Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Form 10-K

For the fiscal year ended December 31, 2001

Commission File No. 0-24205

Factual Data Corp.

5200 Hahns Peak Drive, Loveland, Colorado 80538

(970) 663-5700

Securities registered pursuant to Section 12(b) of the Act: None.

Common Stock, no par value

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

      The aggregate market value of the voting stock held by non-affiliates of the registrant on March 31, 2002, was approximately $21 million based upon the reported closing sale price of such shares on the Nasdaq National Market for that date. As of March 31, 2002, there were 6,119,893 shares outstanding of which 2,650,650 were held by non-affiliates.

DOCUMENTS INCORPORATED BY REFERENCE:

The exhibit index appears on page E-1.

Table of Contents

Table of Contents

Item 1.     Description of Business

Our Company

      We provide a wide range of customized information services to businesses across the United States that assist them in making critical decisions, such as determining whether to make a mortgage or other loan, offer employment, accept new tenants, or enter into a business relationship. We specialize in providing customized mortgage credit reports and other mortgage related services, consumer credit reports, employment screening, resident screening, and commercial credit reports. Our customers include mortgage lenders and independent mortgage brokers, consumer lenders, employers, property managers, and other business customers desiring information regarding creditworthiness and other matters. We believe we are an industry leader in delivering our service offerings over the Internet and in utilizing technology and focusing on customer service to provide our services with the speed, reliability, accuracy, and customization that industry participants increasingly demand.

      To date, mortgage services have been our primary business and providing mortgage credit reports has generated the majority of our revenue. We believe that we currently are the second largest provider of mortgage credit reports in the United States and the largest provider to independent mortgage brokers. In addition, we are one of five approved information vendors for Freddie Mac’s automated underwriting system and one of 12 approved direct vendors for Fannie Mae’s automated underwriting system. We are also integrated with the top mortgage loan origination software systems in the United States.

      We believe our success in the mortgage services industry results from our focus on developing and offering industry-leading technology and providing industry-leading customer service. This focus is based on our long-standing view that technology and customer service are rapidly transforming the highly fragmented and non-automated mortgage services industry. This has transformed the preparation and delivery of mortgage credit reports from a completely manual procedure with a several day turnaround to a completely automated process with turnaround time approaching a matter of seconds for many of our services.

      In order to capitalize on our competitive advantages in the mortgage credit reporting industry, we began an aggressive expansion plan in 1998. Since that time, we have acquired 37 mortgage service businesses. Prior

1

Table of Contents

      In an effort to leverage the core competencies and infrastructure that we developed in becoming a leader in the mortgage credit reporting industry, we initiated a diversification strategy into other related information service businesses. We developed our employment screening, resident screening, and commercial credit information businesses internally. We expanded into the consumer credit industry by entering into three lease agreements with Experian Information Solutions, Inc. beginning in mid-2000. Through these leases we sell Experian consumer credit reports to retail banks, retail merchants, automotive dealerships, credit unions, and other businesses in three states. Under these arrangements, we also provide pre-screened promotional lists and account-monitoring programs to financial service providers, such as credit card issuers and home equity line of credit lenders.

Our Services

      We specialize in gathering data from a wide range of sources, adding value by analyzing that information, and electronically delivering and presenting it in the manner that best suits each customer’s decision-making process. The following tables set forth certain information relating to our services.

Mortgage Information Services

2

Table of Contents

Consumer and Commercial Information Services

Resident Screening Services

3

Table of Contents

Employment Screening Services

Our Acquisition Program

      We have acquired 37 information service businesses since 1998, 14 of which were system affiliates. The total purchase price for these acquisitions was approximately $36.5 million. Approximately $20.4 million of this amount was paid in cash, most of which we generated through our initial public offering in 1998 and our private placement in early 1999; $13.8 million was paid with promissory notes or bank debt; and $2.3 million was paid with shares of our common stock. In virtually all of these acquisitions, we were able to bolster the margins of the acquired businesses significantly. We accomplished this by quickly converting the businesses onto our low-cost, efficient technology platform and by eliminating most of their overhead.

      Due to the fragmented nature of the industry, the large number of smaller companies, and various industry trends, the opportunity to acquire information service businesses is abundant. Many of these businesses have increasingly found it difficult to make the managerial and capital commitments necessary to achieve required customer service levels and upgrade technology and systems, particularly with market demands for increased speed, accuracy, and cost-effectiveness.

      We believe our company is regarded as an attractive acquirer by information service companies because of the following factors:

	•	our historical growth and performance;
	•	the reputation of our management team;
	•	the ability of management and employees of acquired companies to participate in our growth and expansion through potential stock ownership and career advancement opportunities; and
	•	our ability to offer liquidity to the owners of acquired companies.

      We focus our acquisition efforts on information service businesses. Likely acquisition candidates are companies that would meet the following characteristics:

	•	be accretive to earnings;
	•	increase our customer and revenue base;
	•	offer significant economies of scale through consolidation of facilities, marketing, and administrative functions; and

4

Table of Contents

	•	need to associate with a technologically sophisticated information service provider in order to remain competitive.

Customer Service and Support

      We devote considerable effort to customer service and support. Each staff member within our company is certified to understand the Fair Credit Reporting Act, the laws that govern our business and the rights of consumers. Our customer service representatives are available 12 hours per day during the business week.

      Data obtained from the three national repositories frequently contains errors and inconsistencies, which may take up to 30 days to correct. Because of this industry problem, customers request that we verify, update, and otherwise correct the information we receive from the credit repositories on approximately 20% of the reports we issue. Our “4 Hours or It’s Free” guarantee demonstrates our commitment to provide what we believe to be the fastest turnaround time in the industry. We are able to take customer service requests online and immediately begin processing the request. We continually monitor the quality of our customer-support services and enhance our performance guidelines to provide the highest quality service.

      We train our technical support staff in all aspects of our software, all loan origination systems with which we are integrated, and the most common Internet browsers. Our technical support department is available 12 hours per day during the business week. Our goal is to assure that each technical support representative is able to solve a customer’s problem within five minutes. If this is not possible, our senior technical support representatives work with the customer until the problem is solved. With their knowledge of customer requirements and the demands made on our software, our technical support department is an integral part of our attention to servicing customer needs in a timely and friendly manner.

Our Technology

      Our advanced proprietary software and web-based applications enable us to deliver thorough, accurate reports that meet our customers’ formatting specifications. Our technological efforts are designed to enhance our technological leadership, expand our ability to service additional volume without a commensurate increase in costs, and enhance the speed, reliability, customization, and user-friendliness of our service offerings. We have invested significant management attention, personnel, and more than $5.5 million on proprietary computer software, state-of-the-art hardware, and communications systems. We employ 44 technical personnel, including 18 software programmers, to continue to expand our electronic capabilities and develop new applications and service offerings. Our information, processing, and telecommunications systems can access up to 18,000 files per hour and have a capacity exceeding 30,000 calls per day. In addition, our systems are scalable, enabling us to grow our customer base and portfolio of services without degrading efficiency or expending substantial funds.

