Management believes our systems have sufficient back-up and disaster
recovery capability. Because of those precautions, Factual Data has experienced
little downtime. Nevertheless, Factual Data's business depends on our ability to
protect the Technology Centers against damage from fire, power loss,
telecommunications failure, natural disasters, or a similar event. Despite our
precautionary backup power and duplicate telecommunication facilities, we could
experience a natural disaster, hardware or software malfunction, or other
interruption of Technology Center operations. Extended interruptions in our
services could be significantly detrimental, and our insurance may not be
adequate to compensate us for all resulting losses.
<PAGE>
Item 3. Legal Proceedings.
On March 13, 2000, we were served with a Demand for Arbitration by the
holder of separate exclusive area development and franchise agreements covering
(1) the State of Ohio; Mercer County Pennsylvania; and Hinsdale and Lenawee
County Michigan, and (2) the State of Florida (except the counties of Broward,
Dade, Monroe, Collier, Lee, and Hendri). The arbitration demand alleges breaches
of the franchise agreements, violations of the Minnesota Franchise Act, and
various state-law tort claims. The arbitration demand seeks unspecified damages
and declaratory relief. We have not yet filed our answer and we are in the
process of evaluating the case. Management intends vigorously to contest the
claims alleged in this proceeding and we will assert counterclaims relating to
unauthorized out-of-territory sales, failure to develop franchise areas, and for
other amounts owed by the franchisee to us. Due to the early stage of this
litigation we cannot, nor can our counsel, express a judgment as to either the
likelihood of success on our counterclaims or an unfavorable outcome, or the
amount or range of a potential recovery or loss.
We are not a party to any other legal proceedings except in the ordinary
course of our business but none of these proceedings are material; we are not
aware of any legal proceeding threatened against us.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted by us to a vote of our security holders during
the fourth quarter of our fiscal year ended December 31, 1999.
<PAGE>
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our Common Stock and Warrants our quoted on the Nasdaq National Market
under the symbols "FDCC" and "FDCCW." The following table sets forth for the
periods indicated the high and low closing prices of the Common Stock and
Warrants as reported on the Nasdaq National Market after June 22, 1999 and on
the Nasdaq SmallCap Market prior to that:
Common Stock Warrants
1998 -------------------- -------------------
High Low High Low
------- -------- -------- ---------
Second Quarter (from May 13) $ 9.63 $5.50 $3.63 $ .50
Third Quarter 9.50 6.50 3.38 1.38
Fourth Quarter 8.38 6.38 2.78 1.25
Common Stock Warrants
1999 -------------------- -------------------
High Low High Low
------- -------- -------- ---------
First Quarter $ 9.34 $7.25 $3.19 $ 1.63
Second Quarter 11.19 9.06 4.00 2.63
Third Quarter 10.69 7.75 3.63 1.38
Fourth Quarter 8.00 7.00 1.59 1.00
Dividends. We have not paid or declared cash distributions or dividends on
our Common Stock and 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.
On March 27, 2000, the closing price of our Common Stock and Warrants
reported on the Nasdaq National Market was $8.25 per share and $1.96 per
Warrant. As of March 27, 2000, there were only a few holders of record of our
Common Stock and record holders of our Warrants and we estimate, based upon
information provided by brokers and repositories, that we have in excess of 600
beneficial owners of our Common Stock and over 600 beneficial owners of our
Warrants.
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Report contains certain forward-looking statements within the meaning
of Section 21E of 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 services offered by us
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 operating results in the future in a material way. Such
risks and uncertainties include but are not limited to the following: interest
rate fluctuations, effects of national and regional economic and market
conditions, seasonal housing market fluctuations, labor and marketing costs,
operating costs such as telephone and repositories costs, intensity of
competition, success of our consolidation plan and legal claims.
Overview
We specialize in gathering data from a wide range of sources, and then add
value by analyzing that information and presenting and delivering it in the
manner that best suits each customer's decision-making process. Although we have
the expertise and flexibility to serve customers with information needs that we
haven't yet considered, naturally there are some products and services that we
provide with great frequency. See Item 1.
Our portfolio of services includes various lender services, employee
screening, resident screening, commercial credit information, and similar
information services for businesses and government-sponsored enterprises.
During 1999, we devoted substantial resources to upgrading our Technology
Center, refining our proprietary software, and expanding our team of experienced
managers, programmers, and customer service staff. Now, we are poised to offer
one of the most diverse and comprehensive directories of business information
solutions in the industry.
In order to expand information services, we have an aggressive
consolidation plan whereby we have identified both competitors and System
Affiliates as potential acquisition candidates. See Item 1. As we implement our
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 their agreements with us expire.
We are excited about our accomplishments in 1999. Our revenue growth
coupled with the rapid expansion of our technological and corporate
infrastructure has provided Factual Data a strong competitive position. While
our growth in Internet related e-commerce was far reaching in 1999, we feel we
have only just begun to harness the power of the Web as it relates to our
business. We expect the building that we accomplished in 1999 will enable us
to continue to diversify within information services, and to perform well in
2000. Selected Financial Data
The following consolidated selected financial data should be read in
conjunction with our Consolidated Financial Statements and related Notes thereto
appearing elsewhere in this Report. The consolidated statements of income data
for the years ended December 31, 1998 and 1999 and the consolidated balance
sheet data as of December 31, 1998 and 1999 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
selected financial data provided below is not necessarily indicative of our
future results of operations or financial performance.
<PAGE>
For the Year Ended
December 31,
----------------------------
1998 1999
----------- -----------
(in thousands, except per share data)
Statements of Income Data:
Revenue
Information services ............... $ 6,236 $ 21,904
Ancillary income ................... 1,451 2,069
System Affiliates .................. 2,198 1,601
Training, license and other ........ 59 256
----------- -----------
Total revenue ................. 9,944 25,830
----------- -----------
Operating Expenses
Costs of services provided ......... 4,747 15,400
Consolidation costs ................ -- 1,245
Depreciation and amortization ...... 776 2,715
Selling, general and administrative 2,067 4,907
----------- -----------
Total operating expenses ... 7,590 24,267
----------- -----------
Income from operations ................ 2,354 1,563
Other income .......................... 185 201
Interest expense ...................... (152) (580)
----------- -----------
Income before income taxes ............ 2,387 1,184
Income tax expense .................... 810 525
----------- -----------
Net income ............................ $ 1,577 $ 659
=========== ===========
Basic earnings per share .............. $ .59 $ .13
=========== ===========
Weighted average common stock
outstanding ......................... 2,680,753 4,937,763
=========== ===========
Diluted earnings per share ............ $ .57 $ .13
=========== ===========
Weighted average common stock
outstanding ......................... 2,769,214 5,219,140
=========== ===========
Supplemental information
EBITDA (a) $ 3,315,249 $ 4,479,625
=========== ===========
(a) EBITDA is defined as earnings before interest, income taxes, depreciation
and amortization. EBITDA should not be considered as an alternative to net
income (as an indicator of operating performance) or as an alternative to
cash flow (as a measure of liquidity or ability to service debt
obligations) and is not in accordance with nor superior to generally
accepted accounting principles, but provides additional information for
evaluating Factual Data Corp.
