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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999 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, CA 90066
(Address of principal executive offices) (Zip Code)
(310) 302-6300
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, par value $0.001 per share
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 ___
---
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. ______
The aggregate market value based on the closing price of the Registrant's Common
Stock held by non-affiliates of the Registrant was approximately $37,200,000 as
of March 27, 2000.
There were 17,601,644 shares of outstanding Common Stock of the Registrant as of
March 27, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for its 2000 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A not later than
120 days after the end of the Registrant's fiscal year (December 31, 1999) are
incorporated by reference in Part III Items 10, 11, 12 and 13 and Part IV of
this Form 10-K.
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INDEX
Part I Page Number
- ------ -----------
Item 1: Business 2
Item 2: Properties 22
Item 3: Legal Proceedings 22
Item 4: Submission of Matters to a Vote of Security Holders 22
Part II
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Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 23
Item 6: Selected Financial Data 24
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations 26
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 34
Item 8: Financial Statements and Supplementary Data 34
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 34
Part III
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Item 10: Directors and Executive Officers of the Registrant 35
Item 11: Executive Compensation 35
Item 12: Security Ownership of Certain Beneficial Owners and Management 35
Item 13: Certain Relationships and Related Transactions 35
Part IV
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Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K 36
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PART I
Item 1. Business
THE FOLLOWING DISCUSSION 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 OUR 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
OUR OTHER PUBLIC FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. WE
UNDERTAKE NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS,
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
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. Using our services, clients can
obtain addresses, aliases, listed telephone numbers, property ownership, court
records and judgments, criminal convictions, corporate affiliations and death
record information, among other things.
All of our searches are performed by electronically accessing various
information databases. We aggregate the requested information and deliver the
search results via e-mail, facsimile or United States mail, at the customer's
direction. A growing number of searches can be conducted directly by clients via
our Web site. For example, our Internet-based "Instant Searches" are processed
online, in a completely automated fashion, and the results are often delivered
in as little as a few seconds or minutes. For more complex searches, we also
provide additional services, including assisted searches, both online and
through our toll free telephone number. Search results can be delivered through
our Web site, by e-mail, telephone, facsimile or mail. We continually evaluate
our database and other information sources to ensure that we make available the
most timely, accurate and comprehensive data and information to our clients.
Industry Background
The Fragmented Nature of Individual Reference Services
A considerable amount of information can be accessed with respect to
every individual as permitted by law. This information includes names and
addresses, aliases, nationwide court records, property ownership, bankruptcies,
criminal records, associates, etc. However, the sources of this information are
often fragmented, and geographically dispersed. In addition, the reliability of
this information and the data provided by multiple sources may not be
consistent. In this environment, individuals, businesses and government agencies
who wish to access individual reference services are faced with the
time-consuming, costly and difficult task of gathering data from numerous
locations and sources. Even after gathering the data, consumers and businesses
may not be able to adequately verify the information and organize it into a
useful format.
While services and technologies have developed to enable remote access
to individual reference services, there generally has been no single,
comprehensive access point for the multitude of information available about
individuals.
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Other sources, including credit reporting services and other database services,
make available only limited types of information for specific purposes, such as
verifying individual credit records. More comprehensive search and background
check services are available through private investigation firms, but they are
typically too detailed and expensive to permit general use by the public and
small business.
Highly Mobile Society
In addition, our society is highly mobile and constantly changing:
people are moving, getting married or divorced, changing jobs, changing names,
acquiring and disposing of assets and interacting with different private and
public entities for personal, professional and commercial reasons. These
population and market dynamics often make it very difficult to maintain contact
with friends, relatives and others and to verify individual background and
reference information for important business, personal or other purposes.
According to research published by the U.S. Department of Commerce's Census
Bureau, between March 1997 and March 1998, about 42.5 million Americans, 16% of
the population, moved. In addition, according to research published by the
Bureau of National Affairs, the average monthly employee turnover rate for 1999
was approximately 1.2% of the U.S. work force. Moreover, according to the U.S.
Bureau of Labor Statistics, in February 1998, the average worker in the U.S. had
been with their current employer for only 3.6 years. According to the U.S.
Bureau of Labor Statistics, approximately 24 million individuals re-entered the
United States work force in 1999.