      We are one of five approved information vendors for Freddie Mac’s automated underwriting system and one of 12 approved direct vendors for Fannie Mae’s automated underwriting system. As the two largest sources of capital for the mortgage industry, Freddie Mac and Fannie Mae have developed numerous programs to simplify the underwriting process and lower the overall cost for both borrowers and lenders. To protect the integrity of their automated underwriting systems, both entities limit the number of directly approved service providers. We believe our technology has allowed us to establish relationships with Freddie Mac and Fannie Mae, which have provided us with expertise, expanded market position, and enhanced industry credibility.

      We collect, integrate, analyze, and deliver information from our technology centers in Loveland and Denver, Colorado. In the event of an interruption of service at either of our centers, the other center can be used to supplement or replace the services as needed. We rely on load balancing and fail-over services from Sprint, as well as redundant routing services within our own network, to ensure that all work is handled expeditiously.

      We believe our systems have sufficient back-up and disaster recovery capability. Because of those precautions, we have experienced little downtime. Nevertheless, our business depends on our ability to protect

5

Table of Contents

Privacy and Security Concerns

      Privacy and consumer advocates and federal regulators have become increasingly concerned about how personal information is collected, used, shared, and maintained. For most of our services, we are regulated as a “consumer reporting agency” under the Fair Credit Report Act, or FCRA. We also must comply with the laws of all 50 states. Finally, there is increasing pressure from regulators, legislators, and the private sector for firms engaged in providing information services to restrict the type of information they collect, to adopt controls on how they use and share information, and to ensure that their databases of sensitive information are secure.

      We expend significant effort to assure the security of information that we receive and reports that we generate. We believe we are the only information services provider that requires every employee to be certified under the FCRA. Our staff members receive FCRA training and must pass the certification exam administered by the Consumer Data Industry Association, an international trade association representing consumer credit, mortgage credit reporting, collection service, resident screening, and employment reporting companies. If we acquire a business whose employees are not certified, we require them to complete the FCRA training and certification.

      Additionally, our technology center, website, and computer systems are tested by an independent security firm at least four times each year. These voluntary audits help to reduce our exposure to computer viruses, hackers, common theft, and system failure.

Competition

      We operate in a highly competitive and fragmented industry with a large number of companies in each of our service offerings. While a significant number of these companies are small and operate solely on a local or regional basis, several large companies, including Equifax Credit Information Services, Inc. and The First American Corporation, have substantially greater financial, marketing, and other resources and much greater name recognition than we do.

      The primary competitive factors in the information services industry include the following:

	•	responsiveness and reliability of customer service personnel,
	•	accuracy and completeness of reports,
	•	user-friendliness and customization of reports,
	•	technological sophistication and integration with customers’ technology,
	•	speed of delivery,
	•	fraud detection capabilities,
	•	price,
	•	brand recognition, and
	•	security.

      Our primary competitors in the mortgage services industry include The First American Corporation, CBC Companies, Inc., Fidelity National Financial, Inc., and Equifax Credit Information Services, Inc. In addition, we estimate that there are approximately 1,100 providers of mortgage credit reports, a significant number of which are companies that are small and operate on a local or regional basis.

6

Table of Contents

      In the consumer credit industry, our primary competitors are TransUnion LLC and Equifax Credit Information Services, Inc., both of which are also credit repositories that maintain large databases of credit information. We are a significant customer of both companies.

      We compete in the resident screening services industry, primarily with Resident Data, Inc., Rent Grow, Inc., and The First American Corporation.

      Some of our competitors in the employment screening industry include ChoicePoint, Inc., Avert, Inc. (a division of Automatic Data Processing, Inc.), and TransUnion LLC.

Government Regulation

      Fair Credit Reporting Act. The FCRA governs consumer reporting agencies and the methods they use to produce and sell consumer reports. For example, the FCRA prohibits disclosure of “obsolete” information, which is generally consumer information that is more than seven years old.

      The primary goal of the FCRA is to ensure that consumer information is not made available to persons or businesses not authorized to receive such information. The statute permits consumer reporting agencies to furnish a consumer report only when requested or authorized by the subject consumer, or when requested by a person or business that the agency believes intends to use the information for legitimate business purposes, including the following:

	•	to make decisions about new transactions, to monitor risk, and to comply with the terms of existing credit relationships; and
	•	to make hiring or promotion decisions.

      The FCRA permits consumers to hold a consumer reporting agency liable if the agency willfully or negligently fails to comply with the statute. Officers and directors of consumer reporting agencies that knowingly and willfully disclose consumer information to unauthorized persons or businesses may suffer criminal penalties.

      State laws. Many states have at least one unique statute or regulation that affects the information services industry, including the following:

	•	a number of states have laws similar, but not identical, to the FCRA;
	•	some states require businesses engaged in investigative reporting (a term that includes some of the techniques used to generate certain types of consumer reports), to be licensed;
	•	numerous states regulate the type of information that can be made available to the public or impose conditions on the release of certain information;
	•	certain states prohibit access to workers’ compensation histories; and
	•	some states require a signed release from the subject of the report before personal information may be released.

Customers

      Our customers include some of the nation’s largest mortgage originators, real estate investment trusts, government sponsored enterprises, and employers. Our customer base consists primarily of independent mortgage brokers, but also includes property management firms, a variety of banks and credit unions, automobile dealers, collection agencies, and employers of all types. No customer accounted for more than 10% of our revenue during fiscal 2001.

7

Table of Contents

Sales and Marketing

      We maintain an active sales and marketing program to expand our market share throughout the United States. Key aspects of our sales and marketing program include the following:

	•	face-to-face marketing efforts with prospective customers by 16 national account representatives and 46 sales representatives managed by seven regional managers;
	•	in-house telemarketing to existing and prospective customers that have indicated interest in purchasing our services;
	•	public relations efforts;
	•	participating in trade shows and seminars;
	•	advertising in trade publications;
	•	utilizing our website; and
	•	mailing quarterly news releases to existing and prospective customers.

Certain Strategic Relationships

      We have a number of strategic relationships that are critical to our business.

	•	Reseller Agreements with Equifax, Experian, and TransUnion. On October 8 and November 17, 1998, and October 20, 2001, we entered into reseller services agreements with Equifax, Experian, and TransUnion, respectively, which are the three preeminent national credit repositories in the United States. Under these agreements, we purchase consumer credit information, on a nonexclusive basis, for resale to our customers.

