Form 8-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 


 

FORM 8-K/A

 


 

AMENDMENT NO. 1

TO

CURRENT REPORT PURSUANT

TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

Date of report (Date of earliest event reported): May 5, 2004

 


 

FIRST ADVANTAGE CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 


 

Delaware   0-50285   61-1437565

(State or Other Jurisdiction

of incorporation)

  (Commission File Number)  

(IRS Employer

Identification Number)

 

One Progress Plaza, Suite 2400

St. Petersburg, Florida 33701

(Address of principal executive offices)

 

(727) 214-3411

(Registrant’s telephone number)

 

Not Applicable.

(Former name or former address, if changed since last report)

 



Item 2. Acquisition or Disposition of Assets.

 

On May 5, 2004, First Advantage Corporation filed a Current Report on Form 8-K reporting its acquisition of CoreFacts, LLC. This amendment number 1 amends Item 7 of the subject Current Report on Form 8-K to provide the financial statements and pro forma financial information as set forth in Item 7.

 

Item 7. Financial Statements. Pro Forma Financial Information and Exhibits.

 

(a) Financial statements of business acquired.

 

Audited consolidated balance sheets of CoreFacts, LLC as of December 31, 2003 and 2002 and the related consolidated statements of income and members’ equity and cash flows for the years ended December 31, 2003 and 2002.

 

Unaudited consolidated balance sheets of CoreFacts, LLC as of March 31, 2004 and the related unaudited consolidated statements of income and members’ equity and cash flows for the three months ended March 31, 2004 and 2003.

 

Financial statements of other businesses acquired.

 

Audited consolidated balance sheets of Realeum, Inc. as of December 31, 2003 and 2002 and the related consolidated statements of operations, stockholders’ deficit and cash flows for the years ended December 31, 2003 and 2002.1

 

Unaudited consolidated balance sheets of Realeum, Inc. as of March 31, 2004 and the related unaudited consolidated statements of operations, stockholders’ deficit and cash flows for the three months ended March 31, 2004 and 2003.1

 

Audited combined balance sheets of CIC Enterprises, Inc. and Affiliated Companies as of December 31, 2003 and 2002 and the related combined statements of operations, changes in shareholders’ equity and cash flows for the years ended December 31, 2003 and 2002.1

 

Unaudited combined balance sheets of CIC Enterprises, Inc. and Affiliated Companies as of March 31, 2004 and the related unaudited combined statements of operations, changes in shareholders’ equity and cash flows for the three months ended March 31, 2004 and 2003.1


1 This includes the audited and unaudited financial statements for two other acquisitions completed by the Company that are subject to another Form 8-K/A to be filed by the Company.


(b) Pro forma financial information.

 

Unaudited pro forma combined balance sheet of First Advantage Corporation and Subsidiaries as of March 31, 2004 and the unaudited pro forma combined statement of income (loss) for the year ended December 31, 2003 and for the three months ended March 31, 2004.2

 

(c) Exhibits.

 

Exhibit No.

 

Description


2.1   Membership Interest Purchase Agreement dated as of April 21, 2004 among First Advantage Corporation, Andrew S. Levetown, Mark Carter, John Ashley, John Jenkins, Laura Zuckerman, Henry Hsu, Thea Bournazian, Anthony Sartori and John Nelligan (incorporated by reference to Current Report on Form 8-K filed by the Company on May 5, 2004)
99.1   Press Release dated April 22, 2004 (incorporated by reference to Current Report on Form 8-K filed by the Company on May 5, 2004)

2 This includes the unaudited pro forma financial information for two other acquisitions completed by the Company that are subject to another Form 8-K/A to be filed by the Company.


REPORT OF INDEPENDENT ACCOUNTANTS

 

To the Board of Directors and Members

of CoreFacts, LLC:

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and members’ equity, and of cash flows present fairly, in all material respects, the financial position of CoreFacts, LLC at December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Argy, Wiltse & Robinson, P.C.

 

McLean, Virginia

April 9, 2004

 


COREFACTS, LLC

 

CONSOLIDATED BALANCE SHEETS

 

DECEMBER 31, 2003 AND 2002

 

     2003

   2002

ASSETS              

Current assets

             

Cash and cash equivalents

   $ 345,678    $ 216,770

Accounts receivable, net of allowance for doubtful accounts of $52,435 and $64,589, respectively

     1,422,109      1,243,228

Prepaid expenses and other current assets

     237,833      131,646
    

  

Total current assets

     2,005,620      1,591,644

Property and equipment, net

     137,257      125,400

Other assets

     12,202      12,202
    

  

Total assets

   $ 2,155,079    $ 1,729,246
    

  

LIABILITIES AND MEMBERS’ EQUITY              

Current liabilities

             

Accounts payable

   $ 44,570    $ 49,157

Accrued expenses

     119,320      30,561

Bank line-of-credit

     0      150,000
    

  

Total current liabilities

     163,890      229,718

Members’ equity

     1,991,189      1,499,528
    

  

Total liabilities and members’ equity

   $ 2,155,079    $ 1,729,246
    

  

 

The accompanying notes are an integral part of these financial statements.

 

-2-


COREFACTS, LLC

 

CONSOLIDATED STATEMENTS OF INCOME AND MEMBERS’ EQUITY

 

YEARS ENDED DECEMBER 31, 2003 AND 2002

 

     2003

    2002

 

Service revenues

   $ 5,815,732     $ 3,807,743  

Cost of service revenues

     2,131,834       1,242,441  
    


 


Gross margin

     3,683,898       2,565,302  
    


 


Salaries and benefits

     480,850       380,470  

Rent expense

     314,997       288,584  

Bad debt expense

     79,296       137,289  

Depreciation and amortization

     44,595       31,438  

Other operating expenses

     388,790       267,477  
    


 


Total operating expenses

     1,308,528       1,105,258  
    


 


Operating income

     2,375,370       1,460,044  
    


 


Interest income (expense)

                

Interest income

     1,289       4,332  

Interest expense

     (368 )     (1,615 )
    


 


Total interest income, net

     921       2,717  
    


 


Net income

     2,376,291       1,462,761  

Members’ equity at the beginning of the year

     1,499,528       1,374,277  

Members’ distributions

     (1,884,630 )     (1,337,510 )
    


 


Members’ equity at the end of the year

   $ 1,991,189     $ 1,499,528  
    


 


 

The accompanying notes are an integral part of these financial statements.

 

-3-


COREFACTS, LLC

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

YEARS ENDED DECEMBER 31, 2003 AND 2002

 

     2003

    2002

 

Cash flows from operating activities:

                

Net income

   $ 2,376,291     $ 1,462,761  
    


 


Adjustments to reconcile net income to net cash provided by operating activities:

                

Depreciation and amortization

     44,595       31,438  

Allowance for doubtful accounts

     (12,154 )     50,974  

Change in operating assets and liabilities

                

Accounts receivable

     (166,727 )     (104,853 )

Prepaid expenses and other current assets

     (106,187 )     (96,808 )

Accounts payable

     (4,587 )     30,440  

Accrued expenses

     88,759       (32,195 )
    


 


Total adjustments

     (156,301 )     (121,004 )
    


 


Net cash provided by operating activities

     2,219,990       1,341,757  
    


 


Cash flows from investing activity:

                

Purchases of property and equipment

     (56,452 )     (79,374 )
    


 


Net cash used in investing activity

     (56,452 )     (79,374 )
    


 


Cash flows from financing activities:

                

Net (repayments) borrowings under bank line-of-credit

     (150,000 )     150,000  

Members’ distributions

     (1,884,630 )     (1,337,510 )
    


 


Net cash used in financing activities

     (2,034,630 )     (1,187,510 )
    


 


Net increase in cash and cash equivalents

     128,908       74,873  

Cash and cash equivalents at the beginning of the year

     216,770       141,897  
    


 


Cash and cash equivalents at the end of the year

   $ 345,678     $ 216,770  
    


 


Supplementary disclosure of cash flow information:

                

Cash paid for interest

   $ 368     $ 1,615  
    


 


 

The accompanying notes are an integral part of these financial statements.

 

-4-


COREFACTS, LLC

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2003 AND 2002

 

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

 

CoreFacts, LLC, (CoreFacts or the Company) was formed in the Commonwealth of Virginia on September 12, 2000. CoreFacts is a nationwide provider of forensic and investigative services. The Company will cease operations on November 30, 2040, or earlier, if certain events occur, as defined in the operating agreement.

 

Principles of consolidation

 

The consolidated financial statements for the year ended December 31, 2003 and 2002 include the accounts of the Company and CoreFacts, Inc. (a wholly-owned subsidiary). All significant inter-company transactions and balances have been eliminated.

 

Use of estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.

 

Revenue recognition

 

Revenue from services is recognized as incurred and billed upon completion of each case. If a fixed fee agreement is made, revenue is recognized upon completion of contracted services. Retainers are recorded as current liabilities until the case is complete and then used to offset related receivables.

 

Cash equivalents

 

The Company considers all highly liquid instruments purchased with original maturities of three months or less to be cash equivalents.

 

Property and equipment

 

Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over estimated useful lives of three to seven years.

 

Income taxes

 

The Company is a limited liability company for income tax reporting purposes. As such, the Company is not subject to corporate income taxes and the income, deductions, credits and other tax attributes of the Company flow to the members of the Company.

 

-5-


NOTE 2 - PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following at December 31:

 

     2003

    2002

 

Computer equipment

   $ 169,378     $ 139,075  

Software

     56,411       33,433  

Furniture and office equipment

     31,149       27,978  
    


 


       256,938       200,486  

Less: accumulated depreciation and amortization

     (119,681 )     (75,086 )
    


 


     $ 137,257     $ 125,400  
    


 


 

NOTE 3 - BANK LINE-OF-CREDIT

 

The Company has a $300,000 working capital line-of-credit which bears interest at a rate of prime plus 1% (5% at December 31, 2003). The $150,000 demand note at December 31, 2002 was borrowed under the line-of-credit, was collateralized by the assets of the Company, and personally guaranteed by a principal member of the Company. The demand note was repaid during 2003. At December 31, 2003, there are no amounts outstanding under the line-of-credit.

 

Interest expense, which approximated interest paid, totaled $368 and $1,615 for the years ended December 31, 2003 and 2002, respectively.

 

NOTE 4 - EMPLOYEE BENEFIT PLAN

 

Effective January 1, 2003, the Company adopted the CoreFacts 401(k) Plan (the Plan). The Plan is available to all employees. The Plan allows for employee-elective contributions up to the maximum deductible amount as determined by the Internal Revenue Code, but not to exceed 90% of their annual compensation. The Company makes matching contributions on elective deferrals up to 4% of annual compensation. The Company may contribute an additional discretionary amount that is allocated to each participant in proportion to his or her compensation earned while a participant for that plan year. The Company’s expense related to the Plan amounted to $29,135 for the year ended December 31, 2003.

 

NOTE 5 - RELATED PARTIES

 

During the year 2002, a principal member of the Company withdrew from employment with the Company. Under the provisions of the Operating Agreement, his ownership units were converted to termination units. The termination units were worth $78,500 on the date of withdrawal and were payable in no more than three equal annual installments, the first payment of $38,500 was made within 90 days after the date of termination, with the remaining $40,000 balance paid during 2003.

 

-6-


NOTE 6 - CONCENTRATION OF CREDIT RISK

 

The Company is subject to credit risk concentrations primarily from cash and cash equivalents and accounts receivable. The Company believes the risk of loss associated with cash and cash equivalents is very low, since cash and cash equivalents are maintained in a financial institution. The Company’s accounts receivable balances consist primarily of amounts due under contracts with law firms and other commercial companies. Accounts receivable are generally due within 30 days and no collateral is required. The Company maintains a reserve for potential credit losses and historically such losses have been within management’s expectations.

 

NOTE 7 - COMMITMENTS

 

The Company leases office space under the terms of a noncancelable operating lease that expires in September 2005. The following is a schedule by year of the approximate future minimum lease payments required under this operating lease, which has an initial or remaining term in excess of one year as of December 31, 2003:

 

Years ending December 31,


    

2004

   $ 227,000

2005

     175,000
    

     $ 402,000
    

 

NOTE 8 - SUBSEQUENT EVENT

 

Subsequent to December 31, 2003, the members of the Company entered into an agreement whereby First Advantage Corporation acquired all of the membership interest in the Company under the terms of a membership interest agreement. In consideration for the purchase of the membership interests, First Advantage Corporation paid the sellers an aggregate purchase price of $15,500,000, in a combination of cash and notes payable.