December 31,
----------------------------
1998 1999
----------- -----------
Balance Sheet Data: (in thousands)
Working capital ....................... $ 1,786 $ (2,377)
Total assets .......................... 18,177 39,692
Total liabilities ..................... 7,341 14,334
Shareholders' equity................... 10,836 25,359
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
December 31,
-----------------
1998 1999
----- -----
Revenue
Information services .............. 62.7% 84.8%
Ancillary income .................. 14.6 8.0
System Affiliates ................. 22.1 6.2
Training, license and other ....... .6 1.0
----- -----
Total revenue ................ 100.0% 100.0%
----- -----
Operating Expenses
Costs of services provided ........ 47.7 59.6
Consolidation costs ............... -- 4.8
Depreciation and amortization ..... 7.8 10.5
Selling, general and administrative 20.8 19.0
----- -----
Total operating expenses ..... 76.3% 93.9
----- -----
Income from operations ............... 23.7% 6.1%
Other income ......................... 1.9 .8
Interest expense ..................... (1.5) (2.2)
----- -----
Income before income taxes ........... 24.1% 4.7%
----- -----
Income tax expense ................... 8.1% 2.1%
----- -----
Net income ........................... 16.0% 2.6%
----- -----
Comparison of Operating Results for Years Ended December 31, 1999 and 1998
Information services revenue increased $15.67 million, or 251%, from $6.24
million in 1998 to $21.90 million in 1999. The increase was primarily a result
of our acquisitions (See Note 2 to the consolidated financial statements). We
completed nineteen acquisitions during the year 1999 compared to eight
acquisitions in 1998. We continued to diversify in the business to business
information services sector, as employment screening and resident qualifier
services combined increased $1.02 million, or 95%, from $1.08 million in 1998 to
$2.10 million in 1999. Diversification into non-first mortgage lending, new
clients like the Money Store, and new business partners like Fannie Mae, all
also contributed to increased revenues in 1999.
Ancillary income represents fees paid by System Affiliates for various
additional products and services provided to them. Ancillary income increased by
$618,000, or 43%, from $1.45 million in 1998 to $2.07 million in 1999. The
increase is primarily a result of us providing additional services to our System
Affiliates.
System Affiliates revenues decreased $600,000, or 27%, from $2.20 million
in 1998 to $1.60 million in 1999. The decrease is due to the acquisition of nine
System Affiliates and the reduced royalty fees. This reduction in System
Affiliates revenues is expected to continue as we acquire additional System
Affiliates and phase out our franchising and licensing programs.
Training, license and other revenue increased $197,000, or 334%, from
$59,000 in 1998 to $256,000 in 1999. The majority of this increase is interest
from investments earned on the $13.86 million private placement closed in March
1999.
Costs of services increased $10.66 million, or 225%, from $4.74 million in
1998 to $15.40 million in 1999. For the year ended December 31, 1999, nineteen
acquisitions were completed as compared to eight acquisitions during the year
ended December 31, 1998. The increases in direct operational costs are related
to our acquisitions, which tend to impact our operating margins. The decrease in
operating margin is directly related to the following areas:
Salaries -- As a result of acquisitions the number of employees whose
costs are included in costs of services has increased. 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 services, these increased costs tend
to impact our operating margin during the transition period. Also
included in the salary increase are the additions to the programming
staff for system enhancements, new service development and custom
client interfaces. This added staff provides the needed resources for
national account development, while increasing our ability to
integrate new services from acquisitions.
Bureau costs -- Due to volume pricing we purchase information at a
more favorable price than the small independent companies we are
acquiring. Converting an acquisition from its existing price
structure to ours takes approximately 90 to 150 days. With most small
independents being on another system, royalties must also be paid
until the new office is completely converted to the Factual Data
system.
Telecommunication costs -- As telecommunication costs are also volume
driven, we strive to convert the telecommunication of each acquired
company to its selected carrier. The conversion from one phone carrier
to another can include installing new software 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 $2.84 million, or
137%, from $2.07 million in 1998 to $4.91 million in 1999. This increase is
related to costs associated with building our corporate, regional processing and
technology infrastructures. The year 1999 signaled the building of a new
foundation for Factual Data Corp. by successfully creating a dynamic
infrastructure, in terms of management and national account sales.
Consolidation costs for the year 1999 were $1.25 million as compared to $0
for the year 1998. These costs include one time consolidation charges for items
such as recruiting fees, salaries for terminated owners and managers, and travel
costs for the consolidation and relocation of our regional processing centers.
Depreciation and Amortization for the year ended December 31, 1999, was
$2.72 million compared to $776,000 for December 31, 1998. This increase of $1.94
million, or 250%, reflects the amortization expense for twenty-seven
acquisitions in 1999 compared to eight acquisitions in 1998.
Interest expense increased $428,000, or 282%, from $152,000 in 1998 to
$580,000 in 1999. This increase is due to additional notes payable issued in
connection with our acquisitions.
Income taxes decreased $285,000, or 35%, from $810,000 in 1998 to $525,000
in 1999. Our effective tax rate remained at approximately 37%.
As a result of the foregoing factors, net income for the year 1999 was
$659,000, or $0.13 per diluted share, compared to $1.58 million, or $0.57 per
diluted share, for 1998. This earning per share calculation takes into account
consolidation costs of $1.25 million or $.24 per diluted share for the year
ended 1999. Excluding the consolidation costs we would have reported earnings,
after tax, of $1.9 million or $0.36 per diluted share for the year ended 1999.
Our 1999 EBITDA (earnings before interest, taxes, depreciation and
amortization) was $4.5 million, or $0.86 per diluted share based on 5,219,140
shares, as compared to $3.3 million, or $1.20 per share based on 2,769,214
diluted shares in 1998. In 1999, this EBITDA per share calculation takes into
account consolidation costs of $1.25 million or $.24 per diluted share, as a
result of acquisitions, for the year ended 1999. Excluding the consolidation
costs we would have reported EBITDA for the year ended 1999 of $5.7 million or
$1.10 per diluted share.
Comparison of Operating Results for Years Ended December 31, 1998 and 1997
Liquidity and Capital Resources
We had cash balances of $1.02 million at December 31, 1999. 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 $659,000 and
depreciation and amortization of $2.72 million resulted in cash flow provided
from operations of $2.63 million.
We used cash of $2.96 million to purchase additional equipment and
furniture to build the infrastructure for our corporate and regional centers
acquired in 1999. We also used cash to fund $2.62 million of principal payments
on long-term debt. In March and April of 1999, we completed a private placement
of 1,912,451 shares of Factual Data Corp. common stock and raised $15.50 million
gross, $13.86 million net, to be used in our continuing acquisition program. The
private placement proceeds allowed us to close on nineteen acquisitions, which
were funded by paying cash of $13.81 million and issuing notes payable of $7.46
million. In connection with these acquisitions we acquired primarily fixed
assets and intangibles and acquired access to certain key operating markets.
