<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2000
or
[_] Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange
Act of 1934 for the transition period from __________ to _______________
Commission File No. 0-26149
US SEARCH.COM INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4504143
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5401 Beethoven Street, Los Angeles, California 90066
(Address of principal executive offices, including zip code)
(310) 302-6300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) Yes [X] No [_], and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
There were 17,937,744 shares of outstanding Common Stock of the registrant as of
May 12, 2000.
<PAGE>
US SEARCH.COM INC.
Form 10-Q for the quarterly period ended March 31, 2000
INDEX Page Number
Part I. FINANCIAL INFORMATION 3
Item 1. Financial Statements 3
Balance Sheets as of March 31, 2000 and December 31, 1999 3
Statements of Operations for the three month periods ended March
31, 2000 and March 31, 1999 4
Statements of Cash Flows for the three month periods ended March
31, 2000 and March 31, 1999 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risks 20
Part II. OTHER INFORMATION 21
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3 Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
INDEX TO EXHIBITS 23
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
US SEARCH.COM INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 12,128,000 $ 17,382,000
Restricted cash 2,000,000 2,000,000
Accounts receivable, less allowance for doubtful
accounts of $98,000 (2000) and $74,000 (1999) 319,000 131,000
Other current assets 3,176,000 3,608,000
-------------- -----------------
Total current assets 17,623,000 23,121,000
Property and equipment, net 2,981,000 2,218,000
Other assets 321,000 311,000
-------------- -----------------
Total assets $ 20,925,000 $ 25,650,000
============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 5,349,000 $ 5,438,000
Accrued liabilities 933,000 623,000
Notes payable, current portion 26,000 25,000
Capital lease obligations, current portion 122,000 22,000
-------------- -----------------
Total current liabilities 6,430,000 6,108,000
Notes payable, net of current portion 8,000 15,000
Capital lease obligations, net of current portion 218,000 22,000
Other non-current liabilities 11,000 16,000
-------------- -----------------
Total liabilities 6,667,000 6,161,000
-------------- -----------------
Commitments and contingencies (Note 3)
Stockholders' equity:
Preferred stock, $.001 par value; authorized 1,000,000
shares; none issued and outstanding - -
Common stock, $.001 par value; authorized 40,000,000 shares;
issued and outstanding 17,934,644 (2000)
and 17,421,644 (1999) 18,000 17,000
Additional paid-in capital 54,651,000 53,790,000
Unearned deferred compensation (487,000) (1,099,000)
Accumulated deficit (39,924,000) (33,219,000)
-------------- -----------------
Total stockholders' equity 14,258,000 19,489,000
-------------- -----------------
Total liabilities and stockholders' equity $ 20,925,000 $ 25,650,000
============== =================
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
US SEARCH.COM INC.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net revenue $ 7,450,000 $ 3,296,000
Cost of services 3,173,000 1,051,000
----------- -----------
Gross profit 4,277,000 2,245,000
----------- -----------
Operating expenses:
Selling and marketing 7,445,000 2,729,000
General and administrative 3,884,000 846,000
Charge (credit) for compensation
related to stock options (117,000) 876,000
----------- -----------
Total operating expenses 11,212,000 4,451,000
----------- -----------
Loss from operations (6,935,000) (2,206,000)
Interest income 238,000 -
Interest expense (11,000) (2,786,000)
Amortization of debt issue costs - (1,603,000)
Other income, net 3,000 -
----------- -----------
Loss before income taxes (6,705,000) (6,595,000)
Provision for income taxes - 1,000
----------- -----------
Net loss $(6,705,000) $(6,596,000)
=========== ===========
Basic and diluted net loss per share $ (0.38) $ (0.69)
=========== ===========
Weighted-average shares outstanding
used in per share calculation 17,525,675 9,521,211
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
US SEARCH.COM INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended March 31,
-----------------------------
2000 1999
------------- ------------
Cash flows from operating activities:
Net loss....................................... $(6,705,000) $(6,596,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization.................. 177,000 42,000
Provision for doubtful accounts................ 76,000 98,000
Charge for warrants and beneficial conversion
feature issued to majority stockholder........ - 2,639,000
Amortization (credit) of unearned
compensation.................................. (117,000) 876,000
Amortization of debt issue costs............... - 1,603,000
Gain on disposal of property and equipment..... (1,000)
Related-party charges.......................... - 231,000
Change in assets and liabilities:
Accounts receivable........................... (107,000) (88,000)
Accounts payable.............................. (89,000) (504,000)
Accrued liabilities........................... 310,000 (124,000)
Prepaid and other............................. 260,000 (27,000)
----------- -----------
Net cash used in operating activities............ (6,195,000) (1,850,000)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment............. (609,000) (59,000)
Proceeds from disposal of property and
equipment..................................... 3,000 -
----------- -----------
Net cash used in investing activities............ (606,000) (59,000)
----------- -----------
Cash flows from financing activities:
Repayments of line of credit................... - (348,000)
Repayments of third party notes payable........ (6,000) (111,000)
Advances from related parties.................. - 2,300,000
Repayments of capital lease obligations........ (37,000) (15,000)
Proceeds of stock option exercise.............. 1,590,000 -
----------- -----------
Net cash provided by financing activities........ 1,547,000 1,826,000
----------- -----------
Net decrease in cash and cash equivalents........ (5,254,000) (83,000)
Cash at beginning of period...................... 17,382,000 99,000
----------- -----------
Cash at end of period............................ $12,128,000 $ 16,000
=========== ===========
Non cash investing and financing activities:
Capital lease obligations...................... 331,000 -
The accompanying notes are an integral part of these statements.
4
<PAGE>
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Business:
US SEARCH.com Inc. (the "Company") provides individual, corporate and
professional clients with a single, comprehensive access point to a broad range
of individual reference services and background screening services. Individual
reference services include personal identifying information about individuals
that can be used to identify, locate or verify the identity and background of an
individual. The Company was formed as a California S Corporation in 1994, and
converted to a C Corporation in November 1997.
In June 1999 the Company completed its initial public offering and sold
4,500,000 shares of common stock raising net proceeds from the offering of
$36,109,000. The Company's shares are now traded on the NASDAQ national market
system under the symbol "SRCH".
2. Basis of Presentation:
These unaudited financial statements and notes prepared in accordance with
instructions to Form 10-Q have been condensed and, therefore, do not contain
certain information included in the Company's annual financial statements and
notes thereto. The unaudited condensed financial statements and notes thereto
should be read in conjunction with the Company's annual financial statements and
notes thereto.
The unaudited condensed financial statements reflect, in the opinion of
management, all adjustments which are of a normal recurring nature, necessary to
present fairly the financial position of the Company as of March 31, 2000, and
the results of its operations and its cash flows for the three month periods
ended March 31, 2000 and 1999. Interim results are not necessarily indicative
of results to be expected for a full fiscal year.