	Each agreement enables us to resell the information and reports for use solely in connection with credit granting, mortgage processing, employment screening, and resident screening. Under each agreement, we may also disclose the credit information to a consumer who requests disclosure. In addition, the Equifax and TransUnion agreements permit the use of the information in connection with a legitimate business transaction, involving consumers.
	The Equifax agreement will remain in effect until terminated by either party upon at least one year’s notice. Under the Experian agreement, Experian will continue to renew the agreement for successive one-year periods as long as we are in compliance under the agreement and Experian continues to provide services to other resellers. The TransUnion agreement will remain in effect until terminated upon at least 60 days’ prior notice by either party. Each agreement also provides for termination in the event of our breach, bankruptcy, or insolvency.

	•	Affiliate Services Agreements with Experian. Effective April 28 and December 1, 2000 and February 1, 2001, we entered into three agreements with Experian for credit reporting on consumers who reside in Colorado, the southern portion of Texas, and Wyoming, respectively. Under each of these agreements, Experian has agreed to allow us, on a non-exclusive basis, to access all credit and other information in its database associated with consumers living in these geographical areas. In addition, Experian assigned to us certain subscriber agreements for certain of its customers located within these areas. We also receive fees from Experian when it sells information to its customers regarding consumers who live in the geographical areas covered by the agreement.

	The agreements for Wyoming and portions of south Texas allow Experian to impose marketing and sales performance requirements on us. Each of these two agreements also restricts us from entering into any similar agreement with any other consumer reporting agency during the term of the agreement.
	Each agreement has an initial term of ten years and continues for successive one-year periods unless either party delivers to the other party a written notice of intent not to renew the agreement at least six

8

Table of Contents

months before the end of the initial ten-year term or any one-year renewal period. In addition, either party may terminate the agreement upon the insolvency or bankruptcy of the other party or following the other party’s breach of the agreement. Experian may also terminate the agreement if we were to enter into a transaction without Experian’s approval that results in a change in our control, ownership, or management.

	•	Credit Report Transmission and Access Marketing Agreement with Fannie Mae and Credit Reporting Company Agreement with Freddie Mac. On November 11, 1998 and January 1, 2000, we entered into agreements with Fannie Mae and Freddie Mac, respectively, granting us the right to access technology and information and processing capabilities available through these organizations’ automated underwriting systems and databases, for use in processing consumer mortgage loan applications. Under the Fannie Mae agreement, we provide these services to our customers for which we pay fees to Fannie Mae. Under the Freddie Mac agreement, we provide these services to its customers for which Freddie Mac pays us a fee.

	The Fannie Mae agreement will remain in effect for successive 12-month periods until terminated by either party upon 30 days notice. However, Fannie Mae may terminate the agreement at any time for any reason upon 60 days advance notice. Fannie Mae also may terminate the agreement upon our insolvency, bankruptcy, or breach of the agreement.
	Freddie Mac has the right to terminate the agreement for any reason in its sole discretion on 30 days’ advance notice. Freddie Mac would also have the right to terminate the agreement if it had concerns regarding our financial condition or if we failed to perform adequately under the agreement.

System Affiliates

      From 1989 to 1993, we franchised our mortgage credit reporting system to companies we call system affiliates. Franchisees pay us fees to use our name and our methods to generate reports. In 1993, we terminated our franchise program in favor of licensing agreements that permit licensees to use our systems to service their own customers in return for a percentage of their gross billings. We stopped executing license agreements in 1995. We will honor our existing contractual obligations, but we do not intend to offer new franchises or licenses in the future. In 2001, system affiliates provided 2.5% of our gross revenue compared to 3.8% in 2000. We expect revenue from system affiliates will decline over time since the number of system affiliates will likely decline.

Intellectual Property

      We rely on a combination of trademark, servicemark, copyright, trade secret and contract protection (like licenses) to establish and protect our proprietary rights in our services and technology. We currently maintain 146 registered trademarks, servicemarks, and copyrights. We are not aware of any infringement of our proprietary rights.

Insurance

      We maintain commercial general liability and property insurance. This policy provides for a general liability aggregate limit of $2 million, and $5 million annual aggregate umbrella coverage. We also carry an errors and omissions policy covering our various service offerings. This policy provides $2 million coverage for each of our seven processing centers.

Employees

      As of April 15, 2002, we employed 235 people on a full-time and 14 people on a part-time basis. Of our full-time employees, 21 are involved in administration, 20 in finance and accounting, 75 in sales and marketing, 40 in technology and systems, and 79 in operations. There are no union or collective bargaining agreements between us and our employees. We consider our relationship with our employees to be good.

9

Table of Contents

Other Information

      Factual Data was incorporated in the State of Colorado in 1985. Our principal office is located at 5200 Hahns Peak Drive, Loveland, Colorado 80538, and our telephone number is (970) 663-5700.

SPECIAL CONSIDERATIONS

      To inform shareholders of our future plans and business strategies, this report contains statements concerning our future performance, intentions, objectives, plans and expectations that are or may be deemed to be “forward-looking statements.” Our ability to do this has been fostered by the Private Securities Litigation Reform Act of 1995, which provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information so long as those statements are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. Such factors affecting us include, but are not limited to, the following:

      Our primary service is the preparation of our mortgage credit reports. The demand for this service depends primarily upon the level of home mortgage originations and refinancings and, to a lesser extent, the efforts of lenders to develop new, and monitor existing, credit relationships. Consumer demand for mortgage credit tends to vary as a result of interest rate fluctuations and general economic conditions, with demand tending to decrease during periods of economic contraction or rising interest rates. As a result of our lack of diversification and dependence on mortgage market activity, a downturn in the demand for mortgage credit reports would adversely affect our business, operating results, and financial condition, particularly if we were unable to control our costs, including repository, labor, and communication charges, during a period of reduced demand.

      We plan to diversify our business and reduce our reliance on the mortgage industry through acquisitions of non-mortgage information service businesses and the introduction of new services developed internally. Each of these strategies involves substantial risks and uncertainties, and we cannot provide assurance that our acquisition program or new service offerings will be successful.

      Historically, the majority of the businesses we have acquired have been mortgage-related. We believe our acquisition program has allowed us to rapidly grow our business. To the extent that we are able to continue to acquire attractive mortgage-related businesses, we intend to do so. Accordingly, our dependence on the mortgage industry may increase.

      During 1998, we implemented a consolidation strategy to acquire businesses that we believe have the potential to complement or expand our business. Our growth strategy of acquiring additional businesses involves significant risks, including the following:

      Drain on resources. The acquisition process requires a substantial commitment of management time and resources in considering various potential acquisition candidates, including the exchange of confidential information, conducting due diligence, negotiating acquisition terms, and completing the acquisition. As a result of these and other factors, a number of potential acquisitions that from time to time appear likely to occur are not consummated.