Management believes that our anticipated cash requirements for the
immediate future will be met from internally generated funds. We are currently
negotiating bank financing to continue our consolidation plan.
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.
<PAGE>
Item 7. Financial Statements.
See pages F-1 through F-23 attached hereto.
<PAGE>
FACTUAL DATA CORP.
Table of Contents
Independent Auditors' Report......................................F - 1
Consolidated 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 - 7
<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, 1999, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
years ended December 31, 1998 and 1999. 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, 1999 and the results of their operations and
their cash flows for the years ended December 31, 1998 and 1999 in conformity
with generally accepted accounting principles.
/s/ Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
February 11, 2000
Denver, Colorado
F - 1
<PAGE>
FACTUAL DATA CORP.
Consolidated Balance Sheet
December 31, 1999
Assets (Notes 5 and 6)
Current assets
Cash .................................................. $ 1,023,945
Accounts receivable, net .............................. 3,663,094
Prepaid expenses and other ............................ 355,531
Income tax refund receivable .......................... 594,011
-----------
Total current assets ................................ 5,636,581
Property and equipment, net (Notes 3 and 6) .............. 5,998,532
Intangibles (Notes 2 and 4) .............................. 27,756,373
Other assets ............................................. 300,989
-----------
$39,692,475
===========
Liabilities and Shareholders' Equity
Current liabilities
Line-of-credit (Note 5) ............................... $ 500,000
Current portion of long-term debt (Note 6) ............ 3,432,526
Accounts payable ...................................... 3,099,678
Accrued payroll and expenses .......................... 968,691
Deferred income taxes (Note 9) ........................ 13,386
-----------
Total current liabilities ........................... 8,014,281
Long-term debt (Note 6) ................................. 5,908,584
Deferred income taxes (Note 9) ........................... 410,645
Commitments (Note 10)
Shareholders' equity (Note 7)
Preferred stock, 1,000,000 shares authorized; none
issued and outstanding .............................. --
Common stock, 10,000,000 shares authorized;
5,380,103 issued and outstanding .................... 22,478,244
Retained earnings ..................................... 2,880,721
-----------
Total shareholders' equity .......................... 25,358,965
-----------
$39,692,475
===========
See notes to consolidated financial statements.
F - 2
<PAGE>
FACTUAL DATA CORP
Consolidated Statements of Income
For the Years Ended
December 31,
1998 1999
Revenue
Information services .................... $ 6,235,604 $ 21,903,658
Ancillary income ........................ 1,451,104 2,069,302
System affiliates ....................... 2,198,260 1,601,388
Training, license and other.............. 58,578 255,714
------------ ------------
Total revenue .......................... 9,943,546 25,830,062
Operating expenses
Costs of services provided .............. 4,746,634 15,399,461
Selling, general and administrative ..... 2,066,926 4,907,378
Consolidation costs (Note 13) ........... -- 1,245,059
Depreciation and amortization ........... 776,093 2,715,342
------------ ------------
Total operating expenses .............. 7,589,653 24,267,240
------------ ------------
Income from operations ..................... 2,353,893 1,562,822
Other income (expense)
Other income ............................ 185,262 201,458
Interest expense ........................ (152,421) (579,668)
------------ ------------
Total other income (expense) .......... 32,841 (378,210)
------------ ------------
Income before income taxes ................. 2,386,734 1,184,612
Income tax expense (Note 9) ................ 810,000 525,198
------------ ------------
Net income and comprehensive income ........ $ 1,576,734 $ 659,414
============ ============
Basic earnings per share ................... $ 0.59 $ 0.13
============ ============
Basic weighted average shares outstanding
(Note 12) ................................. 2,680,754 4,937,763
============ ============
Diluted earnings per share ................. $ 0.57 $ 0.13
============ ============
Diluted weighted averages shares
outstanding (Note 12) ..................... 2,769,214 5,219,140
============ ============
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, 1998 and 1999
<TABLE>
<CAPTION>
Common Stock Total
--------------------------- Retained Shareholders'
Shares Amount Earnings Equity
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
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 ........................ 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
Shares retired from escrow account (Note 7) ... (83,694) -- -- --
Net proceeds of private placement offering
(net of offering costs of $1,636,461)
(Note 7) ..................................... 1,912,451 13,863,539 -- 13,863,539
Net income for the year ended December 31,
1999 ......................................... -- -- 659,414 659,414
---------- ----------- ------------ -----------
Balance at December 31, 1999 .................. 5,380,103 $22,478,244 $ 2,880,721 $25,358,965
========== =========== ============ ===========
</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,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net income ................................... $ 1,576,734 $ 659,414
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization .............. 776,094 2,715,342
Loss (gain) on sale of fixed assets ........ 25,454 (4,524)
Deferred income taxes ...................... 240,276 61,978
Changes in operating assets and liabilities
Accounts receivable ...................... (1,920,392) (743,516)
Prepaid expenses and other ............... (67,089) (182,742)
Income tax refund receivable ............. -- (594,011)
Other assets ............................. (37,604) (173,320)
Accounts payable ......................... 1,323,142 873,993
Accrued payroll, payroll taxes and
expenses ................................ 125,973 537,250
Accrued taxes and other .................. 615,987 (524,186)
------------ ------------
1,081,841 1,966,264
------------ ------------
Net cash provided by operating
activities ............................ 2,658,575 2,625,678
------------ ------------
Cash flows from investing activities
Purchases of property and equipment .......... (1,206,424) (2,836,128)
(Purchases of) proceeds from short-term
investments ................................ (2,212,386) 2,212,386
Purchase of intangibles ...................... (123,809) --
Payments received on note receivable ......... 45,000 --
Net cash used in the acquisition of businesses (3,604,900) (13,814,698)
------------ ------------
Net cash used in investing activities .. (7,102,519) (14,438,440)
------------ ------------
Cash flows from financing activities
Line-of-credit, net .......................... -- 500,000
Principal payments on long-term debt ......... (1,149,209) (2,620,127)
Net proceeds in private placement offering
(net of offering expenses paid of $1,438,304
(1998) and $1,636,461 (1999) ................. 6,289,696 13,863,539
------------ ------------
Net cash provided by financing
activities ............................ 5,140,487 11,743,412
------------ ------------
Net increase (decrease) in cash and cash
equivalents ................................... 696,543 (69,350)
Cash and cash equivalents, at beginning of
period ........................................ 396,752 1,093,295
------------ ------------
Cash and cash equivalents, at end of period .... $ 1,093,295 $ 1,023,945
============ ============
</TABLE>
Continued on following page.
See notes to consolidated financial statements.
F - 5
<PAGE>
FACTUAL DATA CORP.
Consolidated Statements of Cash Flows
Continued from previous page.
Supplemental disclosure of cash flow information:
Interest paid on borrowings for the years ended December 31, 1998 and 1999
was $131,731 and $533,062, respectively.