Stock Split
In June 1999, the Company authorized a 906.782-for-one stock split pursuant
to a stock dividend to its current stockholders which became effective on June
22, 1999. The share information in the accompanying financial statements has
been retroactively restated to reflect the effect of the stock split.
Restricted Cash
As of March 31, 2000, $2,000,000 was pledged as collateral principally in
connection with an outstanding letter of credit relating to a building lease
agreement.
Net Loss Per Common Share
Basic net loss per common share is computed using the weighted average number
of shares of common stock and diluted net loss per common share is computed
using the weighted average number of shares of common stock and common
equivalent shares outstanding. Common equivalent shares related to stock options
and warrants are excluded from the computation when their effect is
antidilutive. As of March 31, 2000 the number of stock options that were
antidilutive amounted to 2,732,744. As of March 31, 1999, there were 1,459,914
options, 906,782 warrants and 1,586,868 shares issuable on the conversion of the
subordinated note which are excluded from the computation of diluted earnings
per share because their inclusion would have been antidilutive.
5
<PAGE>
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(unaudited)
3. Commitments And Contingencies:
Strategic Alliance Commitments
The Company has several cancelable and non-cancelable distribution and
marketing agreements with various Internet companies. Terms of these agreements
provide for varying levels of exclusivity and minimum and maximum fees payable
based on the number of banners, buttons and text links displayed on affiliate
web sites. The Company also has committed to purchase television advertising
from various media companies. At March 31, 2000, the minimum non-cancelable
payments under these agreements are approximately $8,527,000 for the remainder
of 2000, $3,920,000 for 2001 and $1,000,000 for 2002.
Purchase Commitments:
In July 1999, the Company entered into an agreement with a supplier of online
information services data pursuant to which the Company has committed to
purchase approximately $20 million worth of such data and information over a
five and one-half year term. The minimum non-cancelable payments under this
agreement are $2,700,000 for the remainder of 2000, $3,600,000 for 2001 and
$4,200,000 for 2002-2004.
Lease Agreement
In September 1999, the Company entered into a five-year lease for a 52,500
square foot facility located in the Marina Del Rey area of Los Angeles,
California. Under the terms of the lease agreement, the Company is committed to
make total rental payments of $5.3 million over the term of the lease.
4. Stock Options:
During the quarter ended March 31, 2000, 1,747,900 options were granted
pursuant to the 1998 Stock Incentive Plan, at an average exercise price of $8.06
and 513,000 shares were exercised at an average exercise price of $3.10. As of
March 31, 2000, there were 2,732,744 options outstanding of which 378,773 were
exercisable.
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT TO
THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS ABOUT THE COMPANY'S BUSINESS, MANAGEMENT'S BELIEFS AND ASSUMPTIONS
MADE BY MANAGEMENT. WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS,"
"BELIEVES," "SEEKS," "ESTIMATES," "LIKELY," VARIATIONS OF SUCH WORDS AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN
RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE,
ACTUAL RESULTS AND OUTCOMES MAY DIFFER MATERIALLY FROM WHAT IS EXPRESSED OR
FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES
INCLUDE THOSE SET FORTH BELOW UNDER "FACTORS AFFECTING OUR BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION" AND ELSEWHERE IN THIS REPORT AS WELL AS THOSE
NOTED IN OUR ANNUAL REPORT ON FORM 10-K (FILE NO. 0-26149) AND OUR OTHER PUBLIC
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY UNDERTAKES NO
OBLIGATION TO UPDATE PUBLICLY ANY FORWARD- LOOKING STATEMENTS, WHETHER AS A
RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO THESE DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE SECTION TITLED "FACTORS AFFECTING OUR BUSINESS, OPERATING
RESULTS AND FINANCIAL CONDITION" IN THIS REPORT.
Overview
US SEARCH provides individual, corporate and professional clients with a
single, comprehensive access point to a broad range of individual reference
services and background screening services. Individual reference services
include personal identifying information about individuals that can be used to
identify, locate or verify the identity and background of an individual. Our
services can be accessed through our Web site, USSEARCH.com, or by calling our
toll free telephone number, 1-800-USSEARCH.
We generate revenues by performing individual reference search services for
clients. Our services include individual locator, individual profile report,
employment screening, nationwide court record search, real property, criminal
conviction and other related information search services. Individual locator
services provide clients with the address and listed phone number for
individuals, as well as, date of death, and the city, state and zip code where
the death benefits were issued. Our Internet-based "Instant Searches" provide a
subset of this information in a completely automated fashion and at a lower
price. Individual profile report services provide clients with the first and
last name, alias, current and previous address, listed phone number, vehicle
ownership where permitted by law, bankruptcy, property ownership, nationwide
court record and corporate affiliation information about an individual into a
single report. The typical time required to complete a search is one day to four
weeks, with "Instant Searches" requiring as little as a few seconds or minutes.
We publish the prices for our services directly on our Web site and typically
determine a client's manner of payment prior to beginning the search process.
Prices for our non-instant searches have ranged from approximately $20 to $500
per search. Prices for "Instant Searches" have ranged from approximately $5 to
$10 per search. The prices for our services vary based on the nature and amount
of information and whether or not the search is assisted by a search specialist.
Revenue for our services are recognized when the results are delivered to the
client. The terms of sale do not provide for refunds after our services have
been delivered, however, in instances where the clients indicate that the
initial search result was unsuccessful, we may perform another search or provide
a refund at our discretion. In addition, where clients desire additional
information they can request to broaden the scope of their "Instant Searches"
and we may apply a portion of the cost of the client's "Instant Searches"
towards the cost of the more comprehensive search.
We are expanding our available services to corporate and professional
clients. We expect a longer sales cycle as we collaborate with clients and
educate them on the use and benefits of our services. We expect our revenues in
the future, especially
7
<PAGE>
from corporate and professional clients, to be dependent in large part on our
ability to establish relationships with partners that integrate and market our
services as part of their own product and service offerings. We have little or
no influence over the marketing efforts of these partners and the success of the
products and services offered by them. Our partners are generally under no
minimum payment obligations. As a result, we have limited ability to evaluate
the success of our partnership efforts and predict the realization or timing of
any revenues from corporate and professional clients.
Our cost of services consists primarily of payroll expenses, data
acquisition costs, local and long distance telephone charges associated with
providing our services, and an allocable portion of network and technology
infrastructure. Our cost of services is likely to increase substantially as we
obtain access to new data and information sources and expand infrastructure to
support an increase in marketing and sales personnel to address existing and
anticipated demand for our services.
We have an agreement with a supplier of online information services data to
purchase approximately $20 million worth of such data over a five and one-half
year term. The minimum non-cancelable payments under this agreement are $2.7
million for the remainder of 2000, $3.6 million for 2001 and $4.2 million for
2002-2004.
