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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

For the fiscal year ended December 31, 2002

Commission File No. 0-24205
     

Factual Data Corp.
(Exact name of Registrant as specified in its charter)

5200 Hahns Peak Drive, Loveland, Colorado 80538
(Address of principal executive offices) (Zip code)

(970) 663-5700
(Registrant’s telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)

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

     Indicate by check mark 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. x

     The aggregate market value of the voting stock held by non-affiliates of the registrant on March 3, 2003, was approximately $26 million based upon the reported closing sale price of such shares on the Nasdaq National Market for that date. As of March 3, 2003, there were 6,190,884 shares outstanding of which 2,721,641 were held by non-affiliates.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

     State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $39,097,000

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant’s Proxy Statement to be filed with the Commission in connection with the Annual Meeting of Shareholders scheduled to be held on May 2, 2003 are incorporated by reference into Part III of this Report on Form 10-K.

The exhibit index appears on page E-1.

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FACTUAL DATA CORP.
2002 ANNUAL REPORT ON FORM 10-K

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STATEMENT UNDER THE SECURITIES LITIGATION REFORM ACT OF 1995

     This annual report on Form 10-K contains forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are not historical facts and constitute or rely upon projections, forecasts, assumptions or other forward-looking information. Generally these statements may be identified by the use of forward-looking words or phrases such as “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates,” “may,” and “should.” These statements are inherently subject to known and unknown risks, uncertainties and assumptions. Our future results could differ materially from those expected or anticipated in the forward-looking statements. Specific factors that might cause such differences include factors described and discussed in the description of our business in Item 1 and in our management’s discussion and analysis of financial condition and results of operations in Item 7 of this report.

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PART I

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 direct information vendors for Freddie Mac’s automated underwriting system and one of 12 approved direct information 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. Our technology 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 to our acquisition of these businesses, the businesses had found it increasingly 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.

     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 related information service businesses. Further, we developed our resident screening, employment screening, and commercial credit information businesses internally. We expanded into the consumer credit reporting 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 services providers, such as credit card issuers and home equity line of credit lenders.

     In 2002, we launched FDinsight, to offer consumers advanced background information about people and companies that affect them professionally and personally. We also created our Direct Lender Services Division in 2002 to focus on offering our web-based technology platform to banks, credit unions and lenders in the home equity, home improvement and second mortgage market. We grew our business in 2002 by acquiring three of our mortgage credit reporting franchises, increasing our corporate territory in Florida, Kansas and Pennsylvania. We established new relationships with other mortgage industry leaders, AppIntell, Basis100, FNC and Ocwen; and a non-mortgage industry leader, RentRight. Our ‘4 Hours or It’s Free’ guarantee program was implemented in 2002 to provide clients with a guaranteed four-hour turnaround on online customer service update requests. Furthermore, in 2002 we launched services aimed at the mortgage backed securities market via portfolio services.

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Our Services

     We specialize in gathering data from a wide range of sources, adding value by updating and 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

Consumer and Commercial Information Services

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Resident Screening Services

Employment Screening Services

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Our Acquisition Program

     We have acquired 37 information service businesses since 1998, 13 of which were system affiliates (i.e., former franchisees or licensees). 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 integrating the acquired 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 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
	•		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.

     In addition to the initially received report, our customers require additional data, verifications and updated information on 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.

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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 handle additional volume without a commensurate increase in costs, and enhance the speed, reliability, customization, and user-friendliness of our service offerings. Over the past six years, we have invested significant management attention, personnel, and more than $7.5 million on proprietary computer software, state-of-the-art hardware, and communications systems. We employ 51 technical staff, 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 50,000 transactions 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 the technology centers against damage from fire, power loss, telecommunications failure, natural disasters, and similar occurrences. Despite our precautionary backup power and duplicate telecommunication facilities, we could experience a natural disaster, hardware or software malfunction, or other interruption of technology center operations. Extended interruptions in our services could be significantly detrimental, and our insurance may not be adequate to compensate us for all resulting losses.

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 centers, 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.

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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 Information Services, 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 which operate on a local or regional basis.