      Unforeseen expenses. Acquisitions may entail reorganizing acquired business operations, corporate infrastructure and systems, and financial controls. Unforeseen expenses, difficulties, and delays frequently

10

Table of Contents

      Competition for acquisitions may negatively affect our investment returns. We may be unable to identify suitable acquisition candidates or to complete the acquisition of candidates that we identify. Competition for acquisition candidates may increase purchase prices for acquisitions to levels beyond our financial capability or to levels that would not result in the returns required by our acquisition criteria. We may not be able to identify suitable acquisition candidates at economical prices, and we may not be able to compete for available acquisition opportunities.

      We may incur debt or dilute our shareholders. We may issue common or preferred stock and incur substantial indebtedness in acquiring additional businesses. Issuances of common stock in future acquisitions may dilute shareholders. We may also issue preferred stock with terms and preferences that exceed the rights of common shareholders. We may incur indebtedness in connection with acquisitions, and we cannot assure you that the operations and cash flow of the acquired entity will be sufficient to repay the debt. Finally, we may not be able to borrow funds at economical terms or issue common stock with a sufficient market price to complete the acquisitions.

      The market price of our common stock may be negatively affected due to timing and integration concerns. The size, timing, and integration cost of any future acquisitions may cause substantial fluctuations in our operating results from quarter to quarter. Consequently, operating results for any quarter may not be indicative of the results that may be achieved for any subsequent quarter or for a full fiscal year. These fluctuations could adversely affect the market price of our common stock.

      In addition to pursuing growth by acquisitions, we intend to continue to pursue a strategy of growth by introducing new services in our existing and new markets. Accomplishing these expansion goals will depend upon a number of factors, including the following:

	•	our ability to identify new markets in which we can sell our existing or additional services;
	•	our ability to hire, train, and retain qualified personnel;
	•	the timely integration of new services with existing operations;
	•	our ability to achieve adequate market penetration at favorable operating margins; and
	•	our financial resources.

      We may not be able to introduce new services on a timely or profitable basis. Moreover, the costs associated with introducing new services may adversely affect our profitability.

      As a result of these growth strategies, we expect to expend significant time and effort in introducing new services. Our systems, procedures, controls, and financial resources may not be adequate to support our expanding operations. The inability to manage our growth effectively could have a material adverse effect on our business, financial condition, and results of operations.

      Our planned growth also will impose significant added responsibilities on members of senior management and require us to identify, recruit, and integrate additional senior level managers. We may not be able to identify, hire, or train suitable additions to management.

      Our success depends, in part, on our ability to integrate the operations of the acquired businesses and other businesses we acquire in the future, including centralizing certain functions to achieve cost savings, pursuing programs and processes that promote cooperation and the sharing of opportunities and resources, developing sales and marketing programs, and retaining acquired customers. We may not be able to oversee the combined entity efficiently or to implement effectively our growth and operating strategies. To the extent

11

Table of Contents

      Our growth strategy will require us to secure significant additional capital. Our future capital requirements will depend upon the size, timing, and structure of future acquisitions and our working capital and general corporate needs. If we finance future acquisitions in whole or in part through the issuance of common stock or securities convertible into or exercisable for common stock, existing shareholders will experience dilution in the voting power of their common stock and earnings per share could be negatively impacted. The extent to which we will be able or willing to use our common stock for acquisitions will depend on the market value of our common stock from time to time and the willingness of potential sellers to accept our common stock as full or partial consideration. Our inability to use our common stock as consideration, to generate cash from operations, or to obtain funding through debt or equity financings in order to pursue our acquisition program could materially limit our growth.

      As of March 31, 2002, we had approximately $3.4 million in cash and cash equivalents, and $4.3 million available on our operating line of credit. Any borrowings made to finance future acquisitions or for operations could make us more vulnerable to a downturn in our operating results, a downturn in economic conditions, or increases in interest rates on borrowings that are subject to interest rate fluctuations. If our cash flow from operations is insufficient to meet our debt service requirements, we could be required to sell additional equity securities, refinance our obligations, or dispose of assets in order to meet our debt service requirements. In addition, our credit arrangements contain financial and operational covenants and other restrictions with which we must comply, including the maintenance of various financial ratios, limitations on capital expenditures, and the incurrence of additional indebtedness. Adequate financing may not be available if and when we need it or may not be available on terms acceptable to us. The failure to obtain sufficient financing on favorable terms and conditions could have a material adverse effect on our growth prospects and our business, financial condition, and results of operations.

      We operate in a highly competitive environment with a large number of companies competing with each of our service offerings. For example, there are approximately 1,100 providers of mortgage credit reports. While a significant number of these companies are small and operate solely on a local or regional basis, several large companies with which we compete, including The First American Corporation, CBC Companies, Inc., Equifax Credit Information Services, Inc., Fidelity National Financial, Inc., and Experian Information Solutions, Inc., have substantially greater financial, marketing, and other resources and much greater name recognition than we do.

      We do not maintain our own databases. To obtain consumer credit data, we rely on agreements with the three preeminent national credit repositories: Equifax Credit Information Services, Inc., Experian Information Solutions, Inc., and TransUnion, LLC. Substantial portions of our business depend on our ability to access consumer credit data from these credit repositories and to do so at a cost that is comparable with our competitors.

      Under each agreement, we may resell the information and reports for use solely in connection with credit granting, mortgage processing, employment screening, and resident screening, but not for insurance underwrit-

12

Table of Contents

      The agreements do not guarantee the accuracy or correctness of the information contained in the databases maintained by credit repositories, but require us to hold the repositories harmless and indemnify them from claims or liabilities arising from the use of inaccurate information contained in the databases.

      Equifax and TransUnion have the right to terminate upon one year and 60 days’ advance notice, respectively. Experian can terminate in the event of a breach by us.

      We also have service agreements with Experian covering Colorado, Wyoming, and the southern portion of Texas. Experian could terminate any of the agreements on at least six months’ notice before the end of the initial 10-year term or before the end of any succeeding one-year term.

      In view of our dependence on these three credit repositories for our consumer credit data, substantial harm to our business would result if any of these three repositories, for whatever reason, were to terminate any of these agreements and we were unable to enter into an acceptable replacement agreement. In addition, any substantial increase in the prices we pay these repositories for consumer credit data that we cannot pass through to our customers could have a material adverse impact on our results of operations and our ability to compete.

      As of March 31, 2002, we had outstanding approximately $18.0 million of indebtedness, including approximately $1.7 million under our operating line of credit, $10.3 million under capital lease obligations, and approximately $6.0 million under notes payable from acquisitions. We may incur additional indebtedness in the future to finance acquisitions, expand our service offerings, or make capital expenditures. Our current credit facilities contain, and any additional credit facilities can be expected to contain, restrictive financial, operational, and other covenants.