Our operating expenses consist primarily of selling, marketing, general and
administrative expenses. We expect our operating expenses to continue to
increase substantially as we attempt to expand our sales and marketing force and
hire additional technology, administrative, sales, advertising, financial and
accounting personnel.
Selling and marketing expenses constitute the largest portion of our
operating expenses. Prior to the introduction of our Internet-based services,
advertising consisted primarily of radio and television advertising. With the
growth of our Internet-based services, an increasing portion of our advertising
expenses consists of Internet-based advertising such as arrangements with
Internet search engines and popular Web sites. Production costs associated with
such advertising are expensed in the period first aired or displayed to the
public. Costs relating to actual airing or display of such advertising are
expensed in the quarter the advertising appears. We expect our selling and
marketing expenses to increase as we attempt to expand our sales to businesses
and professionals. We plan to target an increasing portion of our marketing and
advertising programs and related expenditures toward business and professional
clients rather than consumers.
We have non-cancelable advertising and marketing agreements with several
Internet companies. These agreements provide for varying levels of exclusivity
and require us to make monthly minimum payments based on the number of
impressions displayed on affiliate Web sites. The Company also has committed to
purchase television advertising from various media companies. As of March 31,
2000, the minimum non-cancelable payments required under these agreements are
approximately $8.5 million during the remainder of 2000, $3.9 million in 2001,
and $1.0 million in 2002.
Our general and administrative expenses consist primarily of compensation
and related costs for administrative personnel, fees for outside professional
advisors and our occupancy costs and other overhead costs. Under an
administrative services agreement that terminated on June 30, 1999, Kushner-
Locke provided human resources services, accounting services and management
services. In connection with this agreement, we paid Kushner-Locke a monthly fee
of $35,000. We have hired additional human resources, finance and accounting
personnel to replace the services provided by Kushner-Locke under this
agreement. We expect the trend of increased general and administrative costs to
continue as we hire additional technology personnel, as well as sales, marketing
and executive personnel to promote new services to corporate and professional
clients.
We incurred significant net losses of approximately $399,000 in 1997, $6.8
million in 1998, $26.4 million in 1999 and $6.7 million for the quarter ended
March 31, 2000. At March 31, 2000, we had an accumulated deficit of
approximately $39.9 million. We expect to incur significant additional losses
and continued negative cash flow from operations for the next year.
We recorded a non-cash interest charge of approximately $2.6 million in the
first quarter of 1999 relating to the beneficial conversion feature of the
convertible subordinated note issued to Kushner-Locke in January 1999. This
charge was calculated using the deemed fair value of common stock on the date
each advance was made to us subtracting the conversion price and multiplying the
resulting amount by the number of shares into which the advance is convertible.
8
<PAGE>
The value assigned to the beneficial conversion feature was no greater than the
amount of each advance made under the convertible subordinated note.
We also recorded in the first quarter of 1999 $1.3 million relating to
warrants issued to Kushner-Locke in January 1999. This charge represents the
deemed fair value of the warrants, which is the per share value derived by
applying the Black-Scholes option pricing model to our underlying shares of
common stock and multiplying that value by the number of shares of common stock
issuable upon exercise of the warrants.
Since the first quarter of 1999, we have granted certain stock options to
employees and non-employee directors and will continue to grant options under
the Amended and Restated 1998 Stock Incentive Plan and the 1999 Non-Employee
Directors' Stock Option Plan. We recorded unearned deferred compensation of
approximately $3.2 million, representing the difference between the deemed fair
value of our common stock for accounting purposes and the exercise price of such
options at the date of grant. This amount was recorded as a reduction of
stockholders' equity and amortized over the vesting period of the applicable
options. During the quarter ending March 31, 2000, a credit was recorded to
deferred compensation to account for the cancellation of certain options granted
in 1999. As a result, we currently expect to amortize the remaining unearned
deferred compensation at March 31, 2000 as follows: $269,000 in the remainder of
2000; $185,000 in 2001; $32,000 in 2002; and $1,000 in 2003.
Results of Operations
Comparison of the Three Months Ended March 31, 2000 to the Three Months Ended
March 31, 1999
Net Revenues. Our net revenues increased to approximately $7.5 million for
the three months ended March 31, 2000, or 126%, from approximately $3.3 million
for the three months ended March 31, 1999. The increase is primarily
attributable to an increase in the number of Internet-based transactions which
occurred as a result of increased web site visitor traffic. The growth in Web
site traffic was driven by increased advertising on a greater number of Internet
search engines and popular Web sites.
Gross Profit. Gross profit increased to approximately $4.3 million for the
three months ended March 31, 2000, or 91%, from approximately $2.2 million for
the three months ended March 31, 1999. Gross profit as a percentage of net
revenues was approximately 57% and 68% for the three month periods ended March
31, 2000, and March 31, 1999, respectively. Cost of services increased to
approximately $3.2 million for the three months ended March 31, 2000, or 202%,
from approximately $1.1 million for the three months ended March 31, 1999. As a
percentage of net revenues, cost of services was approximately 43% and 32% for
the three month periods ended March 31, 2000 and March 31, 1999, respectively.
Data acquisition and fulfillment costs as a percentage of revenues increased due
to the introduction of certain lower- priced public record report products.
Telephone costs decreased as a percentage of net revenues primarily due to a
lower percentage of 900-number telephone billings. Labor costs increased as a
percentage of net revenues primarily due to increased hourly wage rates and the
growth in personnel involved in handling the increased volume of service
requests.
Selling and Marketing Expenses. Selling and marketing expenses increased to
approximately $7.4 million for the three months ended March 31, 2000, from
approximately $2.7 million for the three months ended March 31, 1999. As a
percentage of net revenues, advertising and marketing expenses increased to
approximately 100% for the three months ended March 31, 2000, from approximately
83% for the three months ended March 31, 1999. This increase is primarily
attributable to an increase in the level of Internet-based advertising.
General and Administrative Expenses. General and administrative expenses
increased to approximately $3.9 million for the three months ended March 31,
2000, from approximately $846,000 for the three months ended March 31, 1999. As
a percentage of net revenues, general and administrative expenses increased to
approximately 52% for the three months ended March 31, 2000, from approximately
26% for the three months ended March 31, 1999. This increase in general and
administrative expenses in absolute dollars is primarily attributable to the
cost associated with the hiring of additional management and administrative
personnel. Included in the quarter ended March 31, 2000 are approximately
$450,000 of expenses relating to the replacement of our chief executive officer.
9
<PAGE>
Charge for compensation related to stock options. During the three month
period ended March 31, 2000, a net credit of approximately $117,000 was recorded
in connection with options granted in 1999. The credit was recorded to adjust
for the cancellation of options issued in 1999 to former employees. We expect
to incur a charge of approximately $269,000 for the remainder of 2000, $185,000
for 2001, $32,000 for 2002 and $1,000 for 2003 in connection with these options,
compared to a compensation charge of $876,000 for the three months ended March
31, 1999.