 

-7-


CoreFacts, LLC

 

Consolidated Balance Sheets (Unaudited)

 

     March 31,
2004


   December 31,
2003


Assets

             

Current assets:

             

Cash and cash equivalents

   $ 544,371    $ 345,678

Accounts receivable

     1,735,014      1,422,109

Prepaid expenses and other current assets

     120,766      237,833
    

  

Total current assets

     2,400,151      2,005,620

Property and equipment, net

     137,026      137,257

Other assets

     12,202      12,202
    

  

Total assets

   $ 2,549,379    $ 2,155,079
    

  

Liabilities and Members’ Equity

             

Current liabilities:

             

Accounts payable

   $ 129,479    $ 44,570

Accrued and other liabilities

     232,255      119,320
    

  

Total current liabilities

     361,734      163,890

Commitments and contingencies

             

Members’ equity

     2,187,645      1,991,189
    

  

Total liabilities and members’ equity

   $ 2,549,379    $ 2,155,079
    

  

 

-1-


CoreFacts, LLC

 

Consolidated Statements of Income and Members’ Equity

For the Three Months Ended March 31, 2004 and 2003 (Unaudited)

 

     For the Three Months Ended
March 31,


 
     2004

    2003

 

Service revenues

   $ 1,643,237     $ 719,580  

Cost of service revenues

     601,051       271,750  
    


 


Gross Margin

     1,042,186       447,830  

Operating Expenses:

                

Salaries and benefits

     187,938       114,467  

Depreciation and amortization

     12,151       10,145  

Other operating expenses

     212,088       171,929  
    


 


Total operating expenses

     412,177       296,541  
    


 


Income from operations

     630,009       151,289  
    


 


Interest (expense) income:

                

Interest expense

     —         (166 )

Interest income

     1,316       479  
    


 


Total interest income, net

     1,316       313  
    


 


Net income

     631,325       151,602  

Members’ equity, beginning of period

     1,991,189       1,499,528  

Distributions to members

     (434,869 )     (274,241 )
    


 


Members’ equity, end of period

   $ 2,187,645     $ 1,376,889  
    


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

-2-


CoreFacts, LLC

 

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2004 and 2003 (Unaudited)

 

     For the Three Months Ended
March 31,


 
     2004

    2003

 

Cash flows from operating activities:

                

Net income

   $ 631,325     $ 151,602  

Adjustments to reconcile net income to net cash provided by operating activities:

                

Depreciation expense

     12,151       10,145  

Change in operating assets and liabilities:

                

Accounts receivable

     (312,905 )     359,812  

Prepaid expenses and other current assets

     117,067       76,290  

Accounts payable

     84,909       (38,540 )

Accrued and other liabilities

     112,935       104,523  
    


 


Net cash provided by operating activities

     645,482       663,832  
    


 


Cash flows from investing activities:

                

Purchases of property and equipment

     (11,920 )     (2,109 )
    


 


Net cash used in investing activities

     (11,920 )     (2,109 )
    


 


Cash flows from financing activities:

                

Borrowings (repayments) on line of credit

     —         (150,000 )

Distributions to members

     (434,869 )     (274,241 )
    


 


Net cash used in financing activities

     (434,869 )     (424,241 )
    


 


Increase in cash and cash equivalents

     198,693       237,482  

Cash and cash equivalents at beginning of period

     345,678       216,770  
    


 


Cash and cash equivalents at end of period

   $ 544,371     $ 454,252  
    


 


Supplemental disclosures of cash flow information:

                

Cash paid for interest

   $ —       $ 166  
    


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

-3-


CoreFacts, LLC

 

Notes to Consolidated Financial Statements

March 31, 2004 and 2003 (Unaudited)

 

1. Organization and Nature of Business

 

CoreFacts, LLC (the Company) is a nationwide provider of forensic and investigative services, is a Virginia Limited Liability Company established September 12, 2000. The Company will cease operations on September 12, 2040.

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair statement of the results for the interim period have been included.

 

For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2003 included in this Form 8-K/A.

 

Operating results for the three months ended March 31, 2004 and 2003 are not necessarily indicative of the results that may be expected for the entire fiscal year.

 

2. Subsequent Event

 

Subsequent to December 31, 2003, the members of the Company entered into an agreement whereby First Advantage Corporation acquired all the membership interest in the Company under the terms of a membership interest agreement. In consideration for the purchase of the membership interests, First Advantage Corporation paid the sellers an aggregate purchase price of $15,500,000, in a combination of cash and notes payable.

 

-4-


Report of Independent Certified Public Accountants

 

To the Board of Directors and Shareholders

of Realeum, Inc.

 

In our opinion, the accompanying consolidated balance sheet as of December 31, 2003 and the related consolidated statements of income, of shareholders’ deficit and of cash flows present fairly, in all material respects, the financial position of Realeum, Inc. and subsidiaries (the “Company”) at December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 of the notes to the consolidated financial statements, the Company’s recurring losses from operations and net capital deficiency raise substantial doubt about its ability to continue as a going concern. Management’s plans as to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Pricewaterhouse Coopers LLC

 

Tampa, Florida

June 18, 2004

 

1


Report of Independent Auditors

 

Board of Directors and Stockholders

Realeum, Inc.

 

We have audited the accompanying consolidated balance sheet of Realeum, Inc. as of December 31, 2002, and the related consolidated statement of operations, stockholders’ equity (deficit), and cash flows for the year then ended. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with accounting principles generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Realeum, Inc. at December 31, 2002, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.

 

As discussed in Note 1 to the financial statements, the Company’s recurring losses from operations and net capital deficiency raise substantial doubt about its ability to continue as a going concern. Management’s plans as to these matters are also described in Note 1. The 2002 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Ernst & Young LLP

 

McLean, Virginia

 

April 25, 2003, except

for the third paragraph

of Note 5, as to which the

date is May 29, 2003

 


Realeum, Inc.

Consolidated Balance Sheets

December 31, 2003 and 2002

 

     2003

    2002

 

Assets

                

Current assets

                

Cash and cash equivalents

   $ 1,115,084     $ 1,381,669  

Restricted cash

     634,783       621,739  

Accounts receivable (less allowance for doubtful accounts of $6,466 and $0 in 2003 and 2002, respectively)

     80,521       41,785  

Prepaid expenses and other current assets

     215,197       330,079  
    


 


Total current assets

     2,045,585       2,375,272  

Property and equipment, net

     874,420       2,065,465  

Restricted cash

     —         634,783  

Other assets

     317,642       583,258  
    


 


Total assets

   $ 3,237,647     $ 5,658,778  
    


 


Liabilities and Stockholders' Deficit

                

Current liabilities

                

Accounts payable and accrued expenses

   $ 438,108     $ 1,167,419  

Deferred revenue

     190,726       460,634  

Current portion of long-term debt

     730,326       1,014,260  

Other liabilities

     108,472       —    
    


 


Total current liabilities

     1,467,632       2,642,313  

Long-term debt

     —         730,326  

Deferred revenue

     197,530       287,383  
    


 


Total liabilities

     1,665,162       3,660,022  

Commitments and contingencies

                

Series A redeemable convertible preferred stock, $0.01 par value No shares authorized, issued or outstanding

     —         14,551,059  

Series B redeemable convertible preferred stock, $0.01 par value No shares authorized, issued or outstanding

     —         14,556,312  

Series AA redeemable convertible preferred stock, $0.01 par value 13,821,840 shares authorized; 13,211,604 shares issued and outstanding

     34,669,476       —    

Stockholders' deficit

                

Common stock, $0.01 par value; 20,000,000 shares authorized;

                

1,811,655 and 17,418,975 shares issued and outstanding

                

at December 31, 2003 and 2002, respectively

     18,116       174,190  

Additional paid in capital

     5,495,217       5,189,616  

Warrants

     190,403       190,403  

Accumulated deficit

     (38,755,737 )     (32,524,773 )

Unearned compensation

     (44,990 )     (138,051 )
    


 


Total stockholders’ deficit

     (33,096,991 )     (27,108,615 )
    


 


Total liabilities and stockholders’ deficit

   $ 3,237,647     $ 5,658,778  
    


 


 

The accompanying notes are an integral part of these financial statements.

 

2


Realeum, Inc.

Consolidated Statements of Operations

For the Years Ended December 31, 2003 and 2002

 

     2003

    2002

 

Revenues

                

Subscription

   $ 666,638     $ 560,000  

Services

     398,585       532,689  
    


 


Total revenues

     1,065,223       1,092,689  
    


 


Cost of revenues

                

Subscription

     828,197       1,164,553  

Services

     1,277,108       818,244  
    


 


Total cost of revenues

     2,105,305       1,982,797  
    


 


Gross margin

     (1,040,082 )     (890,108 )

Operating Expenses

                

Research and development

     2,741,387       6,499,277  

Sales and marketing

     1,027,144       2,286,660  

General and adminsitrative

     1,362,327       1,930,545  

Impairment of software development costs

     —         9,915,644  
    


 


Total operating expenses

     5,130,858       20,632,126  
    


 


Loss from operations

     (6,170,940 )     (21,522,234 )
    


 


Other income (expense)

                

Interest expense

     (122,755 )     (254,037 )

Interest income

     60,484       127,705  

Other income (expense)

     2,247       (56,683 )
    


 


Total other income (expense)

     (60,024 )     (183,015 )
    


 


Net loss

   $ (6,230,964 )   $ (21,705,249 )
    


 


 

The accompanying notes are an integral part of these financial statements.

 

3


Realeum, Inc.

Consolidated Statements of Stockholders’ Equity (Deficit)

For the Years Ended December 31, 2003 and 2002

 

     Common Stock

   

Additional
Paid-in

Capital


   

Warrants


  

Accumulated

Deficit


   

Deferred
Stock

Compensation


   

Total
Stockholders’
Equity

(Deficit)


 
     Shares

    Amount

            

Balance at December 31, 2001

   17,484,794     $ 174,847     $ 5,205,896     $ 82,000    $ (10,819,524 )   $ (268,122 )   $ (5,624,903 )

Cancellation of restricted stock grants

   (79,893 )     (799 )     (25,566 )     —        —         26,365       —    

Amortization of unearned stock compensation

   —         —         —         —        —         103,706       103,706  

Warrant issued

   —         —         —         108,403      —         —         108,403  

Exercise of stock options

   14,074       142       9,286       —        —         —         9,428  

Net loss

   —         —         —         —        (21,705,249 )     —         (21,705,249 )
    

 


 


 

  


 


 


Balance at December 31, 2002

   17,418,975       174,190       5,189,616       190,403      (32,524,773 )     (138,051 )     (27,108,615 )

Cancellation of restricted stock grants

   (8,800 )     (88 )     (2,821 )     —        —         2,909       —    

Amortization of unearned stock compensation

   —         —         —         —        —         90,152       90,152  

Exercise of stock options

   4,288       43       2,394       —        —         —         2,437  

Preferred stock converted to common upon Series AA preferred stock sale

   110,135,613       1,101,356       28,006,015       —        —         —         29,107,371  

Common shares exchanged for Series AA preferred stock

   (109,433,543 )     (1,094,336 )     (27,863,036 )     —        —         —         (28,957,372 )

Reverse stock split

   (16,304,878 )     (163,049 )     163,049       —        —         —         —    

Net loss

   —         —                 —        (6,230,964 )     —         (6,230,964 )
    

 


 


 

  


 


 


Balance at December 31, 2003

   1,811,655     $ 18,116     $ 5,495,217     $ 190,403    $ (38,755,737 )   $ (44,990 )   $ (33,096,991 )
    

 


 


 

  


 


 


 

The accompanying notes are an integral part of these financial statements.