      Our level of debt could have a number of negative consequences, including the following:

	•	requiring us to dedicate a substantial portion of our cash flow from operations to repayment of debt, thereby limiting the availability of cash for other purposes;
	•	increasing our vulnerability to adverse economic conditions or worsening operating results by making it more difficult to borrow additional funds to maintain our operations;
	•	hindering our flexibility in planning for or reacting to changes in our business and industry by preventing us from borrowing money to expand our business or upgrade our equipment or facilities; and
	•	limiting or impairing our ability to obtain financing in the future for working capital, capital expenditures, acquisitions, or general corporate purposes.

      Concerns about individual privacy and the collection, distribution, and use of information about individuals have led to substantial governmental regulation of the credit reporting industry. The credit reporting industry is regulated under the federal Fair Credit Reporting Act, or FCRA, and by legislation in many states. The credit reporting industry has been subject to increased legislative attention. Bills are pending in various state legislatures that are generally intended to regulate how personal information is used. While we do not believe that any of the proposed state bills, if passed as currently drafted, would have a material adverse effect on us, there can be no assurance that pending or additional federal or state consumer-oriented legislation will not significantly limit demand for, or increase the costs of, certain of our services. Under general legal

13

Table of Contents

      Mortgage originators and secondary mortgage market participants, including Fannie Mae and Freddie Mac, require that any mortgage originated or purchased be supported by a credit report on the mortgagee that is prepared by an independent entity, such as us. A number of the larger mortgage originators and purchasers are increasingly using automated credit reporting techniques that require credit report providers to render almost instantaneous responses, often within 60 seconds or less. We may not be able to continue to provide the level of performance required by these or other large institutions. Additionally, we may not be able to match the level of technological service provided, or developed in the future, by competitors. We also recently introduced a program under which we guarantee to complete line item verifications and updates on our mortgage credit reports within four hours of a request, or the service is free of charge. Our inability to meet the guaranty could adversely affect our revenue and harm our reputation in the industry.

      In order to provide mortgage credit reports to a growing number of our customers, we rely on access to the automated underwriting systems owned and maintained by Fannie Mae and Freddie Mac, which are the two largest participants in the secondary mortgage market. We receive this access through agreements with Fannie Mae and Freddie Mac. As a result of these agreements, we depend to a great extent on the success of the Fannie Mae and Freddie Mac automated underwriting systems, which currently constitute a relatively small but growing portion of all conforming mortgage originations. There can be no assurance that Fannie Mae and Freddie Mac will continue or expand these programs, maintain current cost structures, or determine not to impose additional procedures or requirements.

      Fannie Mae has the right to terminate the agreement at any time for any reason upon 60 days’ notice. Fannie Mae also may terminate the agreement in the event of our bankruptcy, insolvency, or breach. Freddie Mac has the right to terminate the agreement in its sole discretion upon 30 days’ notice. The termination of either agreement, and the denial of our access to Fannie Mae’s and Freddie Mac’s systems, would have a major detrimental impact on our ability to provide automated mortgage credit reports.

      Any hardware or software malfunction, loss of telecommunications capabilities, or other operational interruptions at either of our data centers for more than a short period of time could adversely affect our ability to service our customers. Although we maintain redundant systems and backups in and between our two data centers, we remain subject to the consequences of power loss, internal or external telecommunications failures, fire, and various natural disasters.

      We rely on trademark and copyright laws, trade secret protection, and confidentiality and other agreements with our employees, customers, and others to protect our intellectual property. However, some of our intellectual property and our technological know-how is not protected and, despite our precautions, it may be possible for third parties to use our intellectual property and know-how without authorization from us. We may not be successful in protecting our proprietary rights and know-how. Any infringement of any of our

14

Table of Contents

      Our success depends, in large part, upon the continuing efforts and abilities of our executive officers, particularly our Chief Executive Officer, J. H. Donnan. We do not have an employment agreement with Mr. Donnan or any of our other executive officers or key personnel. In addition, we likely will depend on the key management of any significant businesses we acquire in the future. The loss of the services of one or more of our key employees before we are able to attract and retain qualified replacement personnel could adversely affect our business.

      Our articles of incorporation and bylaws contain provisions that may have the effect of making more difficult, discouraging, or delaying attempts by others to obtain control of our company, even when these attempts may be in the best interests of our shareholders. These provisions include the following:

	•	the ability of our Board of Directors to issue authorized but unissued common and preferred stock without action by our shareholders;
	•	a classified Board of Directors, which provides for the election of directors for three-year terms, with approximately one-third of the Board of Directors standing for election each year;
	•	limitations on alteration of the classified Board provisions and the ability of shareholders to remove directors; and
	•	the requirement to obtain the affirmative vote of the holders of at least two-thirds of our capital stock to approve a merger, dissolution, or sale of all or substantially all of our assets.

      Our intangible assets are recorded at cost less accumulated amortization and consist of customer lists, goodwill, covenants not-to-compete, license agreements, intellectual property, and loan origination costs. Through December 31, 2001, customer lists and goodwill were amortized using the straight-line method over 15 years; and covenants not-to-compete and license agreements were amortized over the life of the agreements, which ranged from three to 10 years; intellectual property was amortized from 13 to 15 years; and loan origination costs were amortized over the loan term.

      In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” SFAS 142 provides that goodwill and certain intangibles no longer will be amortized, but instead will be tested for impairment at least annually. In the event that we determine our intangible assets have been impaired, we must record a write-down of those assets on our statement of operations during the period of impairment. Our determination of impairment will consider various factors, including the following:

	•	significant underperformance relative to expected historical or projected future operating results;
	•	significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
	•	significant negative industry or economic trends;
	•	significant decline in our stock price for a sustained period; and
	•	our market capitalization relative to net book value.

      We plan to adopt SFAS 142 during fiscal 2002, and we may incur future impairments of our intangible assets or goodwill upon adoption.

15

Table of Contents

      In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS 144 requires the recognition of an impairment loss if the carrying amount of a long-lived assets is not recoverable from their undiscounted cash flows and measures the impairment loss as the difference between the carrying amount and fair value of the assets.

      We expect to continue to amortize our customer lists and intellectual property over the same time periods as previously used. These recent accounting pronouncements, however, require the testing of our intangible assets for impairment at least once each year. In addition, we are required to assess the consumptive life, or longevity, of our intangible assets and adjust their amortization periods accordingly. Our net intangible assets were recorded on our balance sheet at approximately $28.7 million as of December 31, 2001, and we expect the carrying value of net intangible assets will increase significantly as we acquire additional businesses. Any impairments in future periods of those assets, or a reduction in their consumptive lives, could materially and adversely affect our statement of operations and financial position.