Interest Income (Expense). Interest income, net of interest expense
increased to $227,000 for the three months ended March 31, 2000 compared to
interest expense of $2,786,000 for the three months ended March 31, 1999. For
the three months ended March 31, 2000, interest income was earned on the cash
proceeds from the sale of our common stock in the initial public offering, while
no such cash balances were available for investing during the three months ended
March 31, 1999. Interest expense during the quarter ended March 31, 1999
contains $2.6 million of expense with respect to the beneficial conversion
feature associated with the convertible subordinated notes issued to Kushner-
Locke in January 1999.
Liquidity and Capital Resources
As of March 31, 2000, cash and cash equivalents decreased to $12.1 million
(excluding $2.0 million of restricted cash pledged as collateral in connection
with our new building lease) from $17.4 million at December 31, 1999 primarily
as a result of operating losses.
Cash used in operations increased to $6.2 million for the three months
ended March 31, 2000 as compared to $1.9 million for the three months ended
March 31, 1999. This increase is primarily attributable to increased
expenditures on Internet-based advertising and increased general and
administrative expenses relating to the hiring of executive personnel and the
development of information technology infrastructure.
Cash used in investing activities increased to $606,000 for the three
months ended March 31, 2000 as compared to $59,000 for the three months ended
March 31, 1999. This increase is primarily attributable to increased purchases
of computer hardware and software and other fixture and equipment in connection
with our new premises.
Cash provided by financing activities decreased to approximately $1.5
million for the three months ended March 31, 2000 as compared to $1.8 million
for the three months ended March 31, 1999. During the three months ended March
31, 2000 we received $1.6 million from the exercise of employee stock options,
while during the three months ended March 31, 1999 we received $2.3 million from
Kushner-Locke from the issuance of convertible subordinated notes.
Since inception we have experienced negative cash flow from operations and
expect to continue to experience significant negative cash flow from operations
in the foreseeable future. We currently believe that our existing capital
resources will be sufficient to meet our cash requirements through the next 12
months. In addition, we are currently exploring alternatives for raising
additional capital. No assurance is given that we will not be required to raise
additional financing prior to that time. Furthermore, there is no assurance that
additional financing will be available when needed or that, if available, the
financing will be on favorable terms. If the financing is not available when
required or is not available on acceptable terms, we may be unable to develop or
enhance our services, take advantage of business opportunities or respond to
competitive pressures, any of which could have a material adverse effect on our
business and results of operations.
Year 2000 Issue
We depend on the delivery of information over the Internet, a medium which
is susceptible to the Year 2000 Issue. The "Year 2000 Issue" is typically the
result of limitations of software written using two digits rather than four to
define the applicable year. If software with date-sensitive functions are not
Year 2000 compliant, they may recognize a date using "00" as the year 1900
rather than the year 2000.
10
<PAGE>
Risks
The Year 2000 Issue could result in a system failure or miscalculations
causing significant disruption of our operations, including, among other things,
interruptions in Internet traffic, accessibility of our Web site, delivery of
our service, transaction processing or searching, telephone call center
operations and other features of our services. We depend on information
contained primarily in electronic format in databases and computer systems
maintained by third parties, including governmental agencies. The disruption of
third-party systems or our systems interacting with these third- party systems
could prevent us from receiving orders or delivering search results in a timely
manner. In addition, we rely on the integration of many systems in aggregating
search data from multiple sources. The failure of any of those systems as a
result of Year 2000 compliance issues could prevent us from delivering our
products and services. Failure of our systems or third-party systems providing
information used in our services could materially adversely affect our business,
financial condition and results of operations. We have experienced no material
interruption of operations or any other complication as a result of the Year
2000 issue.
FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
The following is a discussion of certain risks, uncertainties and other factors
that currently impact or may impact our business, operating results and/or
financial condition. Anyone evaluating us and making an investment decision with
respect to our Common Stock or other securities is cautioned to carefully
consider these factors, along with similar factors and cautionary statements
contained in our filings with the Securities and Exchange Commission.
We have incurred significant net losses and we may never achieve profitability
We incurred significant net losses of approximately $399,000 in 1997, $6.8
million in 1998, $26.4 million in 1999 and $6.7 million in the first quarter
ended March 31, 2000. As of March 31, 2000, we had an accumulated deficit of
approximately $39.9 million. We expect to incur significant additional losses
and continued negative cash flow from operations for the remainder of 2000. We
may never achieve profitability.
Our revenues and operating results may fluctuate significantly
Our quarterly revenues and operating results have fluctuated in the past, and
may significantly fluctuate in the future due to a variety of factors, many of
which are outside of our control. These factors include:
. service interruption, delays and costs relating to expansion of our
networking infrastructure and facilities, for example, we have experienced
system interruptions in the past as well as slower response times during
periods of high calling volume;
. fluctuations in the cost of television, radio, print and Internet-based
advertising, for example, television advertising prices are generally higher
during the last quarter of the calendar year due to the seasonal trends in
programming and consumer viewing patterns;
. the inability to maintain or develop relationships with, or continue
advertising on, various key Internet companies and popular Web sites, for
example, due to capital constraints, we decreased our advertising on popular
Web sites during the quarter ended December 1998;
. delays and costs associated with unsuccessful service introductions;
. loss of one or more of our database providers;
. anticipating and responding to the introduction of new or enhanced services
by our competitors, or more generally to increase demand for our services,
for example, we reduced the price of our Internet-based services in December
1998 to further increase demand for these services; and
. service interruption and delays or inability to access our services as a
result of computer viruses, physical or electronic break-ins and similar
disruption.
11
<PAGE>
We face competition from many sources
The market in which we operate is highly competitive and highly fragmented.
Currently, our competition falls into four categories:
. free individual locator and information services, including services
offered by Internet search engines, telephone companies and other third
parties who publish free printed or electronic directories;
. fee-based Internet search services offering comparable services, such as
KnowX.com, which, during the quarter ending September 30, 1999 was acquired
by DBT Online, our primary data supplier; firms offering more comprehensive
data and information, and which are already serving the business to
business market, such as ChoicePoint, Inc., (which recently announced a
merger with DBT Online, our primary data supplier); LEXIS- NEXIS, a
division of Reed Elsevier Inc., The Dun & Bradstreet Corporation, Equifax,
Experian, Trans Union, Reuters Limited and Avert, Inc.
. local, regional and national private investigation firms, such as Kroll-
O'Gara Company, Pinkerton, the Proudfoot Reports Division of ASI Solutions,
Inc., and a significant number of companies operating on either a national
scale or a local or regional basis.