 

4


Realeum, Inc.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2003 and 2002

 

     2003

    2002

 

Cash flows from operating activities

                

Net income

   $ (6,230,964 )   $ (21,705,249 )

Adjustments to reconcile net income to net cash provided by operating activities

                

Depreciation expense

     1,198,797       1,175,031  

Compensation expense recorded for issuance of restricted stock, net of cancellations

     90,152       103,706  

Noncash interest

     —         137,654  

Interest on note receivable from officer

     (13,002 )     (12,216 )

Loss on disposal of fixed assets

     —         56,683  

Impairment of software development costs

     —         9,915,644  

Change in operating assets and liabilities

                

Accounts receivable, prepaid expenses and other current assets

     76,145       (328,986 )

Other assets

     278,618       210,892  

Accounts payable and accrued liabilities

     (729,311 )     (690,473 )

Deferred revenue

     (359,761 )     (46,757 )

Other liabilities

     108,472       —    
    


 


Net cash used in operating activities

     (5,580,854 )     (11,184,071 )
    


 


Cash flows from investing activities

                

Change in restricted cash balances

     621,740       (137,867 )

Proceeds from the sale of property and equipment

     —         1,000  

Purchases of property and equipment

     (7,753 )     (1,477,012 )

Acquisition of software product and related costs

     —         (235,245 )
    


 


Net cash provided by (used in) investing activities

     613,987       (1,849,124 )
    


 


Cash flows from financing activities

                

Proceeds from issuance of common stock

     2,437       9,431  

Proceeds from issuance of preferred stock, net of related costs

     5,712,105       14,406,312  

Proceeds from issuance of notes payable

     —         1,000,000  

Restriction of cash under compensating balance agreement

     —         (956,521 )

Repayments of long-term debt

     (1,014,260 )     (473,915 )
    


 


Net cash provided by financing activities

     4,700,282       13,985,307  
    


 


Increase in cash and cash equivalents

     (266,585 )     952,112  

Cash and cash equivalents at beginning of year

     1,381,669       429,557  
    


 


Cash and cash equivalents at end of year

   $ 1,115,084     $ 1,381,669  
    


 


Supplemental disclosures of cash flow information

                

Cash paid for interest

   $ 122,755     $ 116,383  

Non-cash transactions

                

Issuance of preferred stock in satisfaction of accrued liability

   $ —       $ 150,000  

Unearned compensation charge (forfeitures), net

     (2,909 )     (26,365 )

Issuance of Series AA preferred stock in satisfaction

                

of Series A and B preferred stock

     29,107,371       —    

 

The accompanying notes are an integral part of these financial statements.

 

5


Realeum, Inc.

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

 

1. Organization and Nature of Business

 

Realeum, Inc. (the Company) was incorporated on June 21, 2000 under the laws and provisions of the state of Delaware.

 

Realeum, Inc., headquartered in McLean, Virginia, provides property management and asset optimization software and services to the multifamily real estate industry. The Company currently operates in one business segment.

 

The Company derives revenue principally from the license of its Realeum Foundation product and the delivery of associated implementation, collocation (ASP) and support services. The mix of products and services sold varies by customer.

 

In prior years, the Company was a Development Stage Company as defined in Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises.

 

Liquidity Considerations

 

The Company faces significant risks associated with successful execution of its planned business strategy as it emerges from the development stage. These risks include, but are not limited to, continued technology and product development, introduction and market acceptance of products and related services, sufficient liquidity, competition from existing and new competitors which may enter the marketplace, retention of key personnel and current economic conditions.

 

These risks faced by the Company raise substantial doubt about the Company’s ability to continue as a going concern. To reduce its expenditures, the Company has downsized its operations in 2002, which included reducing headcount, and the curtailment of capital spending and most nonessential expenditures. Management believes that these actions have reduced its ongoing operating expenses, and related cash outflow, such that the Company will have sufficient working capital to support necessary activities through 2003 and beyond. If these actions previously taken in response to the risks identified are not sufficient, management is committed to the successful execution of its operating plan and will take further action, as deemed necessary, to align its operations and reduce expenditures through additional headcount reductions and other cost cutting measures.

 

While the Company plans to reach sustainable positive cash flow through its current and planned product offerings and expansion of its customer base without additional capital financing, there is no assurance that it will succeed in doing so, or that it will generate sufficient revenue to enable it to continue operations over the longer term. If additional capital financing is necessary, there can be no assurance that it will be available on favorable terms, or at all. If additional funding is not available should it become necessary, the Company may be unable to continue as a going concern and achieve its intended business strategy. The consolidated financial statements do not include any adjustments that may result from this uncertainty.

 

6


Realeum, Inc.

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The Company is the successor to a related entity, Trillium Data Solutions, LLC (Trillium). On June 21, 2000 in exchange for the issuance of 13,615,875 shares of Realeum common stock to the owner’s of Trillium, all assets and liabilities of Trillium were assigned to Realeum. The primary assets transferred were capitalized software development costs totaling approximately $3,400,000 related to products under development. The transfer of assets and liabilities to the Company has been accounted for as an exchange of interests under common control and such amounts have been recorded at the historical amounts. The total amount of net assets transferred was approximately $2,100,000.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original or remaining maturity at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and high liquid money market funds.

 

Restricted Cash

 

The Company has issued an $300,000 letter of credit to its landlord, whereby the Company granted the landlord a security interest and limited powers of attorney over a certificate of deposit. The certificate serves as collateral supporting a lease for the Company’s headquarters. The letter of credit is callable if the Company defaults on its lease. The letter of credit may be reduced by amendment in increments of $100,000, on first and second anniversary dates of the lease agreement. As of December 31, 2003, $200,000 remained restricted.

 

In November of 2002, the Company entered into an installment note payable agreement whereby the Company agreed to maintain a money market cash balance equal to the outstanding balance of the installment note payable, serving as collateral against the installment note payable in favor of the lender. The balance due under the note has been classified as short-term restricted cash in the amount of $434,783.

 

Property and Equipment

 

Property and equipment, including leasehold improvements, are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful life of the assets, generally three to five years. The cost of equipment acquired under a capital lease is amortized over the shorter of the life of the lease, or the estimated useful life of the assets. Maintenance and repairs are charged to operations as incurred and major improvements are capitalized. The cost of assets retired or otherwise disposed of and the accumulated depreciation

 

7


Realeum, Inc.

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

 

thereon are removed from the accounts with any gain or loss realized upon sale or disposal credited or charged to operations, respectively.

 

Concentration of Credit Risk and Significant Customers

 

Financial instruments which potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents, accounts receivable and other current assets. The Company by policy and practice maintains its cash and cash equivalents with financial institutions that the Company believes are of high credit quality. Deposits with these financial institutions may exceed the amounts of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash and cash equivalents. The Company generally requires no collateral from its customers. To reduce its risk, the Company periodically reviews the credit worthiness of its customers and may establish reserves for potential credit losses.

 

At December 31, 2003 and 2002, one customer, who is a related party, accounted for 100% of revenue and gross accounts receivable.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, which approximates their fair market value because of the short-term maturity of these instruments. Notes payable are carried at cost, which approximates fair value due to the proximity of the implicit rate of these financial instruments and the prevailing market rates for similar instruments.

 

Impairment of Long-Lived Assets

 

The Company periodically evaluates the carrying value of long-lived assets for impairment, when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Factors considered important which could trigger an impairment review include, but are not limited to significant changes in the manner of use or anticipated manner of use of the acquired assets or the strategy for the Company’s overall business, significant negative industry or economic trends, significant negative trends with regard to the Company’s revenue goals and a significant decline in the value of the Company’s stock. When the Company determines that the carrying value of a long-lived asset may not be recoverable based on the existence of one or more of the above indicators for impairment, the Company measures any impairment based on a projected undiscounted cash flow method, which is compared to the asset’s carrying value. If an asset is considered to be impaired, the impairment loss is recorded based on the difference between the fair value of the assets and its carrying amount. During 2002, the Company noted that future projected costs were in excess of the fair value of future revenues streams related to the costs. Accordingly, the Company recorded an impairment charge (Note 12).

 

Revenue Recognition

 

Revenues are derived from subscriptions of bundled term license, post contract support and, in most cases, hosting services. The Company recognizes such revenue using the “subscription” method, whereby the initial and renewal amounts are recognized ratably over the period of the license during which the services are expected to be provided. Revenue for implementation and training, directly related to the initial subscription, are recognized ratably over the initial contract term. Revenue for training or consulting services that are not bundled or directly associated with the initial subscription is recognized based on achievement of billable milestones as written in the contract or upon contract completion and currently comprises less that 5% of overall revenue. The

 

8


Realeum, Inc.

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

 

Company licenses its software products to end users primarily through the Company’s direct sales force.

 

The Company recognizes revenue pursuant to the requirements of American Institute of Certified Public Accountants (“AICPA”) Statement of Position No. 97-2 “Software Revenue Recognition” (“SOP 97-2”), issued in October 1997, as amended by AICPA Statements of Position 98-4 and 98-9. For all arrangements, the Company determines whether persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. If any of these criteria are not met, revenue recognition is deferred until such time as all criteria are met.

 

Research and Development Costs

 

The Company accounts for software development costs under Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Certain Computer Software to be Sold, Leased or Otherwise Marketed”, under which certain software development costs are capitalized after technological feasibility has been established. Product development costs incurred in the period between achievement of technological feasibility, which the Company defines as the establishment of a working model and until the general availability of such software to customers of a product has been established are capitalized until the time at which the product is considered available for general release.

 

No internally-generated software development costs were capitalized during fiscal years 2003 and 2002.

 

Advertising Expense

 

Advertising costs are generally expensed as incurred. Advertising costs totaled approximately $6,726 and $59,000 during the years ended December 31, 2003 and 2002, respectively.

 

Income Taxes

 

The Company uses the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are remeasured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recorded to reduce the deferred tax asset if it is more likely than not that some portion of the asset will not be realized. No income tax benefit has been recorded in the statement of operations as realization is uncertain.

 

Stock-Based Compensation

 

The Company accounts for its stock-based compensation in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and complies with the disclosure provisions of SFAS 123, “Accounting for Stock-Based Compensation”. Under APB No. 25, compensation expense is based on the difference, if any, on the date of the grant, between the fair value of the Company’s stock and the exercise price of the option.

 

Unearned compensation is amortized and expensed in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 28 (“FIN 28”). The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS 123 and Emerging Issues Task Force (“EITF”) No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in

 

9


Realeum, Inc.

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

 

Conjunction with Selling, Goods or Services.” The Company uses the Black-Scholes option pricing model to value options granted to non-employees. The related expense is recorded over the period in which the related services are received.

 

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. SFAS 148 amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair-value for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 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. SFAS 148 is effective for fiscal years beginning after December 15, 2002.

 

The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model with the following assumptions:

 

Option Value Information (a)

 

     Year Ended
December 31,


 
     2003

    2002

 

Expected dividend yield

     —         —    

Expected volatility

     0 %     100 %

Risk free interest rate

     0.00 %     4.50 %

Expected option term (in years)

     —         5  

Fair value of options granted

   $ 0.00     $ 0.22  

 

(a) Weighted averages of option grants during each period

 

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s 2003 and 2002 reported and pro forma information follows:

 

     Year Ended December 31,

 
     2003

    2002

 

Net loss, as reported

   $ (6,230,964 )   $ (21,705,249 )

Deduct: total stock-based employee compensation expense determined under fair value based methods for all awards, net of related tax effect

     (362,293 )     (395,252 )
    


 


Pro forma net loss

   $ (6,593,257 )   $ (22,100,501 )
    


 


 

Recent Pronouncements

 

In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Realeum is currently evaluating the effect that the adoption of EITF Issue No. 00-21 will have on its results of operations and financial condition.

 

3. Balance Sheet Components

 

Other current assets

 

     December 31,

     2003

   2002

Prepaid expenses

   $ 215,198    $ 326,824

Due from employees

     —        3,255
    

  

     $ 215,198    $ 330,079
    

  

 

Property and equipment, net

 

     December 31,

 
     2003

    2002

 

Collocation hardware and software

   $ 1,100,305     $ 1,100,305  

Computer hardware

     1,219,507       1,268,885  

Computer software

     1,358,001       1,375,181  

Furniture and equipment

     78,072       78,072  
    


 


       3,755,885       3,822,443  

Less accumulated depreciation and amortization

     (2,881,465 )     (1,756,978 )
    


 


Property and equipment, net

   $ 874,420     $ 2,065,465  
    


 


 

Depreciation and amortization totaled approximately $1,199,000 and $1,175,000 for the years ended December 31, 2003 and 2002, respectively.

 

As of December 31, 2003, $1,900,000 of fixed assets were subject to a lien resulting from equipment-financing notes.

 

10


Realeum, Inc.