      Our directors and executive officers and persons associated with them beneficially own a total of approximately 57.5% of the issued and outstanding shares of our common stock. As a result of this ownership, these persons have the power to control our company, including the election of directors, the determination of matters requiring shareholder approval, and other matters pertaining to corporate governance. This concentration of ownership also may have the effect of delaying or preventing a change in control of our company.

      The market price of our common stock could be subject to wide fluctuations as a result of many factors, including the following:

	•	variations in quarterly operating results;
	•	amortization and possible impairment of the carrying value of our intangible assets;
	•	the level and success of our acquisition program and new service offerings;
	•	the success of our integration of acquisitions;
	•	changes in earnings estimates published by analysts;
	•	the level of interest rates;
	•	general economic, political, market, and industry conditions;
	•	seasonality and weather conditions;
	•	governmental policies and regulations;
	•	industry performance in general;
	•	factors relating to suppliers, customers, and competitors; and
	•	recruitment or departures of key personnel.

      In addition, the relatively few number of shares held by the public, periodically weak market demand for small-and mid-capitalization stocks, and price and volume fluctuations in the stock market unrelated to our performance could result in significant fluctuations in the market price of our common stock. The performance of our common stock could adversely affect our ability to raise equity in the public markets and adversely affect our acquisition program.

      The issuance of additional common or preferred stock in the future, including shares that we may issue pursuant to exercise of outstanding options or warrants and future acquisitions, may result in dilution in the net

16

Table of Contents

      Substantial sales of our common stock in the public market, including shares issued upon the exercise of outstanding options and warrants, or the perception that these sales could occur, may have a depressive effect on the market price of our common stock and could impair our ability to raise capital or make acquisitions through the issuance of equity securities. As of March 31, 2002, there were 6,119,893 shares of our common stock outstanding. Of these shares, 2,650,650 are freely tradable without restriction or further registration under the securities laws and 3,469,243 shares are held by directors, officers, and other affiliates of our company. We have registered for resale 1,669,243 shares held by affiliates of two of our directors. The remaining balance of shares held by our directors, officers and other affiliates are subject to the resale limitations of Rule 144 described below. In addition, approximately 880,000 shares issuable upon the exercise of options and warrants outstanding as of March 31, 2002 may become available for sale in the public markets.

      In general, under Rule 144 adopted under the Securities Act, any person that beneficially owns restricted securities for one year and any person deemed to be an affiliate of our company is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (1) 1% of the then outstanding shares of common stock of our company or (2) the average weekly trading volume in common stock during the four calendar weeks preceding such sale. A person that is not an affiliate and has held restricted securities for at least two years is entitled to sell such shares without any limitations.

Item 2.     Properties

      Our corporate offices are located in two buildings in Loveland, Colorado. We have 20-year operating leases for 32,086 square feet of space in one building and 19,349 square feet in the other. We anticipate the two spaces will be adequate to meet our office requirements for the foreseeable future. We also hold six operating leases for our regional offices, most of which are not material and none of which has a term exceeding ten years.

Item 3.     Legal Proceedings

      We are not a party to any legal proceedings except those in the ordinary course of our business. We believe there is no proceeding threatened or pending against us which, if determined adversely, would have a material adverse effect on our financial condition or results of operations.

Item 4.     Submission of Matters to a Vote of Security Holders

      No matters were submitted by us to a vote of our security holders during the fourth quarter of our fiscal year ended December 31, 2001.

Item 5.     Market for Registrant’s Common Equity and Related Shareholder Matters

      Our common stock is quoted on the Nasdaq National Market under the symbol “FDCC.” The following table sets forth, for the periods indicated, the high and low sales prices of our common stock as reported on the Nasdaq National Market:

17

Table of Contents

      On April 12, 2002, the last reported sales price of our common stock as reported on the Nasdaq National Market was $7.25 per share. As of April 12, 2002, there were 33 holders of record of our common stock and approximately 600 beneficial owners of our common stock.

      We have not paid or declared cash distributions or dividends on our common stock and do not intend to pay cash dividends in the foreseeable future. Our bank credit facility has customary restraints on our ability to pay cash dividends. Any cash dividends in the future will be determined by our Board of Directors based on our earnings, financial condition, capital requirements, and other relevant factors.

Item 6.     Selected Financial Data

      The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere in this report. The consolidated statements of operations data for the years ended December 31, 1997, 1998, 1999, and 2000 and the consolidated balance sheet data as of December 31, 1997, 1998, 1999, and 2000 are derived from our consolidated financial statements, which have been audited by Ehrhardt Keefe Steiner & Hottman PC, our former independent public accountants. The consolidated statements of operations data for the year ended December 31, 2001 and the consolidated balance sheet data as of December 31, 2001 are derived from our consolidated financial statements, which have been audited by BDO Seidman LLP, our independent public accountants, as

18

Table of Contents

(1)	Acquisition consolidation costs include charges for items such as recruiting fees, salaries, and travel costs from the consolidation and relocation of the acquired companies’ operations to our regional processing centers.

19

Table of Contents

(2)	Branch-efficiency costs consist primarily of future operating lease payments for office space, telecommunications and office equipment, leasehold improvements, furniture, and equipment.
(3)	During fiscal 2000, we elected to change our method of evaluating intangible assets from an undiscounted cash flow approach to a discounted cash flow approach, resulting in a one-time charge of approximately $11.8 million. See note 3 to our consolidated financial statements.

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

      You should read the following discussion and analysis in conjunction with our audited consolidated financial statements, including the notes thereto contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including the special considerations set forth in Item 1 and elsewhere in this report.

Overview

      We provide a wide range of customized information services to businesses across the United States that assist them in making critical decisions, such as determining whether to make a mortgage or other loan, offer employment, accept new tenants, or enter into a business relationship. We specialize in providing customized mortgage credit reports and other mortgage related services, consumer credit reports, employment screening, resident screening, and commercial credit reports. Our customers include mortgage lenders and independent mortgage brokers, consumer lenders, employers, property managers, and other business customers desiring information regarding creditworthiness and other matters. We believe we are an industry leader in delivering our service offerings over the Internet and in utilizing technology and focusing on customer service to provide our services with the speed, reliability, accuracy, and customization that industry participants increasingly demand.

Critical Accounting Policies

      We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported and expected financial results.

      In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective, and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

      We recognize revenue when the mortgage credit report or other information, collectively a “unit,” has been delivered to the customer, persuasive evidence of the terms of the arrangement exists, our fee is fixed and determinable, and collectibility is reasonably assured. Delivery usually takes place electronically and revenue is recognized when the customer has access to the data. Our “4 Hours or It’s Free” guarantee applies to line-item verifications and updates on our reports. We do not recognize revenue on services subject to the guarantee until the guarantee conditions are met. The fees we charge our customers are based on the type of unit delivered. We do not receive upfront set up fees or other upfront fees from our customers. Our cost of services primarily includes data costs, which are expensed when the unit is delivered to the customer.