Some of these competitors do not currently offer their individual reference
services or background checking over the Internet, but they may do so in the
future. There are no significant barriers that would prevent new companies from
entering the market in which we operate. In addition, some of our current
suppliers and companies with which we have advertising agreements may compete
with us in the future, which may make it more difficult to advertise our
services effectively on their Web sites.
We may be unable to respond to the competitive efforts of other companies
Many of our competitors have greater financial and marketing resources than we
do and may have significant competitive advantages through other lines of
business, their existing client base and other business relationships. These
competitors and other potential competitors may undertake more extensive
marketing campaigns, adopt more aggressive pricing policies and devote more
resources to developing information search services for individual or corporate
clients than we are willing or able to accomplish. Our competitors or potential
competitors may develop services that are superior to ours, develop services
less expensive than ours or that achieve greater market acceptance than our
services. We may not be able to successfully compete against our current or
future competitors with respect to any of these factors. As a response to
changes in the competitive environment, we may make pricing, service or
marketing decisions such as reducing our prices or increasing our advertising,
all of which may affect our operating results. If we are unsuccessful in
responding to our competitors, our business, financial condition and results of
operations will be materially adversely affected.
We are dependent on a limited number of third party database and other
information suppliers for information used in our services
We obtain data used in our services from a limited number of third party
suppliers. Some of these suppliers offer services that may compete with ours.
Our primary data supplier, DBT Online, acquired Know-X.com, which provides fee-
based internet search services comparable to some of our service offerings.
Moreover, DBT Online recently announced an agreement to be merged with
Choicepoint, Inc., one of our competitors. If our current suppliers raise their
prices, or if, due to limitations or restrictions placed on a supplier by
government regulations or its own contractual arrangements, or for other
reasons, the information they provide becomes unavailable or unreliable, we may
need to find alternative sources of information. The time it takes to identify
and contract with suitable alternative data suppliers, as well as integrate
these data sources into our service offerings, could cause service disruptions,
increased costs and reduced quality of our services. Additionally, costs of
obtaining data that may be necessary in our new service offerings, such as
criminal record searches, could be significantly higher, on a per transaction
basis, than our current information costs. Termination of existing agreements,
or, failure after termination, to enter into new agreements with third party
suppliers on terms favorable to us, could have a material adverse effect on our
business, financial condition and results of operations. Additionally, failure
to obtain the data and information necessary for our intended service offerings
at commercially reasonable costs or at all could prevent us from offering these
new services and our business, financial condition and results of operations
could be materially adversely affected.
12
<PAGE>
We may incur liability based on consumer complaints.
A substantial amount of our business involves sales of services to
consumers. We have received complaints concerning our services directly from
consumers and have received inquiries from consumer agencies such as the Better
Business Bureau and state attorney general consumer divisions. We could in the
future experience similar complaints and inquiries from consumers and
governmental and consumer agencies. If we are unable to resolve existing and
future complaints and inquiries, we could be subject to governmental regulatory
action as well as civil liability. This could in turn have a material adverse
effect on our business, financial condition and results of operations.
Our business and financial performance may suffer if we are unsuccessful in
expanding our service offerings
Our strategy includes expanding the market awareness of our existing
services. We intend to offer a greater number of new services available through
our Web site and to develop and promote service offerings to address the needs
of corporate and professional clients. We have very limited experience in
providing services to corporate and professional clients. Attracting these
clients will require us to hire new sales and marketing personnel and spend
money to develop and promote these new services. We may fail in our efforts to
provide these new services in a timely and cost-effective manner. If individual
or corporate clients are unwilling to pay for the aggregation of data and
information, or if the market for our services fails to develop or develops more
slowly than anticipated, our business and prospects will be materially adversely
affected. Implementing these measures will substantially increase our operating
expenses and will place considerable strain on our existing management and
operational resources. We will incur a substantial portion of these expenses
before we achieve any meaningful revenues or market acceptance of new services.
Our new services may not achieve a sustainable level of market acceptance or
ever become profitable. If a new service is unsuccessful, our reputation and
brand position may be damaged and this may make it more difficult to sell our
existing services. A significant amount of our future growth depends on our
ability to offer these new services.
We depend on a limited number of service offerings for a significant portion of
our revenues
We have historically derived a substantial portion of our revenues from a
small number of service offerings, particularly our individual locator,
individual profile reports and "Instant Searches" services. If we are unable to
continue to offer these services or if our costs of providing these services
increase such that we can no longer offer these services at competitive prices,
our business and results of operations may be materially adversely affected.
We may need to raise additional capital that may not be available
Our existing capital resources may not be sufficient to meet our cash
requirements through the next 12 months. We may need to raise additional capital
and we may not be able to obtain additional financing on favorable terms, if at
all. If we cannot raise necessary additional capital on acceptable terms, we may
not be able to develop or enhance our services, take advantage of future
opportunities or respond to competitive pressures or unanticipated requirements,
any of which could have a material adverse effect on our business and results of
operations. If additional capital is raised through the issuance of equity
securities, the percentage ownership of the stockholders of US SEARCH will be
reduced, stockholders may experience dilution in net book value per share, or
these equity securities may have rights, preferences or privileges senior to
those of the holders of our common stock. Any debt financing, if available, may
involve covenants limiting, or restricting our operations or future
opportunities.
We are dependent upon the success of the products and services offered by our
partners.
In our efforts to increase the market acceptance of our services and to
more effectively market our services to corporate and professional clients, we
intend to continue to develop and establish relationships with key partners and
enter into affiliate and co-marketing programs. Our intent is that these
partners will promote our services or incorporate our services into their
products and services intended for the corporate and professional markets. We
have little or no ability to influence the marketing efforts of these partners
and these partners may fail to dedicate adequate resources necessary to
successfully develop and market products which incorporate our services. As a
result, our success in the corporate and professional market is dependent in
part on factors which are outside our control which include the performance of
our partners and the market acceptance of our partners' products and services.
13
<PAGE>
Agreements with partners may not result in any increase in our revenues or
improvement in our operations or financial conditions.
Existing arrangements with partners, for example, those with NetHot
Development, BeFree and Employee Matters generally do not contain minimum
purchase commitments or payment obligations. Similarly, new agreements with
additional partners may not contain any minimum purchase commitments or payment
obligations or may be limited to a pilot or test program. As a result, existing
agreements and new agreements, if any, with partners may not result in any
meaningful increase in our revenues, or any improvement in our operations or
financial condition.
We have substantial fixed costs which may not be offset by our revenues
A substantial portion of our operating expenses are fixed in any given
quarter, such as costs relating to management personnel, administrative support
and advertising on television programming, Internet search engines and popular
Web sites. Our advertising is typically conducted under non-cancelable fixed
term contracts. We also have minimum payment obligations under the agreement
with our key database and information supplier. As a result, a substantial
portion of our expenses in any given period is fixed and based in part on our
expectations of future revenues and advertising and sales productivity. We may
be unable to adjust our spending in a timely manner to compensate for any
unexpected revenue shortfall. If we are unable to generate sufficient revenues
to offset our advertising costs or the minimum payment obligations under the
agreement with our key database and information supplier, or if we are unable to
lower our advertising costs to respond to lower than expected revenues, our
results of operations will suffer and the market price of our common stock could
fall.