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

 

Other assets

 

     December 31,

     2003

   2002

Note receivable from officer

   $ 229,584    $ 216,582

Deferred financing costs

     6,832      49,166

Deferred implementation costs

     81,226      317,510
    

  

     $ 317,642    $ 583,258
    

  

 

Deferred implementation costs relate to labor costs incurred during the performance of implementation services under sales contracts. These costs are recognized ratably over the term of the sales contract and upon acceptance by the customer. All revenue associated with these sales have been deferred until acceptance by the customer and are also recognized ratably over the contract term.

 

Accounts payable and accrued liabilities

 

     December 31,

     2003

   2002

Accounts payable

   $ 106,213    $ 108,634

Accrued compensation and benefits

     156,883      749,153

Accrued trade liabilities

     175,012      309,632
    

  

     $ 438,108    $ 1,167,419
    

  

 

4. Preferred Stock

 

Series A Redeemable Convertible Preferred Stock

 

On August 28, 2000, the Company issued 21,061,328 shares of Series A redeemable convertible preferred stock (Series A Preferred Stock) for $0.72 per share for net proceeds of $14,551,059. Holders of Series A Preferred Stock are entitled to receive non-cumulative cash dividends at a rate of $0.07 per share, when and as declared by the Board of Directors. As of December 31, 2001 no dividends had been declared by the Board of Directors. In the event of liquidation or winding up of the Company, holders of Series A Preferred Stock receive a liquidation preference of $0.72 per share (Original Purchase Price) plus an amount equal to all dividends declared but unpaid thereon, computed to the date payment thereof is made available. The holders of Series A Preferred Stock are entitled to such number of votes per share on each such action as shall equal the number of shares of Class A Common Stock into which each share of Series A Preferred Stock is then convertible. In addition, the holders of Series A Preferred Stock are entitled to elect two directors to the Company’s Board of Directors. Each share of Series A Preferred Stock is convertible, at the option of the holder, into one share of Class A Common Stock. Shares of Series A Preferred Stock automatically convert into shares of Class A Common Stock upon the consummation of an initial public offering in which the public offering price is not less than $2.14 per share and the gross proceeds to the Company are not less than $20,000,000.

 

Upon request of the holders of at least two-thirds of the outstanding shares of all Preferred Stock, voting as a single class, the Company will redeem any outstanding shares of Series A Preferred Stock for cash according to the percentages listed below on the first anniversary of the date such request is delivered to the Company provided, however, that the first redemption date will be no earlier than August 18, 2005:

 

Date of Redemption


  

Percentage of Shares of Series A

Convertible Preferred

Stock then Outstanding that can

be Redeemed


First Anniversary

   25% of all shares then outstanding

Second Anniversary

   33-1/3% of all shares then outstanding

Third Anniversary

   50% of all shares then outstanding

Fourth Anniversary

   100% of the shares then outstanding

 

11


Realeum, Inc.

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

 

The Series A preferred stock shall be redeemed at an amount equal to $0.7122 per share, subject to adjustment based on future events, plus an amount equal to all dividends declared but not paid.

 

Series B Redeemable Convertible Preferred Stock

 

On January 3, 2002 and April 9, 2002, the Company completed the sale of 68,573,188 shares of Series B convertible redeemable preferred stock (Series B Preferred Stock) at a per share price of $0.21, for net proceeds of $14,556,312, net of offering costs. The holders of Series B Preferred Stock are entitled to receive cash dividends on an annual basis, at a rate of $0.02 per share, when and as declared by the Board of Directors. In the event of liquidation or winding up of the Company, holders of Series B Preferred Stock receive a liquidation preference of $0.213654 per share (Original Purchase Price) plus an amount equal to all dividends declared but unpaid thereon, computed to the date payment thereof is made available. The holders of Series B Preferred Stock are entitled to such number of votes per share on each such action as shall equal the number of shares of Class A Common Stock into which each share of Series B Preferred Stock is convertible. In addition, the holders of Series B Preferred Stock are entitled to elect two directors to the Company’s Board of Directors while there are at least 30 million shares of Series B Preferred Stock outstanding. Each share of Series B Preferred Stock is convertible, at the option of the holder, into one share of Class A Common Stock. Shares of Series B Preferred Stock may automatically convert into shares of Class A Common Stock upon the consummation of an initial public offering in which the public offering price is not less that $2.14 per share and the gross proceeds to the Company are not less than $20,000,000, if so determined by the holders of 70% of the outstanding Series B Preferred Stock.

 

Upon request of the holders of at least two-thirds of the outstanding shares of all Preferred Stock, voting as a single class, the Company will redeem any outstanding shares of Series B Preferred Stock for cash according to the percentages listed below on the first anniversary of the date such request is delivered to the Company, provided however that the first redemption date will be no earlier than August 18, 2005:

 

Date of Redemption


  

Percentage of Shares of Series B

Convertible Preferred

Stock then Outstanding that can

be Redeemed


First Anniversary

   25% of all shares then outstanding

Second Anniversary

   33-1/3% of all shares then outstanding

Third Anniversary

   50% of all shares then outstanding

Fourth Anniversary

   100% of the shares then outstanding

 

The Series B Preferred Stock shall be redeemed at an amount equal to $0.213654 per share, subject to adjustment based on future events, plus an amount equal to all dividends declared by not paid.

 

Sale of Redeemable Convertible Preferred Stock

 

On February 5, 2003, the Company completed the sale of 27,173,283 shares of Series AA convertible redeemable preferred stock (Series AA Preferred Stock) at a per share price of $0.21, providing approximately $5,700,000, net of offering costs. Immediately following the closing of the Series AA Preferred Stock, all previously existing classes of preferred stock were automatically converted into shares of Common Stock at a predetermined redemption price. Following this conversion, each purchaser of Series AA Preferred Stock was entitled to exchange each share of converted Common Stock for additional Series AA Preferred Shares at an agreed upon pro rata basis.

 

The holders of Series AA Preferred Stock are entitled to receive a cash dividend of 10 percent per annum on each outstanding share of Series AA Preferred Stock. Such dividends shall be cumulative. In the event of liquidation or winding up of the Company, holders of Series AA Preferred Stock receive a liquidation preference of two times the Series AA Preferred Stock issue price of $0.213654 per share (Original Purchase Price) plus an amount equal to all dividends

 

12


Realeum, Inc.

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

 

accrued but unpaid thereon. After such liquidation preference has been satisfied, holders of Series AA Preferred Stock participate with holders of the Company’s Common Stock to an aggregate amount of four times the Series AA Preferred Stock issue price.

 

Shares of Series AA Preferred Stock may automatically convert into shares of Class A Common Stock upon the consummation of an initial public offering in which the public offering price is not less that $1.07 per share and the gross proceeds to the Company are not less than $40,000,000, if so determined by the holders of seventy percent of the outstanding Series AA Preferred Stock.

 

Upon request of the holders of at least seventy percent of the outstanding shares of all Series AA Preferred Stock, voting as a single class, the Company will redeem any outstanding shares of Series AA Preferred Stock for cash provided that no such redemption shall occur prior to January 31, 2007 and not more than 50% of the aggregate number of shares of Series AA Preferred Stock outstanding immediately prior to the first redemption date may be redeemed prior to January 31, 2008.

 

The Series AA Preferred Stock shall be redeemed at an amount equal to $0.213654 per share, subject to adjustment based on future events, plus an amount equal to all dividends accrued but unpaid. At December 31, 2003 no dividends were declared by the Company.

 

5. Stockholders’ Equity

 

Common Stock

 

In June 2000, the Company authorized 54,000,000 shares of Class A and Class B common stock, $0.01 par value. In conjunction with the sale of Series B Redeemable Convertible Preferred Stock, the Company authorized an additional 99,882,693 shares of Class A and Class B common stock; of which 17,418,975 and 17,484,794 shares were issued and outstanding at December 31, 2002 and 2001, respectively. The current equity structure consists of 799,246 Class A (voting) and 16,685,547 Class B (nonvoting) common stock. Dividends may be declared on the common stock. Both classes of common stock have equal rights and privileges as to dividends. In the event of liquidation or winding up of the Company and after the payment of all preferential amounts required to be paid to the holders of Preferred Stock, any remaining funds shall be distributed among the holders of the issued and outstanding preferred stock and common stock on an as-if-converted basis.

 

Included within the Class B common stock amounts noted above are 1,177,519 shares of restricted stock. The shares were issued at $0.33 per share and vest over a four year term. The Company recorded compensation expense, related to vesting of these restricted common shares, of $93,061 and $103,706 for the years ended December 31, 2003 and 2002, respectively.

 

On May 29, 2003, the Board of Directors approved the conversion of the Company’s Series A and Series B Common Stock into a single class of common stock on a one-for-one basis. In addition, the Board of Directors declared a ten-for-one reverse stock split for both common and preferred stock classes. Subsequent to the reverse stock split, the Company’s authorized shares totaled, 33,821,840; 13,821,840 designated as preferred stock and 20,000,000 designated as common stock.

 

Common Stock Warrants

 

In May of 2002, in connection with a capital lease arrangement, the Company issued a warrant to purchase 561,656 shares of Series B Preferred Stock at $0.21 per share. The

 

13


Realeum, Inc.

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

 

warrant was immediately vested and exercisable upon issuance and has a term of ten years. The Company estimated the fair value of the warrant using the Black-Scholes option pricing model, at the date of grant and the following assumptions: Risk free rate of 3.9%, no expected dividends and 100% volatility. Due to its financial condition, the Company does not expect to utilize the capital lease facility and has recognized the fair value of the warrant of $108,403 as interest expense for the year ended December 31, 2002.

 

In April 2001, in connection with an equipment and financing arrangement, the Company issued a warrant to purchase 136,800 shares of common stock at $0.71 per share. The fair value of the warrant of $82,000 will be recognized as interest expense over the life of the associated financing instrument. The warrant was immediately vested and exercisable upon issuance and has a term of the later of seven years or three years after the closing of an initial public offering of the Company’s common stock. The Company estimated the fair value of the warrant using the Black- Scholes option pricing model, at the date of grant and the following assumptions: Risk free rate of 4.4%, no expected dividends and 100% volatility.

 

Common Stock Options

 

During 2003 and 2002, the Company issued -0- and 6,943,826 options for shares of common stock at $0 and $0.22 per share to its employees.

 

In June 2000, the Company adopted the Realeum, Inc. 2000 Stock Incentive Plan (the 2000 Plan) to provide for the granting of stock awards, such as stock options, restricted common stock and stock appreciation rights to employees, directors and other individuals as determined by the Board of Directors. The Company has reserved 23,077,519 shares of common stock for issuance under the 2000 Plan.

 

Stock options granted under the 2000 Plan can be either incentive stock options (ISOs) as defined by the Internal Revenue Code, or nonqualified stock options. The Board of Directors determines who will receive options under the 2000 Plan and determines the vesting period, which is generally four years. Options may have a maximum term of 10 years. The exercise price of ISOs granted under the 2000 Plan must be at least equal to the fair market value of the common stock on the date of grant. The Board of Directors determines the exercise price of nonqualified options based upon fair market value at the date of grant.

 

The Company applies APB No. 25 in accounting for its stock option plan and, accordingly, recognizes compensation expense for the difference between the fair value of the underlying common stock and the grant price of the option at the date of grant.

 

14


Realeum, Inc.

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

 

A summary of all of the stock option activity is as follows:

 

     Options
Available for
Grant


    Options
Outstanding


    Weighted
Average
Excercise Price


Balance at December 31, 2001

   6,967,995     4,380,550     $ 0.64

Additional shares authorized

   10,229,108     —         0.00

Options granted

   (6,950,863 )   6,950,863       0.22

Options exercised

   —       (14,074 )     0.67

Restricted stock cancelled

   79,893     —         0.00

Options cancelled

   1,788,732     (1,788,732 )     0.37
    

 

     

Balance at December 31, 2002

   12,114,865     9,528,607       0.39

Options exercised

   —       (4,288 )     —  

Restricted stock cancelled

   8,800     —         —  

Options cancelled

   701,450     (701,450 )     —  

Reverse stock split

   (11,542,600 )   (7,940,582 )     —  
    

 

     

Balance at December 31, 2003

   1,282,515     882,287     $ —  
    

 

     

 

The options outstanding at December 31, 2003 range in price from $0.22 to $0.72 per share and have a weighted average remaining contractual life of 6.58 years. At December 31, 2003, 609,403 options were vested and 483,543 were exercisable at a weighted average price per share of $0.63.

