SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
| x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 |
|
| o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 000-24205
Factual Data Corp.
| Colorado (State or other jurisdiction of incorporation or organization) |
84-1449911 (I.R.S. Employer Identification No.) |
5200 Hahns Peak Drive, Loveland, Colorado 80538
(Address of principal executive offices) (Zip code)
(970) 663-5700
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 8, 2003, the registrant had 6,241,656 shares of common stock outstanding.
TABLE OF CONTENTS
FACTUAL DATA CORP.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2003
TABLE OF CONTENTS
| PART I | Financial Information | |||
| Item 1 | Financial Statements | |||
| Consolidated Balance Sheets — December 31, 2002 and June 30, 2003 (Unaudited) | 3 | |||
| Unaudited Consolidated Statements of Income — For the Three and Six Months Ended June 30, 2002 and 2003 | 4 | |||
| Unaudited Consolidated Statements of Cash Flows — For the Six Months Ended June 30, 2002 and 2003 | 5 | |||
| Notes to Unaudited Consolidated Financial Statements | 7 | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 | ||
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 21 | ||
| Item 4 | Controls and Procedures | 21 | ||
| PART II | Other Information | |||
| Item 1. | Legal Proceedings | 22 | ||
| Item 2. | Changes in Securities and Use of Proceeds | 22 | ||
| Item 3. | Defaults upon Senior Securities | 22 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 22 | ||
| Item 5. | Other Information | 22 | ||
| Item 6. | Exhibits and Reports on Form 8-K | 23 | ||
| SIGNATURES | 24 | |||
| EXHIBIT INDEX | 25 | |||
| CERTIFICATIONS |
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
FACTUAL DATA CORP.
CONSOLIDATED BALANCE SHEETS
| June 30, | |||||||||||
| December 31, | 2003 | ||||||||||
| 2002 | (Unaudited) | ||||||||||
| Assets | |||||||||||
Current assets |
|||||||||||
Cash and cash equivalents |
$ | 7,826,653 | $ | 12,953,359 | |||||||
Trade accounts receivable, net of allowance of $300,786 and $386,365 |
7,346,692 | 10,630,275 | |||||||||
Prepaid expenses and other |
665,628 | 432,753 | |||||||||
Deferred income taxes |
365,834 | 463,943 | |||||||||
Total current assets |
16,204,807 | 24,480,330 | |||||||||
Property and equipment, net of accumulated depreciation of $8,189,225 and $9,393,002 |
5,716,378 | 5,847,243 | |||||||||
Other assets |
|||||||||||
Intangibles, net (including book value of goodwill of $565,971 and $565,971) |
28,375,674 | 27,092,870 | |||||||||
Deferred income taxes |
3,048,234 | 2,991,364 | |||||||||
Other assets |
162,409 | 146,143 | |||||||||
Total other assets |
31,586,317 | 30,230,377 | |||||||||
Total assets |
$ | 53,507,502 | $ | 60,557,950 | |||||||
| Liabilities and Shareholders’ Equity | |||||||||||
Current liabilities |
|||||||||||
Current portion of long-term debt |
$ | 3,345,403 | $ | 3,010,040 | |||||||
Current portion of capitalized lease obligation — license agreements |
3,096,616 | 2,811,085 | |||||||||
Accounts payable |
4,034,104 | 7,704,362 | |||||||||
Accrued branch efficiency costs |
52,729 | — | |||||||||
Accrued compensation |
1,875,410 | 1,628,819 | |||||||||
Consolidation costs payable |
— | 211,893 | |||||||||
Income taxes payable |
1,165,459 | 810,209 | |||||||||
Accrued expenses |
531,496 | 428,861 | |||||||||
Deferred revenue |
66,898 | 68,048 | |||||||||
Total current liabilities |
14,168,115 | 16,673,317 | |||||||||
Capitalized lease obligation — license agreements, less current portion |
4,559,385 | 3,582,747 | |||||||||
Long-term debt, less current portion |
3,765,526 | 2,382,590 | |||||||||
Total liabilities |
22,493,026 | 22,638,654 | |||||||||
Commitments and contingencies
|
|||||||||||
Shareholders’ equity Preferred stock, 1,000,000 shares authorized; none issued and outstanding |
— | — | |||||||||
Common stock, no par value, 50,000,000 shares authorized; 6,190,884 shares
issued and outstanding at December 31, 2002 and 6,223,607 shares issued and
outstanding at June 30, 2003 |
27,695,398 | 28,681,962 | |||||||||
Deferred compensation |
— | (268,711 | ) | ||||||||
Retained earnings |
3,319,078 | 9,506,045 | |||||||||
Total shareholders’ equity |
31,014,476 | 37,919,296 | |||||||||
Total liabilities and shareholders’ equity |
$ | 53,507,502 | $ | 60,557,950 | |||||||
See accompanying notes to unaudited consolidated financial statements.
3
FACTUAL DATA CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
| For the Three Months Ended | For the Six Months Ended | ||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||
| 2002 | 2003 | 2002 | 2003 | ||||||||||||||||
Revenue: |
|||||||||||||||||||
Mortgage services |
$ | 11,455,210 | $ | 20,873,218 | $ | 22,689,668 | $ | 39,044,300 | |||||||||||
Consumer services |
1,722,970 | 2,109,164 | 3,323,075 | 4,023,769 | |||||||||||||||
Other services |
915,238 | 1,037,226 | 1,569,926 | 1,903,663 | |||||||||||||||
Total revenue |
14,093,418 | 24,019,608 | 27,582,669 | 44,971,732 | |||||||||||||||
Operating expenses: |
|||||||||||||||||||
Costs of services |
8,074,127 | 12,835,170 | 15,260,039 | 23,829,021 | |||||||||||||||
Selling, general, and administrative |
3,430,783 | 4,450,084 | 6,248,024 | 8,001,679 | |||||||||||||||
Depreciation and amortization |
1,047,832 | 1,245,517 | 2,041,629 | 2,456,402 | |||||||||||||||
Acquisition consolidation costs |
6,367 | — | 115,479 | — | |||||||||||||||
Total operating expenses |
12,559,109 | 18,530,771 | 23,665,171 | 34,287,102 | |||||||||||||||
Income from operations |
1,534,309 | 5,488,837 | 3,917,498 | 10,684,630 | |||||||||||||||
Other income (expense): |
|||||||||||||||||||
Other income |
127,410 | 129,902 | 232,978 | 256,447 | |||||||||||||||
Interest expense |
(365,441 | ) | (260,926 | ) | (770,696 | ) | (555,216 | ) | |||||||||||
Total other expense |
(238,031 | ) | (131,024 | ) | (537,718 | ) | (298,769 | ) | |||||||||||
Income before income taxes |
1,296,278 | 5,357,813 | 3,379,780 | 10,385,861 | |||||||||||||||
Income tax expense |
514,618 | 2,107,916 | 1,301,952 | 4,198,894 | |||||||||||||||
Net income |
$ | 781,660 | $ | 3,249,897 | $ | 2,077,828 | $ | 6,186,967 | |||||||||||
Earnings per share: |
|||||||||||||||||||
Basic |
$ | .13 | $ | .52 | $ | .34 | $ | 1.00 | |||||||||||
Diluted |
$ | .13 | $ | .50 | $ | .34 | $ | .97 | |||||||||||
Weighted average shares outstanding: |
|||||||||||||||||||
Basic |
6,125,140 | 6,205,590 | 6,123,054 | 6,198,278 | |||||||||||||||
Diluted |
6,232,827 | 6,462,731 | 6,200,781 | 6,369,470 | |||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
4
FACTUAL DATA CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Six Months Ended | ||||||||||||
| June 30, | ||||||||||||