Cash paid for income taxes for the years ended December 31, 1998 and 1999
was $155,138 and $844,695, respectively.
Supplemental disclosure of non-cash investing and financing activities:
During 1998 and 1999, the Company financed fixed assets purchases totaling
$892,579 and $700,902, respectively, with notes payable and capital leases.
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. During 1999, the Company acquired nineteen companies for
$13,814,698 cash and notes payable of $7,462,811 (Note 2).
See notes to consolidated financial statements.
F - 6
<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 franchised and licensed offices through 44 locations. 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.
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 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 December 31, 1999, balances of cash and cash equivalents
at banking institutions exceeded the federally insured limit by approximately
$904,000. 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.
F - 7
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
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 $208,000 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 applies 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.
F - 8
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
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.
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.
F - 9
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
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, 1999 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, 1999 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 and private placement.
F - 10
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
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 had no investments in debt or equity securities at December 31,
1999.
Reclassifications
Certain amounts in the 1998 financial statements haven been reclassified to
conform with the 1999 presentation.
Note 2 - Acquisition of Assets
In fiscal year 1999, the Company purchased the assets of nineteen businesses.
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, 1999, the Company acquired the assets of one business.
F - 11
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 2 - Acquisition of Assets (continued)
The aggregate purchase price of the Company's 1999 acquisitions has been
allocated to the assets purchased based on the fair market values on the date of
acquisition, as follows:
Computer equipment, furniture and fixtures $ 603,370
Prepaid expenses and other assets ........ 66,825
Non-compete agreements ................... 686,000
Intellectual property .................... 450,000
Customer lists ........................... 19,471,314
------------
Subtotal ............................. 21,277,509
Notes payable issued ..................... (7,462,811)
------------
Cash paid ................................ $ 13,814,698
============
The following table depicts the unaudited pro forma results of the Company
giving effect to its 1999 acquisitions as if they occurred on January 1, 1998.
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.
Years Ended
December 31,
-----------------------------
1998 1999
------------ ------------
Revenue .............................. $ 39,797,335 $ 38,229,720
Net income ........................... $ 2,965,312 $ 1,042,441
Basic earnings per share ............. $ 1.11 $ .21
Diluted earnings per share ........... $ 1.07 $ .20
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 years ended December 31, 1998 and 1999, the Company paid
related commissions on successful business acquisitions of approximately $70,000
and $245,000, respectively.
F - 12
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 3 - Property and Equipment
Property and equipment at December 31, 1999 consists of the following:
Computer equipment and software $ 3,786,958
Furniture and fixtures ......... 2,990,449
Software development costs ..... 1,571,759
Leasehold improvements ......... 689,256
Vehicles ....................... 149,626
-----------
9,188,048
Less accumulated depreciation (3,189,516)
-----------
$ 5,998,532
===========
Note 4 - Other Assets
Other assets at December 31, 1999 consist of the following:
Customer lists (Note 2) ......... $ 27,557,769
Goodwill ........................ 8,771
Covenants not to compete (Note 2) 1,481,132
License agreement ............... 75,000
Intellectual property (Note 2) .. 450,361
------------
29,573,033
Less accumulated amortization (1,816,660)
------------
$ 27,756,373
============
Note 5 - Line-of-Credit
The line-of-credit at December 31, 1999 consists of:
$3,005,036 line-of-credit, interest payable at 8.25%
principal and unpaid interest due September 2000. The
line-of-credit requires the Company to meet certain
financial restrictive covenants. The line is
collateralized by substantially all the assets of the
Company..................................................... $ 500,000
=========
F - 13
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 6 - Long-Term Debt
Long-Term Obligations
Long-term debt obligations at December 31, 1999 consist of the following:
Unsecured note payable to an individual, monthly principal
payments are the greater of $750 or 5% of gross billable
revenue of a certain corporate-owned franchise with the
balance due August 31, 2002. Interest at 8.5%............. $ 53,309
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 automobiles............. 46,218
Notes payable to corporations and individuals incurred in
the acquisition of several businesses. Monthly principal
and interest payments total $65,365 and quarterly
principal and interest payments total $816,646, through
December 2004. Interest ranges up to 8%. Notes are
collateralized by security agreements and assets acquired
in the acquisitions........................................ 7,921,086
Various capital leases with monthly payments totaling
$33,034, including interest and expiring through November
2004. Collateralized by office furniture and equipment.
The net book value at December 31, 1999 for the fixed
1,320,497 assets leased amounted to approximately
$1,403,147................................................ 9,341,110
----------
Less current portion (3,432,526)
----------
$5,908,584
==========
F - 14
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 6 - Long-Term Debt (continued)
Long-Term Obligations (continued)
As of December 31, 1999, future maturities of long-term obligations are as
follows:
Long-term Capital
Year Ending December 31, Debt Leases Total
------------------------ ---------- ---------- -----------
2000 $3,156,740 $ 396,947 $3,553,687
2001 2,272,855 396,947 2,669,802
2002 1,482,887 396,947 1,879,834
2003 737,423 336,860 1,074,283
2004 370,709 93,713 464,422
---------- ---------- -----------
8,020,614 1,621,414 9,642,028
Less amount
representing interest - (300,918) (300,918)
---------- ---------- -----------
Total principal 8,020,614 1,320,496 9,341,110
Less current portion (3,156,740) (275,786) (3,432,526)
---------- ---------- -----------
$4,863,874 $1,044,710 $5,908,584
========== ========== ===========
Note 7 - Shareholders' Equity
Private Placement Offering
In March and April of 1999, the Company completed a private placement of
1,912,451 shares of its common stock and raised $15,500,000 million gross,
$13,863,539 net, which was used in its continuing acquisition program. An agent
earned warrants to purchase 55,641 shares of the Company's common stock.
F - 15
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 7 - Shareholders' Equity (continued)
Warrants and Options
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,
(iii) 55,641 shares of common stock for issuance on exercise of 55,641 warrants
with respect to the Company's private placement and (iv) 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 36,500 shares
had been granted as of December 31, 1999. 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. The warrants
issued in connection with the Company's 1999 private placement have an exercise
price of $8.08 per share and expire on April 1, 2004.
Stock Option Plans
Management of the Company has adopted the 1997 Stock Incentive 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 and 10,000 shares to outside directors
under the plan in connection with its IPO. The Company also issued 5,000 shares
to an employee in 1999 under the plan. These shares vest equally over three
years from the date of grant. The Company has 36,500 options outstanding under
the plan at December 31, 1999.
Effective January 1, 2000, the Company also established the 1999 Employee
Formula Award Stock Option Plan (the Plan). The Company has reserved 100,000
shares of its Common Stock for issuance upon the exercise of options available
for grant under the Plan. Employees who have been employed by the Company or
one of its affiliates for at least one year and employees who are designated as
full-time are eligible for this Plan. The options vest equally over five years.
