As filed with the Securities and Exchange Commission on October 25, 2000
Registration No. 333-47051
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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POST EFFECTIVE AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FACTUAL DATA CORP.
-------------------------------------------
(Exact name of registrant as specified in its charter)
Colorado 7374 84-1449911
- - --------------------------------- --------------- ----------------------
(State or other jurisdiction (Primary S.I.C. (I.R.S. Employer
of incorporation or organization) Code Number) Identification Number)
5200 Hahns Peak Drive
Loveland, Colorado 80538
(970) 663-5700
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(Address and telephone number of principal executive offices
and principal place of business)
J.H. Donnan
5200 Hahns Peak Drive
Loveland, Colorado 80538
(970) 663-5700
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(Name, address and telephone number of agent for service)
COPIES TO:
Samuel E. Wing
Jones & Keller, P.C.
1625 Broadway, Suite 1600
Denver, Colorado 80202
Telephone: (303) 573-1600
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Approximate date of proposed sale to the public: As soon
as practicable after the effective date of this
Post-Effective Amendment No. 2 to the Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. X
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. ___
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. ___
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. ___
The Registrant hereby amends this Post Effective Amendment No. 2 to the
Registration Statement on such date or dates as may be necessary to delay its
effective date until the Registrant shall file a further amendment which
specifically states that this Post Effective Amendment No. 2 to the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Post Effective Amendment No. 2 to the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
PROSPECTUS SUBJECT TO COMPLETION, DATED OCTOBER ___, 2000
FACTUAL DATA CORP.
We are offering 1,620,000 shares of our common stock to holders
electing to exercise warrants and options issued as part of our initial public
offering in May 1998. We will receive all the proceeds from this offering. The
1,380,000 warrants sold to the public in our offering are exercisable at $7.15
per share.
We issued an option to the underwriter of our initial public offering
to purchase 120,000 shares of our common stock for $7.04 per share and warrants
to purchase an additional 120,000 shares of our common stock for $9.15 per
share. The underwriter will receive all of the proceeds from the sale of these
options and warrants if they are sold rather than exercised by it. See "Selling
Securityholder."
Our common stock and public warrants trade on the Nasdaq National
Market under the symbols FDCC and FDCCW.
-------------------------
You should carefully consider the risk factors beginning on page 4
before purchasing any of the securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is _______________, 2000
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The information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
- - --------------------------------------------------------------------------------
ABOUT 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.
We specialize in preparing mortgage credit reports (MCRs) that we
format and customize for each mortgage lender's requirements and then transmit
to these lenders via modem, network or facsimile. We market our services
nationally through 44 combined locations, including our own offices and through
our franchisees and licensees. Our franchisees and licensees are collectively
referred to as system affiliates. We are implementing a consolidation plan in
the mortgage credit report industry.
As we headed into 1999, our 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
our 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 any business decision. 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.
Our executive offices are located at 5200 Hahns Peak Drive, Loveland,
Colorado 80538. Our telephone number is (970) 663-5700. We maintain a site on
the World Wide Web at http://www.factualdata.com. However, the information on
our website is not part of this prospectus.
2
Statement of Income Data:
Year Ended December 31, Six Months Ended June 30,
----------------------- -------------------------
1998 1999 1999 2000
-------- -------- --------- --------
(unaudited)
(in thousands, except per share data)
Revenue $ 9,944 $ 25,830 $ 12,349 $ 15,816
Operating expenses 7,590 24,267 10,816 15,031
Net income 1,577 659 932 199
Basic earnings per share .59 .13 .21 .04
Weighted average number of
shares outstanding--basic 2,681 4,938 4,442 5,381
Diluted earnings per share .57 .13 .19 .04
Weighted average number of
shares outstanding--diluted 2,769 5,219 4,791 5,589
Other Statistical Data:(1)
Information services MCRs 2,767 3,451 1,770 1,990
Gross system billings $ 45,193 $ 48,595 $ 25,745 $ 25,249
Balance Sheet Data:
December 31, 1999 June 30, 2000
----------------- -------------
(unaudited)
(in thousands)
Working capital (deficit) $ (2,377) $ (2,010)
Total assets 39,692 49,563
Total liabilities 14,334 23,980
Shareholders' equity 25,359 25,582
(1) Represents the aggregate number of MCRs generated through our
system for our own accounts, and for our system affiliates, and the gross system
billings by us and our system affiliates.
3
Summary of the Offering
Securities offered by us
1,620,000 shares of common stock issuable upon exercise of warrants and an
option. Warrants to purchase 1,380,000 shares are held by the public and
are exercisable at $7.15 per share at any time prior to 5:00 p.m. (EST) May
12, 2001.
Securities offered by a
selling securityholder(1)
120,000 options to purchase common stock at $7.04 per share and 120,000
warrants to purchase common stock at $9.15 per share, both at any time
prior to May 13, 2001.
Common stock outstanding 5,382,818 shares.
Common stock to be outstanding if
all warrants exercised 7,002,818 shares.(2)
Warrant Terms:
Exercise price $7.15 per share.(3)
Expiration date May 12, 2001
Redemption
We may redeem the warrants upon 30 days' prior written notice at a price of
$.05 per warrant if the closing high bid price of our common stock equals
or exceeds $10.73 for 20 consecutive trading days immediately preceding the
date we mail a notice of redemption.
Use of proceeds
We will use the net proceeds from the exercise of warrants, if any, for
acquisitions, general corporate purposes and working capital. See "Use of
Proceeds."
Nasdaq symbols
Common stock FDCC
Warrants FDCCW
Risk factors
Our securities involve a high degree of risk and immediate dilution.
Warrant holders should carefully consider the factors set forth under the
captions "Risk Factors" and "Dilution" before exercising their warrants to
purchase common stock.
- - ------------------
(1)There is no trading market for the selling securityholder's options or
warrants and none is expected to develop.
(2)Assumes all warrants and the selling securityholder's options are
exercised.
(3)Options to purchase 120,000 shares and warrants to purchase 120,000
shares held by the selling securityholder are exercisable at $7.04 and $9.15 per
share, respectively.
4
RISK FACTORS
To inform investors of our future plans and objectives, this prospectus
(and other reports and statements issued by us and our officers from time to
time) contain certain statements concerning our future performance, intentions,
objectives, plans and expectations that are or may be deemed to be
"forward-looking statements." Our ability to do this has been fostered by the
Private Securities Litigation Reform Act of 1995, which provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information so long as those statements are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. Such risks and
uncertainties include but are not limited to the following:
A decrease in demand for mortgage credit reports will likely decrease
our earnings.
Our primary service is our mortgage credit report ("MCR"). The use of
this service is driven largely by consumer demand for credit for new home
mortgages and refinancings and, to a lesser extent, lenders' efforts to develop
new, and monitor existing, credit relationships. Consumer demand for mortgage
credit tends to vary due to interest rate fluctuations and general economic
conditions. We have found that MCR demand tends to increase during periods of
economic expansion or when interest rates are declining. Our expenses consist
largely of labor, repository and communication charges, and our ability to
quickly control these costs is critical if the demand for MCRs slackens. Also,
our lack of significant diversification in other services hinders our ability to
withstand the negative impact of a downturn in demand for MCRs.
Our consolidation plan includes operational and financial risks which
may negatively affect our earnings.
In mid-1998, we implemented a consolidation plan to acquire certain of
our system affiliates and competitors engaged in providing MCR services that
either complement or will expand our business. This plan involves a number of
risks including:
o ability to retain acquired customers
o diversion of management time
o use of our financial resources in reviewing acquisition candidates
o operational assimilation of the acquired companies
o amortization charges of acquired intangible assets
5
There are 30 system affiliates that have exclusive territory rights
which expire at various times through the year 2005. We cannot compete or
license others in those areas. We will be required to purchase a system
affiliate, or wait until the expiration of the applicable agreement with the
system affiliate, before expanding into, or acquiring a competitor in, the same
territory. The success of our consolidation plan, both long-term and short-term,
remains unknown.
We may be unable to manage our recent and continued growth, which could
negatively affect our earnings.
Since mid-1998, we have made 28 acquisitions and employees have grown
from about 37 to over 225. Our ability to manage these acquisitions, our new
employees and the increased business activity while continuing to make
additional acquisitions is critical to our success. Also critical in our
acquisitions is our ability to:
o attract and keep mid-level employees and other managers
o implement internal cost controls, operating policies and procedures
o implement our sales and marketing techniques
We may not be successful in implementing our business strategy due to
the significant competition we face.
The MCR industry is highly fragmented. We believe there are
approximately 1,400 competitors in the United States providing MCR services. We
face both direct and indirect competition for our services. There are large
numbers of companies engaged in the sale of one or more of the services we
offer. A significant number of these competitors are small companies operating
on a local or regional basis, while some are large companies operating on a
national scale. Several large companies have far greater financial resources
than we do, including Equifax Credit Information Services, Inc., The First
American Financial Corp. and Trans Union Corporation. We face intense
competition in MCR services from these entities, and as to our other services,
from companies engaged in employment and tenant application verification
activities.
Significant governmental regulation, privacy issues and other legal
considerations increase our operating costs.
Our business involves collecting consumer and business credit data and
other information and distributing this information to lenders and businesses
making credit and other decisions. Concerns about individual privacy and the
collection, distribution and use of information about individuals have led to
substantial governmental regulation of the credit reporting industry. The
industry is regulated under the federal Fair Credit Reporting Act and by
legislation in many states. The industry has recently been subject to increased
legislative attention. There can be no assurance that pending or additional
federal or state consumer-oriented legislation will not significantly limit
demand for, or increase the costs of, our services. Under general legal concepts
and, in some instances, under specific federal and state statutes, we could be
held liable to customers or to the subjects of credit reports prepared by us for
inaccurate information or misuse of information. No assurance can be given that
we can successfully defend any claims made against us, that insurance will cover
these claims or that uninsured losses from these claims might arise thereby
negatively impacting our operations and financial condition.
6
We are leveraged.
At June 30, 2000, our debt was approximately $18.3 million, exclusive
of payables and accruals. In May, 2000, we entered into a $10 million credit
facility with a bank and paid $4.8 million of our then existing debt. We intend
to continue making acquisitions using our remaining credit facility and seller
subordinated debt. Our ability to make principal and interest payments depends
on net cash flow from our operations.
We are dependent upon the services of our Chief Executive Officer.