| 2002 | 2003 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 2,077,828 | $ | 6,186,967 | ||||||||
Reconciliation of net income to net cash provided by
operating activities: |
||||||||||||
Depreciation and amortization |
2,041,629 | 2,456,402 | ||||||||||
Bad debt expense |
388,824 | 255,393 | ||||||||||
Loss on sale of fixed assets |
— | 260 | ||||||||||
Net cash settlements under swap agreement |
59,733 | — | ||||||||||
Amortization of deferred compensation |
40,064 | 205,485 | ||||||||||
Deferred income taxes |
353,417 | (41,239 | ) | |||||||||
Changes in assets and liabilities, net of business acquisitions: |
||||||||||||
Accounts receivable |
(1,973,979 | ) | (3,538,977 | ) | ||||||||
Prepaid expenses and other |
(272,132 | ) | 232,876 | |||||||||
Other assets |
25,467 | 16,266 | ||||||||||
Accrued branch efficiency costs |
(282,117 | ) | (52,729 | ) | ||||||||
Consolidation costs payable |
— | 211,893 | ||||||||||
Accounts payable |
215,281 | 3,670,258 | ||||||||||
Income taxes payable |
(272,708 | ) | (355,250 | ) | ||||||||
Accrued expenses and compensation |
(165,210 | ) | (349,225 | ) | ||||||||
Deferred revenue |
(13,476 | ) | 1,150 | |||||||||
Net cash provided by operating activities |
2,222,621 | 8,899,530 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Cash used for software development |
(431,399 | ) | (474,684 | ) | ||||||||
Purchase of property, equipment and intangibles |
(1,035,577 | ) | (850,789 | ) | ||||||||
Net cash settlements under swap agreement |
(59,733 | ) | — | |||||||||
Acquisition of businesses, net of cash acquired |
(1,020,000 | ) | — | |||||||||
Proceeds from sale of equipment |
— | 20,750 | ||||||||||
Net cash used in investing activities |
(2,546,709 | ) | (1,304,723 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Principal payments |
(2,189,522 | ) | (2,980,470 | ) | ||||||||
Payments on line of credit |
(2,200,000 | ) | — | |||||||||
Proceeds from issuance of long-term debt |
1,533,333 | — | ||||||||||
Net proceeds from employee stock purchases and option
exercises |
76,221 | 512,369 | ||||||||||
Net cash used in financing activities |
(2,779,968 | ) | (2,468,101 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
(3,104,056 | ) | 5,126,706 | |||||||||
Cash and cash equivalents, beginning of period |
6,163,743 | 7,826,653 | ||||||||||
Cash and cash equivalents, end of period |
$ | 3,059,687 | $ | 12,953,359 | ||||||||
See accompanying notes to unaudited consolidated financial statements.
5
FACTUAL DATA CORP.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Supplemental disclosure of non-cash investing and financing activities (unaudited):
During the six months ended June 30, 2002, we issued notes payable of $1.1 million in connection with acquisitions.
| Six Months Ended June 30, | ||||||||
| 2002 | 2003 | |||||||
Cash paid for interest |
$ | 705,942 | $ | 450,666 | ||||
Cash paid for income taxes |
1,206,517 | 4,523,300 | ||||||
See accompanying notes to unaudited consolidated financial statements.
6
FACTUAL DATA CORP.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). However, certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States have been omitted or condensed pursuant to the rules and regulations of the SEC.
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 our financial position and operating results for the interim periods. The unaudited consolidated financial statements should be read in conjunction with the financial statements and notes thereto contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2003, which includes audited financial statements for the years ended December 31, 2002 and 2001. The results of operations for the six month period ended June 30, 2003, may not be indicative of the results of operations for the year ended December 31, 2003.
Certain amounts in the unaudited consolidated statements of operations and the unaudited consolidated statements of cash flows for the six months ended June 30, 2002 have been reclassified to conform to the current period’s presentation.
2. Business Acquisitions
During the six months ended June 30, 2002, we completed three asset acquisitions. The purpose of these acquisitions was to acquire franchise rights, enabling us to increase market share. The acquisitions have been accounted for using the purchase method and the results of operations are reflected in our consolidated financial statements from the date of the acquisition. The purchase price allocation of the acquisitions and consideration paid were as follows:
| Acquisitions Completed | |||||||||
| During the | |||||||||
| Six Months Ended | |||||||||
| Lives | June 30, 2002 | ||||||||
| (Unaudited) | |||||||||
Fair value of assets: |
|||||||||
Property and equipment |
3-7 years | $ | 5,500 | ||||||
Customer rights and customer lists |
15 years | 1,707,500 | |||||||
Non-compete agreements |
3 years | 220,000 | |||||||
Goodwill |
N/A | 397,000 | |||||||
Other assets |
N/A | 10,000 | |||||||
| $ | 2,340,000 | ||||||||
Consideration paid: |
|||||||||
Notes payable issued |
$ | 1,145,000 | |||||||
Accounts payable assumed |
175,000 | ||||||||
Cash payments |
1,020,000 | ||||||||
| $ | 2,340,000 | ||||||||
7
The following unaudited pro forma information presents our consolidated results of operations as if the 2002 acquisitions occurred on January 1, 2002. The unaudited pro forma financial data does not purport to be indicative of the actual results which would have been obtained, or the results which may be obtained in the future.
| Six Months | ||||
| Ended June 30, 2002 | ||||
| (Unaudited) | ||||
Total revenue |
$ | 28,135,498 | ||
Net income |
2,185,740 | |||
Basic earnings per share |
0.36 | |||
Diluted earnings per share |
0.35 | |||
3. Line of Credit and Long-Term Debt
On April 30, 2002, we renewed our $10.0 million credit facility agreement with our bank whereby we entered into a $6.0 million line of credit and converted the existing $1.7 million balance on our line of credit into a new $4.0 million term loan and modified its terms. The term loan requires monthly principal payments of $83,333 through April 30, 2006, with interest at the floating rate or Eurodollar rate of 4.1% at June 30, 2003. Our $6.0 million line of credit bears interest at the floating rate or Eurodollar rate as defined in the agreement of 4.1% at June 30, 2003. The bank has extended the maturity date to June 30, 2004, at which time principal and unpaid interest are due. The line of credit and the term loan require that we meet certain financial covenants and as of June 30, 2003 we were in compliance with such covenants. The line of credit and the term loan are collateralized by substantially all of our assets. There were no amounts due on the line of credit at June 30, 2002 or at June 30, 2003.