The Individual Reference Service Industry
The individual reference service industry plays an important role in
our highly mobile society--helping consumers, businesses and government agencies
find people, verify identities and otherwise obtain useful information about
individuals that may assist in decision-making processes. Individual reference
services provide clients with access to databases containing information
obtained from various fragmented, geographically dispersed sources, including
(1) records that government agencies have made available for public inspection;
(2) publicly available information from non-governmental sources, such as
telephone directories and newspaper reports; and (3) to a lesser extent,
proprietary or non-public sources, such as survey data, other self-reported
information, or credit header data (the non-financial identifying information at
the top of a credit report).
Growth of the Internet and Electronic Commerce
The growth of the Internet has fueled electronic commerce. A report
generated by International Data Corporation ("IDC"), a third-party market
research firm, estimates that the number of users worldwide who make purchases
over the web will grow from an estimated 31 million at the end of 1998 to an
estimated 183 million in 2003. Several factors have fueled the growth of the
Internet and its increased use by businesses and consumers as a vehicle for
commerce, including:
. the large and growing number of personal computers in the workplace and
home, both domestic and international;
. the continued improvements in network infrastructure and capacity;
. the easy, low-cost access to the Internet and new navigation capabilities;
. the proliferation of online content and the development of specialized
online services; and
. the growing acceptance and awareness of the Internet among consumer and
business users.
The growth of the Internet as a global medium for communication and
information exchange has driven demand for content and services which can be
accessed and delivered online. In particular, the Internet provides the ability
to efficiently and rapidly search, access and manipulate information from a wide
variety of sources regardless of their location. Through electronic commerce,
these information services can be accessed and delivered online quickly, easily
and inexpensively.
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Growing acceptance of electronic commerce has enabled businesses to
offer their products and services to a global audience and develop one-to-one
relationships with businesses and consumers without having to make significant
investments in traditional infrastructure such as retail outlets, distribution
channels and sales personnel. Technological advances that enable secure online
transactions have also facilitated an increase in electronic commerce. In
addition, businesses and consumers can access a broader selection of goods,
efficiently compare goods and make informed purchasing decisions. Consumers and
business users also benefit from the increased convenience of purchasing goods
and services from anywhere at anytime using their personal computers or mobile
and wireless devices.
As a result, the volume of business transacted on the Internet is
increasing substantially. IDC estimates that the total value of goods and
services purchased over the Internet worldwide will grow to over $1 trillion per
year. IDC also estimates that business to consumer commerce on the Internet will
increase from approximately $11 billion in 1998 to approximately $94 billion in
2002. Business to business commerce on the Internet is expected to grow from
approximately $21 billion in 1998 to approximately $332 billion in 2002.
The use of the Internet for recruiting employees is also growing
rapidly. According to the Internet Business Network, the electronic recruiting
industry in the United States is expected to grow from $4 billion in 1998 to
over $28 billion by 2005. In addition, issues such as workplace violence make
pre-employment screening an increasingly important step in the recruiting
process for many employers.
The fragmented nature of individual reference data sources, the highly
mobile nature of our society and the growth of the Internet and electronic
commerce has created a significant opportunity for companies, including those
within the individual reference services industry, who are capable of offering
this content through the Internet. Using the Internet, decision-making
information can be gathered and delivered without the need for time consuming
and expensive searches by the client. Without these services, individuals would
typically be required to locate and visit multiple government offices or other
data sources and become acquainted with varying methods of categorization,
access and retrieval.
Benefits of US SEARCH Services
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. Our services can be accessed through
our Web site, USSEARCH.com, or by calling our toll free telephone number,
1-800-USSEARCH. We perform searches by electronically accessing multiple,
geographically-dispersed databases, aggregating the requested information, and
then delivering the search results in a user-friendly format, often within
seconds or minutes. Search results can be delivered by e-mail, telephone,
facsimile or mail. Most of our searches are highly automated. A growing number
of searches can be conducted instantly by our clients online via our Web site.
We also provide our clients with additional services, such as assisted searches,
both online or through our toll free telephone number. We continually evaluate
our database and other information sources to ensure that we make available
timely, accurate and comprehensive individual reference and background
information to our clients. Key benefits of our services include:
. Single Access Point to Broad Range of Information Services. We provide
corporate, professional and consumer clients with a single, comprehensive
access point to a broad range of individual reference information. Through
our Web site and toll free telephone number, clients can obtain addresses,
aliases, phone numbers, property ownership, court records and judgments,
corporate affiliations, and death information. In addition, we have entered
into and intend to continue to pursue arrangements where our individual
reference and background screening services are integrated into the web
sites of other providers of business services.