     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 adverse 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 that do not have a permissible purpose 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.

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     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 2002.

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 23 national account representatives and 54 sales representatives managed by 8 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

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			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 to sell consumer credit reporting services 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 restrict 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 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 upon 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 offered licensing agreements that permit licensees to use our systems to service their own customers in return for a percentage of their gross billings. We discontinued executing license agreements and franchise 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 2002, system affiliates provided 2.0% of our gross revenue compared to 2.5% in 2001. We expect revenue from system affiliates will decline over time since the number of system affiliates will likely decline.

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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 March 3, 2003, we employed 273 people on a full-time and 7 people on a part-time basis. Of our full-time employees, 13 are involved in administration, 32 in finance and accounting, 82 in sales and marketing, 51 in technology and systems, and 95 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.

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:

A decrease in demand for mortgage credit reports will likely decrease our earnings.

     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 labor, and communication charges, during a period of reduced demand.

Our diversification efforts may be unsuccessful.

     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

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acquire attractive mortgage-related businesses, we intend to do so. Accordingly, our dependence on the mortgage industry may increase.

Our acquisition strategy involves significant risks, including a drain on our resources, unforeseen expenses, increased competition for acquisitions, additional debt, shareholder dilution, and a lower stock price.

     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 encountered in connection with rapid expansion through acquisitions could inhibit our growth and negatively impact our profitability.

     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.

Our internal growth and operating strategies involve risk.

     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 on 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.

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     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.

We must integrate the operations of acquired businesses.

     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 that we successfully implement our acquisition strategy, our resulting growth will place significant additional demands on our management and infrastructure. Our failure to implement successfully our strategies or operate effectively the combined entity could have a material adverse effect on our business, financial condition, and results of operations. These effects could include lower revenue; higher cost of sales; increased selling, general, and administrative expenses; and reduced margins.

We may require significant additional capital to expand our business.

     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 December 31, 2002, we had approximately $7.8 million in cash and cash equivalents, and $6.0 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 may not be successful in implementing our business strategy due to the significant competition we face.

     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 Information Services, Inc., and Experian Information Solutions, Inc., have substantially greater financial, marketing, and other resources and much greater name recognition than we do.

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Our agreements with the three preeminent credit repositories have limited scope, can be cancelled on short notice, allow for unspecified future price increases, and expose us to claims and liabilities from the use of inaccurate information.

     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 underwriting, collections, or governmental licensing transactions. Under each agreement, we may also disclose the credit information to a consumer who is denied a benefit and requests disclosure. In addition, the Experian and TransUnion agreements permit the use of the information in connection with a legitimate business transaction involving the consumer.

     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.

Our indebtedness could adversely affect our financial position and limit our ability to expand our business.

     As of December 31, 2002, we had outstanding approximately $14.8 million of indebtedness, including $8.4 million under capital lease obligations, and approximately $6.4 million under bank debt and 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.

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Our business is subject to governmental regulation, increasing concern about privacy issues, and legal considerations.

     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 concepts and, in some instances, under specific federal and state statutes, we could be held liable to customers or to the subjects of credit reports prepared by us for inaccurate information or misuse of information. We maintain internal policies designed to help assure that credit information retrieved by us is accurate and complies with provisions of the FCRA. We may not be able to defend successfully any claims made against us, and insurance may not cover any such claims. Uninsured losses from such claims might arise that could adversely impact our operations and financial condition.

We may not be able to meet the automated level of performance required by some of our larger customers and strategic relationships, and the agreements we have with Fannie Mae and Freddie Mac can be cancelled on short notice.

     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.

     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,

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we remain subject to the consequences of power loss, internal or external telecommunications failures, fire, and various natural disasters.

We depend on our intellectual property and technological know-how, and our failure to protect that intellectual property or advance our know-how could have an adverse effect on our business.

     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 intellectual property rights or third-party use of our know-how could have an adverse effect on our ability to operate successfully.

We depend on key personnel.

     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, bylaws, and Colorado law could make it more difficult for a third party to acquire us.

     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.

We must evaluate our intangible assets annually for impairment.