Future maturities of long-term debt as of June 30, 2003 are as follows:
| Period Ending | Long-Term | Capital | ||||||||||
| June 30, | Debt | Leases | Total | |||||||||
| (Unaudited) | (in thousands) | |||||||||||
2003 (6 months) |
$ | 1,405 | $ | 241 | $ | 1,646 | ||||||
2004 |
1,978 | 233 | 2,211 | |||||||||
2005 |
1,190 | 44 | 1,234 | |||||||||
2006 |
334 | — | 334 | |||||||||
2007 |
— | — | — | |||||||||
Subtotal |
4,907 | 518 | 5,425 | |||||||||
Less amount representing interest |
— | 32 | 32 | |||||||||
Subtotal |
4,907 | 486 | 5,393 | |||||||||
Less current maturities |
2,607 | 403 | 3,010 | |||||||||
Total |
$ | 2,300 | $ | 83 | $ | 2,383 | ||||||
4. Earnings Per Share
The following table sets forth a computation of our basic and diluted earnings per share for the three months ended June 30, 2002 and 2003:
| Three Months Ended | ||||||||||
| June 30, | ||||||||||
| 2002 | 2003 | |||||||||
| (Unaudited) | ||||||||||
Numerator: |
||||||||||
Net income available to common shareholders |
$ | 781,660 | $ | 3,249,897 | ||||||
Denominator: |
||||||||||
Basic earnings per share — weighted average shares |
6,125,140 | 6,205,590 | ||||||||
Effect of dilutive securities: |
||||||||||
Stock options and warrants |
107,687 | 257,141 | ||||||||
Denominator for diluted earnings per share — weighted
average shares |
6,232,827 | 6,462,731 | ||||||||
Earnings per share: |
||||||||||
Basic |
$ | 0.13 | $ | 0.52 | ||||||
Diluted |
$ | 0.13 | $ | 0.50 | ||||||
8
Stock options and warrants exercisable into approximately 718,267 shares of common stock were outstanding at June 30, 2003 and stock options and warrants exercisable into approximately 630,768 shares of common stock were outstanding as of June 30, 2002. Of these securities, 461,126 and 523,081, respectively, were not included in the computation of diluted earnings per share for the three months ended June 30, 2002 and 2003 because they were anti-dilutive but could potentially dilute EPS in future periods.
| Six Months Ended | ||||||||||
| June 30, | ||||||||||
| 2002 | 2003 | |||||||||
| (Unaudited) | ||||||||||
Numerator: |
||||||||||
Net income available to common shareholders |
$ | 2,077,828 | $ | 6,186,967 | ||||||
Denominator: |
||||||||||
Basic earnings per share — weighted average shares |
6,123,054 | 6,198,278 | ||||||||
Effect of dilutive securities: |
||||||||||
Stock options and warrants |
77,727 | 171,192 | ||||||||
Denominator for diluted earnings per share — weighted
average shares |
6,200,781 | 6,369,470 | ||||||||
Earnings per share: |
||||||||||
Basic |
$ | 0.34 | $ | 1.00 | ||||||
Diluted |
$ | 0.34 | $ | 0.97 | ||||||
Stock options and warrants exercisable into approximately 718,267 shares of common stock were outstanding at June 30, 2003 and stock options and warrants exercisable into approximately 630,768 shares of common stock were outstanding as of June 30, 2002. Of these securities, 547,075 and 553,041, respectively, were not included in the computation of diluted earnings per share for the six months ended June 30, 2002 and 2003 because they were anti-dilutive but could potentially dilute EPS in future periods.
5. Business Segment Information
We operate in three business segments: mortgage services, consumer services and other services, which consists of resident and employment screening services. Operating results and other financial data are presented for our principal business segments as follows:
| Mortgage | Consumer | Other | |||||||||||||||
| Three Months Ended | Services | Services | Services | Total | |||||||||||||
| (Unaudited) | |||||||||||||||||
June 30, 2003: |
|||||||||||||||||
Net sales |
$ | 20,873,218 | $ | 2,109,164 | $ | 1,037,226 | $ | 24,019,608 | |||||||||
Cost of services |
10,750,304 | 1,362,159 | 722,707 | 12,835,170 | |||||||||||||
Segment income |
3,065,067 | 116,135 | 68,695 | 3,249,897 | |||||||||||||
Total assets |
47,968,517 | 11,433,988 | 1,155,445 | 60,557,950 | |||||||||||||
Goodwill |
565,971 | — | — | 565,971 | |||||||||||||
Depreciation and
amortization |
997,190 | 210,968 | 37,359 | 1,245,517 | |||||||||||||
Capital expenditures |
530,181 | — | — | 530,181 | |||||||||||||
June 30, 2002: |
|||||||||||||||||
Net sales |
$ | 11,455,210 | $ | 1,722,970 | $ | 915,238 | $ | 14,093,418 | |||||||||
Cost of services |
6,393,248 | 1,034,871 | 646,008 | 8,074,127 | |||||||||||||
Segment income |
577,384 | 158,904 | 45,372 | 781,660 | |||||||||||||
Total assets |
37,791,125 | 11,550,367 | 1,343,105 | 50,684,597 | |||||||||||||
Goodwill |
565,971 | — | — | 565,971 | |||||||||||||
Depreciation and
amortization |
896,658 | 109,996 | 41,178 | 1,047,832 | |||||||||||||
Capital expenditures |
396,456 | — | 7,769 | 404,225 | |||||||||||||
Business segment information for the three months ended June 30, 2002 have been reclassified to conform to the current period’s presentation.