. Corporate and Professional Service Offerings. Our information and search
services for corporate and professional clients currently include
individual locator, individual profile report, search services, pre-
employment and background screening. We offer these services primarily to
corporate and professional organizations, such as attorneys and law firms,
nationwide retailers, insurance companies, health care providers, colleges
and universities, medical researchers and lodging and transportation
companies. In addition, we have established a corporate sales
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force to increase the marketing of our services to prospective professional
and corporate clients and to address the specific needs of each corporate
and professional client.
. Expanding Range of Online Search Services. Our online searches provide
clients with convenient, effective and inexpensive access to information
about individuals. Online searches access databases electronically and can
be performed quickly and effectively by the client on our Web site. In the
case of our Internet-based "Instant Searches," which include individual
locator, first name only, national death record searches, court record,
civil judgment, and bankruptcy searches, the search request is processed
online, in a completely automated fashion, and the results are often
delivered in as little as a few seconds or minutes. Our online searches
currently include "Instant Searches," individual locator, individual
profile report, anti-fraud identification verification, nationwide court
records, employment screening, real property searches, and criminal
convictions. We intend to increase the number of online searches, including
the number of "Instant Searches," available to our clients.
. Growing Access to Information Sources. We electronically access and
aggregate data from multiple, geographically-dispersed databases and other
information sources. These data sources provide us with access to a wide
variety of information about individuals such as aliases, bankruptcies,
past and current addresses and telephone numbers, property ownership, court
judgments and criminal convictions. We continually evaluate our information
sources to ensure that we have access to the most timely, accurate and
comprehensive information.
. Additional Services. We provide additional services through our search
specialists for more complex and in-depth information search requests. We
are often able to fulfill a client's search request based on very minimal
client input information, such as a first and last name or a date of birth.
We provide both pre-and post-sales support via e-mail, and telephone-based
client services and search consultations, 24 hours a day, seven days a
week. Our search specialists are trained to perform searches, help clients
define search criteria, refine the search process to produce useful results
for clients, and assist clients in understanding the search results. We
provide services to business clients with a separate sales and customer
service staff and in many cases an upgraded range of services as permitted
by law.
US SEARCH Strategy
Our objective is to be the leading provider of individual reference and
background information services on the Internet to corporate, professional and
consumer clients. To accomplish these objectives, we plan to:
Establish relationships with key professional and corporate partners. To
increase the market acceptance of our services and to more effectively market
our services to corporate and professional clients, we have established
co-marketing agreements with companies and intend to continue to develop and
establish relationships with key partners and enter into additional co-marketing
programs. Our intent is that these partners will incorporate our services into
their products and services intended for the corporate and professional markets.
For example, in the market for pre-employment background screening services, we
have established a relationship with Net Hot Development, Inc. which provides
recruiting management and human resources software and related solutions.
Strengthen the US SEARCH Brand. We began marketing our services under our 1-
800 US SEARCH brand. We intend to strengthen our brand position through
continued extensive advertising, emphasizing on our USSEARCH.com Web site and
promotion of additional information and search services under the US SEARCH
brand. We also intend to combine increasing Internet-based advertising and
Internet marketing agreements with strategically placed television advertising
to attract a greater number of users to our Web site and to allocate the
delivery of advertising contracted impressions to pages which attract corporate
and professional users.
Leverage Efficiencies of the Internet. We are committed to offering a
greater number of Internet-based "Instant Searches" and expanding the type and
nature of information that can be accessed through our Web site. To do this, we
intend to increase the use and accessibility of our Web site and enhance our
technology infrastructure to accommodate electronic access to additional
information sources, increase the speed and automation of search and delivery
processes, and improve our user interface, navigation and transaction
processing.
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Expand Range of Service Offerings. We regularly evaluate potential service
offerings and will promote new services to our clients. To do this, we plan to
continue to gain access to additional third party content and database
information and enter into marketing agreements with Application Service
Providers and other providers of web-and intranet-based business services and
other popular Web sites to offer integrated search services to clients. We
intend to monitor the market acceptance of new service offerings and combine
complementary services to encourage multiple searches by the same client. We
also intend to evaluate the acquisition of companies that offer such business to
business services.