     Our intangible assets are recorded at cost less accumulated amortization. Customer rights and customer lists are amortized using the straight-line method over 15 years, and non-compete agreements and franchise agreements are amortized using the straight-line method over the life of the agreements, which extend from three to ten years. Our license agreements to access information are amortized using the ratio of the units accessed over the ten year initial term of the agreement. Our intellectual property is amortized using the straight-line method over 13 to 15 years and loan origination costs are amortized using the straight-line method 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:

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	•		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 adopted SFAS 142 during 2002, and although we did not recognize any impairment upon such adoption, we may incur impairments of our intangible assets or goodwill in the future.

     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 $27.8 million as of December 31, 2002, and we expect the carrying value of net intangible assets will increase significantly as we acquire additional businesses. Any impairments of those assets in future periods, or a reduction in their consumptive lives, could materially and adversely affect our statement of operations and financial position.

Directors, officers, and certain other shareholders own a significant portion of our common stock.

     Our directors and executive officers and persons associated with them beneficially own a total of approximately 56.7% 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.

Our stock price may be volatile.

     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.

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Shareholders may incur immediate and substantial dilution.

     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 tangible book value per share of our common stock. Our Board of Directors has the power and authority to determine the terms of an offering of shares of our capital stock, or securities convertible into or exchangeable for these shares, to the extent of our shares of authorized and unissued capital stock.

Sales of large number of shares could adversely affect the price of our common stock.

     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 3, 2003, there were 6,190,884 shares of our common stock outstanding. Of these shares, 2,721,641 are freely tradable without restriction or further registration under the securities laws and directors, officers, and other affiliates of our company hold 3,469,243 shares. 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 744,944 shares issuable upon the exercise of options and warrants outstanding as of March 3, 2003 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.

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PART II

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

     We held our 2002 Annual Meeting of Shareholders on November 1, 2002. The following matters were acted upon at the meeting:

	•		we elected two members to our Board of Directors to serve three year terms and until their successors are elected and qualified;
	•		we considered and approved a proposal to amend our Articles of Incorporation to increase the number of authorized shares of our common stock from 10,000,000 to 50,000,000 shares;
	•		we considered and approved a proposal to increase the number of shares reserved for issuance under our 1999 Employee Formula Award Stock Option Plan from 400,000 to 600,000 shares; and
	•		we ratified the appointment of BDO Seidman, LLP as our independent public accountants for the fiscal year ending December 31, 2002.

     The results of voting on these matters at the meeting were as follows:

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

     General

     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:

     On March 3, 2003, the last reported sales price of our common stock as reported on the Nasdaq National Market was $9.45 per share. As of March 3, 2003, there were 39 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

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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.

     Equity Compensation Plan Information

     The following sets forth information as of March 17, 2003 concerning compensation plans (including individual compensation arrangements) under which shares of our common stock are authorized for issuance:

Equity Compensation Plan Information

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, 1998, 1999 and 2001 and the consolidated balance sheet data as of December 31, 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 years ended December 31, 2001 and 2002 and the consolidated balance sheet data as of December 31, 2001 and 2002 are derived from our consolidated financial statements, which have been audited by BDO Seidman, LLP, our independent public accountants, as indicated in their report included herein. The selected financial data provided below is not necessarily indicative of our future results of operations or financial performance.

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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.

     While capitalizing on the favorable mortgage market environment, we have also successfully garnered new market share in our non-mortgage business lines. Revenue in our non-mortgage divisions increased 19 percent over 2001 results, emphasizing our ability to grow in new markets in less than favorable market conditions.

     In our mortgage-based division, dramatic increases in flood zone determinations, as well as increases in fraud detection products and automated property valuation services outlined the successful launch of new lines through our industry leading delivery channel, www.factualdata.com. Additionally, we achieved $7 million in new revenue growth over 2001 from new or expanded major account relationships thanks to our national/major account marketing team, our technological superiority and our ‘Four Hours or It’s Free’ guarantee.

     We have also been successful in reaching new markets for our current products with the successful launch of our services aimed at the mortgage backed securities market via our industry leading portfolio services, as well as the launch of our direct lender services division and our recently announced relationship with Bankers Systems.