9
| Mortgage | Consumer | Other | |||||||||||||||
| Six Months Ended | Services | Services | Services | Total | |||||||||||||
| (Unaudited) | |||||||||||||||||
June 30, 2003: |
|||||||||||||||||
Net sales |
$ | 39,044,300 | $ | 4,023,769 | $ | 1,903,663 | $ | 44,971,732 | |||||||||
Cost of services |
19,846,783 | 2,613,648 | 1,368,590 | 23,829,021 | |||||||||||||
Segment income |
5,875,702 | 205,300 | 105,965 | 6,186,967 | |||||||||||||
Total assets |
47,968,517 | 11,433,988 | 1,155,445 | 60,557,950 | |||||||||||||
Goodwill |
565,971 | — | — | 565,971 | |||||||||||||
Depreciation and
amortization |
1,963,068 | 420,951 | 72,383 | 2,456,402 | |||||||||||||
Capital expenditures |
1,325,473 | — | — | 1,325,473 | |||||||||||||
June 30, 2002: |
|||||||||||||||||
Net sales |
$ | 22,689,668 | $ | 3,323,075 | $ | 1,569,926 | $ | 27,582,669 | |||||||||
Cost of services |
12,083,741 | 2,021,721 | 1,154,577 | 15,260,039 | |||||||||||||
Segment income |
1,815,871 | 205,265 | 56,692 | 2,077,828 | |||||||||||||
Total assets |
37,791,125 | 11,550,367 | 1,343,105 | 50,684,597 | |||||||||||||
Goodwill |
565,971 | — | — | 565,971 | |||||||||||||
Depreciation and
amortization |
1,756,811 | 211,600 | 73,218 | 2,041,629 | |||||||||||||
Capital expenditures |
1,459,207 | — | 7,769 | 1,466,976 | |||||||||||||
6. Intangible Assets
Our intangible assets consisted of the following:
| December 31, | June 30, | |||||||||||
| Lives | 2002 | 2003 | ||||||||||
| (Unaudited) | ||||||||||||
Customer rights and customer lists |
15 years | $ | 26,149,336 | $ | 26,149,336 | |||||||
Goodwill |
— | 565,971 | 565,971 | |||||||||
Non-compete agreements |
3 years | 1,725,151 | 1,725,151 | |||||||||
Franchise and license agreements |
10 years | 8,044,036 | 8,044,036 | |||||||||
Intellectual property |
13-15 years | 462,902 | 462,902 | |||||||||
Loan origination costs |
5 years | 97,020 | 97,020 | |||||||||
| 37,044,416 | 37,044,416 | |||||||||||
Less accumulated amortization |
8,668,742 | 9,951,546 | ||||||||||
| $ | 28,375,674 | $ | 27,092,870 | |||||||||
Effective January 1, 2002, we adopted SFAS No. 142. As of June 30, 2003, we had $565,971 in unamortized goodwill.
In accordance with SFAS No. 142, we have determined goodwill and our other intangible assets are not impaired. Goodwill and other intangible assets will be tested annually and whenever events and circumstances occur indicating that the assets may be impaired.
Future amortization expense for our intangible assets is estimated as follows (unaudited):
| Period Ending June 30, | ||||
2003 (6 months) |
$ | 1,280,000 | ||
2004 |
2,583,250 | |||
2005 |
2,589,359 | |||
2006 |
2,653,727 | |||
2007 |
2,743,468 | |||
Thereafter |
14,677,095 | |||
| $ | 26,526,899 | |||
10
The following table summarizes the activity in our intangible assets for the periods indicated:
| Year Ended | ||||||||||||
| December 31, | Six Months Ended June 30, | |||||||||||
| 2002 | 2002 | 2003 | ||||||||||
| (Unaudited) | ||||||||||||
Goodwill: |
||||||||||||
Beginning balance |
$ | 168,971 | $ | 168,971 | $ | 565,971 | ||||||
Additions |
397,000 | 397,000 | — | |||||||||
Amortization |
— | — | — | |||||||||
Ending balance |
$ | 565,971 | $ | 565,971 | $ | 565,971 | ||||||
Customer rights and customer lists: |
||||||||||||
Beginning balance |
$ | 19,843,170 | $ | 20,160,400 | $ | 19,919,679 | ||||||
Additions |
1,787,242 | 1,754,067 | — | |||||||||
Amortization |
(1,710,733 | ) | (843,897 | ) | (867,295 | ) | ||||||
Ending balance |
$ | 19,919,679 | $ | 21,070,570 | $ | 19,052,384 | ||||||
Franchise and license agreements: |
||||||||||||
Beginning balance |
$ | 7,959,000 | $ | 7,959,000 | $ | 7,107,704 | ||||||
Additions (reductions) |
(290,314 | ) | (290,314 | ) | — | |||||||
Amortization |
(560,982 | ) | (119,645 | ) | (339,198 | ) | ||||||
Ending balance |
$ | 7,107,704 | $ | 7,549,041 | $ | 6,768,506 | ||||||
Other intangibles: |
||||||||||||
Beginning balance |
$ | 712,869 | $ | 395,640 | $ | 782,320 | ||||||
Additions |
220,000 | 220,000 | — | |||||||||
Amortization |
(150,549 | ) | (52,597 | ) | (76,311 | ) | ||||||
Ending balance |
$ | 782,320 | $ | 563,043 | $ | 706,009 | ||||||
Total intangible assets |
$ | 28,375,674 | $ | 29,748,625 | $ | 27,092,870 | ||||||
11
The changes in the carrying amount of goodwill by segment are as follows:
| Mortgage | Consumer | Other | ||||||||||||||
| Services | Services | Services | Total | |||||||||||||
Balance as of January 1, 2002 |
$ | 168,971 | $ | — | $ | — | $ | 168,971 | ||||||||
Goodwill acquired during the period |
397,000 | — | — | 397,000 | ||||||||||||
Balance as of June 30, 2003 |
$ | 565,971 | $ | — | $ | — | $ | 565,971 | ||||||||
7. Shareholders’ Equity
On May 4, 2001, we granted 50,500 options to purchase our common stock at $8.00 per share to seven employees. On July 19, 2002 the Board of Directors modified the options to allow the holders to exercise the options on a cashless basis. As a result of this modification, the options are accounted for as variable plan options in accordance with Financial Interpretation No. 44, “Accounting For Certain Transactions Involving Stock Options.” During the three and six months ended June 30, 2003, we recognized deferred compensation expense of $180,125 and $205,484 related to these options.
8. Stock Options
At June 30, 2003, the Company has a stock-based employee compensation plan. We account for this plan under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. The following table illustrates the effect on net income had we applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.
| Three Months Ended June 30, | 2002 | 2003 | ||||||
| (Unaudited) | ||||||||
Net income as reported |
$ | 781,660 | $ | 3,249,897 | ||||
Add: Stock-based employee compensation |
40,063 | 180,125 | ||||||
Deduct: Total stock based employee
compensation expense determined
under fair value based method for
all rewards, net of income taxes |
(138,352 | ) | (462,781 | ) | ||||
Net income pro forma |
$ | 683,371 | $ | 2,967,241 | ||||
Basic earnings (loss) per share |
||||||||
As reported |
$ | 0.13 | $ | 0.52 | ||||
Pro forma |
$ | 0.11 | $ | 0.48 | ||||
Diluted earnings (loss) per share |
||||||||
As reported |
$ | 0.13 | $ | 0.50 | ||||
Pro forma |
$ | 0.11 | $ | 0.46 | ||||
12
| Six Months Ended June 30, | 2002 | 2003 | ||||||
| (Unaudited) | ||||||||
Net income as reported |
$ | 2,077,828 | $ | 6,186,967 | ||||
Add: Stock-based employee compensation |
40,063 | 205,484 | ||||||
Deduct: Total stock based employee
compensation expense determined
under fair value based method for
all rewards, net of income taxes |
(231,146 | ) | (640,090 | ) | ||||
Net income pro forma |
$ | 1,886,745 | $ | 5,752,361 | ||||
Basic earnings (loss) per share |
||||||||
As reported |
$ | 0.34 | $ | 1.00 | ||||
Pro forma |
$ | 0.31 | $ | 0.93 | ||||
Diluted earnings (loss) per share |
||||||||
As reported |
$ | 0.34 | $ | 0.97 | ||||
Pro forma |
$ | 0.30 | $ | 0.90 | ||||
Effective May 2003, our shareholders approved the increase of the number of shares reserved for issuance under our 1999 Employee Formula Award Stock Option Plan from 600,000 to 1,000,000 shares.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with our unaudited consolidated financial statements, including the notes thereto contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including the special considerations set forth in our annual report on Form 10-K for the year ended June 30, 2002 and elsewhere in this report.