We are highly dependent on the services of our Chief Executive Officer,
J.H. Donnan, who was subject to an employment agreement which expired on July 1,
2000. See "Management--Employment Agreements" for information on its proposed
renewal. To the extent that Mr. Donnan's services become unavailable, we may not
be able to promote existing personnel or employ qualified persons on favorable
terms. We own a $1 million Key Man term life insurance policy on the life of Mr.
Donnan.
Our reseller agreements can be cancelled on short notice and they
expose us to claims or liabilities from the use of inaccurate information.
We do not maintain our own consumer credit database. Instead, we obtain
consumer credit data from large, national credit repositories such as Experian,
Inc., TransUnion Corporation and Equifax, Inc. under reseller agreements with
these entities. Generally, the reseller agreements are terminable without cause
by either party within a short period of time upon written notice. Also, the
agreements can be terminated if we were to use the information in violation of
the FCRA or other applicable laws, or in violation of the reseller agreement.
The reseller agreements typically do not provide any warranties as to the
accuracy or correctness of the information contained in the databases maintained
by credit repositories, and further provide that we will hold the repositories
harmless and indemnify them from claims or liabilities arising from the use of
inaccurate information contained in the databases.
We intend to diversify with new products.
Our primary revenue source is from residential mortgage credit
reporting. As discussed in "Business" we have introduced, and intend to
introduce, several new products to help diversify our business and add to
revenues. We cannot provide assurance that our diversification strategy will be
successful or that our new products can compete successfully in the market.
7
Our success partly depends upon our ability to protect our technology
from misappropriation or infringement.
We rely on a combination of trademark, servicemark, copyright, trade
secret and contract protection to establish and protect our proprietary rights
in our services and technology. Because there is little in the design,
development or delivery of our services that is protectable under law,
competitors can replicate our services. We generally enter into confidentiality
agreements with customers and limit access to and distribution of our
proprietary information. These steps may not be adequate to deter
misappropriation or infringement of our proprietary technologies and costly
litigation may ensue. Although we believe that our intellectual property and
technologies do not infringe any proprietary rights of others, third parties may
assert claims of infringement in the future.
We may not be able to meet the automated level of performance required
by some of our larger customers.
Fannie Mae and Freddie Mac provide a secondary market for residential
mortgages. Both entities require that any mortgage purchased be supported by a
credit report on the mortgagee and be prepared by an entity, such as us,
independent from the lender. We are aware that these and other entities are
increasingly using automated credit reporting techniques that require credit
report providers to render almost instantaneous responses, often within 60
seconds or less. We may not be able to continue to provide the level of
performance required by these or other large institutional lenders.
Additionally, we may not be able to match the level of technological service
provided, or developed in the future, by competitors.
A loss of operations in our data centers could negatively impact our
earnings.
Our operations depend on our ability to protect our data centers
against damage from fire, power loss, telecommunications failure, natural
disasters or similar events. We moved into a new facility in Loveland, Colorado
in April 1998, that is outfitted with backup power and duplicate
telecommunication facilities; nonetheless, in the event we experience a natural
disaster, hardware or software malfunction or other interruption of our data
centers operations, our business could be hurt. Extended interruptions in our
services could be particularly detrimental, and our insurance may not be
adequate to compensate us for resulting losses that may occur.
We brought our second data center on line in Denver, in July 1999. This
data center brings additional availability to our customers in the unlikely
event of a facilities disaster. The Denver data center has redundant cooling,
power, and telecom to protect itself. Additionally, the Denver data center has
telecom route diversity from the Loveland facility to further the redundancy.
Potentially, there could still be a natural disaster that would encompass both
the Denver data center as well as the Loveland data center. Additionally, if
Sprint would have a sufficiently large disaster within its systems, this could
adversely affect our ability to communicate with our customers and/or vendors.
8
Impediments to takeover attempts and removal of directors may depress
the price of our common stock.
Our Articles of Incorporation and Bylaws contain provisions that may
discourage or make it more difficult for a third party to acquire us. These
provisions include:
o the ability of our Board of Directors to issue authorized but unissued
common and preferred stock without action by our shareholders,
although issuances are subject to approval by the majority of our
independent directors;
o the election of directors for three-year terms, with approximately
one-third of the Board of Directors standing for election each year;
o limitations on alteration of the staggered board provisions and the
ability of shareholders to remove directors; and
o the affirmative vote of the holders of at least two-thirds of our
capital stock entitled to vote to approve a merger, dissolution or
sale of all or substantially all of our assets.
We intend not to declare dividends.
We have not declared nor paid, and we intend not to declare or pay, any
cash or other dividends in the foreseeable future. Earnings, if any, will be
retained to finance our operations and growth.
Sales of outstanding shares may hurt our stock price.
The market price of our common stock could fall substantially if our
shareholders sell large amounts of our common stock. The possibility of such
sales in the public market may also hurt the market price of our securities.
Potential future sales of our common stock include the following:
o 1,912,451 shares which we have registered for resale in connection
with our $15.5 million private placements in March and April, 1999
o warrants to purchase 55,641 shares of our common stock at $8.08 per
share issued to our placement agent in connection with the private
placements
o warrants to purchase 100,000 shares of common stock which may be
issued to a financial consulting firm at exercise prices ranging from
$9.00 to $13.00 per share and expiring on September 1, 2003
9
o 149,718 options outstanding as of August 1, 2000, subject to vesting
provisions, issued under our employee's plans with exercise prices
ranging from $5.50 to $8.00 per share.
o 1,380,000 shares underlying warrants to purchase our common stock
issued in our initial public offering with an exercise price of $7.15
per share
o shares underlying warrants and options to purchase 240,000 shares of
our common stock with an exercise price of $9.15 per share regarding
120,000 warrants and $7.04 per share regarding 120,000 options, both
issued to the underwriter of our 1998 initial public offering
10
DILUTION
The deficit in the net tangible book value of our common stock at June
30, 2000 was approximately $(10,142,000), or $(1.88) per share. Without taking
into account any other changes in tangible book value after June 30, 2000,
except to give pro forma effect to the exercise of 1,620,000 warrants, our pro
forma net tangible book value at June 30, 2000 would have been approximately
$1,652,000 or $0.24 per share. This represents an immediate increase in net
tangible book value of $2.12 per share to existing holders of common stock and
an immediate dilution of $7.05 per share, or 97%, to purchasers of common stock
who exercise warrants, as illustrated in the following table:
Average weighted exercise price per share(1) $ 7.29
Net tangible book value per share
before any exercise $(1.88)
Increase per share attributable to new purchasers 2.12
------
Pro forma net tangible book value per share
assuming full exercise 0.24
------
Dilution per share to new purchasers $ 7.05
======
Dilution as a percent of exercise price per share 97%
======
- - ------------------
(1) The exercise prices are:
o $7.15 for 1,380,000 public warrants issued in our initial public
offering
o $7.04 for 120,000 options issued to the underwriter of our initial
public offering
o $9.15 for 120,000 warrants issued to the underwriter of our initial
public offering o
11
USE OF PROCEEDS
If all warrants and options were exercised, we would receive about $11.8
million net of legal, accounting, printing and other offering costs.
We intend to use any proceeds received from the exercise of our warrants
and options for acquisitions, general corporate purposes and working capital.
See "Business."
Pending the uses described above, we will invest the proceeds in
short-term, government, government guaranteed or investment grade securities.
12
CAPITALIZATION
The following table sets forth our capitalization at June 30, 2000. The
table should be read in conjunction with our Consolidated Financial Statements
and Notes thereto appearing elsewhere in this prospectus.
June 30, 2000
--------------
(in thousands)
Long-term debt, including current maturities $ 18,250
Shareholders' equity:
Preferred stock, 1,000,000 shares authorized;
none issued or outstanding 0
Common stock, 10,000,000 shares authorized;
5,382,818 shares issued and outstanding(1) 22,502
Retained earnings 3,080
---------
Total shareholders' equity 25,582
---------
Total capitalization $ 43,832
=========
- - ------------------
(1) Does not include up to:
o 149,718 shares of common stock issuable upon exercise of options
issued to employees and directors under our employee's stock option
plans which have an exercise prices ranging from $5.50 to $8.00 per
share
o 1,675,641 shares of common stock issuable upon full exercise of other
all outstanding warrants and options at prices ranging from $7.04 to
$9.15 per share
DIVIDEND POLICY
We have not paid any cash dividends on our common stock. It is our
current policy not to pay cash dividends on our common stock. Any payment of
cash dividends in the future will be dependent upon our financial condition,
results of operations, current and anticipated cash requirements, restrictions
on the payment of dividends under the terms of any future financing arrangements
and our plans for expansion, as well as other factors that our Board of
Directors deems relevant.
13
SELECTED FINANCIAL DATA
The following consolidated selected financial data should be read in
conjunction with our Consolidated Financial Statements and Notes thereto
appearing elsewhere in this prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The consolidated statements
of income data for the years ended December 31, 1998 and 1999 and the balance
sheet data as of December 31, 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 data as
of and for the six months ended June 30, 1999 and 2000 have been derived from
our unaudited financial statements which, in our opinion, contain all normal,
recurring adjustments needed for the fair presentation of results for such
periods. With respect to the unaudited interim consolidated financial
information for the six months ended June 30, 1999 and 2000 included herein, the
independent certified public accountants have not audited such consolidated
financial information and have not expressed an opinion or any other form of
assurance with respect to such consolidated financial information. The selected
financial data provided below is not necessarily indicative of our future
results of operations or financial performance.
For the Year Ended For the Six Months Ended
December 31, June 30,
--------------------- --------------------
1998 1999 1999 2000
-------- -------- -------- --------
(unaudited)
Statements of Income Data: (in thousands, except per share data)
Revenue
Information services $ 6,236 $ 21,904 $ 10,418 $ 14,252
Ancillary income 1,451 2,069 1,007 935
System affiliates 2,198 1,601 924 629
Training, license and other 59 256 - -
-------- -------- -------- --------
Total revenue 9,944 25,830 12,349 15,816
-------- -------- -------- --------
Operating Expenses
Costs of services provided 4,747 15,400 7,048 8,943
Consolidation costs - 2,715 617 326
Depreciation and amortization 776 1,245 2,069 3,872
Selling, general and administrative 2,067 4,907 1,081 1,891
-------- -------- -------- --------
Total operating expenses 7,590 24,267 10,815 15,032
-------- -------- -------- --------
Income from operations 2,354 1,563 1,533 785
Other income 185 201 224 160
Interest expense (152) (580) (223) (585)
Income before income taxes 2,387 1,184 1,534 360
Income tax expense (benefit) (810) (525) (603) 161
Net income 1,577 659 932 199
Basic earnings per share .59 .13 .21 .04
Weighted average shares outstanding--basic 2,681 4,938 4,442 5,381
Diluted earnings per share .57 .13 .19 .04
Weighted average shares outstanding-diluted 2,769 5,219 4,791 5,589
EBITDA(a) 3,315 4,480 2,838 2,836
- - ------------------
14
(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.