USSEARCH provides clients with a single, comprehensive access point to
a broad range of reference information about individuals. The fees for our
services range from $10.00 to $500.00 per transaction based on the nature and
amount of information gathered and whether or not the search is assisted by one
of our search specialists. We believe that by providing a broad range of
services at multiple price points, we promote increased use of our services and
offer a better value than alternative sources. We have expanded our service
offerings to include pre-employment background screening and other services for
corporate and professional clients and government agencies.
The table below illustrates our current service offerings. Prices for our
services vary based on the nature and amount of information gathered and whether
or not the search is assisted by a search specialist.
Name of Search Service Typical Selling Prices Type of Search Results
- --------------------------------- ------------------------------- --------------------------------
"Instant Searches"...............
$10 for first search First and last name,
-last name only search $ 5 for additional searches addresses
-first name only search $14.95 for first search First and last name,
$ 2.50 for additional searches addresses
-national death records search $12.00 First and last name, date
of birth, date of death,
city, state and zip code
where the death benefits
were issued
Individual Locator Search....... $19.95-$69.95 Address and telephone
number of the person,
date of birth*, date of
death* and the city,
state and zip code where
the death benefits were
issued*
(* Based on package)
Individual Profile Report.......$39.95-$139.95 First and last name,
aliases, current and
previous addresses,
telephone numbers,
bankruptcies, property
ownership, nationwide
court records, and
Anti-Fraud Identification Verification.. $50.00-$69.95 Addresses associated
with the social security
number, telephone
number, date of birth,
any known aliases, and
name variations of the
social security number,
and the state and year
the social security
number was issued
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Nationwide Court Records Search......... $20.00 Pending and past
lawsuits, civil
judgments, foreclosures,
property and tax liens,
and unlawful detainers
Employment Screening......................$69.95-$149.95 First and last name,
aliases, date of birth,
social security number,
current a previous
address, criminal
records, employment
verification, driver's
license history* civil
records search*,
education verification,*
property records*,
vehicle ownership*,
bankruptcies*, liens*,
Judgments*, (* Based
on package)
Criminal Records Search............... $20.00-$39.95 Misdemeanor and felony
convictions in most
counties in the U.S.
Instant Searches. To conduct an "Instant Search," the client enters available
information into appropriate fields on our Web site. Searches are performed
automatically and results are delivered via email, often in a matter of seconds
or minutes. If a client desires additional information, the client can then
request a more comprehensive search service which may include using a search
specialist to assist in completing the search request. We apply up to a portion
of the cost of the "Instant Searches" purchased online by the client towards the
cost of the more comprehensive search.
Individual Locator. This service is targeted at individual, corporate and
professional clients interested in locating missing individuals such as long-
lost friends, family, former employees, or business contacts. Corporate and
professional organizations may also wish to locate a large number of members in
connection with class reunions, corporate gatherings or fundraising efforts. We
can search public records and publicly available data to find the person, with
as little as a person's name, date of birth or last known address.
Individual Profile Reports. Individual or corporate clients can order a
search to verify information about a person and determine whether there is any
material information about a person's history that has not been disclosed. This
service provides a simple individual profile report at an affordable,
cost-effective price. Using this service, a client will receive information
about a person's previous addresses, lawsuits, judgments, UCC filings, property
ownership and corporate affiliations. We believe that the individual profile
report can provide valuable decision support to corporate and professional
clients. The data sources for this report include public records, publicly
available data and certain non-public records.
Anti-Fraud Identification Verification. This service allows clients to search
for evidence of anyone using their social security number or assuming their
identity for fraudulent purposes. One of the major causes of credit card fraud
is the unlawful use of a person's social security number to gain credit. The
person whose identity was used typically suffers the expense of time and money
trying to remove the information from his or her credit reports. Our service
allows for early detection of this activity, avoiding time consuming and costly
resolution. The client is provided with addresses associated with their social
security number for the past 7-10 years, the telephone number, date of birth,
known aliases, and name variations of the social security number, and the state
and year the social security number was issued.
Nationwide Court Records Search. This service allows clients to search court
records across all 50 states to determine if an individual has filed any
lawsuits, had lawsuits filed against them, obtained a civil judgment, had a
civil judgment
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filed against them, had property or tax liens against them, had any
foreclosures, or had any unlawful detainers filed against them.