Overview
We provide a wide range of customized information services to businesses across the United States that assist them in making critical decisions, such as determining whether to make a mortgage or other loan, offer employment, accept new tenants, or enter into a business relationship. We specialize in providing customized mortgage credit reports and other mortgage related services, consumer credit reports, employment screening, resident screening, and commercial credit reports. Our customers include mortgage lenders and independent mortgage brokers, consumer lenders, employers, property managers, and other business customers desiring information regarding creditworthiness and other matters. We believe we are an industry leader in delivering our service offerings over the Internet and in utilizing technology and focusing on customer service to provide our services with the speed, reliability, accuracy, and customization that industry participants increasingly demand.
Founded in 1985, we have been publicly held since 1998. Our common stock trades on Nasdaq under the symbol “FDCC.” For more information visit www.factualdata.com. The website shall not be deemed to be part of this report.
Critical Accounting Policies
We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported and expected financial results.
In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most
13
important to the portrayal of our financial condition and results of operations and require our most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Revenue Recognition
We recognize revenue when the mortgage credit report or other information, collectively a “unit,” has been delivered to the customer, persuasive evidence of the terms of the arrangement exists, our fee is fixed and determinable, and collectibility is reasonably assured. Delivery usually takes place electronically and revenue is recognized when the customer has access to the data. Our “4 Hours or It’s Free” guarantee program applies to line-item verifications and updates on our reports. We do not recognize revenue on services subject to the guarantee until the guarantee conditions are met. The fees we charge our customers are based on the type of unit delivered. Generally, we do not receive upfront set up fees or other upfront fees from our customers. Our cost of services primarily includes data costs, which are expensed when the unit is delivered to the customer.
Valuation of Goodwill and Other Intangible Assets
We assess the impairment of identifiable intangible assets and goodwill at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include the following:
| • significant underperformance relative to expected historical or projected future operating results; | |||
| • significant changes in the manner of our use of the acquired assets or the strategy for our overall business; | |||
| • significant negative industry or economic trends; | |||
| • significant decline in our stock price for a sustained period; and | |||
| • our market capitalization relative to net book value. |
In 2002, Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” became effective. As of June 30, 2002 and June 30, 2003, the net carrying amount of goodwill of $565,971is no longer amortized and is subject to impairment testing under SFAS No. 142. In lieu of amortization, we are required to perform an initial impairment review of our goodwill in 2003 and an annual impairment review thereafter. We completed a transitional impairment test of goodwill on January 1, 2002 and our annual test on September 30, 2002 and have determined goodwill and our other intangible assets are not impaired. Goodwill and other intangible assets will be tested annually and whenever events and circumstances occur indicating that the assets may be impaired. We have also evaluated the useful lives of our existing intangible assets and determined that the existing useful lives are appropriate. Other intangible assets of $26.5 million at June 30, 2003 are subject to the amortization methods prescribed by SFAS No. 142.
Allowance for Doubtful Accounts
We estimate the uncollectibility of our accounts receivable. We specifically analyze accounts receivable, historical bad debts, customer concentrations, customer creditworthiness, current economic trends, and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Material differences may result in the amount and timing of bad debt expense for any period if we made different judgments or utilized different estimates. Our accounts receivable was $11.0 million as of June 30, 2003, and our allowance for doubtful accounts was $386,000 as of June 30, 2003.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our consolidated balance sheet.
Significant judgment is required in determining our provision for income taxes and deferred tax assets and liabilities. We believe that it is more likely than not that the deferred tax assets will be realized from the generation of future taxable income. Although the
14
deferred tax asset is considered realizable, actual amounts could be reduced, and charged against our results from operations in future periods, if we do not generate sufficient future taxable income.
Capitalized Software Development Costs
We capitalize costs, which include primarily salaries in connection with developing software for internal use. We use judgment in determining whether development costs meet the criteria for immediate expense or capitalization. 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. We cease capitalization of development costs once the software has been substantially completed and is ready for its intended use. We capitalized $431,000 and $475,000 of costs during the six months ended June 30, 2002, and 2003, respectively. The software development costs capitalized are amortized over the estimated useful life of the software, which we estimate to be three years. Amortization expense was $367,000 and $391,000 for the six months ended June 30, 2002 and 2003, respectively.
Business Segments
We classify our business operations into three reporting segments: mortgage services, consumer services, and other services. Historically, we have derived most of our revenue from mortgage services, with our primary service in this segment being our mortgage credit reports. Through our consumer services business, we generate revenue primarily from the delivery of consumer credit reports. Our other services consist of resident and employment screening services.
Results of Operations
Comparison of three months ended June 30, 2002 and 2003
Revenue, cost of services, and cost of services as a percent of revenue for our operating segments for the periods indicated are as follows ($ in thousands):
| Three Months Ended | Mortgage | Consumer | Other | |||||||||||||
| June 30, 2002 | Services | Services | Services | Total | ||||||||||||
Net sales |
$ | 11,455 | $ | 1,723 | $ | 915 | $ | 14,093 | ||||||||
Cost of services |
$ | 6,393 | $ | 1,035 | $ | 646 | $ | 8,074 | ||||||||
Cost of services as a percent of revenue |
55.8 | % | 60.1 | % | 70.6 | % | 57.3 | % | ||||||||
| Three Months Ended | Mortgage | Consumer | Other | |||||||||||||
| June 30, 2003 | Services | Services | Services | Total | ||||||||||||
Net sales |
$ | 20,873 | $ | 2,109 | $ | 1,037 | $ | 24,019 | ||||||||
Cost of services |
$ | 10,750 | $ | 1,362 | $ | 723 | $ | 12,835 | ||||||||
Cost of services as a percent of revenue |
51.5 | % | 64.6 | % | 69.7 | % | 53.4 | % | ||||||||
Total revenue increased $9.9 million, or 70.2%, from $14.1 million in the three months ended June 30, 2002 to $24.0 million in the same period of 2003.
Mortgage services revenue increased $9.4 million, or 81.7%, from $11.5 million in the three months ended June 30, 2002 to $20.9 million in the same period of 2003 as a result of mortgage activity fueled by historically low interest rates, our continued success in obtaining new market share and increasing organic growth by $6.4 million and increasing national and major mortgage accounts by $3.0 million for the three months ended June 30, 2003, compared to the three months ended June 30, 2002.