Balance Sheet Data: December 31, 1999 June 30, 2000
----------------- -------------
(unaudited)
(in thousands)
Working capital (deficit) $ (2,377) $ (2,010)
Total assets 39,692 49,563
Total liabilities 14,334 23,980
Shareholders' equity 25,359 25,582
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains certain forward-looking statements within the
meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934
and we intend that such forward-looking statements be subject to the safe
harbors created thereby. These forward-looking statements include our plans and
objectives for future operations, including plans and objectives relating to the
services we offer and our future economic performance.
The forward-looking statements included herein are based on current
expectations that involve a number of risks and uncertainties that might
adversely affect our business in the future in a material way. Such risks and
uncertainties include but are not limited to the following:
o interest rate fluctuations
o effects of national and regional economic and market conditions
o seasonal housing market fluctuations
o labor and marketing costs
o operating costs such as telephone and repositories costs
o intensity of competition
o success of our consolidation plan
o our ability to manage growth
o our ability to diversify our products
o availability of net cash flow to service debt
o legal claims
Overview
Factual Data Corp. is a Loveland, Colorado-based information service
provider to the mortgage and consumer lending industries, employers, landlords
and other business customers located throughout the United States. We market our
services through our website, www.factualdata.com, and nationally through 44
combined locations, including 9 franchisees and 13 licensees.
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. We
became a publicly traded company in 1998 and our common stock warrants trade on
the Nasdaq Stock Market.
16
National Market Under the Symbols FDCC and FDCCW
In the second quarter of 2000, our portfolio of services included fully
automated consumer credit reports, employee screening, resident screening, and
similar information services for businesses and government-sponsored
enterprises. Items of note in the second quarter included key e-commerce
agreements and accounts, namely our Experian affiliation, Mortgage Investment
Lending Associates (MILA), and Genesis 2000; the introduction of Home Equity
Lending Products (HELP) to streamline the home equity lending process for
lenders and borrowers; and a $10 million credit facility from Wells Fargo Bank
to continue acquisitions and provide funds for working capital.
For more information about our services, or items of note to investors,
please visit our website at www.factualdata.com. The website is not part of this
prospectus.
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 Six Months Ended
December 31 June 30,
------------------ ------------------
1998 1999 1999 2000
------ ------ ------ ------
Revenue
Information services 62.7% 84.8% 84.3% 90.1%
Ancillary income 14.6 8.0 8.2 5.9
System affiliates 22.1 6.2 7.5 4.0
Training, license and other .6 1.0 - -
------ ------ ------ ------
Total revenue 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
Operating expenses
Costs of services provided 47.7 59.6 57.0 56.4
Consolidation costs - 4.8 5.0 2.1
Depreciation and amortization 7.8 10.5 16.8 24.5
Selling, general and administrative 20.8 19.0 8.8 12.0
------ ------ ------ ------
Total operating expenses 76.3 93.9 87.6 95.0
------ ------ ------ ------
Income from operations 23.7 6.1% 12.4 5.0
Other income 1.8 .8 1.8 1.0
Interest expense (1.5) (2.2) (1.8) (3.7)
------ ------ ------ ------
Income before income taxes 24.1 4.7 12.4 2.3
------ ------ ------ ------
Income tax expense 8.1 2.1 4.9 1.0
------ ------ ------ ------
Net income 16.0% 2.6% 7.5% 1.3%
====== ====== ====== ======
EBITDA(a) 33.3% 17.3% 23.0% 17.9%
- - ------------------
17
(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.
Comparison of Operating Results for Years Ended December 31, 1998 and 1999
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 John H. Harland Company, 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:
o 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.
18
o 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.
o 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 $0.24 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.
19
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 $0.24 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.
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 have been
considering sources of equity funding and with current market conditions have
decided to look at debt financing to continue our consolidation plan. This
funding will not completely enable us to acquire the number and type of
companies that interest us, so we will be required to obtain additional public,
private or debt financing or a combination of the foregoing to complete the 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.
20
Comparison of Operating Results for the Six Months Ended June 30, 2000 and 1999
Revenue for the six months ended June 30, 2000 increased 28% to $15.8
million from $12.3 million reported for the six months ended June 30, 1999.
Information services revenue increased $3.9 million, or 38% from $10.4 million
for the six months ended June 30, 1999 to $14.3 million for the six months ended
June 30, 2000. For the six months ended June 30, 2000 revenue from our
employment screening and tenant qualifier services increased 49% to $1.44
million from $964,000 for the six months ended June 30, 1999. This increase
includes same store sales growth and revenue from an employment screening
acquisition.
Ancillary income represents fees paid by System Affiliates for various
additional products and services provided to them. Ancillary income decreased by
$72,000, or 7%, from $1.0 million for the six months ended June 30, 1999 to
$935,000 for the six months ended June 30, 2000. This decrease was due to the
acquisition of nine system affiliates as part of our consolidation plan.
System Affiliates revenues decreased by $295,000, or 32%, from $924,000
for the six months ended June 30, 1999 to $629,000 for the six months ended June
30, 2000. This decrease was due to the acquisition of nine System Affiliates as
part of our consolidated plan.
Costs of services increased $1.89 million or 27%, from $7.05 million
for the six months ended June 30, 1999 to $8.94 million for the six months ended
June 30, 2000. Although the costs of services in terms of dollars have
increased, as a percentage of sales these direct costs have slightly decreased.
Selling, general and administrative expenses increased $1.80 million,
or 87% from $2.07 million for the six months ended June 30, 1999 to $3.87
million for the six months ended June 30, 2000. As a percentage of sales,
selling, general and administrative costs increased from 16.8% for the six
months ended June 30, 1999 to 24.5% for the six months ended June 30, 2000. We
have continued to expand our corporate infrastructure. Our corporate facility
now includes a second building of approximately 16,000 square feet to
accommodate our new national sales staff as well as additional corporate
management. Along with the new corporate facility we opened a second technology
center located in Denver, Colorado. The expenses related to these new facilities
and additional staffing did not exist in the first six months of 1999. Further
items that relate to the increase include additional professional fees due to
new SEC reporting requirements, as well as the hiring of an investor relations
firm.
Depreciation and Amortization expense increased $810,000, or 75% from
$1.08 million for the six months ended June 30, 1999 to $1.89 million for the
six months ended June 30, 2000. This increase reflects the amortization expense
of our twenty-eight acquisitions through the second quarter 2000 compared to
twenty-one of these acquisitions we had made through the second quarter 1999. As
we continue the amortization of intangible assets created by the acquisitions,
it will continue to incur these non-cash but tax-deductible expenses.
21
Interest expense increased $362,000, or 162% from $223,000 for the six
months ended June 30, 1999 to $585,000 for the six months ended June 30, 2000.
The increase is due to additional notes payable issued in connection with our
new acquisitions, as well as the newly restructured debt facility.
Income taxes decreased $442,000 or 73%, from $603,000 for the six
months ended June 30, 1999 to $161,000 for the six months ended June 30, 2000.
Our effective tax rate is approximately 39% for the six months ended June 30,
1999 compared to 45% for the six months ended June 30, 2000. As previously
stated in the three-month comparison, the increase in the effective tax rate is
directly related to the non-deductible, permanent rather than timing differences
from a December 1998 acquisition.
As a result of the foregoing, net income decreased $733,000, or 79%,
from $932,000 for the six months ended June 30, 1999 to $199,000 for the six
months ended June 30, 2000.
For the six months ended June 30, 2000 we had 5,589,319 diluted
weighted average shares outstanding as compared to 4,790,637 diluted weighted
average shares outstanding for the six months ended June 30, 1999.
Diluted earnings per share decreased by $0.15 per share, or 79%, from
$0.19 per share for the six months ended June 30, 1999 to $0.04 per share for
the six months ended June 30, 2000. This earnings per share comparison takes
into effect a 17% increase in weighted average number of diluted shares
outstanding, from 4,790,637 for the six months ended June 30, 1999 to 5,589,319
for the six months ended June 30, 2000.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
for the six months ended June 30, 2000, were $2.84 million as compared to $2.84
million for the six months ended June 30, 1999. Diluted earnings before
interest, taxes, depreciation and amortization (EBITDA) per share for the six
months ended June 30, 2000, were $0.51 as compared to $0.59 for the six months
ended June 30, 1999. Again this per share comparison takes into effect a 17%
increase in weighted average number of diluted shares outstanding.
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.
22
Liquidity and Capital Resources
We had cash and cash equivalents of $1,091,000 at June 30, 2000. 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
$199,000 and depreciation and amortization of $1,891,000 resulted in cash flow
provided from operations of $1,869,000. As we begin to see our infrastructure
substantially being complete, we are focusing on improving cash flows from
operations to fund current maturities of long-term debt.
We used cash and cash equivalents of $626,000 to purchase additional
equipment and furniture to build the infrastructure for our corporate and
regional centers. We also used cash to liquidate $5.03 million of principal
payments on long-term debt. Net cash used for the continuing acquisition costs
were $315,000, and net activity on the line of credit was $331,000. We also
received cash proceeds of $4.0 million for the restructuring of debt, which
resulted in a gain of $189,000.
Management believes that our anticipated cash requirements for the
immediate future will be met from internally generated funds as well as the $6.0
million line-of-credit through Wells Fargo. The Company is continuing to pursue
acquisitions and looking at favorable alternatives to finance these
acquisitions.
23
BUSINESS
Terminology
There are several instances in this prospectus 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.
o 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.
o The Credit Repositories are Equifax, Inc., Experian, Inc., and
TransUnion Corporation. These three firms are the leading
domestic suppliers of consumer credit data.
o 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.
o Freddie Mac and Fannie Mae are government-sponsored enterprises
that purchase the majority of mortgage originated in the United
States and package them as securities.
o 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.
o 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. We believe we are
poised to offer one of the most diverse and comprehensive directories of
business information solutions in the industry.
24
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. We 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 real estate records.