Our senior executive officers are relatively new to US SEARCH
Our Chief Executive Officer joined US SEARCH in February 2000. In addition,
several other members of our executive management team joined us after September
1, 1999, and therefore may take some time to adequately familiarize themselves
with the nature of our business and operations. If these executives are unable
to learn about and adjust to our business quickly and efficiently, our business
and results of operations may be materially adversely affected.
We depend on our marketing agreements with Internet companies
An important element of our current business strategy is to maintain
relationships with an increasing number of Internet search engines and popular
Web sites for advertising and to direct and attract traffic to our Web site.
Advertising on the Internet is expensive, new and evolving. The effectiveness of
Internet-based advertising is not clear. Under our marketing and advertising
agreements, we are typically required to make payments in advance of running ads
on a Web site. Internet companies display our text, banner or logo, often
referred to as "impressions," on their Web sites. These impressions may not lead
to sales of our services, and our payment is required whether or not the
advertising was effective. We may not be able to maintain our existing marketing
relationships with other Internet companies. We may also be unable to enter into
new marketing relationships with Internet companies, which generate adequate
returns to offset related costs. Internet-based advertising expenses comprised
over 47% of our total operating expenses for the 3-month period ended March 31,
2000. We currently anticipate that these expenses will continue to constitute a
significant portion of our total operating expenses in future periods. Due to
our limited operating experience, we are unable to accurately forecast the
revenues these agreements will generate. Any termination of existing agreements
or failure to enter into new agreements with Internet companies on terms
favorable to us, could have a material adverse effect on our business, financial
condition and results of operations.
Our access to key Internet advertising depends on marketing agreements between
other Internet companies that are beyond our control
Advertising arrangements with one Internet company may provide us access to
another company's Web site. For example, our arrangement with Infospace provides
us with advertising within the white page directories of the AOL and Netcenter
Web sites, independent of any agreements with AOL or Netcenter. Our advertising
on these Web sites depends on the continued relationship Infospace has with
companies such as AOL and Netcenter. If this relationship is terminated for any
reason and if we are either unable to enter into an agreement with these
companies or unable to enter into an agreement with another company that has an
agreement providing access to AOL and/or Netcenter, our advertising will no
longer appear on their Web sites. This could significantly reduce our
advertising reach and, consequently, lower the number of potential clients
visiting our Web site which could in turn materially adversely affect our
business, financial condition and results of operations.
14
<PAGE>
Service interruptions may have a negative impact on our revenues and may damage
our reputation and decrease our ability to attract clients
We depend on the satisfactory performance, reliability and availability of
our Web site and telecommunications infrastructure to attract clients and
generate sales. Our revenues, reputation and brand would be harmed and the value
of our services to clients would be reduced if we experience technical
difficulties that result in slower response times, disruptions or unavailability
of the services. We have experienced unanticipated system interruptions in the
past and we believe that these interruptions may occur again in the future. For
example, we have experienced system disruptions and slower response times as we
change or upgrade the software and hardware running on our network. In addition,
telephone systems and networks are subject to unanticipated downtimes due to
national disasters, power outages and similar events. Our servers may be
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions, which could lead to interruptions, delays, loss of data or the
inability to accept and fulfill client orders. The occurrence of any of these
events may have a material adverse effect on our business, financial condition
and results of operations.
Our limited experience offering business services on the Internet could make it
difficult for us to expand this business
Our success and future growth depends on our ability to expand the nature
and number of our services offered on the Internet especially our business to
business product offerings. Historically, we offered our services primarily
through our toll free telephone number, 1-800 U.S. SEARCH. Since December 1998,
we began offering our Internet-based "Instant Searches." Additionally, we intend
to increase the number and range of business services and "Instant Searches"
available on our Web site. Our limited experience may make it difficult for us
to continually increase Internet traffic and transactions on our Web site. In
particular, it may be difficult for us to adequately predict business response
to our Internet advertising, causing us to spend more on Internet advertising
than planned. Our Internet advertising may also be ineffective in strengthening
our brand, increasing awareness of our business services, particularly our
business to business services, or generating additional traffic or sales. The
loss of one or more marketing relationships with Internet companies could
adversely impact our ability to generate additional traffic or sales. If we fail
to generate additional traffic, or if we fail to increase demand for our
Internet-based services as a result of any additional traffic, our business,
financial condition and results of operations could be materially adversely
affected.
If we are unable to expand and improve our infrastructure and operational
capacity, we will be unable to grow and our business and our financial condition
will suffer
The recent growth of our business has placed significant strain on our
communication and networking infrastructure. From time to time, demand for our
services following television or Internet-based advertising has exceeded our
infrastructure and operational capacity. Clients may experience delays during
times when demand for our services exceeds our operational capacity. These
instances are independent of any service interruptions related to disruption of
our Web site or other systems. For example, we have in the past experienced
longer response times to client telephone calls during periods of high calling
volume because we lacked adequate capacity through our telephone systems and
operations and support personnel to handle the increased number of calls.
Similarly, we have experienced slower Web site response times during periods of
high traffic because our Internet servers lacked adequate capacity. If these
events occur again, we may lose clients and our reputation may be damaged. This
growth has also increased the demands on our management team and technical,
sales and operational resources. We anticipate that continued growth will
require us to implement and improve our operational, financial and management
information systems. In addition, we will need to invest in new and expanded
computer, telecommunication and information systems that better address our
existing capacity constraints. We have relocated to a larger facility that will
better address our operational and personnel needs. We have also added executive
personnel to manage our infrastructure. As we offer new services and pursue
corporate and professional markets, we will need to increase our executive and
sales and support personnel. Our business and results of operations will be
adversely affected if we are unable to expand and continually improve our
infrastructure.
15
<PAGE>
We may be subject to federal and state laws relating to the use of personal
information and privacy rights
Many privacy and consumer advocates and federal regulators have become
increasingly concerned with the use of personal information, particularly
consumer credit reports. We do not currently provide such credit reports. We
plan to offer credit reports with the pre-employment screening services
conducted in compliance with the Fair Credit Reporting Act. However, for certain
qualified business customers, we use the social security numbers of individuals
to search various databases, including those of consumer credit reporting
agencies. For example, we search the "header" information contained in various
consumer credit reporting agencies' databases to find, among other items,
current and previous addresses, social security numbers used by an individual,
or possible other names (such as maiden names, married names, etc.). "Header"
information consists of such information as the name, social security number,
date of birth, and current and previous addresses on a consumer credit report.