Consumer services revenue increased $400,000, or 23.5%, from $1.7 million in the three months ended June 30, 2002 to $2.1 million in the same period of 2003 as a result of an increase in market share and new products and services.
Other services revenue increased $122,000, or 13.3%, from $915,000 in the three months ended June 30, 2002 to $1,037,000 in the same period of 2003. This increase in resident and employment screening services was a result of the development of new customers.
15
Cost of services are direct operational costs and consist of data costs, salaries, and telecommunications costs. Total cost of services increased $4.7 million, or 58.0%, from $8.1 million in the three months ended June 30, 2002 to $12.8 million in the same period of 2003. These costs are primarily variable costs, which tend to fluctuate with changes in revenue. Although these costs tend to remain fairly consistent as a percentage of revenue, during the three months ended June 30, 2003, our cost of services decreased as a percentage of revenue as a result of the lower data and salary costs discussed below. As a percentage of revenue, cost of services decreased from 57.3% in the three months ended June 30, 2002 to 53.4% in the same period of 2003.
Mortgage cost of services increased $4.4 million, or 68.8%, from $6.4 million in the three months ended June 30, 2002 to $10.8 million in the same period of 2003. As a percentage of revenue, mortgage cost of services decreased from 55.8% in the three months ended June 30, 2002 to 51.5% in the same period of 2003 as a result of lower data costs and our ability to use our technology to reduce salary costs.
Consumer cost of services increased $320,000 or 30.8%, from $1.04 million in the three months ended June 30, 2002 to $1.36 million in the same period of 2003. As a percentage of revenue, these costs increased from 60.1% in the three months ended June 30, 2002 to 64.6% in the same period of 2003. This increase was primarily due to the mix of new services.
Other cost of services increased $77,000, or 11.9%, from $646,000 in the three months ended June 30, 2002 to $723,000 in the same period of 2003 and decreased as a percentage of revenue from 70.6% in the three months ended June 30, 2002 to 69.7% in the same period of 2003 as a result of reduced salary costs.
Selling, general and administrative expenses increased $1.1 million, or 32.4%, from $3.4 million in the three months ended June 30, 2002 to $4.5 million in the same period of 2003. As a percentage of revenue, these costs decreased from 24.3% to 18.5%, a 5.8% decrease due to our ability to increase sales without additional cost in corporate salaries and tech center communications costs, thereby allowing us to reduce proportionately our selling, general and administrative expenses. There were selling, general and administrative costs of $279,000 related to the proposed merger with Kroll, Inc.
Depreciation and amortization increased $200,000 or 19.0%, from $1.05 million in the three months ended June 30, 2002 to $1.25 million in the same period of 2003. This increase was due to depreciation and amortization on hardware and software upgrades to our technology center totaling $79,000. Also contributing to the increase in amortization are our license agreements to sell Experian information, which increased $108,000. The $13,000 balance of the increase was due to amortization on newly acquired intangibles from acquisitions in the first quarter of 2002.
Acquisition consolidation costs decreased $6,400, from $6,400 in the three months ended June 30, 2002 to $0 in the same period 2003. We completed all such activities in 2002.
Interest expense decreased $104,000, or 28.5%, from $365,000 in the three months ended June 30, 2002 to $261,000 in the same period of 2003 as a result of lower average outstanding loan balances.
Income tax expense was $515,000 in the three months ended June 30, 2002 compared to $2.1 million in the same period of 2003. Our effective tax rate was 39.7% and 39.3% for the three months ended June 30, 2002 and 2003, respectively.
As a result of the foregoing factors, net income in the three months ended June 30, 2003 was $3.2 million, or $0.50 per diluted share, compared to $782,000, or $0.13 per diluted share, in the same period of 2002.
Our EBITDA (earnings before interest, taxes, depreciation, and amortization) was $6.9 million in the three months ended June 30, 2003 compared to $2.7 million in the same period of 2002, a $4.2 million, or a 155.6% increase over 2002. EBITDA should not be considered as an alternative to net income, an indicator of operating performance, an alternative to cash flow, a measure of liquidity, or an ability to service debt obligations. EBITDA is not in accordance with, or superior to, accounting principles generally accepted in the United States, but it provides additional information for evaluating our operating performance. Management internally uses EBITDA to analyze the performance of its business segments. Many analysts also use EBITDA as an analytical tool. EBITDA is also a component of certain financial ratios used in our credit agreements. Therefore, we believe EBITDA is a useful financial metric for evaluating our business.
16
| EBITDA Reconciliation | Three Months Ended June 30, | |||||||
| 2002 | 2003 | |||||||
Net income |
$ | 781,660 | $ | 3,249,897 | ||||
Add back: |
||||||||
Interest expense |
365,441 | 260,926 | ||||||
Income tax expense |
514,618 | 2,107,916 | ||||||
Depreciation and amortization |
1,047,832 | 1,245,517 | ||||||
EBITDA |
$ | 2,709,551 | $ | 6,864,256 | ||||
Comparison of six months ended June 30, 2002 and 2003
Revenue, cost of services, and cost of services as a percent of revenue for our operating segments for the periods indicated are as follows ($ in thousands):
| Six Months Ended | Mortgage | Consumer | Other | |||||||||||||
| June 30, 2002 | Services | Services | Services | Total | ||||||||||||
Net sales |
$ | 22,690 | $ | 3,323 | $ | 1,570 | $ | 27,583 | ||||||||
Cost of services |
$ | 12,084 | $ | 2,022 | $ | 1,154 | $ | 15,260 | ||||||||
Cost of services as a percent of revenue |
53.3 | % | 60.8 | % | 73.5 | % | 55.3 | % | ||||||||
| Six Months Ended | Mortgage | Consumer | Other | |||||||||||||
| June 30, 2003 | Services | Services | Services | Total | ||||||||||||
Net sales |
$ | 39,044 | $ | 4,024 | $ | 1,904 | $ | 44,972 | ||||||||
Cost of services |
$ | 19,847 | $ | 2,614 | $ | 1,368 | $ | 23,829 | ||||||||
Cost of services as a percent of revenue |
50.8 | % | 65.0 | % | 71.9 | % | 53.0 | % | ||||||||
Total revenue increased $17.4 million, or 63.0%, from $27.6 million in the six months ended June 30, 2002 to $45.0 million in the same period of 2003.
Mortgage services revenue increased $16.3 million, or 71.8%, from $22.7 million in the six months ended June 30, 2002 to $39.0 million in the same period of 2003 as a result of mortgage activity fueled by historically low interest rates, our continued success in obtaining new market share and increasing organic growth by $10.8 million and increasing national and major mortgage accounts by $5.5 million for the six months ended June 30, 2003, compared to the six months ended June 30, 2002.
Consumer services revenue increased $700,000, or 21.2%, from $3.3 million in the six months ended June 30, 2002 to $4.0 million in the same period of 2003 as a result of an increase in market share and new products and services.
Other services revenue increased $300,000, or 18.8%, from $1.6 million in the six months ended June 30, 2002 to $1.9 million in the same period of 2003. This increase in resident and employment screening services was a result of the development of new customers.