Few companies can afford to have experienced researchers on staff to research
and compile 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. Our 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:
o 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.
o 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.
o Use our third party sources and personal interviews to confirm
information that an applicant has self-reported.
o 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.
25
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 a manner that best suits each customer's decision-making
process. Although we have the expertise and flexibility to serve customers with
informational needs in a variety of ways, 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.
We offer customized MCR products to satisfy a range of needs. Our MCR
products meet all government and industry standards.
Bureau Express Report. Our Bureau Express Report, which contains 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, we 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 our Web site. These MCRs are compiled by our proprietary computer and
telecommunications systems in seconds.
Number of reports. Factual Data and its System Affiliates delivered
approximately 3.45 million MCRs in 1999 and 1.99 million MCR's in the first six
months of 2000. Over 90% of these were ordered and received via e-commerce. We
and our System Affiliates delivered 2.8 million MCRs in 1998.
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 our upgraded Technology Centers. Results are
returned on-line, usually within seconds. We also offer flood determination
certificates as a standalone product.
26
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. Our 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. We 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 us 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 us to check originators' license information,
criminal records, credit history, and other pertinent information.
Credit Scan(TM) pre-funding credit research. Our 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. We 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.
27
Employer Services
Our 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. Our EMPfacts
Report can include, at the customer's option:
o results of substance abuse testing
o driving records
o worker's compensation history
o public records information (such as judgments and tax liens)
o fraud searches
o criminal records
o educational background
o financial reports
o address verification
o employment history
o social security number search
o professional license verification
o psychological testing
The Empfacts Quick I.D. is an instant employment screening report,
delivered to customers via our 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 50,464 EMPfacts
Reports during the first six months of 2000, 88,228 during 1999 and 86,134 in
1998.
Property Management Services
Resident Qualifier. We 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.
28
Factual Data and its System Affiliates delivered 172,690 Resident
Qualifier Reports via electronic commerce during the first six months of 2000,
147,445 reports in 1999 and 34,350 in 1998.
Business Information Services
CorpData Reports. Our 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 We Intend to Keep Growing
The primary competitive factors in the information services industry
are:
o responsiveness and reliability of customer service personnel
o accuracy and thoroughness of reports
o readability of reports--both by human personnel and by
decision-making software
o technological sophistication
o turnaround time
o price
o name recognition
o security
We believe we are distinguishable from our competitors in virtually all
of these areas, but our strength derives primarily from our technological
sophistication. Our 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, we are the only U.S. information services provider that requires
every employee to be certified under the FCRA. Moreover, we voluntarily submit
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.
29
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. We were 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 our
state-of-the-art Technology Centers and comprehensive menu of information
services will allow us to continue to compete aggressively. For more information
about our 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 our 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, we offer a range of
services designed to meet all of a lender's informational requirements.
In addition to offering a comprehensive array of lender services, we
derive 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. We are 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 we have 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. Mortgage originations 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.
30
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 us and have greater financial and marketing resources.
Our larger customers include Accubanc Mortgage, First Franklin Financial, Temple
Inland Mortgage, Colonial Savings (Ft. Worth) Mortgage, Allied Mortgage Capital
and Citi Mortgage. No individual customer accounted for more than 10% of our
business in 1999.
The resident qualifier services industry. Although our 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 us opportunities 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 significant potential market of 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 we offer 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. We have 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 our 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. We are 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.
31
Because of our 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:
o would immediately add to our customer and revenue base;
o 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
o 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 our outstanding debt, please see note 6 to the
Consolidated Financial Statements. For more information about our 1999 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 our 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.
We have completed one acquisition in 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
additional acquisitions we will complete in 2000, if any.
32
Experian Agreement
On April 28, 2000, we entered into an Affiliate Services Agreement with
Experian Information Solutions, Inc. which allows us to expand into consumer
credit reporting. We leased Experian's customer base in certain zip code areas
(primarily Colorado) with the exception of some of Experian's national accounts.
The agreement will be treated for accounting purposes similar to a capitalized
lease under which an asset and corresponding liability will be booked to reflect
future revenues and future payments we will be obligated to make to Experian
over the next five years. In addition, the agreement provides for rebates to us
if report volumes meet certain levels. Experian has the right to cancel the
agreement after year five if we have not increased the basic report volume by
50% by then. See Note 4 to the Financial Statements for the period ended June
30, 2000.
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. We
owned 14 of those 44 locations and we had 30 System Affiliates.
Technology
We collect, integrate, analyze, and deliver information from our
Technology Centers in Loveland, Colorado and Denver, Colorado. These two centers
work in tandem, sharing the burden of our 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 our 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.
Our two Technology Centers have 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 our technology.
We are committed to maintaining our technological competitive advantage, and we
intend to continue to devote resources to this effort.
33
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, we have experienced little
downtime. Nevertheless, our 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.
Government Regulation and Privacy Issues
For some of our services, we are 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.
Our Management believes that we comply 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:
34
o To make decisions about new credit transactions, and to monitor
risk and compliance with the terms of existing credit
relationships.
o To make hiring decisions.
o To make decisions about new insurance transactions, and to
monitor risk and compliance with the terms of existing insurance
relationships.
o 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. We must comply with the relevant laws of each state in
which we do 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:
o A number of states have laws similar, but not identical, to the
FCRA.
o 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.
o 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.
We 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.
35
First, all of our 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 employee
fully aware of his or her personal duty to manage consumer information with
care.
Second, our 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 our 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
We rely 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.
36
Facilities
Our 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
approximately $282,000 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 approximately $221,000 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 June 30, 2000, we employed 217 people full-time and 19 people on a
part-time basis. There are no union or collective bargaining agreements between
us and our employees. Management considers employee relations to be good.
37
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 filed our answer and we are in the process of
evaluating the case. Management intends to vigorously contest the claims alleged
in this proceeding and we will pursue 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 also involved in two litigations matters with Accurate Credit
Reporting, Inc. ("ACR"), one of our former franchisees.
The first matter is a suit we filed against ACR on March 1, 2000, in
the District Court for the City and County of Denver, Colorado. In that case, we
allege that ACR has breached the settlement agreement it entered into with us
last summer to end the franchise relationship and resolve other differences. We
presently are seeking damages in excess of $25,000. We also intend to amend our
complaint to include additional claims for relief and seek additional, currently
undetermined, damages. Because this case is still in the early stages of
litigation, we cannot, nor can our counsel, express an opinion as to either the
likelihood of our success in the case or our potential recovery against ACR.
The second matter is a suit filed by ACR against us on April 17, 2000
in the United States District Court for the Eastern District of Michigan,
Southern Division. In that case, ACR has asserted numerous claims for relief all
arising from its allegations that we impermissibly used ACR's confidential
customer information to compete with it and that we made false statements to
ACR's Michigan and California customers concerning which company was providing
their service. ACR seeks damages in an amount undisclosed but in excess of
$75,000. We have asked the court to transfer this action to the State of
Colorado. We strongly deny that we have done anything improper and once the
Court rules upon our request to transfer, we will vigorously defend ourselves.
Again, because the case is in the early stages of litigation, we cannot, nor can
our counsel, express an opinion as to either the likelihood that ACR may prevail
on its claims for relief or the amount or range of any potential recovery by ACR
against us.
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.
38
MARKET FOR OUR SECURITIES 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:
1998 Common Stock Warrants
---- ----------------- -----------------
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
1999
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
2000
First Quarter $ 8.56 $ 6.97 $ 2.31 $ 1.00
Second Quarter $ 9.25 $ 8.125 $ 2.41 $ 1.75
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 September 13, 2000, the closing price of our Common Stock and
Warrants reported on the Nasdaq National Market was $8.63 per share and $2.00
per Warrant. As of August 18, 2000, there were 34 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.
39
MANAGEMENT
Executive Officers and Directors
As of September 30, 2000, our executive officers and directors are as follows:
Name Age Position
- - ------------------ --- -------------------------
J.H. Donnan 54 Chairman of the Board and
Chief Executive Officer
James N. Donnan 29 President and a Director
Russell E. Donnan 35 Chief Information Officer
Todd A. Neiberger 35 Chief Financial Officer and
a Director
Robert J. Terry 59 Director
Abdul H. Rajput 53 Director
Daniel G. Helle 38 Director
J. Barton Goodwin 53 Director
The following summarizes the background and experience of the officers
and directors named above.
J.H. Donnan, Chairman of the Board and Chief Executive Officer, 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
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,
prior to co-founding Factual Data Corp. in 1985. 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.
James N. Donnan, 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 was elected President on July 1, 2000 and he succeeded J.H. Donnan who had
been our President from inception to that date. 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.
40
Russell E. Donnan, Chief Information Officer, has been employed by us since
August 1993. He is responsible for technical project management for software and
support services. Before joining us, he was a senior design engineer at Apple
Computer in the Power Book division from February 1992 to August 1993. He is
experienced in the super computer field and was previously employed by Convex
Computer (1990-1992) and as a founding member and employee of Key Computer
(1988-1990), now a subsidiary of Amdahl Corporation. Mr. Donnan graduated from
Ohio State University in 1987 with a degree in electrical engineering.
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.
Robert J. Terry has been a Director since February 1998. From February 1994
to his retirement in January 1998, he formerly served as a director, president
and chief operating officer of Mail-Well, Inc., a publicly traded envelope
manufacturer and printing company. Prior to his Mail-Well experience, he was
associated with Georgia-Pacific and its predecessor companies in various
management positions, including Executive Vice President of its envelope
division and as regional vice president for Butler Paper. Mr. Terry is a
graduate of DePaul University, Bachelor of Science degree in business, and
University of Michigan's Advanced Executive Program.
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 a director and 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 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 obtained a Bachelor of Science degree in Mathematics
and a Master of Science degree in Statistics from the University of Sind,
Pakistan, in 1968 and 1970, respectively.
Daniel G. Helle has been a Director since March 1999. Since 1992, Mr. Helle
has been a Managing Director of CIVC Partners and its predecessor, Continental
Illinois Venture Corporation, a private equity investment subsidiary of Bank of
America. From 1989 to 1992, Mr. Helle was a vice president of Continental
Illinois Venture Corporation. Mr. Helle is also a director of several private
companies. 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.