 

In connection with certain stock option grants during the period ended December 31, 2000, the Company recorded unearned compensation for the deemed fair value of restricted stock grants totaling $519,248, which is being amortized over the four year vesting period of the grants. Amortization of unearned compensation totaled $90,152 and $103,706 for the years ended December 31, 2003 and 2002, respectively.

 

6. Commitments and Contingencies

 

Operating Leases

 

The Company leases office space under a non-cancelable operating lease, expiring July 31, 2006. Total rent expense was approximately $660,000 and $461,000 for the years ending December 31, 2003 and 2002, respectively.

 

Future minimum payments under noncancelable operating leases with initial terms of one year are as follows:

 

Year ending December 31,

      

2004

   $ 671,265

2005

     682,674

2006

     402,664
    

     $ 1,756,603
    

 

Letter of Credit

 

The Company has issued an $200,000 letter of credit to its landlord, whereby the Company granted the landlord a security interest and limited powers of attorney over a certificate of deposit. The certificate serves as collateral supporting a lease for the Company’s headquarters. The letter of credit is callable if the Company defaults on its lease. The letter of credit may be reduced by amendment in increments of $100,000, on first and second anniversary dates of the lease agreement.

 

Purchase Commitments

 

On March 25, 2002, the Company entered into an agreement with a hosting service provider for procurement of dedicated web hosting services which are part of the Company’s collocation services offering. The agreement has a term of 36 months. Under the agreement, the Company is required to make specified minimum monthly payments. The aggregate amount of such required payments at December 31, 2003 is as follows:

 

Year ending December 31,

      

2004

   $ 103,800

2005

     25,950
    

     $ 129,750
    

 

Total purchases under this contract during the years ended December 31, 2003 and 2002 totaled approximately $110,431 and $90,000, respectively.

 

7. Income Taxes

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax

 

15


Realeum, Inc.

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

 

purposes. Significant components of the Company’s deferred tax assets and deferred tax liabilities are presented below:

 

     December 31,

 
     2003

    2002

 

Net operating loss carryforwards

   $ 9,867,932     $ 5,290,118  

Stock compensation

     148,520       113,451  

Capitalized start up costs

     2,847,581       3,652,106  

Fixed assets

     (1,534,758 )     (457,489 )

Other

     240,395       96,686  

Impairment loss

     3,857,186       3,857,186  
    


 


Total deferred tax assets

     15,426,856       12,552,058  

Valuation allowance

     (15,426,856 )     (12,552,058 )
    


 


Net deferred tax asset

   $ —       $ —    
    


 


 

The Company has approximately $25,367,000 and $13,599,000 in net operating loss carryforwards as of December 31, 2003 and 2002, respectively for income tax purposes, which expire beginning principally in 2021. The timing and manner in which the operating loss carryforwards may be utilized in any year will be limited to the Company’s ability to generate future earnings and may be limited due to change in ownership rules. The Company has established a valuation allowance totaling $15,427,000 and $12,552,000 at December 31, 2003 and 2002, respectively for the full amount of the net deferred tax asset due to the uncertainty regarding its ability to realize the benefits of such asset. There was no current or deferred provision for income taxes for the years ended December 31, 2003 and 2002. The differences between the statutory federal income tax rates and the effective income tax rate is mainly due to the effects of the valuation allowance and state taxes.

 

8. Related Party Transactions

 

In August 2001, the Company advanced $200,000 to an officer in exchange for an unsecured note receivable bearing simple interest at a rate of 6.0%. The maturity date of this note was December 31, 2002 and was subsequently extended for an additional 12 months by the Board of Directors in January of 2003.

 

During 2003 and 2002, the Company contracted for services in the amount of approximately $0 and $134,000, respectively, with a company upon which the Company’s Chief Executive Officer held a seat on the Board of Directors.

 

9. Debt

 

Notes payable consist of amounts payable to an equipment financing company and a bank. All are collateralized by the underlying assets as follows:

 

     December 31,

 
     2003

    2002

 

12.5% note, principal and interest payable monthly; matures May 2004

   $ 112,110     $ 279,358  

12.4% note, principal and interest payable monthly, matures October 2003

     —         163,913  

12.4% note, principal and interest payable monthly, matures May 2004

     12,465       31,060  

12.7% note, principal and interest payable monthly, matures June 2004

     5,365       12,362  

12.2% note, principal and interest payable monthly, matures August 2004

     23,422       47,807  

11.2%note, principal and interest payable monthly, matures November 2004

     122,476       220,357  

11.8% note, principal and interest payable monthly, matures January 2005

     19,706       33,208  

Bank prime, (4.25% at December 31, 2002) note, principal and interest payable monthly; matures October 2004

     434,782       956,521  
    


 


       730,326       1,744,586  

Less: current portion of long-term debt

     (730,326 )     (1,014,260 )
    


 


Long-term debt, non-current

   $

—  

 

  $

730,326

 

 

10. 401(k) Plan

 

In January 2001, the Company established the Realeum, Inc. 401(k) Plan (the Plan). The Plan was established to qualify as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. The Plan covers all employees who have completed one month of service and has reached age 21. Employees may elect to contribute up to 15% of their total compensation, subject to Code limitations. The Company currently does not match employee contributions.

 

11. Restructuring of Operation

 

On November 29, 2001, the Board of Directors agreed to a restructuring plan to designed to reduce operating expenses. In connection with the restructuring, the Company reduced its workforce by 19 employees and contractors. The total amount of the restructuring charge was approximately

 

16


Realeum, Inc.

Notes to Consolidated Financial Statements

December 31, 2003 and 2002

 

$226,000 and is comprised of employee-related expenses for employee terminations. The entire charge consists of cash-related expenses.

 

As of December 31, 2001, the company had incurred approximately $58,000 related to the restructuring. The remaining reserve was approximately $168,000 related to severance payments and was paid in the first quarter of 2002.

 

12. Impairment of Long-Lived Assets

 

As part of the Company’s review of its fourth quarter 2002 financial results, an impairment assessment of its long-lived assets was performed. The assessment was performed primarily due to the overall decline in industry growth rates and the Company’s lower than expected 2002 operating results and expected 2003 operating results. As a result, an impairment charge aggregating approximately $9,900,000 was recorded in 2002 to adjust capitalized software development costs and purchased software products to $0, which approximated their estimated fair value.

 

13. Subsequent Events

 

On April 29, 2004, the Company was sold to First Advantage Corporation for a total purchase price of approximately $1.6 million. In connection with the acquisition, up to $12 million of additional purchase price is contingent upon the attainment of certain annual revenue amounts through December 31, 2007.

 

17


Realeum, Inc.

 

Consolidated Balance Sheets (Unaudited)

 

    

March 31,

2004


   

December 31,

2003


 

Assets

                

Current assets:

                

Cash and cash equivalents

   $ 171,354     $ 1,115,084  

Restricted cash

     —         634,782  

Accounts receivable, net

     48,969       80,521  

Prepaid expenses and other current assets

     65,306       215,198  
    


 


Total current assets

     285,629       2,045,585  

Property and equipment, net

     662,710       874,420  

Other assets

     388,431       317,642  
    


 


Total assets

   $ 1,336,770     $ 3,237,647  
    


 


Liabilities and Stockholders’ Deficit

                

Current liabilities:

                

Accounts payable and accrued expenses

   $ 189,169     $ 438,108  

Deferred revenue

     152,430       190,726  

Current portion of long-term debt

     125,000       730,326  

Other liabilities

     246,656       108,472  
    


 


Total current liabilities

     713,255       1,467,632  

Deferred revenue

     181,624       197,530  
    


 


Total liabilities

     894,879       1,665,162  

Commitments and contingencies

                

Series AA redeemable convertible preferred stock, $0.01 par value 13,821,840 shares authorized; 13,211,604 shares issued and outstanding

     34,669,476       34,669,476  

Stockholders’ deficit:

                

Common stock, $0.01 par value; 20,000,000 shares authorized; 1,811,655 shares issued and outstanding

     18,116       18,116  

Additional paid in capital

     5,495,217       5,495,217  

Warrants

     190,403       190,403  

Accumulated deficit

     (39,908,826 )     (38,755,737 )

Unearned compensation

     (22,495 )     (44,990 )
    


 


Total stockholders’ deficit

     (34,227,585 )     (33,096,991 )
    


 


Total liabilities and stockholders’ deficit

   $ 1,336,770     $ 3,237,647  
    


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

-1-


Realeum, Inc.

 

Consolidated Statements of Operations

For the Three Months Ended March 31, 2004 and 2003 (Unaudited)

 

     For the Three Months Ended
March 31,


 
     2004

    2003

 

Revenues

                

Subscription

   $ 109,980     $ 125,000  

Services

     187,181       88,539  
    


 


Total revenues

     297,161       213,539  

Cost of revenues

                

Subscription

     196,602       216,343  

Services

     278,637       400,568  
    


 


Total cost of revenues

     475,239       616,911  
    


 


Gross margin

     (178,078 )     (403,372 )

Operating Expenses:

                

Research and development

     580,765       553,130  

Sales and marketing

     125,905       313,999  

General and administrative

     258,970       362,844  
    


 


Total operating expenses

     965,640       1,229,973  
    


 


Loss from operations

     (1,143,718 )     (1,633,345 )
    


 


Interest (expense) income:

                

Interest expense

     (14,054 )     (47,794 )

Interest income

     4,683       18,732  
    


 


Total interest (expense) income

     (9,371 )     (29,062 )
    


 


Net loss

   $ (1,153,089 )   $ (1,662,407 )
    


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

-2-


Realeum, Inc.

 

Consolidated Statements of Stockholders’ Deficit

For the Three Months Ended March 31, 2004 (Unaudited)

 

              

Additional

Paid-In

Capital


             

Deferred

Stock

Compensation


   

Total

Stockholders’

Deficit


 
     Common Stock

          

Accumulated

Deficit


     
     Shares

   Amount

      Warrants

      

Balance at December 31, 2003

   1,811,655    $ 18,116    $ 5,495,217    $ 190,403    $ (38,755,737 )   $ (44,990 )   $ (33,096,991 )

Amortization of unearned stock compensation

   —        —        —        —        —         22,495       22,495  

Net loss

   —        —        —        —        (1,153,089 )     —         (1,153,089 )
    
  

  

  

  


 


 


Balance at March 31, 2004

   1,811,655    $ 18,116    $ 5,495,217    $ 190,403    $ (39,908,826 )   $ (22,495 )   $ (34,227,585 )
    
  

  

  

  


 


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

-3-


Realeum, Inc.

 

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2004 and 2003 (Unaudited)

 

    

For the Three Months Ended

March 31,


 
     2004

    2003

 

Cash flows from operating activities:

                

Net loss

   $ (1,153,089 )   $ (1,662,407 )

Adjustments to reconcile net income to net cash provided by operating activities:

                

Depreciation expense

     213,459       312,458  

Compensation expense recorded for issuance of restricted stock, net of cancellations

     22,495       25,575  

Change in operating assets and liabilities:

                

Accounts receivable and other current assets

     31,552       (64,695 )

Prepaid expenses and Other assets

     79,103       (15,841 )

Accounts payable and accrued liabilities

     (248,939 )     (253,730 )

Deferred revenue

     (54,202 )     (92,831 )

Other liabilities

     138,184       —    
    


 


Net cash used in operating activities

     (971,437 )     (1,751,471 )
    


 


Cash flows from investing activities:

                

Change in restricted cash balances

     634,782       130,435  

Purchases of property and equipment

     (1,749 )     (1,296 )
    


 


Net cash provided by investing activities

     633,033       129,139  
    


 


Cash flows from financing activities:

                

Proceeds from issuance of common stock

     —         149,527  

Proceeds from issuance of preferred stock, net of related costs

     —         5,562,105  

Repayments of long-term debt

     (605,326 )     (256,353 )
    


 


Net cash (used in) provided by financing activities

     (605,326 )     5,455,279  
    


 


Increase (decrease) in cash and cash equivalents

     (943,730 )     3,832,947  

Cash and cash equivalents at beginning of period

     1,115,084       1,381,669  
    


 


Cash and cash equivalents at end of period

   $ 171,354     $ 5,214,616  
    


 


Supplemental disclosures of cash flow information:

                

Cash paid for interest

   $ 14,054     $ 47,794  
    


 


Non-cash transactions:

                

Issue of Series AA preferred stock in satisfaction of Series A and B preferred stock

   $ —       $ 29,107,371  
    


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

-4-


Realeum, Inc.