We also search these databases to determine if a customer's social security
number is being used by any other party. Attempts have been made and can be
expected to continue to be made by various federal regulators and organized
groups to adopt new or additional federal and state legislation to regulate the
use of personal information. If federal and/or state laws are amended or enacted
in the future relating to access and use of personal information, in particular,
and privacy and civil rights, in general, there could be a material adverse
effect on our business and results of operations.
We have been a majority owned subsidiary of the Kushner-Locke Company and we may
fail to succeed as an independent operating company
Peter Locke and Donald Kushner, the Co-Chairmen of US SEARCH, are the Co-
Chairmen and Co- Chief Executive Officers of the Kushner-Locke Company
("Kushner-Locke"), which owns approximately 53.6% of the outstanding common
stock. As a result, Kushner-Locke has and is likely to continue to have
significant influence over us, giving Kushner-Locke the ability to take a broad
range of corporate actions without the approval of the other stockholders, such
as:
. electing a majority of our Board of Directors;
. removing any of our directors;
. amending our certificate of incorporation or bylaws;
. delaying or preventing a change in control, impeding a merger or or other
business combination involving us; and
. otherwise controlling management and operations and the outcome of most
matters submitted for a stockholder vote.
Actions taken by Kushner-Locke could conflict with interests of other
stockholders. Also, as a result of the Kushner-Locke ownership and control, a
potential acquiror may be discouraged from attempting to obtain control of us
which could have a material adverse effect on the market price of our common
stock.
We depend on our key management personnel for our future success
Our success depends to a significant degree upon the continued
contributions of our executive management team and its ability to effectively
manage the anticipated growth of our operations and personnel. The loss of any
members of our management team and the inability to hire additional senior
management, if necessary, could have a material adverse effect on our business
and results of operations. In addition, increased costs of new personnel,
including members of executive management, could have a material adverse effect
on our business and operating results.
16
<PAGE>
We depend on attracting qualified employees and responding to employee turnover
for our success
As of March 31, 2000, we had 202 full-time employees and 12 part-time
employees. We anticipate that the number of employees may increase significantly
during the next 12 months as we expand our existing service offerings and
introduce and market new services to corporate and professional clients.
Competition for qualified employees is intense. Our success depends upon our
ability to attract and retain additional highly qualified technical, sales and
marketing personnel to support growing operations. The process of locating and
hiring personnel with the combination of skills and attributes required to carry
out our strategy is time-consuming and costly. Our success also depends on our
ability to effectively train and maximize the productivity of our existing and
future employees. We may also experience higher costs and possible disruption of
our business as we hire and train new personnel to replace those lost in the
ordinary course of our business or lost in an expansion or relocation of our
facility. The loss of key personnel or the inability to attract additional
qualified personnel to supplement or, if necessary, to replace existing
personnel, could have a material adverse effect on our business and results of
operations.
The Internet may fail to support the growth of electronic commerce
The rapid rise in the number of Internet users and the growth of electronic
commerce and applications for the Internet have placed increasing strains on the
Internet's communications and transmissions infrastructure. This could lead to
significant deterioration in transmission speeds and the reliability of the
Internet as a commercial medium and, consequently, could reduce the use of the
Internet by businesses and individuals. The Internet may not be able to support
the demands placed upon it by this continued growth. Any failure of the Internet
to support growth due to inadequate infrastructure or for any other reason would
seriously limit its development as a viable source of commercial and interactive
content and services. This could materially adversely affect the acceptance of
our services and our business.
Our success depends on our ability to protect and enforce our trademarks and
other proprietary rights
We rely on a combination of trademark, service mark, copyright and trade
secret laws, restrictions on disclosure and transferring title and other methods
to protect our proprietary rights. We also generally enter into confidentiality
agreements with our employees, business partners and/or others to protect our
proprietary rights. It may be possible for a third party to copy or otherwise
obtain and use our proprietary information without authorization or to develop
similar technology independently.
"1-800 U.S. SEARCH" and "Reuniting America Two People at a Time" are our
registered trademarks. In addition, we have applied for registered trademark
status for "US SEARCH", "The Public Record Portal" and our logo and service
marks in the United States and intend to pursue registration internationally
through applications. Effective trademark, service mark, copyright and trade
secret protection may not be available in every country in which our products
and services are made available, online or otherwise. Also, policing
unauthorized use of our trademark, service mark or other proprietary rights
might be difficult and expensive and we may be unable to protect our brand and
our trademarks from third party challenges. Our US SEARCH brand may suffer and
our business and results of operations could be materially and adversely
affected if we are unable to effectively protect or enforce our trademark,
service marks or other proprietary rights.
We may be unable to prevent third parties from developing Web sites and
acquiring domain names similar to ours
We have registered several domain names, including 1800USSEARCH.com and
ussearch.com. We know of at least one competitor that has a corporate name and
domain name similar to ours. This competitor also has a Web site with a similar
look and feel to our Web site. We believe that these similarities may cause
confusion on the part of potential clients, and this confusion may harm our
business and results of operations. We may be unable to prevent third parties
from acquiring domain names that are similar to, infringe upon or otherwise
decrease the value of our trademarks and other property rights.
17
<PAGE>
We face significant security risks related to our electronic transmission of
confidential information
We rely on encryption and other technologies to provide system security to
effect secure transmission of confidential information, such as credit card
numbers. We license these technologies from third parties. Advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments may result in a compromise or breach of the security measures used
by us to protect customer transaction data. If any compromise of our security
were to occur, it could materially adversely affect our reputation and business.
A party who is able to circumvent our security measures could misappropriate
proprietary information or cause interruptions in our operations and damage to
our reputation and customers' willingness to engage in electronic commerce on
our Web site. We may be required to expend significant capital and other
resources to protect against these security breaches or to alleviate problems
caused by these breaches. If our third-party contractors experience security
breaches involving the storage and transmission of proprietary information, such
as credit card numbers, our reputation may be damaged and we may be exposed to
risk of loss or litigation.
We face risks of fraud related to fraudulent credit card information and 900
telephone service
Like many other service providers who accept credit card information
without a signature over the telephone or Internet or who provide 900 telephone
service, we have issued credits as a result of orders placed with fraudulent
credit card information. We may suffer losses as a result of fraudulent use of
credit card information or the continued reliance on 900 telephone service in
the future.
We could face liability based on the nature of our services and the content of
the materials that we provide
We may face potential liability from individuals, government agencies or
businesses for defamation, invasion of privacy, negligence, copyright, patent or
trademark infringement and other claims based on the nature and content of the
materials that appear on our Web site or in our search reports sent to
consumers. Although we carry a limited amount of general liability insurance,
our insurance may not cover claims of these types or may not be adequate to
indemnify us for all liability that may be imposed. In addition, this insurance
may not remain available to us on acceptable terms. Any imposition of liability,
particularly liability that is not covered by insurance or is in excess of our
insurance coverage, could have a material adverse effect on our reputation and
our business and results of operations.