41
J. Barton Goodwin has been a Director since July 1999. Since 1986, Mr.
Goodwin has been a partner of BCI Partners, Inc., a private capital investment
company. He is a general partner of Bridge Associates II and Teaneck Associates
and member of Glenpointe Associates, LLC, Glenpointe Associates V, LLC and BCI
Investors, LLC. He serves on the boards of directors of several private
companies. He is also a director of BKF Capital, Inc., a NYSE-traded holding
company whose principal asset is John A. Levin & Co., an equity money management
company. From 1974 to 1986, Mr. Goodwin was a shareholder and Vice President
with Kidder, Peabody & Co. Inc. He was a lieutenant in the U.S. Navy from 1969
to 1972. He graduated from Washington & Lee University and received an MBA from
Columbia University Business School.
Russell and James Donnan are sons of J.H. Donnan.
Director Compensation
Our directors who are also employees do not receive any fixed compensation
for their services as directors while non-employee directors presently receive
compensation of $7,500 annually plus a $500 travel allowance per meeting. We
held five board meetings in 1999 at which all members were present. We also
acted on several resolutions by written consent after telephonic conferences.
Board Meetings and Committees
The Board of Directors had five meetings during 1999. Each director
attended all of the meetings of the Board and of each committee that he belongs
to. Our Board of Directors has two committees. The following describes the
function and membership of each committee and the number of times it met with
respect to fiscal 1999:
AUDIT COMMITTEE -- ONE MEETING
We have adopted an Audit Committee Charter, which has been included with
our Proxy Statement as Appendix A. The Charter requires our Audit Committee to
undertake a variety of activities designed to assist our Board of Directors in
fulfilling its oversight role regarding our auditors' independence, our
financial reporting process, our systems of internal control and compliance with
applicable laws, rules and regulations. The Charter also makes it clear that the
independent auditors are ultimately accountable to the Board of Directors and
the Audit Committee, not management.
The members of our Audit Committee for 1999 were Messrs. Helle, Rajput,
Terry and J.H. Donnan. For the year 2000 the Audit Committee will be comprised
of Messrs. Helle, Rajput and Terry.
42
COMPENSATION COMMITTEE -- ONE MEETING
The function of our Compensation Committee is review and approval of
compensation and benefit programs for key executives and administration of our
stock options plans. The Compensation Committee endeavors to ensure that the
compensation program for our executive officers is effective in attracting and
retaining key executives responsible for our success and is tailored to promote
our long-term interests and that of our stockholders. Our executive officer
compensation program in the fiscal year 1999 was principally comprised of base
salary and long-term incentive compensation in the form of incentive stock
options or non-qualified stock options.
The members of our Compensation Committee for 1999 were Messrs. J.H.
Donnan, Helle, Rajput and Terry. For the year 2000 the Compensation Committee
membership will remain the same.
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 Section 16(a) statements in
connection with our private placement of March 1999.
Executive Compensation
The following table sets forth compensation we have paid to J.H. Donnan,
our Chief Executive Officer and former President, and Marcia R. Donnan, our
former Executive Vice President, for services rendered during fiscal 1999, 1998
and 1997. Ms. Donnan retired on June 30, 2000. No other person serving as an
executive officer during the reported years received compensation in excess of
$100,000 during any of those years.
43
SUMMARY COMPENSATION TABLE
Long Term Compensation
-------------------------------------
Annual Compensation Awards Payouts
----------------------------- -------------------------- -------
Other All
Annual Restricted Securities Other
Compen- Stock Underlying LTIP Compen-
Name and Fiscal Salary Bonus sation Award(s) Options/ Payouts sation*
Principal Position Year ($) ($) ($) ($) SARs ($) ($)
- - ------------------ ------ ------- ----- ------- ---------- ---------- ------- -------
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
- - ------------------
*Consists of certain health and accident insurance benefits and automobile
expense reimbursements.
Employment Agreements
Effective July 1, 2000, our Compensation Committee approved the general
terms of employment agreements with Messrs. J.H. Donnan, James N. Donnan and
Russell E. Donnan. The term of agreements and some other provisions are still
being considered by the Compensation Committee. It is expected these new
employment agreements will be in place within 60 days. Proposed base salaries
are as follows:
J.H. Donnan $250,000
James N. Donnan $130,000
Russell E. Donnan $160,000
In addition to the above initial base salaries, the Compensation Committee
proposed that annual reviews be performed to determine any adjustments to the
base salary along with a formalized bonus structure tied to achievements of
budgeted EBITDA levels and annually stated individual objectives.
Stock Incentive Plan
In April 1997, we adopted our 1997 Stock Incentive Plan. The purpose of the
plan is to provide continuing incentives to our key employees, which may include
officers and members of the Board of Directors. The Stock Incentive Plan
provides for 200,000 shares of common stock available for grant under the plan.
The plan is administered by the Compensation Committee of our Board of
Directors. Subject to the terms of the plan, the Compensation Committee
determines:
44
o the persons to whom awards are granted
o the type of award granted
o the number of shares granted
o the vesting schedule
o employment requirements or performance goals relating to restricted
stock awards
o the type of consideration to be paid upon exercise of options
o the terms of any option, which cannot exceed ten years
The exercise price may be paid in cash, in shares of our common stock
valued at fair market value at the date of exercise, by delivery of a promissory
note or by a combination of such means of payment, as may be determined by our
Compensation Committee.
As of August 1, 2000, options to purchase 36,500 shares of common stock
had been granted to several of our employees and two non-executive directors at
an average exercise price of $6.53 per share.
Our 1999 Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan was adopted in October 1999. Most
of our full-time employees, including our officers, who work for us or one of
our designated subsidiaries are 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.
We believe that the Purchase Plan helps create in our employees a direct
interest to increase shareholder value and provide them with additional
compensation. The Purchase Plan is administered by our 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 quarterly 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. Most
full-time employees that complete one year of employment are eligible to
participate in the Purchase Plan.
45
The initial quarterly offering period began in January 2000. Therefore,
as of December 31, 1999, no shares had been issued under this plan.
Our 1999 Employee Formula Award Stock Option Plan
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 are eligible
to participate in the plan. The plan is administered by the Board of Directors,
and the plan grants the administrator broad powers, including the ability to
amend the plan.
The purpose of the plan is to provide our employees with an opportunity
to acquire our common stock pursuant to options granted under the plan. The
options are automatically issued under the 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 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.
An eligible employee is a person who:
o has been employed with us or with another company we acquire for at
least one year; and
o is a full-time employee at the time of grant.
Subject to the discretion of the administrator on each anniversary date
of the plan 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 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 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 plan or modify the formula at any time.
46
If we merge or reorganize with another company, all outstanding options
under the 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.
The plan provides for the issuance of up to 100,000 shares of our
common stock. As of August 1, 2000, we had granted options covering 97,128
shares which leaves the plan with less than 3,000 shares to cover future option
grants. At our annual meeting of shareholders held in late July 2000, our
shareholders approved a proposal to add an additional 300,000 shares for future
issuance under the plan.
47
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 August 18, 2000 by:
o each person who is known by us to own beneficially more than 5% of our
outstanding Common Stock
o each of our executive officers and directors
o all of our executive officers and directors as a group
Common Stock not outstanding but deemed beneficially owned by virtue of
the right of an individual to acquire shares within 60 days are treated as
outstanding only when determining the amount and percentage of Common Stock
owned by 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) 40,500 .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) 3,534,047 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
Marshall Financial Partners, L.P 399,211 7.4
- - ------------------
(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.
48
(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.
(3) Includes options to purchase 5,000 shares of common stock at $6.50 per
share which are presently exercisable.
(4) Includes options to purchase 5,000 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.
49
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.
50
SELLING SECURITYHOLDER
The following table sets forth information regarding the beneficial
ownership of our securities by the selling securityholder. All information
contained in the table below is based upon beneficial ownership as of August 18,
2000.
The selling securityholder was the underwriter of our initial public
offering completed in May 1998. As part of its compensation in the offering, the
underwriter received options to purchase:
o 120,000 shares of our common stock at $7.04 per share
o warrants to purchase 120,000 shares of our common stock at $9.15
per share
We agreed to register these options, warrants and underlying shares in
order to permit the selling securityholders to sell these securities from time
to time in the public market or in privately-negotiated transactions. We agreed
to prepare and file amendments and supplements to the initial registration
statement necessary to keep the registration of the shares effective until the
earlier of (i) May 13, 2003; or (ii) the date on which all of the securities
have been sold. We have also agreed to pay for all expenses of this offering
other than underwriting discounts and commissions and brokerage commissions and
fees.
This table assumes that all securities owned by the selling
securityholders are being sold. The selling securityholders may offer and sell
less than the number of securities indicated. The selling securityholders are
not making any representation that any securities will or will not be offered
for sale.
Securities
Name and Address Securities Beneficially Owned Securities Offered Beneficially Owned
of Selling Securityholder Prior to the Offering Hereby After the Offering
- - ------------------------- ----------------------------------------- ------------------ ------------------
Options Warrants
----------------- ------------------
Number Percent Number Percent
------- ------- ------- -------
Schneider Securities, Inc. 120,000 100% 120,000 100% all -0-
1120 Lincoln Street, Suite 900
Denver, Colorado 80203
51
PLAN OF DISTRIBUTION
This offering is self-underwritten; we have not employed an underwriter
for the issuance of common stock upon the exercise of the warrants and we will
bear all expenses of the offering.
Upon any solicited exercise of the warrants, we agreed to pay to the
underwriter of our initial public offering a fee of 5% of the aggregate exercise
price of warrant exercises if
o the market price of our common stock on the date the warrant is
exercised was greater than the then exercise price of the warrant
o the exercise of the warrant was solicited by a member of the
National Association of Securities Dealers, Inc. as designated in
writing on the warrant certificate subscription form (provided
that any request for exercise is presumed to be unsolicited
unless the customer states in writing that the transaction was
solicited and designates the broker-dealer to receive
compensation)
o the warrant was not held in a discretionary account
o disclosure of compensation arrangements was made both at the time
of the offering and at the time of exercise of the warrant
o the solicitation of exercise of the warrant was not in violation
of Regulation M promulgated under the 1934 Act
Regulation M under the 1934 Act, as amended, will prohibit the
underwriter from engaging in any market making activities with regard to our
securities during the period commencing as of the date on which the underwriter
becomes a participant in the solicitation of the exercise of warrants until the
termination of such solicitation activity. As a result, the underwriter may be
unable to make a market in our securities during certain periods while the
warrants are exercisable.