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     We have successfully increased our margins by decreasing our cost of services sold as a percentage of revenue. We increased our revenue through national account growth and new products, resulting in dilution to many of our fixed expenses as well as volume generated discounts on variable expenses. Our cash generation and revenue growth have allowed us to pay down debt while increasing cash on hand for both operating needs and acquisitions in the future. 2002 resulted in the highest revenue, EPS and cash position we have enjoyed in our history thus far, and we are pleased with our efficiencies and expanding growth opportunities.

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.

Revenue Recognition

     We recognize revenue when the mortgage credit report or other information, collectively a “unit,” has been delivered to the customer, persuasive evidence of the terms of the arrangement exists, our fee is fixed and determinable, and collectibility is reasonably assured. Delivery usually takes place electronically and revenue is recognized when the customer has access to the data. Our “4 Hours or It’s Free” guarantee 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.

Valuation of Goodwill and Other Intangible Assets

     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.

     In 2002, Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” became effective. As of December 31, 2001 and 2002, the net carrying amount of goodwill of $168,971 and $565,971, respectively, is no longer amortized and is subject to impairment testing under SFAS No. 142. In lieu of amortization, we were required to perform an initial impairment review of our goodwill in 2002 and an annual impairment review thereafter. We completed our first annual impairment test of goodwill as of October 1, 2002 and determined goodwill and other intangible assets are not impaired. This determination was based on valuation

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analyses performed by an independent valuation firm. The valuation analysis performed by the independent valuation firm was in accordance with the guidelines established by SFAS 142 and employed generally accepted valuation techniques. The valuation techniques employed by the independent valuation firm included a discounted cash flow analysis, analysis of guideline publicly-traded companies, and analysis of guideline similar transactions. Goodwill and other intangible assets will be tested annually and whenever events and circumstances occur indicating that the assets may be impaired. We have also evaluated the useful lives of our existing intangible assets and determined that the existing useful lives are appropriate. Other intangible assets of $27.8 million at December 31, 2002 are subject to the amortization methods prescribed by SFAS No. 142. Our customer rights and customer lists are amortized using the straight-line method over 15 years, and non-compete agreements and franchise agreements are amortized using the straight-line method over the life of the agreements, which extend from three to ten years. Our license agreements to access information are amortized using the ratio of the units accessed, for the period, to the total units estimated to be accessed over the ten year initial term of the agreement. Our intellectual property is amortized using the straight-line method over 13 to 15 years and loan origination costs are amortized using the straight-line method over the loan term.

Allowance for Doubtful Accounts

     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 $7.6 million as of December 31, 2002, and our allowance for doubtful accounts was $301,000 as of December 31, 2002.

Accounting for Income Taxes

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

     Significant judgment is required in determining our provision for income taxes and deferred tax assets and liabilities. We recorded a net deferred tax asset of approximately $3.4 million at December 31, 2002, of which approximately $3.6 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.

Capitalized Software Development Costs

     We capitalize costs, which include primarily salaries in connection with developing software for internal use. We use judgment in determining whether development costs meet the criteria for immediate expense or capitalization. Direct costs incurred in the development of software are capitalized once the preliminary project stage is completed, management has committed to funding the project, and completion and use of the software for its intended purpose are probable. We cease capitalization of development costs once the software has been substantially completed and is ready for its intended use. We capitalized $755,000, $749,000, and $794,000 of costs during the years ended December 31, 2000, 2001, and 2002, respectively. The software development costs capitalized are amortized over the estimated useful life of the software, which we estimate to be three years. Amortization expense was $514,000, $654,000, and $751,000 for the years ended December 31, 2000, 2001, and 2002, respectively.

Accounting Pronouncements

     Several recent pronouncements of the Financial Accounting Standards Board are discussed in Item 8—“Financial Statements and Supplemental Data—Summary of Significant Accounting Policies”. Readers are urged to

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review that section with respect to these recent pronouncements, some of which could have a material impact on our financial position and results of future operations.