Unless revised by the Board of Directors, the number of shares of Common Stock
underlying the Options granted on each anniversary date to eligible employees
shall be the sum of (1) the quotient of (a) the eligible employees' compensation
for 12 months preceding the Anniversary Date multiplied by 10%, divided by (b)
the market value of the Company's common stock at the date of issuance plus
(2) the product of (a) 10% of the quotient obtained in (a) above multiplied by
the number of years the employee has been with the Company. Options are granted
under the Plan at not less than the market price of the Company stock. The
options cannot be exercisable for more than 10 years.
F - 16
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 7 - Shareholders' Equity (continued)
Stock Purchase Plan
Additionally, the Company established an Employee Stock Purchase Plan also
effective January 1, 2000. The maximum number of shares of the Company's Common
Stock available for sale under the Plan shall be 75,000 shares. In order to
participate in this Plan, an employee must have been employed by the Company for
at least one year. This Plan allows eligible employees to purchase shares of the
Company's common stock for 90% of the fair market value at the lesser of either
the beginning or end of each semi-annual stock purchase period.
Escrow Shares
In connection with one of the Company's 1998 acquisitions, the Company placed
297,334 shares in escrow. During 1999, the shares were released from escrow as
provided in the purchase agreement, and 213,640 shares were delivered to the
sellers and the remaining 83,694 shares were delivered to the Company and
retired.
The following summarizes the activity under the Company's stock option plans:
Number of Exercise
Shares Price Expiration
---------- ------------- --------------------
Balance at January 1, 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
Stock options granted 5,000 $ 8.00 September 2009
Stock options cancelled - $ -
Balance at December 31, 1999 36,500 $5.50 - 8.00 May 2001 -
September 2009
The weighted average exercise price at December 31, 1999 was $5.98 and the
weighted average remaining contractual life of the Company's options was 2.53
years.
F - 17
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 7 - Shareholders' Equity (continued)
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 1999 or 1998 net income, respectively. 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 42%; discount rate of 5.5%
and expected lives of 10 years.
Note 8 - Business Segments
Operating results and other financial data are presented for the principal
business segments of the Company for the years ended December 31, 1998 and 1999.
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, 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.
System
Affiliates
and License,
Training
Information Ancillary and
Services Income Other Totals
----------- ---------- ---------- -----------
December 31, 1998
Net sales $ 6,235,604 $1,451,104 $2,256,838 $ 9,943,546
Cost of services $ 3,649,518 $ - $1,097,116 $ 4,746,634
Gross profit $ 2,586,086 $1,451,104 $1,159,722 $ 5,196,912
Total assets $17,006,221 $ - $1,170,680 $18,176,901
Depreciation and
amortization $ 671,483 $ - $ 104,610 $ 776,093
Capital expenditures $ 1,833,284 $ - $ 265,719 $ 2,099,003
December 31, 1999
Net sales $21,903,658 $ 2,069,302 $ 1,857,102 $25,830,062
Cost of services $14,029,694 $ - $ 1,369,767 $15,399,461
Gross profit $ 7,873,964 $ 2,069,302 $ 487,335 $10,430,601
Total assets $37,607,690 $ - $ 2,084,785 $39,692,475
Depreciation and
amortization $ 2,564,018 $ - $ 151,324 $ 2,715,342
Capital expenditures $ 2,689,324 $ - $ 847,706 $ 3,537,030
F - 18
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 9 - 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, 1998 and 1999 are as follows:
December 31,
---------------------
1998 1999
-------- --------
Current.................................... $569,724 $463,220
Deferred................................... 240,276 61,978
-------- --------
$810,000 $525,198
======== ========
The deferred income tax assets and liabilities result primarily from differing
depreciation and amortization periods of certain assets, 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 at December 31, 1999:
Current deferred tax asset $ 113,314
Current deferred tax liability (126,700)
$ (13,386)
Long-term deferred tax asset $ 33,492
Long-term deferred tax liability (444,137)
$ (410,645)
F - 19
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 9 - Income Taxes (continued)
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,
------------------
1998 1999
---- -----
Federal statutory rate 34.0% 34.0%
State tax on income, net of federal income tax
benefit 3.3 3.3
Research tax credits (1.0) -
Other, net (1) (2.4) 7.0
---- -----
33.9% 44.3%
==== =====
(1) 1999 reflects a full year of non-deductible amortization from a 1998
business acquisition.
Note 10 - 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. In fiscal year 2000, the Company
expanded into additional office space. Monthly rental payments for the
additional space total $18,383. These rents are included in the minimum annual
lease payment schedule. Rent expense under this operating lease and the previous
corporate office lease totaled approximately $276,000 and $1,365,000 for the
years ended December 31, 1998 and 1999, 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 and $1,405,669 in 1998 and 1999, respectively. 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 1999.
F - 20
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 10 - Commitments (continued)
Future minimum annual lease payments on equipment and office space are as
follows:
Year Ended December 31,
2000 $1,785,676
2001 1,586,645
2002 1,509,168
2003 1,446,836
2004 1,426,702
Thereafter 13,595,763
-----------
$21,350,790
===========
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.
Note 11 - 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 and $98,508 to the Plan for the years ended
December 31, 1998 and 1999, respectively.
F - 21
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 12 - 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,
---------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ----------- -----------
Net income $ 659,414
Basic EPS
Weighted average beginning
shares outstanding (net of
escrow shares retired) - 3,467,652
Weighted average private
placement shares issued - 1,470,111
----------- ---------
Income available to common
stockholders 659,414 4,937,763 $ .13
============
Effect of Dilutive Common Stock
Options - 33,888
Warrants - 247,489
Diluted EPS
Income available to common
stockholders plus assumed
conversions $ 659,414 5,219,140 $ .13
=========== ========= ============
F - 22
<PAGE>
FACTUAL DATA CORP.
Notes to Consolidated Financial Statements
Note 12 - Earnings Per Share (continued)
For the Year Ended December 31,
---------------------------------------
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
stockholders 1,576,734 2,680,754 $ .59
============
Effect of Dilutive Common Stock
Options - 11,896
Warrants - 76,564
Diluted EPS
Income available to common
stockholders plus assumed
conversions $ 1,576,734 2,769,214 $ .57
=========== ========= ============
Note 13 - Consolidation Costs
The Company has presented non-recurring costs such as travel costs for office
and system conversion, recruiting fees and the elimination of previous
management salaries associated with the Company's acquisitions as a separate
operating expense category titled "consolidation costs". These are non-recurring
costs which management believes are more appropriately presented as a separate
category to provide a more meaningful operating expense presentation.
F - 23
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
<PAGE>
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
Executive Officers and Directors
Our executive officers and directors are as follows:
Name Age Position
----------------- ------------- ----------------------------
J. H. Donnan 54 Chairman of the Board, Chief
Executive Officer and President
Marcia R. Donnan 55 Executive Vice President
Todd A. Neiberger 35 Chief Financial Officer and
a Director
Russell E. Donnan 35 Vice President
James N. Donnan 28 Vice President and a Director
Robert J. Terry 59 Director
Abdul H. Rajput 52 Director
Daniel G. Helle 38 Director
J. Barton Goodwin 52 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 seven members. All directors hold office until the 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. 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.