Cost of services are direct operational costs and consist of data costs, salaries, and telecommunications costs. Total cost of services increased $8.5 million, or 55.6%, from $15.3 million in the six months ended June 30, 2002 to $23.8 million in the same period of 2003. These costs are primarily variable costs, which tend to fluctuate with changes in revenue. Although these costs tend to remain fairly consistent as a percentage of revenue, during the six months ended June 30, 2003, our cost of services decreased as a percentage of revenue as a result of the lower data and salary costs discussed below. As a percentage of revenue, cost of services decreased from 55.3% in the six months ended June 30, 2002 to 53.0% in the same period of 2003.
Mortgage cost of services increased $7.7 million, or 63.6%, from $12.1 million in the six months ended June 30, 2002 to $19.8 million in the same period of 2003. As a percentage of revenue, mortgage cost of services decreased from 53.3% in the six months ended June 30, 2002 to 50.8% in the same period of 2003 as a result of lower data costs and our ability to use our technology to reduce salary costs.
Consumer cost of services increased $600,000 or 30.0%, from $2.0 million in the six months ended June 30, 2002 to $2.6 million in the same period of 2003. As a percentage of revenue, these costs increased from 60.8% in the six months ended June 30, 2002 to 65.0% in the same period of 2003. This increase was primarily due to the mix of new services.
17
Other cost of services increased $200,000, or 16.7%, from $1.2 million in the six months ended June 30, 2002 to $1.4 million in the same period of 2003 and decreased as a percentage of revenue from 73.5% in the six months ended June 30, 2002 to 71.9% in the same period of 2003 as a result of reduced salary costs.
Selling, general and administrative expenses increased $1.8 million, or 29.0%, from $6.2 million in the six months ended June 30, 2002 to $8.0 million in the same period of 2003. As a percentage of revenue, these costs decreased from 22.7% to 17.8%, a 4.9% decrease due to our ability to increase sales without additional cost in corporate salaries and tech center communications costs, thereby allowing us to reduce proportionately our selling, general and administrative expenses. There were selling, general and administrative costs of $279,000 related to the proposed merger with Kroll, Inc.
Depreciation and amortization increased $400,000 or 20.0%, from $2.0 million in the six months ended June 30, 2002 to $2.4 million in the same period of 2003. This increase was due to depreciation and amortization on hardware and software upgrades to our technology center totaling $149,000. Also contributing to the increase in amortization are our license agreements to sell Experian information, which increased $220,000. The $31,000 balance of the increase was due to amortization on newly acquired intangibles from acquisitions in the first and second quarters of 2002.
Acquisition consolidation costs decreased $115,000, from $115,000 in the six months ended June 30, 2002 to $0 in the same period 2003. We completed all such activities in 2002.
Interest expense decreased $216,000, or 28.0%, from $771,000 in the six months ended June 30, 2002 to $555,000 in the same period of 2003.
Income tax expense was $1.3 million in the six months ended June 30, 2002 compared to $4.2 million in the same period of 2003. Our effective tax rate was 38.5% and 40.4% for the six months ended June 30, 2002 and 2003, respectively. This increase was due to the change in our graduated tax rates and an increase in our state tax provision.
As a result of the foregoing factors, net income in the six months ended June 30, 2003 was $6.2 million, or $0.97 per diluted share, compared to $2.1 million, or $0.34 per diluted share, in the same period of 2002.
Our EBITDA (earnings before interest, taxes, depreciation, and amortization) was $13.4 million in the six months ended June 30, 2003 compared to $6.2 million in the same period of 2002, a $7.2 million, or a 116.1% increase over 2002. EBITDA should not be considered as an alternative to net income, an indicator of operating performance, an alternative to cash flow, a measure of liquidity, or an ability to service debt obligations. EBITDA is not in accordance with, or superior to, accounting principles generally accepted in the United States, but it provides additional information for evaluating our operating performance. Management internally uses EBITDA to analyze the performance of its business segments. Many analysts also use EBITDA as an analytical tool. EBITDA is also a component of certain financial ratios used in our credit agreements. Therefore, we believe EBITDA is a useful financial metric for evaluating our business.
| EBITDA Reconciliation | Six Months Ended June 30, | |||||||
| 2002 | 2003 | |||||||
Net income |
$ | 2,077,828 | $ | 6,186,967 | ||||
Add back: |
||||||||
Interest expense |
770,696 | 555,216 | ||||||
Income tax expense |
1,301,952 | 4,198,894 | ||||||
Depreciation and amortization |
2,041,629 | 2,456,402 | ||||||
EBITDA |
$ | 6,192,105 | $ | 13,397,479 | ||||
Liquidity and Capital Resources
We had a cash balance of $13.0 million at June 30, 2003. As of June 30, 2003, we had working capital totaling $7.8 million. On April 30, 2002, we renewed our $10.0 million credit facility agreement with our bank whereby we entered into a $6.0 million line of credit and converted the existing $1.7 million balance on our line of credit into a new $4.0 million term loan and modified its terms. The term loan requires monthly principal payments of $83,333, through April 30, 2006 with interest at the floating rate or Eurodollar rate of 4.1% at June 30, 2003. Our $6.0 million line of credit bears interest at the floating rate or Eurodollar rate as defined in the agreement of 4.1% at June 30, 2003. Principal and unpaid interest is due June 30, 2004. The line of credit and the term loan are
18
collateralized by substantially all of our assets. The credit line requires us to meet certain financial restrictive covenants, all of which were met as of June 30, 2003, including the following:
| • minimum quarterly EBITDA levels; | |||
| • interest coverage ratio; | |||
| • book-to-net worth ratio; | |||
| • debt service ratio; | |||
| • annual capital expenditures; | |||
| • total funded debt to last twelve months pro forma EBITDA; and | |||
| • total senior funded debt to last twelve months pro forma EBITDA. |
We believe that our anticipated cash requirements for operations will be met from internally generated funds and our bank credit line. We may be required to obtain additional public, private, or debt financing or a combination of the foregoing to continue our acquisition program and development of new information services.
Contractual Commitments and Commercial Commitments
The following table sets forth a summary of our contractual obligations and commercial commitments as of June 30, 2003:
| Experian | ||||||||||||||||||||||||||||
| Period Ending | Line of | Long-Term | Capital | Capital Lease | Operating | |||||||||||||||||||||||
| June 30, | Credit | Debt | Leases | Agreements | Leases | Total | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||
2003 (6 months) |
$ | — | $ | 1,405 | $ | 241 | $ | 1,656 | $ | 806 | $ | 4,108 | ||||||||||||||||
2004 |
— | 1,978 | 233 | 3,361 | 1,615 | 7,187 | ||||||||||||||||||||||
2005 |
— | 1,190 | 44 | 2,031 | 1,299 | 4,564 | ||||||||||||||||||||||
2006 |
— | 334 | — | 89 | 1,097 | 1,520 | ||||||||||||||||||||||
2007 |
— | — | — | — | 1,119 | 1,119 | ||||||||||||||||||||||
Thereafter |
— | — | — | — | 10,794 | 10,794 | ||||||||||||||||||||||
Total |
— | 4,907 | 518 | 7,137 | 16,730 | 29,292 | ||||||||||||||||||||||
Less capitalized
interest |
— | — | 32 | 743 | — | 775 | ||||||||||||||||||||||
Net |
$ | — | $ | 4,907 | $ | 486 | $ | 6,394 | $ | 16,730 | $ | 28,517 | ||||||||||||||||
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires the fair value of a liability for an asset retirement obligation to be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The adoption of this statement on January 1, 2002 did not have a material impact on our consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force (“EITF”) Issue No. 94-3. The Company will adopt the provisions of SFAS No. 146 for restructuring activities initiated after June 30, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of a company’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amount recognized. Adoption of this standard did not have any immediate effect on our consolidated financial statements.