The warrants may be exercised by the delivery to American Securities
Transfer & Trust, Incorporated, 12039 West Alameda Parkway, Lakewood, Colorado
80228 of your warrant certificate accompanied by an election of exercise and
payment of the warrant exercise price for each share of your common stock
purchased in accordance with the terms of the warrant. Payment must be made in
the form of cash or a cashier's or certified check payable to the order of
Factual Data Corp. Delivery of the certificates representing the common stock
will be made upon receipt of the warrant certificate duly executed for transfer
together with payment for the exercise price and our acceptance of your tender
for exercise. If you exercise fewer than all your warrants, a new warrant
certificate evidencing warrants remaining unexercised will be issued to you.
52
DESCRIPTION OF SECURITIES
The following describes the attributes of our authorized and our
outstanding securities.
Common Stock
We are authorized to issue 10,000,000 shares of common stock, of which
5,382,818 shares were issued and outstanding on August 18, 2000. Holders of
shares of common stock are entitled to dividends as and when declared by our
Board of Directors from funds legally available therefor, and if we liquidate,
dissolve or wind up, common stockholders will share ratably in all assets
remaining after payment of our liabilities. We have not paid any dividends to
date nor do we anticipate paying any dividends in the foreseeable future. It is
our present policy to retain earnings, if any, for use in the development and
expansion of our business. The holders of shares of our common stock are
entitled to one vote for each share held of record, and holders do not have the
right to cumulate their votes for election of directors. The holders of shares
of common stock do not have preemptive rights.
Preferred Stock
We are also authorized to issue up to 1,000,000 shares of preferred
stock with such designations, rights and preferences as may be determined from
time to time by our Board of Directors. Accordingly, our Board of Directors is
empowered, without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights that could aversely affect the
voting power or other rights of the holders of our common stock. In the event of
issuance, the preferred stock could be utilized, under certain circumstances, as
a method of discouraging, delaying or preventing a change in management and in
our control. We have no present intention to issue any shares of preferred
stock, and no shares of preferred stock are currently outstanding.
Warrants
One warrant entitles the holder to purchase one share of our common
stock at an exercise price of $7.15 until 5:00 p.m. (EST) May 12, 2001, subject
to our redemption rights described below. The warrants were issued pursuant to
the terms of a warrant agreement between us and American Securities Transfer &
Trust, Incorporated.
The warrant exercise price and the number of shares of common stock
purchasable upon exercise of the warrants are subject to adjustment in the event
of, among other events, a stock dividend on, or a subdivision, recapitalization
or reorganization of, the common stock, or if we merge or consolidate with or
into another corporation or business entity.
53
We may, in our discretion redeem outstanding warrants, in whole but not
in part, upon not less than 30 days' notice, at a price of $.05 per warrant,
provided that the closing bid price of our common stock equals or exceeds $10.73
(150% of the warrant exercise price) for 20 consecutive trading days. The
redemption notice must be provided not more than five business days after
conclusion of the 20 consecutive trading days in which the closing bid price of
our common stock equals or exceeds $10.73 per share. In the event we exercise
our right to redeem the warrants, the warrants will be exercisable until the
close of business on the date fixed for redemption in such notice. If any
warrant called for redemption is not exercised by such time, it will cease to be
exercisable and the holder will be entitled only to the redemption price of
$0.05 per warrant.
We must have on file a current registration statement with the
Securities and Exchange Commission pertaining to the common stock underlying the
warrants in order for a holder to exercise the warrants or in order for us to
redeem the warrants. This prospectus is part of a current registration statement
we have filed with the Commission. Shares underlying the warrants must also be
registered or qualified for sale under the securities laws of states in which
the warrant holders reside.
The warrants to purchase 120,000 shares of our common stock held by the
selling securityholder are identical in all respects (except as to redemption)
to the public warrants described above, EXCEPT THAT THE EXERCISE PRICE IS $9.15
PER SHARE.
Underwriter's Options
In connection with our May 1998 initial public offering, we issued
options to our underwriter who is referred to herein as the selling
securityholder. The options gave the underwriter the right to acquire:
o 120,000 shares of our common stock for $7.04 per share at any
time prior to May 13, 2003
o 120,000 warrants to acquire 120,000 shares of our common stock
for $9.15 per share at any time prior to May 13, 2001
We may grant options in the future in connection with capital formation
activities.
Listing
Our common stock and warrants trade on The Nasdaq National Market under
the symbols FDCC and FDCCW. There is no market for the selling securityholder's
options or warrants and none is expected to develop.
54
Transfer Agent, Warrant Agent and Registrar
Our transfer agent, warrant agent and registrar for our common stock
and warrants is Computershare Trust Company, Inc. (formerly American Securities
Transfer & Trust, Incorporated), 12039 West Alameda Parkway, Lakewood, Colorado
80228.
55
SHARES ELIGIBLE FOR FUTURE SALE
We have outstanding 5,382,818 shares of common stock, assuming no
exercise of the warrants, the selling securityholder's options or any other
options or warrants. Of these shares, the 1,380,000 shares of common stock sold
in our initial public offering are freely tradeable without restriction under
the Securities Act. We sold the remaining 4,002,818 shares of outstanding common
stock in private transactions in reliance upon exemptions from registration
under the Securities Act. Those shares may be sold only pursuant to an effective
registration statement filed under the Securities Act, or an applicable
exemption, including the exemption contained in Rule 144 of the Securities Act.
We have filed registration statements on Form S-3 covering 2,200,013 of these
shares.
In general, under Rule 144, our shareholders, including our affiliates,
may sell shares of restricted common stock after at least one year has elapsed
since such shares were acquired. The number of shares of common stock which may
be sold within any three-month period is limited to the greater of one percent
of the then outstanding common stock or the average weekly trading volume in our
common stock during the four calender weeks preceding the date on which notice
of such sale was filed under Rule 144. Other requirements of Rule 144 concerning
availability of public information, manner of sale and notice of sale must also
be satisfied. In addition, shareholders who are not affiliates (and who have not
been affiliates for 90 days prior to the sale) and who have beneficially owned
our restricted shares for over two years may resell the shares without
compliance with the foregoing requirements under Rule 144.
No predictions can be made as to the effect, if any, that future sales
of shares, or the availability of shares for future sale, will have on the
market price of our common stock or warrants prevailing from time to time.
Nevertheless, sales of substantial amounts of our common stock or warrants, or
the perception that such sales may occur, could have a material adverse effect
on prevailing market prices.
56
LEGAL MATTERS
The validity under Colorado law of the shares will be passed upon for us by
Jones & Keller, P.C., Denver, Colorado. Members of that law firm own about 7,000
shares of our common stock.
EXPERTS
Our consolidated balance sheet at December 31, 1999, and the
consolidated statements of income, shareholders' equity and cash flows for each
of the two years ended December 31, 1998 and 1999 included in this prospectus
have been included herein in reliance on the report of Ehrhardt Keefe Steiner &
Hottman PC, independent certified public accountants, given on the authority of
that firm as experts in accounting and auditing. With respect to the unaudited
interim consolidated financial information for the six months ended June 30,
1999 and 2000 included herein, the independent certified public accountants have
not audited such consolidated financial information and have not expressed an
opinion or any other form of assurance with respect to such consolidated
financial information.
57
- - --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give any
information or to make any representation not contained in this prospectus. This
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, any offer or solicitation by anyone in any jurisdiction not authorized,
or in which the person making such an offer or solicitation is not qualified to
do so or to any person to whom it is unlawful to make such an offer or
solicitation. By delivery of this prospectus we do not imply that there has been
no change in our affairs or that the information in this prospectus is correct
as of any time subsequent to its date.
- - --------------------------------------------------------------------------------
TABLE OF CONTENTS FACTUAL DATA CORP.
Page
----
Prospectus Summary.......................... 1
Risk Factors................................ 4
Dilution.................................... 10
Use of Proceeds............................. 11
Capitalization.............................. 12 ________________
Dividend Policy............................. 12
Selected Financial Data..................... 13 PROSPECTUS
Management's Discussion and ________________
Analysis of Financial Condition
and Results of Operations.................. 15
Business ................................... 23
Legal Proceedings........................... 37
Market For Our Securities and
Related Stockholder Matters................ 38
Management.................................. 39
Security Ownership of Certain
Beneficial Owners and Management........... 47
Certain Relationships and Related
Transactions............................... 49 October ___, 2000
Selling Securityholder...................... 50
Plan of Distribution........................ 51
Description of Securities................... 52
Shares Eligible for Future Sale............. 55
Legal Matters............................... 56
Experts..................................... 56
Index to Financial Statements............... F-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Capitalized terms used but not defined in Part II have the meanings
ascribed to them in the prospectus contained in this Registration Statement.
Item 24. Indemnification of Directors and Officers
The Registrant's Bylaws requires the Registrant to indemnify, to the
fullest extent authorized by applicable law, any person who is or is threatened
to be made a party to any civil, criminal, administrative, investigative, or
other action or proceeding instituted or threatened by reason of the fact that
he is or was a director or officer of the Registrant or is or was serving at the
request of the Registrant as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise.
The Registrant's Articles of Incorporation provides that, to the
fullest extent permitted by Colorado law, directors and officers of the
Registrant shall not be liable to the Registrant or any of its shareholders for
damages caused by a breach of fiduciary duty by such director or officers.
Sections 7-109-102 and 103 of the Colorado Business Corporation Act
("CBCA") authorize the indemnification of directors and officers against
liability incurred by reason of being a director or officer and against expenses
(including attorney's fees) judgments, fines and amounts paid in settlement and
reasonably incurred in connection with any action seeking to establish such
liability, in the case of third-party claims, if the officer or director acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and in the case of actions by or in the
right of the corporation, if the officer or director acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interest of
the corporation and if such officer or director shall not have been adjudged
liable to the corporation, unless a court otherwise determines. Indemnification
is also authorized with respect to any criminal action or proceeding where the
officer or director also had no reasonable cause to believe his conduct was
unlawful.
All executive officers and directors of the Company have entered into
indemnification agreements with the Company which provide for certain defense
costs and reimbursements.
The above discussion of the Registrant's Articles of Incorporation,
bylaws the CBCA and the indemnification agreements is only a summary and is
qualified in its entirety by the full text of each of the foregoing.
The Registrant maintains customary officer's and director's liability
insurance.
II-3
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of the securities registered
hereby, all of which expenses, except for the Commission registration fee and
the National Association Securities Dealers, Inc. and Nasdaq SmallCap Market
filing fees, are estimated:
Commission registration fee(1) $ -0-
National Association of Securities Dealers, Inc.
filing fee -0-
Nasdaq National Market filing fee -0-
Printing expenses 1,000
Legal fees and expenses 5,000
Accounting fees and expenses 5,000
Blue sky fees and expenses --
Transfer agent fees 1,000
Miscellaneous 3,000
-------
Total $15,000
=======
- - ------------------
(1) Paid in connection with Registration Statement No. 33-47051.