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 coming to 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 internal 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.
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 one of our directors 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. 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.
J. Barton Goodwin has been one of our directors since July, 1999. Since
1986, Mr. Goodwin has been a General Partner of BCI partners, Inc., an
investment management company to Bridge Capital Investors II. Mr. Goodwin is
currently a director of Memorial Operations, a private company involved in the
funeral home and cemetery industry. He is also a director of Baker Fentress &
Co., a closed end equity mutual fund traded on the NYSE. In addition, Mr.
Goodwin serves as an Advisor of the business school at Washington & Lee
University. From 1974 to 1986, Mr. Goodwin was a shareholder and Vice President
with Kidder, Peabody & Co., Inc. where he performed corporate finance services.
Mr. Goodwin graduated from Washington & Lee University with a degree in Business
Administration and he obtained a MBA from Columbia University.
Russell and James Donnan are sons of J.H. and Marcia Donnan who are husband
and wife.
Director Compensation
Our employee directors 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, Rajput and Helle serve on each committee. Mr. J.H. Donnan also
serves on each committee.
The primary function of the Compensation Committee is to review and make
recommendations to the Board with respect to the compensation, including
bonuses, of our officers and to administer the Stock Incentive Plan. The
function of the 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 the audit fee
charged by the independent auditors. The Audit Committee reports to the Board of
Directors with respect to such matters and recommends the selection of
independent auditors.
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 duly filed except that
Mr. Helle and his affiliates failed to timely file 16(a) statements in
connection with our private placement of March 1999.
<PAGE>
Item 10. Executive Compensation.
The following table sets forth compensation awarded by us to J.H. Donnan,
our Chief Executive Officer and President, and Marcia R. Donnan, our Executive
Vice President, for services rendered during fiscal 1997, 1998 and 1999. J.H.
Donnan and Marcia R. Donnan are husband and wife. No other persons serving as an
executive officer during the reported years received compensation in excess of
$100,000 during any of those years.
SUMMARY COMPENSATION TABLE
<PAGE>
<TABLE>
<CAPTION>
Long-Term Compensation
-------------------------------
Annual Compensation Awards Payouts
---------------------------- --------------------- --------
Restricted Securities
Other Stock Underlying LTIP All Other
Name and Fiscal Salary Bonus Annual Award(s) Options/ Payouts Compensation
Principal Position Year ($) (&) ($) Compensation ($) SARs ($) ($)
------------------ ------ ------- ------- ----- ------------ --------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
J.H. Donnan 1999 107,554 -- -- -- -- -- -- 2,624
President, Chief 1998 105,100 9,300 -- -- -- -- -- 3,061
Executive Officer 1997 82,445 -- -- -- -- -- -- 10,265
Marcia R. Donnan 1999 111,156 -- -- -- -- -- -- 3,997
Executive Vice 1998 105,100 9,300 -- -- -- -- -- 4,107
President 1997 93,773 -- -- -- -- -- -- 6,093
------------------
</TABLE>
*Consists of certain health and accident insurance benefits and automobile
expense reimbursements.
<PAGE>
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 our control, 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.
Our Stock Incentive Plan
In April 1997, we adopted the 1997 Stock Incentive Plan. The purpose of
the Stock Incentive 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 an authorization of 200,000 shares of Common
Stock for issuance thereunder. Under the Stock Incentive Plan, we may grant to
participants awards of stock options and restricted stock or any combination
thereof.
The Stock Incentive 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 Stock Incentive Plan, the Compensation Committee determines,
among other matters, the persons to whom awards are granted, the type of award
granted, the number of shares granted, the vesting schedule, employment
requirements or performance goals relating to restricted stock awards, the type
of consideration to be paid to us upon exercise of options and the terms of any
option (which cannot exceed ten years).
Under the stock option component of the Stock Incentive Plan, we may grant
both incentive stock options ("incentive stock options") intended to qualify
under Section 422 of the Internal Revenue Code of 1986, and options which are
not qualified as incentive stock options; provided that incentive stock options
cannot be granted to any participant who is not an employee. Stock options may
not be granted at an exercise price of less than the fair market value of the
Common Stock on the date of grant. The exercise price of incentive stock options
granted to holders of more than 10% of the Common Stock must be at least 110% of
the fair market value of the Common Stock on the date of grant, and the term of
these options cannot exceed five years. Options granted under the Stock
Incentive Plan are not transferable otherwise than by will or the laws of
descent and distribution and, during the lifetime of the optionholder, options
are exercisable only by such optionholder. In addition, outstanding options may
not be exercised more than three months (but in no event beyond the expiration
date of the option) after the optionholder ceases to be an employee, except that
in the event of the death or permanent and total disability of the optionholder,
the option may be exercised by the holder (or his estate, as the case may be)
until the first to occur of the expiration of the option period or the
expiration of one year after the date of death or permanent or total disability.
The exercise price may be paid in cash, in shares of 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 the
Compensation Committee.
Upon a change in our control (as defined in the Stock Incentive Plan), all
stock options granted under the Stock Incentive Plan will become exercisable in
full, and all restricted stock grants will become immediately vested and any
applicable restrictions will lapse. Also, in the event the number of outstanding
shares of Common Stock is increased or decreased or changed into or exchanged
for a different number or kind of our shares of stock or other securities or of
another company whether as the result of stock split, stock dividend,
combination or exchange of shares, merger or otherwise, each share subject to an
unexercised option shall be substituted for the number and kind of shares of
stock into which each share of the outstanding Common Stock is to be changed for
which each such share is to be exchanged and the option price shall be increased
or decreased proportionately.
As of December 31, 1999, options to purchase 36,500 shares of Common Stock
had been granted to employees and two non-executive directors at an average
exercise price of $6.53 per share.
Our 1999 Employee Stock Purchase Plan
Our Board of Directors approved our 1999 Employee Stock Purchase Plan on
August 31, 1999 and our shareholders approved it on October 22, 1999. Most of
our full-time employees, including our officers, who work for us or one of our
designated subsidiaries will be eligible to participate in the Purchase Plan,
and it is intended that the Purchase Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Code.
The purpose of the Purchase Plan is to provide our employees with an
opportunity to purchase our common stock through accumulated payroll deductions.
Our Board of Directors believes that the Purchase Plan will help create in our
employees a direct interest to increase shareholder value and provide them with
additional compensation. The Purchase Plan will be administered by either our
Board of Directors or by a committee of the Board of Directors, and the Purchase
Plan grants the administrator broad powers, including the ability to amend the
plan, subject to tax laws which require shareholder approval for limited types
of material amendments, such as increasing the number of shares available under
the plan.
The Purchase Plan provides eligible employees the right to purchase our
common stock on a semi-annual basis through payroll deductions. Up to 75,000
shares of our common stock are reserved under the plan. These shares may be pro
ratably adjusted in case of stock splits, dividends, or stock reclassifications.