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In November 2002, the FASB issued interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which disclosures are effective for financial statements issued after December 15, 2002. This statement did not have any effect on the Company’s consolidated financial statements as of June 30, 2003.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company provided the additional disclosures required by SFAS No. 148 in its annual financial statements for the year ended December 31, 2002 and also provided the disclosures in its quarterly reports containing condensed financial statements for interim periods beginning with the quarterly period ended March 31, 2003. The Company has determined that it will not change to the fair value based method.
In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” (“FIN No. 46”), which requires the consolidation of variable interest entities, as defined. FIN No. 46 is applicable to financial statements to be issued by the Company after 2002. The Company does not believe that FIN No. 46 will have any effect on its consolidated financial statements.
On April 30, 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. This Statement is effective for contracts entered into or modified after June 30, 2003, for hedging relationships designated after June 30, 2003, and to certain preexisting contracts. The Company will adopt SFAS 149 on a prospective basis at its effective date in the fiscal third quarter. The Company is assessing the impact SFAS 149 may have on its financial statements.
In May 2003, the FASB issued SFAS no. 150, “Accounting for Certain Financial Instruments, with Characteristics of Both Liabilities and Equity,” which provides guidance on how an entity classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been classified as equity, as a liability (or as an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company does not believe that the adoption of SFAS No. 150 will have a significant impact on its results of operations, financial position or cash flows.
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Item 3. Quantitative and Qualitative Disclosure about Market Risk
As of June 30, 2003, our notes payable to corporations and individuals totaling $2.2 million bore interest at fixed rates ranging from 5.0% to 12.0%. Our Experian capital lease agreements totaling $6.4 million are discounted at a fixed rate of interest of 10.0%, and our other capital lease obligations totaling $518,000 are discounted at fixed rates of interest ranging from 8.1% and 10.7%.
Our senior bank debt totaling $2.8 million carries a variable rate of interest which was 4.1% on June 30, 2003.
We are also exposed to some market risk through interest rates related to our cash and cash equivalents balances of $13.0 million. These funds are generally invested in money market funds with short maturities.
We believe that fluctuations in interest rates on our debt obligations and our cash and cash equivalents in the near term will not materiality affect our operating results, financial position, or cash flows.
Item 4. Controls and Procedures
As of the end of the period covered by this report, we evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures over financial reporting pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures over financial reporting are adequate and effective in timely alerting them to material information required to be included in this quarterly report on Form 10-Q.
During the period covered by this report, there have been no significant changes in our internal controls over financial reporting, or in other factors which could significantly affect internal controls over financial reporting, including any corrective actions with regard to significant deficiencies or material weaknesses.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
On June 27, 2003, a shareholder of Factual Data filed a lawsuit against Factual Data and its directors in the District Court for the County of Larimer, Colorado, William Troxler v. Factual Data Corporation [sic], Jerald H. Donnan, Todd A. Neiberger, Robert J. Terry, J. Barton Goodwin, Daniel G. Helle, Abdul H. Rajput and James N. Donnan. The plaintiff alleges, among other things, that the individual defendants engaged in self-dealing in connection with the approval of the merger agreement and the merger. The plaintiff also claims the individual defendants obtained benefits not shared by the plaintiff, and that they breached their fiduciary duties of care, loyalty, candor and independence owed under Colorado law to Factual Data’s public shareholders. The plaintiff further alleges that Factual Data aided and abetted the other defendants’ breaches of fiduciary duty. The plaintiff seeks certification of the case as a class action, and preliminary and permanent injunctive relief declaring that the proposed merger agreement is unlawful and unenforceable. The plaintiff also seeks an order enjoining consummation of the agreement, and an order directing the defendants to exercise their fiduciary duties to obtain a transaction in the best interests of Factual Data shareholders, and that they arrange to rescind any implemented terms of the proposed transaction. Finally, the plaintiff demands that the court impose a trust on any benefits received by the defendants, and award attorneys’ fees and costs. On July 17, 2003, Factual Data and its directors filed a motion to dismiss the lawsuit based on the plaintiff’s lack of standing and his failure to state a claim for relief. On July 23, 2003 the plaintiff filed a motion for expedited discovery. The defendants filed a brief in opposition to this motion. On July 31, 2003, the plaintiff amended his complaint to include monetary damages based on alleged self-dealing and various alleged breaches of fiduciary duties by the defendants. The defendants intend to file an amended motion to dismiss the amended complaint.
Factual Data’s board of directors believes that they have met and will continue to meet their fiduciary obligations. Factual Data and its directors believe the suit is completely without merit and intend to contest it vigorously.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Factual Data has agreed to be acquired by Kroll, Inc. as disclosed in Factual Data’s Report on Form 8-K filed June 24, 2003. Information concerning the proposed acquisition is contained in Factual Data’s definitive proxy statement, filed with the Securities and Exchange Commission on July 21, 2003, relating to a special meeting of shareholders to be held on August 21, 2003.
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Item 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits — The following exhibits are filed herewith: | ||
| Exhibit Number 31.1 Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |||
| Exhibit Number 31.2 Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |||
| Exhibit Number 32.1 Certification of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002. | |||
| Exhibit Number 32.2 Certification of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002. | |||
| (b) | Reports on Form 8-K: | ||
| On April 16, 2003, under Items 7 and 9, we announced that we would release first quarter earnings before the opening of regular market trading on April 24, 2003. We also scheduled an earnings conference call to be held on April 24, 2003. | |||
| On April 24, 2003, under Items 7 and 9, we released the results of our operations for the quarter ended March 31, 2003. | |||
| On June 24, 2003, under Items 5 and 7, we announced that we had signed a definitive agreement to be acquired by Kroll, Inc. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 11, 2003
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FACTUAL DATA CORP. (Registrant) |
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/s/ J.H. Donnan J.H. Donnan Chief Executive Officer (Principal Executive Officer) |
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/s/ Todd A. Neiberger Todd A. Neiberger Chief Financial Officer (Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
| EXHIBIT | ||
| NUMBER | DESCRIPTION | |
| 31.1 | Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32.1 | Certification of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002. |
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