Employment Screening. This service allows corporate clients to order
individual and packaged services for purposes permissible under FCRA guidelines.
Employers utilize this service to make hiring decisions and to reduce overall
risk in the work place. Current product offerings include name, address and
social security number verification; employment verification; education
verification; criminal convictions; civil judgments; professional licensing
verification and driver's license history.
Criminal Records Search. Criminal record searches are available on a county-
by-county basis in all 50 states. Our service provides felony and misdemeanor
criminal convictions for up to 7 to 10 years.
Using US SEARCH Services
Accessing US SEARCH services is quick, easy and inexpensive. Clients can
access our services through our Web site, USSEARCH.com. If desired, customers
can also contact sales personnel using our toll free telephone number, 1-800- US
SEARCH. Our services are available 24 hours a day, seven days a week.
USSEARCH.com Web Site. Clients can access our Web site directly or can click
through via our advertising on the following Internet search engines and popular
Web sites: AOL.com, MSN.com, Excite.com, InfoSpace.com, Lycos.com, Snap.com,
Go/Infoseek.com, WhoWhere.com, Tripod.com, Yahoo.com, Bigfoot.com and
Angelfire.com. From our Web site, a client can choose from one of our completely
automated "Instant Searches" or from several different types of assisted
searches, including (1) individual locator; (2) individual profile reports; (3)
employment background screening; (4) anti- fraud identification verification; or
(5) court records including criminal convictions. Once a search is selected, a
client will be prompted to fill in specific information, such as the full name,
birth date, or last known address of the individual about whom the information
is requested. In some cases, a search can be performed with as little as a
person's first name. Prior to processing the search request, the client must
complete an order form and provide us with the client's credit card information.
In the case of employment background screening, additional forms are required to
achieve full FCRA compliance.
In the case of our Internet-based "Instant Searches," the search request is
processed online, and the results are often delivered in as little as a few
seconds or minutes. In the case of our partially-automated searches, the request
is forwarded to one of our search specialists for fulfillment. Based on the
information provided, our search specialists search, aggregate, cross- reference
and verify data from multiple, dispersed databases in order to find the most
useful results for the client. Our computer system then assembles the results
into a pre-formatted template. After review, the completed report is delivered
to the client by email, facsimile or mail. It is our long-term strategy to offer
an increasing number of automated search services and expand the type and nature
of information that may be accessed online through our Web site.
US SEARCH Telephone Services. Through our toll free telephone number,
1-800-USSEARCH, we provide additional search services for more complex and in-
depth search requests. Our operations and support center has trained search
specialists and customer service agents available 24 hours a day, seven days a
week. We train our search specialists and customer service representatives to
offer solutions that best address the clients' search requests and information
needs. We believe that access to our toll free telephone number increases the
ease and convenience of our services and allows for a greater range of available
services, delivery methods, and payment options.
Information Database Sources. We have direct and indirect electronic access
to a broad range of individual reference service databases and other information
sources such as CSRA/Ameridex, Due Diligence, Accurate Background Checks, and
DBT Online. These suppliers, directly and indirectly, provide us with quick
access to a wide variety of information such as aliases, bankruptcies, property
ownership, past and current addresses, address profiles, current and previous
listed telephone numbers, judgments, personal and real property information,
criminal convictions, corporate affiliation information, UCC filings, and
certain professional licenses. We maintain open accounts with our data providers
and pay
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fees per inquiry. Our primary supplier, DBT Online, is the parent company of
Know-X.com, and has recently announced that it will merge with ChoicePoint, Inc.
Know-X.com and ChoicePoint are competitors of ours.
We continually evaluate our information database sources both to ensure that
we have access to the most timely, cost- effective, accurate and comprehensive
data, and to expand the number of automated searches offered to our clients. If
we determine that a particular information database source is inadequate or it
otherwise becomes unavailable, we believe we can switch to an alternative data
source with some increase in cost and without significant delay.
Marketing and Brand Awareness
We market our services through a combination of Internet and television
advertising featuring our US SEARCH.com brand. We intend to continue to
strengthen our US SEARCH.com brand through Internet advertising programs that
are more efficient, plus continued strategically-placed television advertising,
public relations programs and the extension of our brand to cover a widening
product line of information services. In order to further expand our corporate
and professional business, we plan to target an increasing portion of our
marketing and advertising programs and related expenditures toward business and
professional clients rather than consumers.