 

Notes to Consolidated Financial Statements

March 31, 2004 and 2003 (Unaudited)

 

1. Organization and Nature of Business

 

Realeum, Inc. (the Company) was incorporated on June 21, 2000 under the laws and provisions of the state of Delaware.

 

Realeum, Inc., headquartered in McLean, Virginia, provides property management and asset optimization software and services to the multifamily real estate industry. The Company currently operates in one business segment.

 

The Company derives revenue principally from the license of its Realeum FoundationTM product and the delivery of associated implementation, collocation (ASP) and support services. The mix of products and services sold varies by customer.

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair statement of the results for the interim period have been included.

 

For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2003 included in this Form 8-K/A.

 

Operating results for the three months ended March 31, 2004 and 2003 are not necessarily indicative of the results that may be expected for the entire fiscal year.

 

2. Significant Customer

 

For the three months ended March 31, 2004 and 2003, one customer, who is a related party, accounted for 100% of revenue and gross accounts receivable.

 

3. Subsequent Events

 

On April 29, 2004, the Company was sold to First Advantage Corporation for a total purchase price of approximately $1.6 million. In connection with the acquigsition, up to $12 million of additional purchase price is contingent upon the attainment of certain annual revenue amounts through December 31, 2007.

 

-5-


Report of Independent Certified Public Accountants

 

To the Board of Directors and Shareholders

of CIC Enterprises, Inc. and Affiliated Companies

 

In our opinion, the accompanying combined balance sheets as of December 31, 2003 and 2002 and the related combined statements of operations, of shareholders’ equity and of cash flows present fairly, in all material respects, the financial position of CIC Enterprises, Inc. and Affiliated Companies (the “Company”) at December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Pricewaterhouse Coopers LLP

 

Tampa, Florida

June 16, 2004

 


CIC Enterprises, Inc. and Affiliated Companies

Combined Balance Sheets

December 31, 2003 and 2002

 

     2003

    2002

 

Assets

                

Current assets

                

Cash and cash equivalents

   $ 5,584,354     $ 6,756,012  

Restricted cash and reimbursements receivable

     1,200,000       1,200,000  

Investments

     122,900       100  

Accounts receivable (less allowance for doubtful accounts of $107,387 and $46,678 in 2003 and 2002, respectively)

     3,552,585       1,951,153  

Prepaid expenses and other current assets

     22,571       101  
    


 


Total current assets

     10,482,410       9,907,366  

Property and equipment, net

     903,156       757,526  

Other assets

     120,475       108,794  
    


 


Total assets

   $ 11,506,041     $ 10,773,686  
    


 


Liabilities and Shareholders’ Equity

                

Current liabilities

                

Accounts payable

     531,535       578,060  

Accrued compensation

     4,659,035       5,286,718  

Client deposit

     1,200,000       1,200,000  

Other accrued liabilities

     364,594       384,790  
    


 


Total current liabilities

     6,755,164       7,449,568  
    


 


Commitments and contingencies

                

Shareholders’ equity

                

Common stock

     4,000       4,000  

Additional paid-in capital

     12,010,393       12,010,393  

Accumulated other comprehensive income

     20,075       —    

Accumulated deficit

     (7,283,591 )     (8,690,275 )
    


 


Total shareholders’ equity

     4,750,877       3,324,118  
    


 


Total liabilities and shareholders’ equity

   $ 11,506,041     $ 10,773,686  
    


 


 

The accompanying notes are an integral part of these combined financial statements.

 

2


CIC Enterprises, Inc. and Affiliated Companies

Combined Statements of Operations

For the Years Ended December 31, 2003 and 2002

 

     2003

    2002

 

Service revenues

   $ 18,623,187     $ 17,027,076  

Cost of service revenues

     854,537       525,609  
    


 


Gross margin

     17,768,650       16,501,467  

Salaries and benefits

     11,863,886       11,971,553  

Other selling, general, and administrative expenses

     4,418,587       5,156,548  
    


 


Income (loss) from operations

     1,486,177       (626,634 )
    


 


Other income (expense)

                

Interest expense

     (563 )     —    

Interest income

     19,181       35,398  

Other income

     15,498       151,882  
    


 


Total other income (expense)

     34,116       187,280  
    


 


Net income (loss)

     1,520,293       (439,354 )

Unrealized gain on investments

     20,075       —    
    


 


Comprehensive income (loss)

   $ 1,540,368     $ (439,354 )
    


 


 

The accompanying notes are an integral part of these combined financial statements.

 

3


CIC Enterprises, Inc. and Affiliated Companies

Combined Statements of Changes in Shareholders’ Equity

For the Years Ended December 31, 2003 and 2002

 

     Common Stock

   Additional
Paid-in
Capital


  

Accumulated

Other

Comprehensive

Income


  

Accumulated

Deficit


   

Total

Shareholders’

Equity


 
     Shares

   Amount

          

Balance, December 31, 2001

   1,300    $ 4,000    $ 10,587,893    $ —      $ (7,956,171 )   $ 2,635,722  

Net loss

   —        —        —        —        (439,354 )     (439,354 )

Shareholders' contributions

   —        —        1,422,500      —        —         1,422,500  

Shareholders' distributions

   —        —        —        —        (294,750 )     (294,750 )
    
  

  

  

  


 


Balance, December 31, 2002

   1,300      4,000      12,010,393      —        (8,690,275 )     3,324,118  

Net income

   —        —        —        —        1,520,293       1,520,293  

Unrealized gain on investments

   —        —        —        20,075      —         20,075  

Shareholders' distributions

   —        —        —        —        (113,609 )     (113,609 )
    
  

  

  

  


 


Balance, December 31, 2003

   1,300    $ 4,000    $ 12,010,393    $ 20,075    $ (7,283,591 )   $ 4,750,877  
    
  

  

  

  


 


 

The accompanying notes are an integral part of these combined financial statements.

 

4


CIC Enterprises, Inc. and Affiliated Companies

Combined Statements of Cash Flows

For the Years Ended December 31, 2003 and 2002

 

     2003

    2002

 

Cash flows from operating activities

                

Net income (loss)

   $ 1,520,293     $ (439,354 )

Adjustments to reconcile net income (loss) to net cash used in

                

operating activities

                

Depreciation and amortization

     366,177       188,882  

Change in operating assets and liabilities:

                

Restricted cash and reimbursements receivable

     —         (307,729 )

Accounts receivable

     (1,601,432 )     (182,539 )

Prepaid expenses and other current assets

     (22,470 )     108  

Other assets

     (11,681 )     (62,109 )

Accounts payable

     (46,525 )     64,098  

Accrued compensation

     (627,683 )     (807,362 )

Client deposit

     —         307,729  

Other accrued liabilities

     (20,196 )     (254,971 )
    


 


Net cash used in operating activities

     (443,517 )     (1,493,247 )
    


 


Cash flows from investing activities

                

Proceeds from sale of investments

     —         75  

Purchase of investments

     (102,725 )     —    

Purchases of property and equipment

     (511,807 )     (495,360 )
    


 


Net cash used in investing activities

     (614,532 )     (495,285 )
    


 


Cash flows from financing activities

                

Shareholders’ contributions

     —         1,422,500  

Shareholders’ distributions

     (113,609 )     (294,750 )
    


 


Net cash (used in) provided by financing activities

     (113,609 )     1,127,750  
    


 


Decrease in cash and cash equivalents

     (1,171,658 )     (860,782 )

Cash and cash equivalents at beginning of year

     6,756,012       7,616,794  
    


 


Cash and cash equivalents at end of year

   $ 5,584,354     $ 6,756,012  
    


 


Supplemental disclosures of cash flow information

                

Cash paid for interest

   $ 563     $ —    
    


 


 

The accompanying notes are an integral part of these combined financial statements.

 

5


CIC Enterprises, Inc. and Affiliated Companies

Notes to Combined Financial Statements

December 31, 2003 and 2002

 

1. Organization and Nature of Business

 

CIC Enterprises, Inc. (CIC) and its affiliated companies, Horton, Inc. (Horton), STEPS, Inc. (STEPS), and SFC, Inc. (SFC) (combined, the Companies), have three principal lines of business: credits and incentives which helps clients maximize their tax reduction opportunities through the pursuit of available federal, state, and local credits and incentives; transportation consulting which helps owners and operators of trucks save money through improved fleet asset management and regulatory compliance; and sales and use tax consulting which seeks to identify and recover overpayments of tax and establish a system to avoid future overpayments.

 

2. Significant Accounting Policies

 

Principles of Combination

 

The combined financial statements include the accounts of the Companies; which operate as four Indiana S-corporations under common management. All significant inter-related transactions and balances have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the statements. Actual results could differ from the estimates and assumptions used.

 

Fair Value of Financial Instruments

 

The carrying amount of the Company’s financial instruments at December 31, 2003 and 2002, which includes cash and cash equivalents and accounts receivable, approximates fair value because of the short maturity of those instruments.

 

Cash Equivalents

 

The Company considers cash equivalents to be all short-term investments that have an initial maturity of 90 days or less.

 

Accounts Receivable

 

Accounts receivable are due from companies in a broad range of industries located throughout the United States. Credit is extended based on an evaluation of the customer’s financial condition, and generally, collateral normally is not required.

 

The allowance for all probable uncollectible receivables is based on a combination of historical data, cash payment trends, specific customer issues, write-off trends, general economic conditions and other factors. These factors are continuously monitored by management to arrive at the estimate for the amount of accounts receivable that may be ultimately uncollectible. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, the Company records a specific allowance for bad debts against amounts due, to reduce the net recognized receivable to the amount it reasonable believes will be collected. This analysis requires making significant estimates, and changes in facts and circumstances could result in material changes in the allowance for uncollectible receivables. Management believes that the allowance at December 31, 2003 and 2002 is reasonably stated.

 

6


CIC Enterprises, Inc. and Affiliated Companies

Notes to Combined Financial Statements

December 31, 2003 and 2002

 

Property and Equipment

 

Property and equipment is recorded at cost. Property and equipment include computer software acquired and developed for internal use. Software development costs are capitalized from the time technological feasibility is established until the software is ready for use.

 

The Company follows Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” SOP 98-1 requires the Company to capitalize interest costs incurred and certain payroll-related costs of employees directly associated with developing software in addition to incremental payments to third parties.

 

Depreciation on leasehold improvements is computed on the straight-line method over the life of the related lease, ranging from 39 to 40 years. Depreciation on vehicles is computed using a straight-line method over their estimated useful lives of 5 years. Depreciation on furniture and equipment is computed using the straight-line method over their estimated useful lives ranging from 3 to 7 years. Capitalized software costs are amortized using the straight-line method over estimated useful lives of 3 years.

 

Client Deposit

 

Client deposit represents $1.2 million of funds received from a client to be utilized to pay any and all applicable titling, registration, and tax fees incurred on behalf of the client in connection with a transportation consulting agreement. This deposit is maintained in a separate bank account for the sole purpose stated above, with the Company being reimbursed by the client monthly for fees incurred. Included in the accompanying combined balance sheet at December 31, 2003 and 2002 is $814,191 and $865,208, respectively, in restricted cash and $385,809 and $334,792, respectively in reimbursements receivable due from the client for reimbursable fees and expenses related to this arrangement.

 

Income Taxes

 

The shareholders have consented to the Companies’ elections to be taxed under the provisions of Section 1362(a) of the Internal Revenue Code which provides for the Companies’ income to be taxed directly to their shareholders. Accordingly, no credit or provision for income taxes has been reflected in these financial statements.

 

Impairment of Long-Lived Assets

 

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinuance of operations. SFAS 144 superseded SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets for Long-Lived Assets to Be Disposed of” and APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. The initial adoption of this standard did not have a significant impact on financial position or results of operations of the Company.

 

With respect to long-lived assets to be held and used, an asset (or group of assets) will be considered impaired when the expected undiscounted cash flows from use and disposition are less than the asset’s carrying value. The amount of any impairment charge will be based on the difference between the carrying and fair value of the asset. The determination of fair values considers quoted market prices, if available, and prices for similar assets and the results of other valuation techniques.

 

7


CIC Enterprises, Inc. and Affiliated Companies

Notes to Combined Financial Statements

December 31, 2003 and 2002

 

For assets to be sold, an asset (or group of assets) that meets the criteria established by SFAS 144 for classification of assets held for sale will be carried at the lower of carrying amount or fair value less cost to sell.