We have registered the shares with the Securities and Exchange Commission so
that they will be freely tradeable when purchased and issued to eligible
employees, although by law, our executive officers, directors and significant
shareholders will be subject to resale limitations on the number of shares that
they can sell. The right to purchase shares will not begin until the shares are
registered. The price per share of the common stock under the plan is 90% of the
fair market value of the stock at either the beginning or end of each
semi-annual stock purchase period, depending on which value is lower. All
full-time employees that complete one year of employment will be eligible to
participate in the Purchase Plan, subject to the tax law limitations which limit
participation for employees who own or have the option to purchase 5% or more of
our stock or who have the right to purchase over $25,000 worth of our stock
under all employee stock purchase plans under Section 423 of the Internal
Revenue Code. The Purchase Plan is not subject to the requirements of the
Employee Retirement Income Security Act of 1974, nor is it a qualified plan
under Section 401(a) of the Internal Revenue Code.
When an eligible employee's employment is terminated, he or she will be
deemed to have elected to withdraw from the Purchase Plan, and all funds not yet
used to purchase stock will be returned to that person.
If we liquidate or dissolve, any semi-annual stock purchase period in
progress will terminate immediately prior to the liquidation or dissolution, and
the appropriate amount of stock will be purchased for each participant based
upon the amount of withheld funds in the participant's account.
If we merge with or into another company and the surviving company agrees
to assume the Purchase Plan, then each participant in the Purchase Plan will
have the equivalent right to purchase securities in the surviving company. If
the surviving company refuses to assume or substitute equivalent rights, then
any semi-annual stock purchase period in progress will terminate immediately
prior to the sale or merger, and the appropriate amount of stock will be
purchased for each participant based upon the amount of withheld funds in the
participant's account.
Our Board of Directors may terminate the Purchase Plan at any time,
although any semi-annual stock purchase period in progress may not be canceled.
As of December 31, 1999, no shares had been issued under this plan.
Our 1999 Employee Formula Award Stock Option Plan
Our Board of Directors approved our 1999 Employee Formula Award Stock
Option Plan on August 31, 1999 and our shareholders approved the plan on October
22, 1999. All of our full-time employees, including our officers, who have
worked for us or one of our designated subsidiaries for at least one year will
be eligible to participate in the Formula Award Plan. The Formula Award Plan
will be administered by either our Board of Directors or by a committee of the
Board of Directors, and the Formula Award Plan grants the administrator broad
powers, including the ability to amend the plan.
The purpose of the Formula Award Plan is to provide our employees with an
opportunity to acquire our common stock pursuant to options granted under the
plan. The options will automatically be issued under the Formula Award Plan
based on a formula which takes into account both an employee's salary or wage
and number of years of service. Our Board of Directors believes that the Formula
Award Plan will provide increased incentive to employees to exert maximum effort
to our business, to attract talented employees and to retain current employees,
and to align the interests of our stockholders with our employees.
Up to 100,000 shares of our common stock may be issued under the Formula
Award Plan upon the exercise of options granted to eligible employees. These
shares may be pro ratably adjusted in the case of stock splits, dividends, or
stock reclassifications.
An eligible employee is a person who:
has been employed with us or with another company we acquire for at
least one year; and
is a full-time employee at the time of grant.
Subject to the discretion of the administrator, beginning upon the
effective date of the plan, and on each anniversary date thereafter, each
eligible employee will be granted an option to purchase our common stock. The
exercise price for shares underlying an option will be the fair market value of
our stock as of the particular anniversary date. Each option granted under the
Formula Award Plan will vest and become exercisable to the extent of 20% of the
total number of shares covered by the option on each of the first five
anniversary dates after the grant date of the option. Each option will expire 10
years from its grant date.
The number of shares underlying each option granted to each eligible
employee will be calculated by a formula which includes two components: (1) the
amount of the employee's salary, wages and commissions for the preceding year,
and (2) the number of years of service with us (which number shall include
service with any company which we acquire). The formula weighs the employee's
salary or wage more heavily than it does for the number of years of service.
Thus, our more highly paid employees, such as our executive officers, will
likely receive options with significantly more underlying stock than other
employees. If at any anniversary date there are not enough shares reserved under
the Formula Award Plan to cover the grant of options for that year, then all
options for that year will be pro ratably reduced. In addition, our Board of
Directors has the right to suspend the Formula Award Plan or modify the formula
at any time.
If we merge or reorganize with another company, all outstanding options
under the Formula Award Plan will become fully and immediately exercisable,
although our Board of Directors may subsequently terminate all outstanding
options by giving option holders a 20 day advance written notice. During the 20
day period, option holders may exercise their options.
We intend to register the shares underlying the options with the
Securities and Exchange Commission so that they will be freely tradeable when
purchased and issued by eligible employees, although by law, our executive
officers, directors and significant shareholders will be subject to resale
limitations on the number of shares that they can sell.
Our Board of Directors may terminate the Formula Award Plan at any time,
although any options outstanding at the date of termination will continue to be
in full force and effect.
As of December 31, 1999, no shares had been issued under this plan.
<PAGE>
Item 11. 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 March 27, 2000 by:
each person who is known by us to own beneficially more than 5% of
our outstanding Common Stock
each of our executive officers and directors
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 that individual. Each person has sole voting and sole investment power
with respect to the shares shown except as noted.
Shares Beneficially
Owned
------------------------
Percent of
Number Outstanding
---------- ----------
Executive Officers & Directors(1)
J.H. Donnan(2).............................. 634,202 11.8%
Marcia R. Donnan(2)......................... 634,251 11.8
Russell E. Donnan(2)........................ 272,143 5.1
James N. Donnan(2).......................... 272,629 5.1
Todd A. Neiberger(2)(3)..................... 6,579 .1
Robert J. Terry(4).......................... 35,500 .7
Abdul H. Rajput(4).......................... 10,000 .2
Daniel G. Helle(5).......................... 1,112,829 20.7
J. Barton Goodwin(6)........................ 556,414 10.3
All officers and directors as a group
(nine persons)............................. 3,534,547 65.8
Other beneficial owners
CIVC Fund L.P.(5)(7)........................ 1,112,829 20.7
BCI Growth V, L.P........................... 545,286 10.1
------------------
(1) The address for each of the Donnans and Mr. Neiberger is 5200 Hahns Peak
Drive, Loveland, Colorado 80538; the address for Mr. Terry is 5402 South
Cottonwood Court, Greenwood Village, Colorado 80121; the address for Mr.
Rajput is Post Office Box 8310, Rancho Santa Fe, California 82067; for
CIVC Fund L.P. 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) Includes options to purchase common stock granted in January, 2000 under
our 1999 Employee Formula Award Stock Option Plan as follows: J.H.
Donnan--4,202; Marcia R. Donnan--4,251; Russell E. Donnan--2,143; James N.
Donnan--2,629; and Todd A. Neiberger--1,579.