Marketing to Corporate and Professional Clients. We have established a
corporate sales force and a team of research specialists to promote and increase
the marketing of our services to prospective professional and corporate clients
and to address the specific needs of each corporate and professional client. We
also offer corporate accounts with volume discounts to promote and market our
services. In addition, we work closely with corporate and professional clients
to better understand their information and search needs, and we have leveraged
our existing database information to create search services tailored to those
needs. For example, in November 1999, we began offering pre-employment
background screening services to corporate and professional clients, allowing
these clients to conduct background screening information searches in connection
with hiring and other employment decisions. In addition, we expect to design
customized Web pages with specific search criteria tailored to the needs of each
corporate and professional client. The customized Web page would conveniently
and securely provide online delivery of search results that could then be more
easily integrated with the client's own existing database or other technology
infrastructure.
Internet Advertising. We believe that marketing agreements with
Internet search engines and popular Web sites have increased our brand
recognition and attracted clients. We generate visitors to our Web site from our
various forms of Internet advertising, such as banners, buttons, text links and
integrated "search boxes". We maintain marketing agreements with leading
Internet search engines and popular Web sites, including AOL.com, Yahoo!, The
Lycos Network and Infospace.com. These marketing agreements have placed our
advertising on major Web sites such as AOL.com, Yahoo!, MSN.com, Lycos.com,
Hotbot.com, Excite.com, Wired.com, Quote.com, WhoWhere.com, and others. We
believe that these sites reach a growing base of Internet users that engage in
both business to business and business to consumer eCommerce purchases.
We plan to continue to use Internet advertising to acquire clients and
enhance our brand recognition. In addition, we intend to develop lower-cost
supplemental client acquisition programs including our affiliate marketing
program that works with a wide variety of smaller Web sites, commissioning these
affiliates on a pay-for-performance basis. We also intend to develop strategic
marketing relationships with other companies based upon traffic patterns,
customer profiles and related services, increasing our revenue from the
Internet, primarily via a pay-for-performance basis.
The following is a summary of some of the key features of our key Internet
marketing agreements:
. InfoSpace.com. InfoSpace has agreed to integrate our content into its
Web site and offer our service as a co-branded service distributed on its
network. As a co-branded service, our services and brand are featured
alongside the services and/or brand of the respective Web site within the
network of InfoSpace.com. During the four-year term beginning 1998,
InfoSpace will not run advertising on its Web site from any of our
competitors, and we will not include the name of any competitor of
InfoSpace in our advertising. The Infospace.com agreement provides us with
a minimum guarantee of 72 million impressions per month within the
Infospace network and affiliated Web sites.
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. The Lycos Network (Lycos.com, WhoWhere.com, Tripod.com, Angelfire.com,
Hotbot.com, wired.com, Quote.com). Lycos has agreed to advertise our
content on all of its affiliated sites in the form of buttons, text links,
banners, and keywords. Our agreement is for a term of one year starting in
March of 1999, which has been renewed through February 2001. Our agreement
provides that Lycos will not run advertising from any of our competitors on
any of the sites that Lycos owns. The Lycos agreement provides us with a
minimum guarantee of 500 million impressions for the first year and 836
million impressions in the second year.
. Yahoo! has agreed to integrate our search services into its Yahoo People
Search Web site. Yahoo! has also agreed to advertise our content on Yahoo!
People Search and other areas of Yahoo's US-based Web sites in the form of
graphic links, text links and banners. Our agreement provides that we will
be the only third party to have specific types of services relating to
information about individuals and businesses integrated into or advertised
on Yahoo! People Search. Yahoo! has agreed to place our banner advertising
on specific directory and keyword search result pages. Under this
agreement, Yahoo! has the right to honor its current contracts with
companies that may directly compete with us. The term of our agreement with
Yahoo! expires on January 31, 2001.
. AOL.com. USSEARCH is a Gold Tenant in the Business Services Department of
the Shop@AOL, AOL.com, CompuServe and Netscape online shopping
destinations. Business users can click from Shop@AOL to USSEARCH.com
business services to obtain professional license checks, employment
screening and other business-oriented background searches. The term of our
agreement with AOL.com expires on June 30, 2000.