20

Table of Contents

      We assess the impairment of identifiable intangible assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include the following:

	•	significant underperformance relative to expected historical or projected future operating results;
	•	significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
	•	significant negative industry or economic trends;
	•	significant decline in our stock price for a sustained period; and
	•	our market capitalization relative to net book value.

      Until our adoption of SFAS No. 142 discussed below, when we determine that the carrying value of other intangible assets and goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by us to be commensurate with the risk inherent in our current business model. Other intangible assets and net goodwill amounted to $28.7 million as of December 31, 2001.

      In 2002, Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” became effective. As of December 31, 2001, the net carrying amount of goodwill of $168,000 will no longer be amortized and will be subject to impairment testing under SFAS No. 142. In lieu of amortization, we are required to perform an initial impairment review of our goodwill in 2002 and an annual impairment review thereafter. We are currently assessing, but have not yet determined, how the adoption of SFAS No. 142 will impact our financial position and results of operations. Other intangible assets with a carrying amount of $28.5 million at December 31, 2001 will be subject to the amortization methods prescribed by SFAS No. 142.

      We estimate the uncollectability of our accounts receivable. We specifically analyze accounts receivable, historical bad debts, customer concentrations, customer creditworthiness, current economic trends, and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Material differences may result in the amount and timing of expenses for any period if we made different judgments or utilized different estimates. Our accounts receivable was $6.2 million as of December 31, 2001, and our allowance for doubtful accounts was $244,000 as of December 31, 2001.

      As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes. This process involves estimating our current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our consolidated balance sheet.

      Significant judgment is required in determining our provision for income taxes and deferred tax assets and liabilities. We recorded a net deferred tax asset of approximately $3.9 million at December 31, 2001, of which approximately $3.8 million related to intangible assets. We believe that it is more likely than not that the deferred tax assets will be realized from the generation of future taxable income. Although the deferred tax asset is considered realizable, actual amounts could be reduced, and charged against our results from operations in future periods, if we do not generate sufficient future taxable income.

      We capitalize costs, which include primarily salaries in connection with developing software for internal use. We use judgment in determining whether development costs meet the criteria for immediate expense or

21

Table of Contents

Business Segments

      We classify our business operations into three reporting segments: mortgage services, consumer services, and other services. Historically, we have derived most of our revenue from mortgage services, with our primary service in this segment being our mortgage credit reports. Through our consumer services business, we generate revenue primarily from the delivery of consumer credit reports. Our other services consist of resident and employment screening services.

Results of Operations

      Revenue, cost of services, and cost of services as a percent of revenue for our operating segments for the periods indicated are as follows (in thousands):

      Total revenue increased $19.9 million, or 63.6%, from $31.3 million in 2000 to $51.2 million in 2001.

      Mortgage services revenue increased $17.0 million, or 66.4%, from $25.6 million in 2000 to $42.6 million in 2001 as a result of our ability to obtain new business from national accounts and independent mortgage brokers, acquisitions in key market areas, continued advances in our technology, and a favorable mortgage environment, which fueled demand for our mortgage services.

      Consumer services revenue increased $3.3 million, or 103.1%, from $3.2 million in 2000 to $6.5 million in 2001 as a result of the benefit of a full year of business in all three Experian territories and the addition of new customers in these territories.

      Other services revenue decreased $300,000, or 12.0%, from $2.5 million in 2000 to $2.2 million in 2001. This overall decrease consisted of a $453,000 increase in resident and employment screening services as a result of the development of new customers, offset by a $753,000 decrease as a result of our termination of a resident screening agreement.

      Cost of services are direct operational costs and consist of data costs, salaries, and telecommunications costs. Total cost of services increased $11.5 million, or 62.8%, from $18.3 million in 2000 to $29.8 million in 2001. These costs are primarily variable costs, which tend to fluctuate with changes in revenue, but tend to remain fairly consistent as a percentage of revenue. As a percentage of revenue, cost of services decreased from 58.5% in 2000 to 58.2% in 2001.

22

Table of Contents

      Mortgage cost of services increased $8.9 million, or 57.8%, from $15.4 million in 2000 to $24.3 million in 2001 as a result of our increased revenue. However, as a percentage of revenue, mortgage cost of services decreased from 60.3% in 2000 to 57.1% in 2001 as a result of lower data costs and our ability to use our technology to reduce salary costs.

      Consumer cost of services increased $2.0 million, or 105.3%, from $1.9 million in 2000 to $3.9 million in 2001 as a result of increased revenue. As a percentage of revenue, these costs remained fairly consistent, increasing from 59.0% in 2000 to 59.8% in 2001.

      Other cost of services increased $712,000, or 72.1%, from $988,000 in 2000 to $1.7 million in 2001 and increased as a percentage of revenue from 39.2% in 2000 to 75.5% in 2001. This increase was due to our implementation of a new marketing call center for other services during the fourth quarter of 2000 and our termination of a resident screening agreement.

      Selling, general, and administrative expenses increased $1.2 million, or 14.8%, from $8.1 million in 2000 to $9.3 million in 2001. As a percentage of revenue, these costs decreased from 26.0% to 18.1%, a 7.9% reduction. We expect selling, general, and administrative expenses to increase in the aggregate as we grow our business. However, these expenses should tend to decrease as a percentage of revenue as we integrate acquisitions and lower our costs through continued technological advances.

      Depreciation and amortization decreased $500,000 or 12.2%, from $4.1 million in 2000 to $3.6 million in 2001. This decrease reflected the impact on amortization of the $11.8 million write-down of intangible assets in 2000. The adjustment was the result of our election to change our accounting policy in assessing our intangible assets from a policy based upon undiscounted cash flows to a policy that utilizes discounted cash flows. We believed that the use of a discounted methodology was preferable and was consistent with the methodology we utilized in assessing acquisition opportunities.

      Acquisition consolidation costs decreased $444,000, or 73.8%, from $602,000 in 2000 to $158,000 in 2001. This decrease was due primarily to the fewer number of acquisitions in 2001 than in 2000. These costs included consolidation charges for items such as recruiting fees, salaries, and travel costs for the consolidation and relocation of the acquired companies to our regional processing centers.

      In 2001, we recorded a $170,000 reduction in our previous estimate of branch efficiency costs of $3.0 million in 2000. The branch efficiency costs in 2000 consisted primarily of future operating lease payments for office space, telecommunications and office equipment, leasehold improvements, furniture, and equipment.

      In 2000, we recorded an impairment adjustment to intangible assets of $11.8 million because of a change in accounting policy. In 2001, we did not have any impairment adjustment.