We could face claims from clients or the subjects of our search reports that are
not covered by insurance
We could be held liable to clients and/or to the subjects of individual
search reports prepared by us for inaccurate information or misuse of the
information. We have internal practices designed to help ensure that information
contained in our services meet industry standards for accuracy. We have retained
counsel to ensure that we are in compliance with the Fair Credit Reporting Act
and similar state laws with respect to our pre-employment screening services.
However, we do not currently maintain liability insurance to cover claims by
clients or the subjects of reports. Based on our research, losses from these
claims are either uninsurable or the insurance that is available is so limited
in coverage that it is not economically practicable. We intend to continue our
efforts to obtain insurance coverage for these types of claims but adequate
insurance coverage may not be available on terms acceptable to us. Claims of
violations of the FCRA or similar state laws may be made against us in the
future and the claims, if made, may not be successfully defended. Uninsured
losses from claims could materially adversely affect our business and results of
operations.
We face risks associated with government regulation and legal uncertainties
relating to the Internet
We are subject to regulations applicable to businesses generally and laws
or regulations specifically applicable to electronic commerce. Due to concerns
arising in connection with the increasing popularity and use of the Internet, a
number of new or changed laws, governmental policies and/or regulations may be
adopted, or cases may be decided, with respect to the Internet or commercial
online services covering issues such as property ownership, user privacy, libel,
pricing, acceptable content, copyrights, trademarks and/or other intellectual
property rights, distribution, taxation, access charges and other fees, and
quality of products and services. Cost increases relating to this government
regulation could result in these increased costs being passed along Internet end
users and could dampen the growth in use of the Internet as a communications and
commercial medium, which could have a material adverse effect on our business
and results of operations.
18
<PAGE>
Our services may suffer as a result of natural disasters
Our ability to successfully receive and complete search requests and
provide high-quality client service largely depends on the efficient and
uninterrupted operation of our computer and communications hardware systems.
Substantially all of our computer and communications hardware is currently
located at facilities in Southern California, which is an area susceptible to
earthquakes. Our systems and operations may be vulnerable to damage or
interruption from earthquakes, fire, flood, power loss, telecommunications
failure, break-ins and similar events. We do not carry business interruption
insurance sufficient to compensate fully for all losses, and in some cases, any
losses from any or all these types of events.
Our certificate of incorporation, bylaws and Delaware law contain provisions
that could discourage a third party from acquiring us and consequently decrease
the market value of our common stock
Our certificate of incorporation grants our board of directors the
authority to issue up to 1,000,000 shares of preferred stock, and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights of these shares without any further vote or action by the stockholders.
Since the preferred stock could be issued with voting, liquidation, dividend and
other rights superior to those of the common stock, the rights of the holders of
common stock will be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that may be issued. The issuance of preferred
stock could have the effect of making it more difficult for a third party to
acquire a majority of our outstanding voting stock which could decrease the
market value of our stock. Further, provisions in our certificate of
incorporation and bylaws and of Delaware law could have the effect of delaying
or preventing a third party from acquiring us, even if a change in control would
be in the best interest of our stockholders. These provisions include the
inability of stockholders to act by written consent without a meeting and
procedures required for director nomination and stockholder proposal.
Item 3. Quantitative and qualitative disclosures about market risk
We considered the provisions of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent In Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments." We had no
holdings of derivative financial instruments at March 31, 2000 and our total
liabilities as of March 31, 2000 consist primarily of notes payable and accounts
payable which have fixed interest rates and were not subject to any significant
market risk.
19
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 3, 2000 a tradename and service mark complaint was filed against the
Company in the United States District Court for the Eastern District of
Virginia, styled U.S.Search, LLC v USSearch.com Inc. Civil Action No. 00-554-A.
The complaint seeks injunctive relief, damages not less than $5 million, costs
and other further civil and equitable relief. The Complaint alleges violations
of the Lanham Act and common law unfair competition in that the Company's use of
the U.S. Search trade name and service mark created actual confusion or
likelihood of confusion. The Company has answered the complaint and filed
counterclaims against plaintiff U.S.Search LLC for infringement of a federally
registered trademark, false designation of origin under section 43(a) of the
Lanham Act and common law unfair competition. The Company believes the suit has
no merit.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
- ----------- -----------
3.1* Certificate of Incorporation
3.1.1* Certificate of Amendment of Certificate of Incorporation, dated
May 12, 1999, changing corporate name to US SEARCH.com Inc.
3.2* Bylaws
4.1* Form of Common Stock Certificate
10.1** Employment Agreement, dated February 3, 2000, between US SEARCH
and Brent N. Cohen
27.1 Financial Data Schedule
* Filed with the Company's Registration Statement on Form S-1, File No. 333-
76099, declared effective on June 24, 1999, incorporated herein by
reference.
** Filed with the Company's Annual Report on Form 10-K for the year ending
December 31, 1999, incorporated herein by reference.
(b) Reports on Form 8-K:
None
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
US SEARCH.COM INC.
(Registrant)
Date: May 12, 2000 /s/ WILLIAM G. LANGLEY
William G. Langley
Vice President, Chief Financial Officer
(Principal Financial Officer)
Date: May 12, 2000 /s/ ALAN S. MAZURSKY
Alan S. Mazursky
Vice President, Finance
(Principal Accounting Officer)
21
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
3.1* Certificate of Incorporation
3.1.1* Certificate of Amendment of Certificate of Incorporation, dated
May 12, 1999, changing corporate name to US SEARCH.com Inc.
3.2* Bylaws
4.1* Form of Common Stock Certificate
10.1** Employment Agreement, dated February 3, 2000, between US SEARCH
and Brent N. Cohen
27.1 Financial Data Schedule
* Filed with the Company's Registration Statement on Form S-1, File No. 333-
76099, declared effective on June 24, 1999, incorporated herein by
reference.
** Filed with the Company's Annual Report on Form 10-K for the year ending
December 31, 1999, incorporated herein by reference.
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM US
SEARCH.COM INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31,
2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 12,128
<SECURITIES> 0
<RECEIVABLES> 417
<ALLOWANCES> 98
<INVENTORY> 0
<CURRENT-ASSETS> 17,623
<PP&E> 3,626
<DEPRECIATION> 645
<TOTAL-ASSETS> 20,925
<CURRENT-LIABILITIES> 6,430
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 14,240
<TOTAL-LIABILITY-AND-EQUITY> 20,925
<SALES> 7,450
<TOTAL-REVENUES> 7,450
<CGS> 3,173
<TOTAL-COSTS> 11,212
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> (6,705)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,705)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,705)
<EPS-BASIC> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