Item 26. Recent Sales of Unregistered Securities
A. On June 1, 1997, the Registrant issued 1,800,000 shares of its Common
Stock to its four founders (i.e., Jerald H., Marcia R., Russell E. and James N.
Donnan) in exchange for all of their shares of FDC Group, Inc. and Lenders
Resource Incorporated. Both of these companies are now wholly owned subsidiaries
of the Registrant. Information with respect to the exchange issuance, is as
follows:
(i) Common Stock was issued on June 1, 1997 as follows:
Name Number of Shares
----------------- ----------------
Jerald H. Donnan 630,000
Marcia R. Donnan 630,000
Russell E. Donnan 270,000
James N. Donnan 270,000
(ii) The above persons are the founding family members of the
Registrant; no underwriter was involved in the issuances described above.
II-4
(iii) The shares were issued in exchange for shares of two family
corporations, i.e., Factual Data Corp founded by them in 1985 and Lenders
Resource Incorporated founded by them in 1994.
(iv) The Registrant believes the issuances to have been exempt from
the registration requirements of Section 5 of the Securities Act of 1933
("Act") by virtue of Section 4(2) thereof as a transaction not involving a
public offering and being the formation of a private company by four family
members not needing the protection of the registration provisions of the
Act.
B. Contemporaneous with the completion of the Registrant's initial
public offering, the Registrant issued options to purchase 17,000 shares of the
Registrant's Common Stock to 22 of its employees and options to purchase 15,000
shares to the three directors of the Registrant.
C. The Registrant issued a total of 20,230 shares of its Common Stock
in connection with two acquisitions. In August 1998, 11,595 shares were issued
to Heritage Credit Reporting, Inc. in connection with the acquisition of
Heritage's assets and also in August 1998, 8,635 shares were issued to two
persons in the acquisition of American Credit Connection, Inc.
D. The Registrant issued a total of 351,116 shares of its Common Stock
in connection with two acquisitions. In August 1998, 53,782 shares were issued
to one person in the acquisition of Landmark Financial Services, Inc. and in
December 1998, 297,334 shares (subject to reduction) were issued to five persons
in the acquisition of Mortgage Credit Services, Inc.
E. On March 26 and April 1, 1999, the Registrant sold an aggregate of
1,912,451 shares of its Common Stock to six institutional and accredited
investors in a private placement for $8.08 per share, in cash.
No underwriters were involved in either the acquisition or private
placement transactions. The issuances were made in transactions exempt from the
requirements of Section 5 of the Securities Act, pursuant to Section 4(2)
thereof. With regard to the Registrant's reliance upon such exemption, it made
appropriate inquiries to establish that such issuances qualified for the
exemption. The Registrant further obtained a representation from each purchaser
of his or her intent to acquire the securities for purposes of investment only
and not with a view toward any distribution or public resale, and each of the
certificates representing the securities has been embossed with a restrictive
legend restricting transfer of the securities. Stock transfer instructions were
posted with the Registrant's transfer agent.
II-5
Item 27. Exhibits
The following exhibits have been previously filed with this
Registration Statement, or filed on Form 8-K after the effective date, or filed
herewith:
1.1 -- Revised form of Underwriting Agreement.(1)
1.3 -- Form of Selected Dealers Agreement.(1)
1.4 -- Revised form of Warrant Exercise Fee Agreement.(1)
1.5 -- Form of Custody Agreement.(1)
3.1 -- Restated and Amended Articles of Incorporation.(1)
3.2 -- Amended Bylaws of the Registrant.(1)
4.1 -- Specimen Common Stock Certificate of the Registrant.(2)
4.2 -- Specimen Warrant Certificate of the Registrant.(2)
4.3 -- Form of Representative's Option for the Purchase of Common
Stock.(1)
4.3A -- Revised form of Representative's Option for the Purchase of
Warrants.(1)
4.4 -- Form of Warrant Agreement.(1)
5.1 -- Form of opinion of Jones & Keller as to the legality of the
issuance of the Common Stock.(1)
10.1 -- Office Lease between FDC Office I, LLC and Lenders Resource
Incorporated dated August 14, 1997 and as amended December 26,
1997.(1)
10.2 -- Registrant's 1997 Stock Incentive Plan, as amended, with form of
Stock Option Agreement.(1)
10.3 -- Employment Agreement with Jerald H. Donnan.(1)
10.3A-- Amendment to the Employment Agreement of Jerald H. Donnan dated
March 31, 1998.(1)
10.4 -- Employment Agreement with Marcia R. Donnan.(1)
II-6
10.4A-- Amendment to the Employment Agreement of Marcia R. Donnan dated
March 31, 1998.(1)
10.5 -- Form of Indemnification Agreement.(1)
10.6A -- Form of Franchise Agreement.(1)
10.6B -- Form of License Agreements.(1)
10.6C-- Credit Reporting Service Agreement with Trans Union
Corporation.(1)
10.6D-- Agreement for Service--Consumer Reporting Agencies with Equifax
Credit Information Services, Inc.(1)
10.6E-- Reseller Services Agreement with Experian Information Solutions,
Inc.(1)
10.6F-- Assets Purchase Agreement between the Company and Mirocon, Inc.
dated December 1, 1997.(1)
10.6G-- Flood Zone Determination Agreement between the Company and GE
Capital Corporation dated February 19, 1996.(1)
10.6H-- Asset Purchase Agreement between Factual Data Corp and C B
Unlimited, Inc. regarding the Indiana Territory.(1)
10.6I-- Purchase Agreement by and between Landmark Financial Services,
Inc. and Factual Data Corp. regarding the Texas Territories.(1)
10.6J -- Asset Purchase Agreement--FD Northwest, Inc.(3)
10.6K -- Asset Purchase Agreement--Heritage Credit Reporting, Inc.(4)
10.6L -- Asset Purchase Agreement--American Credit Connection, Inc.(5)
10.6M -- Asset Purchase Agreement--Factual Data of Minnesota, Inc.(6)
10.6N -- Asset Purchase Agreement--Landmark Financial Services, Inc.(7)
10.6O -- Asset Purchase Agreement--ARI of Minnetonka, Inc.(8)
10.6P-- Plan and Agreement of Merger with Mortgage Credit Services,
Inc.(9)
10.6Q -- Asset Purchase Agreement--Oxbow Enterprises, Inc.(10)
10.6R-- Asset Purchase Agreement--Premier Mortgage Credit Services,
Inc.(11)
II-7
10.6S -- Asset Purchase Agreement-- Imfax, Inc.(12)
10.6T -- Asset Purchase Agreement--United Data Services, Inc.(12)
10.6U-- Share Purchase Agreement with Continental Illinois Venture Corp.,
et al.(13)
10.6V -- Asset Purchase Agreement--F.D.D., Inc. and F.D.S.C., Inc.(14)
10.6W -- Asset Purchase Agreement--DataPower Information Services, Inc.(15)
10.6X -- Asset Purchase Agreement--Credit Bureau Services, Inc.(16)
10.6Y -- Affiliate Lease Agreement --Experian(17)
21. -- Subsidiaries of the Registrant.(1)
23.1 -- Consent of Ehrhardt Keefe Steiner & Hottman PC.(2)
23.2 -- Form of consent of Jones & Keller, P.C. (filed as part of Exhibit
5.1).(1)
(1) Previously filed.
(2) Filed herewith.
(3) Filed with Report on Form 8-K, August 25, 1998.
(4) Filed with Report on Form 8-K, August 25, 1998.
(5) Filed with Report on Form 8-K, August 25, 1998.
(6) Filed with Report on Form 8-K, October 1, 1998.
(7) Filed with Report on Form 8-K, October 15, 1998.
(8) Filed with Report on Form 8-K, November 16, 1998.
(9) Filed with Report on Form 8-K, December 28, 1998.
(10) Filed with Report on Form 8-K, January 8, 1999.
(11) Filed with Report on Form 8-K, January 29, 1999.
(12) Filed with Report on Form 8-K, April 12, 1999.
(13) Filed with Report on Form 8-K, April 12, 1999.
(14) Filed with Report on Form 8-K, May 18, 1999.
(15) Filed with Report on Form 8-K, September 23, 1999.
(16) Filed with Report on Form 8-K, September 24, 1999.
(17) Filed with Report on Form 8-K, August 17, 2000.
II-8
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by a final adjudication of such
issue.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) to reflect
in the prospectus any facts or events arising after the effective date of the
Registration Statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information in the Registration Statement; and (iii) to include any additional
or changed material information with respect to the plan of distribution.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to the directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-9
(6) The undersigned Registrant hereby undertakes that it will:
(a) For determining any liability under the Securities Act,
treat the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed
by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act as part of this Registration
Statement as of the time it was declared effective.
(b) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the
securities at that time as the initial bona fide offering of
those securities.
II-10
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Post-effective
Amendment No. 2 to the Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, on this _____ day of September, 2000.
FACTUAL DATA CORP.
By:
---------------------------------
J.H. Donnan, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-effective Amendment No. 2 to the Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
By:/s/Jerald H. Donnan Chairman of the Board of September 18, 2000
------------------- Directors and Chief Executive
Jerald H. Donnan Officer (Principal Executive
Officer)
By:/s/Todd Neiberger Chief Financial Officer and a September 25, 2000
------------------- Director (Principal Financial and
Todd Neiberger Accounting Officer)
By:/s/James N. Donnan President and a Director September 25, 2000
-------------------
James N. Donnan
By:/s/Robert J. Terry Director September 25, 2000
-------------------
Robert J. Terry
By:/s/Abdul H. Rajput Director September 27, 2000
-------------------
Abdul H. Rajput
By:/s/Daniel G. Helle Director September 25, 2000
-------------------
Daniel G. Helle
By:/s/J. Barton Goodwin Director September 25, 2000
--------------------
J. Barton Goodwin
II-11
EXHIBIT INDEX
5.1 Form of opinion of Jones & Keller as to the legality of the issuance of the
shares.
23.1 Consent of Ehrhardt Keefe Steiner & Hottman PC.
23.2 Consent of Jones & Keller, P.C. (filed as part of Exhibit 5.1).
FACTUAL DATA CORP.