Results of Operations

Years Ended December 31, 2001 and 2002

     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. 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 $11.9 million, or 23.2%, from $51.2 million in 2001 to $63.1 million in 2002.

     Mortgage services revenue increased $10.1 million, or 23.7%, from $42.6 million in 2001 to $52.7 million in 2002 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 $500,000, or 7.7%, from $6.5 million in 2001 to $7.0 million in 2002 as a result of the addition of new customers in these territories.

     Other services revenue increased $1.2 million, or 54.5%, from $2.2 million in 2001 to $3.4 million in 2002. This increase in resident and employment screening services was a result of the development of new customers.

     Cost of services are direct operational costs and consist of data costs, salaries, and telecommunications costs. Total cost of services increased $4.1 million, or 13.8%, from $29.8 million in 2001 to $33.9 million in 2002. 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 58.2% in 2001 to 53.7% in 2002.

     Mortgage cost of services increased $2.8 million, or 11.5%, from $24.3 million in 2001 to $27.1 million in 2002 as a result of our increased revenue. However, as a percentage of revenue, mortgage cost of services decreased from 57.1% in 2001 to 51.5% in 2002 as a result of lower data costs and our ability to use our technology to reduce salary costs.

     Consumer cost of services increased $400,000, or 10.3%, from $3.9 million in 2001 to $4.3 million in 2002 as a result of increased revenue. As a percentage of revenue, these costs remained fairly consistent, increasing from 59.8% in 2001 to 61.1% in 2002.

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     Other cost of services increased $800,000, or 47.1%, from $1.7 million in 2001 to $2.5 million in 2002 and decreased as a percentage of revenue from 75.5% in 2001 to 73.7% in 2002. This decrease was due to increased automation of our employment screening and resident screening services, thus decreasing our direct personnel costs.

     Selling, general, and administrative expenses increased $3.5 million, or 37.6%, from $9.3 million in 2001 to $12.8 million in 2002. As a percentage of revenue, these costs increased from 18.1% to 20.3%. $937,000 of the increase was due to one-time costs related to an abandoned securities offering, the negotiation and costs associated with a terminated merger agreement and costs associated with our FDinsight project. The remainder of this period’s increase was primarily due to increased corporate personnel and employee benefit expenses of $1.7 million, business development and training expenses of $560,000 and other selling, general and administrative expenses of $303,000.

     Depreciation and amortization increased $1.0 million, or 27.8%, from $3.6 million in 2001 to $4.6 million in 2002. This increase was due to depreciation and amortization on hardware and software upgrades to our technology center and the expansion of our corporate and branch facilities totaling $432,000. Also contributing to the increase in amortization are our license agreements to sell Experian information, which increased $398,000. The $170,000 balance of the increase was due to amortization on newly acquired intangibles from acquisitions net of a $3,000 reduction in goodwill amortization.

     Acquisition consolidation costs decreased $43,000, or 27.2%, from $158,000 in 2001 to $115,000 in 2002. This decrease was due primarily to the fewer number of acquisitions in 2002 than in 2001. 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.

     Interest expense decreased $700,000, or 31.8%, from $2.2 million in 2001 to $1.5 million in 2002. This decrease was primarily due to a reduction of the outstanding balance on our bank revolving line of credit from $2.2 million at December 31, 2001 to no outstanding balance at December 31, 2002 and the decrease in interest rates on the line of credit from 10.1% to 4.2%.

     Income tax expense was $4.3 million in 2002 compared to an income tax expense of $2.7 million in 2001. Our effective tax rate was 39.1% for 2001 and 40.0% for 2002.

     As a result of the foregoing factors, net income in 2002 was $6.5 million, or $1.04 per diluted share, compared to a net income of $4.1 million, or $0.71 per diluted share, in 2001.

     Our EBITDA (earnings before interest, taxes, depreciation, and amortization), was $16.8 million in 2002 compared to $12.7 million in 2001, a $4.1 million, or a 32.3%, increase over 2001.

Years Ended December 31, 2000 and 2001

     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.

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     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.

     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.

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     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 was primarily 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.

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, reflects 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.