<PAGE>
(3) Includes options to purchase 5,000 shares of common stock at $6.50 per
share which are presently exercisable.
(4) Represents options to purchase shares of common stock at $5.50 per share
which are presently exercisable.
(5) Mr. Helle is a managing director of CIVC Fund L.P., hence is deemed to be
a beneficial owner of its shares.
(6) Mr. Goodwin is a general partner of BCI Partners, Inc., an investment
management company which advises BCI Growth V, L.P., hence he may be
deemed a beneficial owner of both organization's shares.
(7) The number of shares shown include 16,074 owned by certain employees of
CIVC's affiliates over which the affiliates have voting power.
<PAGE>
Item 12. Certain Relationships and Related Transactions.
On September 16,1998, we closed our acquisition of the assets of Factual
Data Minnesota, Inc. ("FD Minnesota") pursuant to an Asset Purchase Agreement.
Since 1990, FD Minnesota had been one of our franchisees located in the Saint
Paul, Minnesota area and operating in Minnesota and Iowa. Pursuant to the
Agreement, we acquired the assets of FD Minnesota in exchange for $353,243 cash
paid at closing 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
pursuant to the Agreement. We also assumed the lease obligations on the FD
Minnesota facility and we continue operations of FD Minnesota at that facility.
In connection with the purchase, we entered into 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 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 that firm
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 CIVC Fund L.P. 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 CIVC's
nominee as a director so long is it owns a number of shares equal to or greater
than 5% of our then outstanding shares. Mr. Goodwin is a general partner of an
affiliate of BCI Growth V, L.P. which purchased $4.5 million of our private
placement.
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 our disinterested independent directors. Any such transactions will
be on terms believed to be no less favorable than could be obtained from
unaffiliated parties.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits Filed Herewith or Incorporated by Reference to Previous
Filings with the Securities and Exchange Commission:
(1) The following exhibits were included with our Registration Statement
#333-47051, or amendments thereto, effective May 13, 1998 and are
hereby incorporated by reference:
Exhibit
Number Exhibit
1.1 -- Revised form of Underwriting Agreement.
1.3 -- Form of Selected Dealers Agreement.
1.4 -- Revised form of Warrant Exercise Fee Agreement.
1.5 -- Form of Custody Agreement.
3.1 -- Restated and Amended Articles of Incorporation.
3.2 -- Amended Bylaws of the Registrant.
4.1 -- Specimen Common Stock Certificate of the
Registrant.
4.2 -- Specimen Warrant Certificate of the Registrant.
4.3 -- Form of Representative's Option for the Purchase
of Common Stock.
4.3A -- Revised form of Representative's Option for the Purchase
of Warrants.
4.4 -- Form of Warrant Agreement.
10.1 -- Office Lease between FDC Office I, LLC and Lenders
Resource Incorporated dated August 14, 1997 and as amended
December 26, 1997.
10.2 -- Registrant's 1997 Stock Incentive Plan, as amended, with
form of Stock Option Agreement.
10.3 -- Employment Agreement with J.H. Donnan.
10.3A -- Amendment to Employment Agreement of J.H. Donnan dated
March 31, 1998.
10.4 -- Employment Agreement with Marcia R. Donnan.
10.4A -- Amendment to Employment Agreement of Marcia R. Donnan dated
March 31, 1998.
10.5 -- Form of Indemnification Agreement.
10.6A -- Form of Franchise Agreement.
10.6B -- Form of License Agreement.
10.6C -- Credit Reporting Service Agreement with Trans Union
Corporation.
10.6D -- Agreement for Service--Consumer Reporting Agencies with
Equifax Credit Information Services, Inc.
10.6E -- Reseller Services Agreement with Experian Information
Solutions, Inc.
10.6F -- Asset Purchase Agreement between us and Mirocon, Inc. dated
December 1, 1997.
<PAGE>
10.6H -- Asset Purchase Agreement between Factual Data Corp and C B
Unlimited, Inc. regarding the Indiana territory.
10.6I -- Purchase Agreement by and between Landmark Financial
Services, Inc. and Factual Data Corp. regarding the Texas
territories.
(2) Filed as exhibits to our Reports on Form 8-K are the following, which
include exhibits which are incorporated by reference:
Date of
Filing Exhibit
August 25, 1998 Asset Purchase Agreement--FD Northwest, Inc.
August 25, 1998 Asset Purchase Agreement--American Credit Connection,
Inc.
August 25, 1998 Asset Purchase Agreement--Heritage Credit Reporting,
Inc.
September 16, 1998 Asset Purchase Agreement--Factual Data Minnesota, Inc.
October 15, 1998 Asset Purchase Agreement--Landmark Financial Services,
Inc.
October 31, 1998 Asset Purchase Agreement--ARI of Minnetonka, Inc.
December 16, 1998 Plan and Agreement of Merger--Mortgage Credit
Services, Inc.
January 5, 1999 Asset Purchase Agreement--Oxbow Enterprises, Inc.
January 19, 1999 Asset Purchase Agreement--Premier Mortgage Services,
Inc.
April 12, 1999 Asset Purchase Agreement--Imfax, Inc.
April 12, 1999 Asset Purchase Agreement--United Data Services, Inc.
April 12, 1999 Share Purchase Agreement and Ancillary Agreements with
Institutional Investors
May 18, 1999 Asset Purchase Agreement--F.D.D., Inc. and F.D.S.C.,
Inc.
September 23, 1999 Asset Purchase Agreement--Data Power Information
Services, Inc.
September 24, 1999 Asset Purchase Agreement--Credit Bureau Services, Inc.
(3) Filed herewith:
Exhibit
Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K Filed During the Quarter Ended December
31, 1999:
Date of Report Item Reported Financial Statements
Filed
October 15, 1999 Item 7--F.D.D. and Yes
F.D.S.C. Acquisitions
November 24, 1999 Item 7--Data Power Yes
Information Systems
Acquisition
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FACTUAL DATA CORP.
Date: June 9, 2000 By:/s/ J.H. Donnan
J.H. Donnan, Chairman, President
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/ J.H. Donnan Chairman of the Board June 9, 2000
--------------------- of Directors, President
J.H. Donnan and Chief Executive
Officer (Principal
Executive Officer)
/s/ Todd A. Neiberger Chief Financial Officer June 9, 2000
--------------------- and a Director
Todd A. Neiberger (Principal and Financial
and Accounting Officer)
/s/ James N. Donnan Vice President and a June 9, 2000
--------------------- Director
James N. Donnan
/s/ Robert J. Terry Director June 9, 2000
---------------------
Robert J. Terry
/s/ Abdul H. Rajput Director June 9, 2000
---------------------
Abdul H. Rajput
/s/ Daniel G. Helle Director June 9, 2000
---------------------
Daniel G. Helle
/s/ J. Barton Goodwin Director June 9, 2000
---------------------
J. Barton Goodwin
<PAGE>
E-1
Exhibit No. Description
27 Financial Data Schedule