INDEX TO FINANCIAL STATEMENTS
Factual Data Corp. - Audited Financial Statements December 31, 1999
Independent Auditors' Report...............................................F - 1
Financial Statements
Consolidated Balance Sheet..........................................F - 2
Consolidated Statements of Income...................................F - 3
Consolidated Statement of Changes in Shareholders' Equity...........F - 4
Consolidated Statements of Cash Flows...............................F - 5
Notes to Consolidated Financial Statements.................................F - 7
Factual Data Corp. - Unaudited Interim Financial Statements June 30, 2000
Financial Statements
Consolidated Balance Sheet.........................................F - 24
Consolidated Statements of Income..................................F - 25
Consolidated Statements of Cash Flows..............................F - 26
Notes to Consolidated Financial Statements................................F - 28
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.
Ehrhardt Keefe Steiner & Hottman PC
February 11, 2000
Denver, Colorado
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
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
FACTUAL DATA CORP.
Consolidated Statement of Changes in Shareholders' Equity
For the Years Ended December 31, 1998 and 1999
Common Stock Total
-------------------------- Retained Shareholders'
Shares Amount Earnings Equity
--------- ------------ ---------- -------------
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
========= ============ ========== =============
See notes to consolidated financial statements.
F - 4
FACTUAL DATA CORP.
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
----------------------------------
1998 1999
------------- ------------
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
============= ============
Continued on following page.
See notes to consolidated financial statements.
F-5
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
FACTUAL DATA CORP.
Notes to 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
FACTUAL DATA CORP.
Notes to 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
FACTUAL DATA CORP.
Notes to 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
FACTUAL DATA CORP.
Notes to 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
FACTUAL DATA CORP.
Notes to 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
FACTUAL DATA CORP.
Notes to 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
FACTUAL DATA CORP.
Notes to 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
FACTUAL DATA CORP.
Notes to 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 assets
leased amounted to approximately $1,403,147. 1,320,497
---------------
9,341,110
Less current portion (3,432,526)
---------------
$ 5,908,584
===============
F-14
FACTUAL DATA CORP.
Notes to 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
FACTUAL DATA CORP.
Notes to 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
FACTUAL DATA CORP.
Notes to 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
FACTUAL DATA CORP.
Notes to 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,
Information Ancillary Training 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
FACTUAL DATA CORP.
Notes to 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
FACTUAL DATA CORP.
Notes to 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
FACTUAL DATA CORP.
Notes to 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
FACTUAL DATA CORP.
Notes to 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, 1999
--------------------------------------------------
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
FACTUAL DATA CORP.
Notes to Financial Statements
Note 12 - Earnings Per Share (continued)
- - ----------------------------------------
For the Year Ended December 31, 1998
--------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Net income $ 1,576,734
Basic EPS
Weighted average beginning shares outstanding
- 1,800,000
Weighted average IPO shares issued - 850,220
Weighted average shares issued in business
acquisitions - 30,534
----------- -------------
Income available to common 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
FACTUAL DATA CORP.
CONSOLIDATED BALANCE SHEET
June 30, 2000
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 1,090,536
Short-term investments -
Prepaid expenses and other 730,199
Accounts receivable, net 5,246,185
-----------------
Total current assets 7,066,920
Property and equipment 6,563,569
Intangibles and other assets 35,724,703
Other assets 207,444
-----------------
49,562,646
=================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line-of-credit $ 831,395
Current portion on long-term debt 2,971,769
Accounts payable 4,374,744
Accrued payroll and expenses 885,637
Income taxes payable -
Deferred income taxes 13,386
-----------------
Total current liabilities 9,076,931
Long-term debt 14,446,594
Deferred income taxes 456,818
Shareholders' equity
Preferred stock, 1,000,000 shares authorized;
none issued and outstanding -
Common stock, 10,000,000 shares authorized;
5,382,818 at June 30, 2000 22,502,397
Retained earnings 3,079,906
-----------------
Total shareholders' equity 25,582,303
-----------------
$ 49,562,646
=================
The accompanying notes to unaudited consolidated financial statements are an
integral part of these consolidated statements.
F-24
FACTUAL DATA CORP.
CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended
June 30,
2000 1999
------------ ------------
(unaudited)
Revenue
Information services $ 14,251,506 $ 10,417,585
Ancillary income 935,284 1,007,196
System affiliates 628,821 924,148
Training, license and other - -
------------ ------------
Total revenue 15,815,611 12,348,929
------------ ------------
Operating expenses
Costs of services provided 8,942,584 7,048,035
Consolidation costs 325,708 617,193
Selling, general and administrative 3,871,653 2,069,471
Depreciation and amortization 1,890,933 1,080,813
------------ ------------
Total operating expenses 15,030,878 10,815,512
------------ ------------
Income from operations 784,733 1,533,417
Other income (expense)
Other income 160,418 224,104
Interest expense (584,997) (223,230)
------------ ------------
Total other income (expense) (424,579) 874
------------ ------------
Income before income taxes 360,154 1,534,291
Income tax expense 160,969 602,533
------------ ------------
Net income and comprehensive income $ 199,185 $ 931,758
============ ============
Basic earnings per share $ .04 $ .21
============ ============
Weighted average basic shares outstanding 5,380,779 4,441,971
============ ============
Diluted earnings per share $ .04 $ .19
============ ============
Weighted average diluted shares outstanding 5,589,319 4,790,637
============ ============
The accompanying notes to unaudited consolidated financial statements are an
integral part of these consolidated statements.
F-25
FACTUAL DATA CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
2000 1999
------------ ------------
(unaudited)
Cash flows from operating activities
Net income $ 199,185 $ 931,758
------------ ------------
Adjustments to reconcile net income to
net cash provided by operating
activities
Depreciation and amortization 1,890,933 1,080,813
Gain on refinance of debt (189,013) -
Deferred income taxes 46,173 17,656
Changes in operating assets and
liabilities
Accounts receivable (1,583,091) (1,377,114)
Prepaid expenses 219,343 (528,898)
Other assets 93,545 (125,600)
Accounts payable 1,275,066 472,876
Accrued payroll, payroll taxes
and expenses (197,849) 189,756
Accrued taxes and other 114,795 (524,186)
------------ ------------
1,669,902 (794,697)
------------ ------------
Net cash provided by operating
activities 1,869,087 137,061
------------ ------------
Cash flow from investing activities
Purchase of property and equipment (626,259) (1,499,818)
Capitalized software costs (395,857) -
Net cash used in the acquisition of
businesses (314,714) (7,522,780)
Sales of short-term securities - 2,212,386
------------ ------------
Net cash (used in) investing
activities (1,336,830) (6,810,212)
------------ ------------
Cash flows from financing activities
Principal payments on long-term debt (4,821,214) (1,111,725)
Proceeds from issuance of long-term debt 4,000,000 -
Net activity on line-of-credit 331,395 -
Net proceeds from employee stock option plan 24,153 -
Net proceeds in private placement
offering (net of offering expenses
paid of $1,514,576 - 13,985,424
------------ ------------
Net cash provided (used) by financing
activities (465,666) 12,873,699
------------ ------------
Net increase in cash and cash equivalents 66,591 6,200,548
Cash and cash equivalents, at beginning
of period 1,023,945 1,093,295
------------ ------------
Cash and cash equivalents, at end of period $ 1,090,536 $ 7,293,843
============ ============
(continued on next page)
F-26
FACTUAL DATA CORP.
Unaudited Consolidated Statements of Cash Flows
Supplemental disclosure of cash flow information:
Interest paid on borrowings for the six months ended June 30, 2000 and
1999, was $584,997 and $223,230, respectively.
Cash paid for income taxes for the six months ended June 30, 2000 and 1999,
was $160,969 and $1,323,636, respectively.
Supplemental disclosure of non-cash investing and financing activities:
During the six months ended June 30, 2000 and 1999, the Company financed
fixed asset purchases totaling $245,525 and $335,356, respectively,
with notes payable and capital leases.
During the six months ended June 30, 2000 and 1999, the Company incurred
$-0- and $1,018,685, respectively, in offering costs that were
included in accounts payable.
During the six months ended June 30, 2000, the Company acquired a license
agreement with a long-term obligation of $8.7 million. (See Note 4.)
The accompanying notes to unaudited consolidated financial statements are an
integral part of these consolidated statements.
F-27
FACTUAL DATA CORP.
Notes to Financial Statements
Note 1 - Summary of Significant Accounting Policies
- - ---------------------------------------------------
The consolidated financial statements are unaudited and reflect all adjustments
(consisting only of normal recurring adjustments), which are, in the opinion of
management, necessary for a fair presentation of the financial position and
operating results for the interim periods. The consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto contained in the Company's Annual Report on Form 10-KSB filed with
the Securities and Exchange Commission, March 31, 2000, which includes audited
financial statements for the years ended December 31, 1999 and 1998. The results
of operations for the six months ended June 30, 2000, may not be indicative of
the results of operations for the year ended December 31, 2000.
The Company's diluted earnings per share takes into account warrants issued in
the Company's IPO, the private equity offering and other outstanding stock
options.
Note 2 - Line-of-Credit
- - -----------------------
The Company refinanced its line-of-credit during the second quarter of 2000. The
facility is now a $6,000,000 line-of-credit with interest payable at prime plus
25 basis points, or libor plus 275 basis points. Principal and unpaid interest
are due April 2001. The line-of-credit requires the Company to meet certain
financial covenants and is collateralized by substantially all the assets of the
Company.
Note 3 - Stockholder's Equity
- - -----------------------------
The Company issued 1,317 shares of stock to employees valued at $12,182 in
connectin with the Company's Employee Stock Purchase Plan during the second
quarter of 2000.
Note 4 - Long-Term Debt and Obligations
- - ---------------------------------------
The Company refinanced seller notes from acquisitions and a portion of the
previous line-of-credit with a $4 million term loan through Wells Fargo bank.
The term loan is a 5-year amortization with interest at prime plus 25 basis
points, or lbor plus 275 basis points. A fixed swap agreement was negotiated in
which the all-in-one interest rate is now locked at 10.10%.
On April 29, 2000 the Company entered into a 10-year lease agreement, with a
5-year payback period as the Experian affiliate for the state of Colorado. The
agreement has been recorded as long-term debt on the balance sheet.
As of June 30, 2000, the future maturities of this long-term obligation are as
follows:
Year Ending December 31,
------------------------
2000 $ 399,507
2001 861,148
2002 1,695,246
2003 2,280,038
2004 2,543,751
2005 908,519
----------
$8,688,209
==========
F-28