      Interest expense increased $700,000, or 46.7%, from $1.5 million in 2000 to $2.2 million in 2001. This increase primarily was due to a full year of interest recognized under our $10.3 million Experian capitalized lease agreements during 2001.

      Income tax expense was $2.7 million in 2001 compared to an income tax benefit of $5.6 million in 2000. Our effective tax rate was 39.1% for 2001.

      As a result of the foregoing factors, net income in 2001 was $4.1 million, or $0.71 per diluted share, compared to a net loss of $10.2 million, or $1.89 per diluted share, in 2000.

      Our EBITDA (earnings before interest, taxes, depreciation, and amortization but excluding branch efficiency costs and an impairment adjustment to intangible assets), was $12.5 million in 2001 compared to $4.7 million in 2000, a $7.8 million, or a 165.9%, increase over 2000. EBITDA should not be considered as an alternative to net income, an indicator of operating performance, an alternative to cash flow, a measure of liquidity, or an ability to service debt obligations. EBITDA is not in accordance with, or superior to, accounting principles generally accepted in the United States, but it provides additional information for evaluating our operating performance. We believe EBITDA is a useful financial metric for evaluating our business.

23

Table of Contents

      Revenue, cost of services, and cost of services as a percent of revenue for our operating segments for the periods indicated are as follows (in thousands):

      Total revenue increased $5.5 million, or 21.3%, from $25.8 million in 1999 to $31.3 million in 2000.

      Mortgage services revenue increased $1.9 million, or 8.0%, from $23.7 million in 1999 to $25.6 million in 2000 primarily as a result of the full-year impact of acquisitions in 1999 and the partial year impact of acquisitions in 2000 as well as our ability to obtain new business from national accounts and independent mortgage brokers. These acquisitions contributed to our ability to increase revenue despite the overall market decline in mortgage originations in 2000.

      Consumer services revenue in 2000 was $3.2 million. We did not generate any consumer services revenue in 1999. During May 2000, we entered into our first lease agreement with Experian covering the state of Colorado.

      Other services increased $400,000, or 19.0%, from $2.1 million in 1999 to $2.5 million in 2000. This increase was primarily due to the commencement of a resident screening agreement.

      Total cost of services increased $2.9 million, or 18.8%, from $15.4 million in 1999 to $18.3 million in 2000. These costs are primarily variable costs, which tend to fluctuate with changes in revenue, but remain fairly consistent as a percentage of revenue. As a percentage of revenue, cost of services decreased 1.1% from 59.6% in 1999 to 58.5% in 2000.

      Mortgage cost of services increased $1.3 million, or 9.2%, from $14.1 million in 1999 to $15.4 million in 2000 as a result of increased revenue. However, as a percentage of revenue, mortgage cost of services increased slightly from 59.5% in 1999 to 60.3% in 2000 as a result of duplicate system costs, extra salary costs, and higher data costs incurred during the conversion period of acquisitions.

      Consumer cost of services were $1.9 million in 2000. We entered into our first Experian lease agreement in May 2000; therefore, we did not incur any consumer cost of services in 1999.

      Other cost of services decreased $312,000, or 24.0%, from $1.3 million in 1999 to $988,000 in 2000 and decreased as a percentage of revenue from 61.4% in 1999 to 39.2% in 2000, primarily as a result of the commencement of a resident screening agreement.

      Selling, general, and administrative expenses increased $3.2 million, or 65.3%, from $4.9 million in 1999 to $8.1 million in 2000. As a percentage of revenue, these costs increased from 19.0% in 1999 to 26.0% in 2000. This increase related to costs associated with building our corporate and regional processing centers and our technology infrastructure.

      Depreciation and amortization increased $1.4 million, or 51.8%, from $2.7 million in 1999 to $4.1 million in 2000. The increase reflected a full year of amortization expense for the 19 acquisitions made in 1999 as well as the incremental amortization expense for the four acquisitions made in 2000.

24

Table of Contents

      Acquisition consolidation costs decreased $598,000, or 49.8%, from $1.2 million in 1999 to $602,000 in 2000. This decrease was primarily due to the fewer number of acquisitions in 2000 than in 1999. These costs include consolidation charges for items, such as recruiting fees, salaries, and travel costs for the consolidation and relocation of the acquired companies to our regional processing centers.

      Branch efficiency costs for the year 2000 were $3.0 million. We did not incur any branch efficiency costs in 1999 (see note 5 to our consolidated financial statements). The branch efficiency costs consisted primarily of future operating lease payments for office space, telecommunications and office equipment, leasehold improvements, furniture, and equipment.

      During 2000, we recorded an impairment adjustment to intangible assets of $11.8 million (see note 3 to our consolidated financial statements). This charge resulted from an election to change our method of evaluating intangible assets during the fourth quarter of 2000 from an undiscounted cash flow approach to a discounted cash flow approach. The discount rate we use in evaluating our intangible assets is based on the weighted average cost of capital for companies in our industry in addition to other internal and external factors. We historically had followed an undiscounted cash flow approach in evaluating the recoverability of our intangible assets, consistent with the provisions of Statement of Financial Accounting Standard (SFAS) No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.”

      Interest expense increased $962,000 or 166.0%, from $580,000 in 1999 to $1.5 million in 2000. This increase was due to additional notes payable issued in connection with our acquisitions and the addition of two Experian capitalized lease agreements in 2000.

      We recorded an income tax benefit of $5.6 million in 2000 compared to an income tax expense of $525,000 in 1999. The tax benefit in 2000 was due primarily to branch efficiency costs and the impairment adjustment to intangible assets.

      As a result of the foregoing factors, net loss in 2000 was $10.2 million, or $1.89 per diluted share, compared to net income of $659,000, or $0.13 per diluted share, in 1999.

      Our EBITDA (earnings before interest, taxes, depreciation, and amortization but excluding branch efficiency costs and an impairment adjustment to intangible assets), was $4.7 million in 2000 compared to $4.5 million in 1999. EBITDA should not be considered as an alternative to net income, an indicator of operating performance, an alternative to cash flow, a measure of liquidity, or an ability to service debt obligations. EBITDA is not in accordance with, or superior to, accounting principles generally accepted in the United States, but it provides additional information for evaluating our operating performance. We believe EBITDA is a useful financial metric for evaluating our business.

25

Table of Contents

Quarterly Results of Operations

      The following table presents selected consolidated financial information for each of our last eight fiscal quarters. The information has been derived from unaudited consolidated financial statements that, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the quarterly information. The operating results for any quarter are not necessarily indicative of the results for any subsequent quarter.

26

Table of Contents

      The following table sets forth selected consolidated financial information as a percentage of total revenue for each of our last eight fiscal quarters.