 

Revenue Recognition and Labor Costs

 

Credits and Incentive Division revenues are generated from transaction fees based on a percentage of the value of the tax credit identified and are recognized in the period that such credit is reported to the client. In a limited number of circumstances, these fees are not earned until the client is able to utilize the identified credit or incentive. In these situations, revenue is recognized in the period the client is able to utilize the benefit.

 

Transportation Consulting revenues are principally recognized monthly, based on the total number of vehicles in a clients’ fleet.

 

Sales and Use Tax Consulting revenues are generated from transaction fees based on a percentage of the value of the tax credit identified and are recognized in the period a client actually utilizes the credit.

 

At December 31, 2003 and 2002, the Companies have approximately $1,468,000 and $2,180,000 of pending billings which would be realized if their clients are able to utilize identified tax credits.

 

The Companies expense associated labor and other operating costs as incurred due to the contingent nature of successful billings.

 

Comprehensive Income

 

SFAS No. 130, “Reporting Comprehensive Income”, governs the financial statement presentation of changes in stockholders’ equity resulting from non-owner sources. Comprehensive income includes all changes in equity except those resulting from investments by owners and distribution to owners.

 

3. Property and Equipment

 

As of December 31, 2003 and 2002, property and equipment is as follows:

 

     2003

    2002

 

Furniture and equipment

   $ 3,506,795     $ 2,823,519  

Vehicles

     233,077       182,110  

Construction in process

     —         274,968  

Leasehold improvements

     64,311       64,311  
    


 


       3,804,183       3,344,908  

Less accumulated depreciation

     (2,901,027 )     (2,587,382 )
    


 


Property and equipment, net

   $ 903,156     $ 757,526  
    


 


 

Deprecation and amortization expense was $366,177 and $188,882 for the years ended December 31, 2003 and 2002, respectively, and is included in selling, general, and administrative expenses.

 

8


CIC Enterprises, Inc. and Affiliated Companies

Notes to Combined Financial Statements

December 31, 2003 and 2002

 

4. Shareholders’ Equity

 

At December 31, 2003 and 2002, the Companies’ equity accounts were as follows:

 

     2003

    2002

 
     Common
Stock


   Additional
Paid In
Capital


   Retained
Earnings
Accumulated
(Deficit)


    Common
Stock


   Additional
Paid In
Capital


   Retained
Earnings
(Deficit)


 

CIC

                                            
No par value 1,000 shares authorized 100 shares issued and outstanding    $ 1,000    $ 8,708,732    $ (10,981,077 )   $ 1,000    $ 8,708,732    $ (10,431,187 )

Horton

                                            
No par value 1,000 shares authorized 100 shares issued and outstanding      1,000      400,000      3,252,440       1,000      400,000      2,682,526  

STEPS

                                            
No par value 1,000 shares authorized, issued and outstanding      1,000      2,663,161      (6,361,403 )     1,000      2,663,161      (5,825,769 )

SFC

                                            
No par value 100 shares authorized, issued and outstanding      1,000      238,500      6,806,449       1,000      238,500      4,884,155  
    

  

  


 

  

  


     $ 4,000    $ 12,010,393    $ (7,283,591 )   $ 4,000    $ 12,010,393    $ (8,690,275 )
    

  

  


 

  

  


 

5. Employee Benefits

 

The Companies have two contributory 401(k) plans (the Plans). One plan covers all eligible employees of CIC and Horton and the other plan covers all eligible employees of STEPS and SFC. The Plans contain a discretionary matching provision which ranges from 25% to 50% of employees’ elective deferrals up to a maximum of 6% of eligible employees’ compensation. In addition, the plans provide for a discretionary profit-sharing provision. The Company’s expense related to the Plans amounted to approximately $38,500 and $28,600 for the years ended December 31, 2003 and approximately $20,200 and $26,900 for the year ended December 31, 2002, respectively. There were no discretionary profit-sharing contributions authorized in 2003 or 2002.

 

6. Commitments and Contingencies

 

Operating Leases

 

The Company leases two facilities in Indianapolis, Indiana under operating leases expiring in April 2006 and June 2007, at monthly rental of approximately $37,300. Monthly rental payments associated with these leases are subject to an annual adjustment based on a certain consumer price index. Rent expense under operating leases was approximately $514,000 and $476,000 for the years ended December 31, 2003 and 2002, respectively.

 

Future minimum rental payments under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2003, are as follows:

 

Year ending December 31,


   Amount

2004

   $ 466,378

2005

     464,902

2006

     270,217

2007

     94,465
    

     $ 1,295,962
    

 

7. Subsequent Event

 

On April 30, 2004, First Advantage Corporation (First Advantage) acquired substantially all of the assets of CIC Enterprises, Inc., STEPS, Inc., SFC, Inc. and Horton, Inc., under the terms of an asset purchase agreement. In consideration for the purchase of the assets, First Advantage Corporation paid the sellers an aggregate purchase price of approximately $30,000,000, in a combination of cash and notes.

 

In connection with the acquisition, up to $14 million of the purchase price is contingent upon the renewal by the United States government of the Work Opportunity Tax Credit program or a similar program. The contingent consideration placed in escrow is comprised of an $11 million subordinated note and a $3 million convertible note (“escrowed assets”). The final amount of the escrowed assets may be reduced based upon the timing, similarity and retroactive application of a new program. If no renewal event, as defined in the acquisition agreement, has occurred prior to December 31, 2005, the entire amount of the escrowed assets will be forfeited by the sellers and returned to First Advantage.

 

9


CIC Enterprises, Inc. and Affiliated Companies

 

Combined Balance Sheets (Unaudited)

 

     March 31,
2004


    December 31,
2003


 

Assets

                

Current assets:

                

Cash and cash equivalents

   $ 2,445,807     $ 5,584,354  

Restricted cash and reimbursements receivable

     1,200,000       1,200,000  

Investments

     137,825       122,900  

Accounts receivable, net

     3,400,754       3,552,585  

Prepaid expenses and other current assets

     22,790       22,571  
    


 


Total current assets

     7,207,176       10,482,410  

Property and equipment, net

     845,119       903,156  

Other assets

     148,185       120,475  
    


 


Total assets

   $ 8,200,480     $ 11,506,041  
    


 


Liabilities and Shareholders’ Equity

                

Current liabilities:

                

Accounts payable

   $ 372,006     $ 531,535  

Accrued compensation

     292,647       4,659,035  

Client deposit

     1,200,000       1,200,000  

Other accrued liabilities

     372,532       364,594  
    


 


Total current liabilities

     2,237,185       6,755,164  

Commitments and contingencies

                

Shareholders’ equity:

                

Common stock

     4,000       4,000  

Additional paid-in capital

     12,710,393       12,010,393  

Accumulated other comprehensive income

     —         20,075  

Accumulated deficit

     (6,751,098 )     (7,283,591 )
    


 


Total shareholders’ equity

     5,963,295       4,750,877  
    


 


Total liabilities and shareholders’ equity

   $ 8,200,480     $ 11,506,041  
    


 


 

The accompanying notes are an integral part of these combined financial statements.

 

-1-


CIC Enterprises, Inc. and Affiliated Companies

 

Combined Statements of Operations

For the Three Months Ended March 31, 2004 and 2003 (Unaudited)

 

     For the Three Months Ended
March 31,


     2004

    2003

Service revenues

   $ 4,335,915     $ 5,383,152

Cost of service revenues

     134,293       30,335
    


 

Gross margin

     4,201,622       5,352,817

Salaries and benefits

     1,797,622       1,783,373

Other selling, general, and administrative expenses

     1,170,920       1,393,908
    


 

Income from operations

     1,233,080       2,175,536
    


 

Interest and other income:

              

Interest income

     1,710       5,523

Other income

     —         2,121
    


 

Total interest and other income

     1,710       7,644
    


 

Net income

   $ 1,234,790     $ 2,183,180
    


 

Unrealized gain on investments

     (20,075 )     —  
    


 

Comprehensive income

   $ 1,214,715     $ 2,183,180
    


 

 

The accompanying notes are an integral part of these combined financial statements.

 

-2-


CIC Enterprises, Inc. and Affiliated Companies

 

Combined Statements of Changes in Shareholders’ Equity

For the Three Months Ended March 31, 2004 (Unaudited)

 

     Common Stock

  

Additional

Paid-in Capital


  

Accumulated

Other

Comprehensive

Income


   

Accumulated

Deficit


   

Total

Shareholders’

Equity


 
     Shares

   Amount

         

Balance, December 31, 2003

   1,300      4,000      12,010,393      20,075       (7,283,591 )     4,750,877  

Net income

   —        —        —        —         1,234,790       1,234,790  

Unrealized gain on investments

   —        —        —        (20,075 )     —         (20,075 )

Shareholders’ contributions

   —        —        700,000      —         —         700,000  

Shareholders’ distributions

   —        —        —        —         (702,297 )     (702,297 )
    
  

  

  


 


 


Balance, March 31, 2004

   1,300    $ 4,000    $ 12,710,393    $ —       $ (6,751,098 )   $ 5,963,295  
    
  

  

  


 


 


 

The accompanying notes are an integral part of these combined financial statements.

 

-3-


CIC Enterprises, Inc. and Affiliated Companies

 

Combined Statements of Cash Flows

For the Three Months Ended March 31, 2004 and 2003 (Unaudited)

 

     For the Three Months Ended
March 31,


 
     2004

    2003

 

Cash flows from operating activities:

                

Net income

   $ 1,234,790     $ 2,183,180  

Adjustments to reconcile net loss to net cash used in operating activities:

                

Depreciation and amortization

     76,344       72,287  

Change in operating assets and liabilities:

                

Accounts receivable

     151,831       (1,996,677 )

Prepaid expenses and other current assets

     (219 )     101  

Other assets

     (27,710 )     3,198  

Accounts payable

     (159,529 )     (201,767 )

Accrued compensation

     (4,366,388 )     (5,140,846 )

Other accrued liabilities

     7,938       48,903  
    


 


Net cash used in operating activities

     (3,082,943 )     (5,031,621 )
    


 


Cash flows from investing activities:

                

Sale (purchase) of investments

     (35,000 )     75  

Purchases of property and equipment

     (18,307 )     (189,096 )
    


 


Net cash used in investing activities

     (53,307 )     (189,021 )
    


 


Cash flows from financing activities:

                

Shareholders’ contributions

     700,000       —    

Shareholders’ distributions

     (702,297 )     (482,392 )
    


 


Net cash used in financing activities

     (2,297 )     (482,392 )
    


 


Decrease in cash and cash equivalents

     (3,138,547 )     (5,703,034 )

Cash and cash equivalents at beginning of period

     5,584,354       6,756,012  
    


 


Cash and cash equivalents at end of period

   $ 2,445,807     $ 1,052,978  
    


 


 

The accompanying notes are an integral part of these combined financial statements.

 

-4-


CIC Enterprises, Inc. and Affiliated Companies

 

Notes to Combined Financial Statements

March 31, 2004 and 2003 (Unaudited)

 

1. Organization and Nature of Business

 

CIC Enterprises, Inc. (CIC) and its affiliated companies, Horton, Inc. (Horton), STEPS, Inc. (STEPS), and SFC, Inc. (SFC) (combined, the Companies), have three principal lines of business: credits and incentives which helps clients maximize their tax reduction opportunities through the pursuit of available federal, state, and local credits and incentives; transportation consulting which helps owners and operators of trucks save money through improved fleet asset management and regulatory compliance; and sales and use tax consulting which seeks to identify and recover overpayments of tax and establish a system to avoid future overpayments.

 

The accompanying unaudited combined financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair statement of the results for the interim period have been included.

 

For further information, refer to the combined financial statements and notes thereto for the year ended December 31, 2003 included in this Form 8-K/A.

 

Operating results for the three months ended March 31, 2004 and 2003 are not necessarily indicative of the results that may be expected for the entire fiscal year.

 

-5-


CIC Enterprises, Inc. and Affiliated Companies

 

Notes to Combined Financial Statements

March 31, 2004 and 2003 (Unaudited)

 

2. Shareholders’ Equity

 

At March 31, 2004 and December 31, 2003, the Companies’ equity accounts were as follows:

 

     March 31, 2004

    December 31, 2003

 
     Common
Stock


   Additional
Paid-in
Capital


   Retained
Earnings
(Deficit)


    Common
Stock


   Additional
Paid-in
Capital


   Retained
Earnings
(Deficit)


 

CIC

                                            

No par value

                                            

1,000 shares authorized

                                            

100 shares issued and outstanding

   $ 1,000    $ 9,408,732    $ (7,214,164 )   $ 1,000    $ 8,708,732    $ (10,981,077 )

Horton

                                            

No par value

                                            

1,000 shares authorized

                                            

100 shares issued and outstanding

     1,000      400,000      1,425,112       1,000      400,000      3,252,440  

STEPS

                                            

No par value

                                            

1,000 shares authorized, issued and outstanding

     1,000      2,663,161      (2,466,836 )     1,000      2,663,161      (6,361,403 )

SFC

                                            

No par value

                                            

100 shares authorized, issued and outstanding

     1,000      238,500      1,504,790       1,000      238,500      6,806,449  
    

  

  


 

  

  


     $ 4,000    $ 12,710,393    $ (6,751,098 )   $ 4,000    $ 12,010,393    $ (7,283,591 )
    

  

  


 

  

  


 

3. Subsequent Event

 

On April 30, 2004, First Advantage Corporation acquired substantially all of the assets of CIC Enterprises, Inc., STEPS, Inc., SFC, Inc. and Horton, Inc., under the terms of an asset purchase agreement. In consideration for the purchase of the assets, First Advantage Corporation paid the sellers an aggregate purchase price of $30,000,000, in a combination of cash and notes.

 

In connection with the acquisition, up to $14 million of the purchase price is contingent upon the renewal by the United States government of the Work Opportunity Tax Credit program or a similar program. The contingent consideration placed in escrow is comprised of an $11 million subordinated note and a $3 million convertible note (“escrowed assets”). The final amount of the escrowed assets may be reduced based upon the timing, similarity and retroactive application of a new program. If no renewal event, as defined in the acquisition agreement, has occurred prior to December 31, 2005, the entire amount of the escrowed assets will be forfeited by the seller and returned to First Advantage Corporation.

 

-6-


UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

The following unaudited pro forma combined financial statements have been prepared to give effect to the acquisition by First Advantage of CoreFacts, LLC, Realeum, Inc. (Realeum) and certain assets and operations of CIC Enterprises, Inc. and Affiliated Companies (CIC) using the purchase method of accounting and the assumptions and adjustments described in the accompanying notes to unaudited pro forma combined financial statements.

 

The table that follows presents unaudited pro forma financial data for First Advantage, CoreFacts, CIC and Realeum for the three months ended March 31, 2004 and for the year ended December 31, 2003 as if the acquisitions had been completed on January 1, 2003 for income statement purposes and on March 31, 2004 for balance sheet purposes. The pro forma information is based upon the historical consolidated financial statements of First Advantage, CoreFacts and Realeum, the historical combined financial statements of CIC and the assumptions, estimates and adjustments described in the notes to the unaudited pro forma combined financial information. The assumptions, estimates and adjustments are preliminary and have been made solely for purposes of developing such pro forma information. It is anticipated that the final purchase price allocation will not differ materially from the preliminary allocations.

 

The unaudited pro forma combined financial statements are presented for illustrative purposes only and are not necessarily indicative of the consolidated financial position or consolidated results of operations of First Advantage that would have been reported had the acquisitions occurred on the dates indicated, nor do they represent a forecast of the consolidated financial position of First Advantage at any future date or the consolidated results of operations for any future period. Furthermore, no effect has been given in the unaudited pro forma combined statements of income (loss) for synergistic benefits or cost savings that may be realized through the combination of the First Advantage, CoreFacts, CIC and Realeum or costs that may be incurred in integrating their operations. The unaudited pro forma combined financial information should be read in conjunction with the historical financial statements and related notes and management’s discussion and analysis of financial condition and results of operations of First Advantage which is included in its annual report on Form 10-K, which is incorporated by reference and the historical financial statements and related notes of CoreFacts, CIC and Realeum which are included in this Form 8-K/A.

 


First Advantage Corporation and Subsidiaries

 

Unaudited Pro forma Combined Balance sheet

March 31, 2004

 

     First Advantage
Corporation
Historical


   Past
Acquisitions (E)


   CoreFacts, LLC
Historical


   CIC
Enterprises, Inc.
Historical


   Realeum, Inc.
Historical


   Pro Forma
Adjustments


    Pro Forma

Assets

                                                 

Current assets:

                                                 

Cash and cash equivalents

   $ 7,480,000    $ —      $ 544,371    $ 2,445,807    $ 171,354    $ (2,445,807 )(D)   $ 8,195,725

Restricted cash and reimbursements receivable

     —        —        —        1,200,000      —        —         1,200,000

Investments

     —        —        —        137,825      —        (137,825 )(D)     —  

Accounts receivable

     31,306,000      835,164      1,735,014      3,400,754      48,969      (181,916 )(D)     37,143,985

Income tax receivable

     1,310,000      —        —        —        —                1,310,000

Due from affiliates

     380,000      —        —        —        —                380,000

Prepaid expenses and other current assets

     2,106,000      13,919      120,766      22,790      65,306      (22,790 )(D)     2,305,991
    

  

  

  

  

  


 

Total current assets

     42,582,000      849,083      2,400,151      7,207,176      285,629      (2,788,338 )     50,535,701

Property and equipment, net

     19,376,000      452,828      137,026      845,119      662,710      300,000 (A)      
                                          (119,719 )(D)     21,653,964

Goodwill

     223,797,000      14,032,805      —        —        —        20,550,892 (A)     258,380,697

Intangible assets, net

     22,254,000      3,474,817      —        —        —        6,100,000 (A)     31,828,817

Database development costs, net

     7,321,000      —        —        —        —        100,000 (A)     7,421,000

Other assets

     1,292,000      632      12,202      148,185      388,431      (49,780 )(D)     1,791,670
    

  

  

  

  

  


 

Total assets

   $ 316,622,000    $ 18,810,165    $ 2,549,379    $ 8,200,480    $ 1,336,770    $ 24,093,055     $ 371,611,849
    

  

  

  

  

  


 

 

    

First Advantage

Corporation
Historical


   Past
Acquisitions (E)


   CoreFacts, LLC
Historical


   CIC
Enterprises, Inc.
Historical


    Realeum, Inc.
Historical


    Pro Forma
Adjustments


    Pro Forma

Liabilities and Stockholder’s Equity

                                                   

Current liabilities:

                                                   

Accounts payable

   $ 6,120,000    $ 249,556    $ 129,479    $ 372,006       189,169       —       $ 7,060,210

Accrued compensation

     9,055,000      —        16,075      292,647       98,182       —         9,461,904

Accrued liabilities

     11,390,000      395,413      216,180      372,532       300,904       (369,571 )(D)     12,305,458

Client deposit

     —        —        —        1,200,000       —         —         1,200,000

Current portion of long-term debt and capital leases

     9,295,000      69,384      —        —         125,000       —         9,489,384
    

  

  

  


 


 


 

Total current liabilities

     35,860,000      714,353      361,734      2,237,185       713,255       (369,571 )     39,516,956

Long-term debt and capital leases, net of current portion

     26,548,000      18,025,812      —        —         —         33,055,457 (B)     77,629,269

Deferred income taxes

     1,582,000      —        —        —         —         —         1,582,000

Other liabilities

     1,863,000      70,000      —        —         181,624       —         2,114,624
    

  

  

  


 


 


 

Total liabilities

     65,853,000      18,810,165      361,734      2,237,185       894,879       32,685,886       120,842,849
    

  

  

  


 


 


 

Commitments and contingencies

                                                   

Stockholders’ equity:

                                                   

Preferred stock

     —        —        —        —         34,669,476       (34,669,476 )(C)     —  

Warrants

     —        —        —        —         190,403       (190,403 )(C)     —  

Deferred stock compensation

     —        —        —        —         (22,495 )     22,495 (C)     —  

Members’ equity

     —        —        2,187,645      —         —         (2,187,645 )(C)     —  

Class A common stock

     5,000      —        —        4,000       181,165       (185,165 )(C)     5,000

Class B common stock

     16,000      —        —        —         —         —         16,000

Additional paid in capital

     242,895,000      —        —        12,710,393       5,332,168       (18,042,561 )(C)     242,895,000

Retained earnings

     7,853,000      —        —        (6,751,098 )     (39,908,826 )     46,659,924 (C)     7,853,000
    

  

  

  


 


 


 

Total stockholders’ equity

     250,769,000      —        2,187,645      5,963,295       441,891       (8,592,831 )     250,769,000
    

  

  

  


 


 


 

Total liabilities and stockholders’ equity

   $ 316,622,000    $ 18,810,165    $ 2,549,379    $ 8,200,480     $ 1,336,770     $ 24,093,055     $ 371,611,849
    

  

  

  


 


 


 

 

See the accompanying notes to the unaudited pro forma financial information.

 

-2-


First Advantage Corporation and Subsidiaries

 

Unaudited Pro Forma Combined Statement of Income (Loss)

For the Year Ended December 31, 2003

 

     First Advantage
Corporation
Historical


    Past
Acquisitions (E)


    CoreFacts,
LLC
Historical


    CIC
Enterprises,
Inc. Historical


    Realeum, Inc.
Historical


    Pro Forma
Adjustments


    Pro Forma

 

Service revenue

   $ 134,910,000     $ 26,923,345     $ 5,815,732     $ 18,623,187     $ 1,065,223     $ (3,279,922 )(D)   $ 184,057,565  

Reimbursed government fee revenue

     31,585,000       —         —         —         —                 31,585,000  
    


 


 


 


 


 


 


Total revenue

     166,495,000       26,923,345       5,815,732       18,623,187       1,065,223       (3,279,922 )     215,642,565  

Cost of service revenue

     38,154,000       12,769,261       2,131,834       854,537       2,105,305       (75,943 )(D)     55,938,994  

Government fees paid

     31,585,000       —         —         —         —         —         31,585,000  
    


 


 


 


 


 


 


Total cost of service

     69,739,000       12,769,261       2,131,834       854,537       2,105,305       (75,943 )     87,523,994  
    


 


 


 


 


 


 


Gross margin

     96,756,000       14,154,084       3,683,898       17,768,650       (1,040,082 )     (3,203,979 )     128,118,571  

Salaries and benefits

     51,178,000       6,427,471       480,850       11,863,886       3,506,840       (4,296,119 )(D)     69,160,928  

Other operating expenses

     30,449,000       7,039,970       783,083       4,052,410       425,221       (1,112,353 )(D)     41,637,331  

Depreciation and amortization

     8,428,000       1,643,177       44,595       366,177       1,198,797       (29,638 )(D)        
                                               1,080,000 (F)     12,731,108  

Impairment loss

     1,739,000       —         —         —         —         —         1,739,000  
    


 


 


 


 


 


 


Total operating expenses

     91,794,000       15,110,618       1,308,528       16,282,473       5,130,858       (4,358,110 )     125,268,367  
    


 


 


 


 


 


 


Income (loss) from operations

     4,962,000       (956,534 )     2,375,370       1,486,177       (6,170,940 )     1,154,131       2,850,204  
    


 


 


 


 


 


 


Other (expense) income:

                                                        

Interest expense

     (154,000 )     (914,858 )     (368 )     (563 )     (122,755 )     (1,045,641 )(G)     (2,238,185 )

Interest income

     41,000       85,403       1,289       19,181       60,484       —         207,357  

Other income

     —         —         —         15,498       2,247       —         17,745  
    


 


 


 


 


 


 


Total other expense, net

     (113,000 )     (829,455 )     921       34,116       (60,024 )     (1,045,641 )     (2,013,083 )
    


 


 


 


 


 


 


Income (loss) before income taxes

     4,849,000       (1,785,989 )     2,376,291       1,520,293       (6,230,964 )     108,490       837,121  

Provision (benefit) for income taxes

     2,046,000       (750,093 )     —         —         —         (941,551 )(H)     354,356  
    


 


 


 


 


 


 


Net income (loss)

   $ 2,803,000     $ (1,035,896 )   $ 2,376,291     $ 1,520,293     $ (6,230,964 )   $ 1,050,041     $ 482,765  
    


 


 


 


 


 


 


Basic and diluted earnings (loss) per share

   $ 0.14