Other Programs and Relationships
. Affiliate Marketing Program. We have launched an affiliate marketing
program, which provides Internet Web site owners the ability to receive
commission payments when their users purchase US SEARCH.com products. We
are outsourcing the enrollment, tracking, payment and customer service
functions via the affiliate marketing services firm Be Free, Inc. In a
completely automated process, affiliates can join our program, download
creative advertising, place this advertising onto their Web pages and
immediately begin referring their audiences to our site and earn
commissions on the resulting sales.
. Co-Marketing Programs. We have entered into a co-marketing agreement with
NetHot Development, Inc. to be the exclusive provider of pre-employment
screening services integrated into NetHot Development's QuickHire(TM)
online hiring management software. We are planning to enter into additional
co-marketing agreements as part of our business to business strategy.
Television Advertising. We use television advertising to promote our services.
Our principal form of television advertising includes 10-second promotional fee
spots on national television programs that prominently feature our toll free
telephone number, 1-800 U.S. SEARCH, and Web site address, USSEARCH.com. We
intend to continue using television advertising to increase brand awareness and
loyalty and attract Internet users to our Web site. We will pursue multiple
marketing and advertising channels, combining strategically placed fee spots on
popular television shows with longer format commercials and other television
advertising. We believe that our television advertising has enabled us to
increase the reach of our US SEARCH brand and services.
We are currently the network closed captioning sponsor for CNBC and
regularly appear on other cable networks including MSNBC, CNN and CNN Headline
News. As a closed captioning sponsor, we receive a 10-second spot during regular
television programming which identifies us as a sponsor. Closed captioning
sponsorship is generally less expensive than other forms of television
advertising. We are also a fee spot sponsor of the two highest rated syndicated
television programs, Jeopardy and Wheel of Fortune.
Technology and Infrastructure
We currently have one Web server, housed offsite and another web server
in-house.
We plan to continue to upgrade and expand our servers and networking
infrastructure in an effort to improve accessibility, reliability, and the
response time of our Web site and back office systems and increase the
efficiency and
10
security of our services. For example, we intend to increase the number of
servers supporting our Web site, and rapidly deploy high quality software and
features into our system to increasingly automate our search processes and
improve communication and response time. By enhancing our technology
infrastructure we will be better positioned to expand our business to business
capabilities. We have invested in our telephone systems to allow for greater
flexibility in managing inbound call flows and gathering relevant trend
information.
By investing in our technology, datacommunications and telecommunications
infrastructures, we believe we can improve client accessibility to our services
and will be able to more effectively and securely collect user information and
respond to search requests. Any failure to effectively integrate planned
networking infrastructure and tools into our operations and any system or vendor
failure that causes an interruption in our service or decreases responsiveness
of our Web site or back office systems could result in less traffic on our Web
site or impact our fulfillment capabilities. If sustained or repeated, the
failures could impair our reputation, brand and overall demand for our services.
Competition
The individual reference service industry is highly competitive and highly
fragmented. Currently, our primary competitors in the area of individual locator
searches include major Internet search engines, telephone companies and other
third parties who publish free printed or electronic directories, private
investigation firms and a variety of other companies. Our primary competitors
for individual profile report search services include these companies, as well
as LEXIS-NEXIS, a division of Reed Elsevier Inc., The Dun & Bradstreet
Corporation, Reuters Limited, Avert, Inc., ChoicePoint, Inc., KnowX.com, a
division of DBT Online, our primary data supplier, the Kroll-O'Gara Company,
Pinkerton and the Proudfoot Reports Division of ASI Solutions, Inc. Many of
these companies 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. In addition, DBT
Online, our primary data supplier, recently announced an agreement to merge with
ChoicePoint, Inc., one of our competitors. We also compete with online services
and other Web site operators, as well as traditional media such as television,
radio and print for a share of advertisers' total advertising space or programs.
We do not presently consider major Internet search directories or Web sites as
competitors. In fact, we view them as lead generators through their search
directories and other services, and we presently benefit from strategic
advertising arrangements with several of the major Internet search engines and
Web sites.
Government Regulation
In connection with services we provide, particularly pre-employment screening,
we may be considered a "consumer reporting agency" as such term is used in the
Fair Credit Reporting Act, or the "FCRA," and, therefore, we are required to
comply with the various consumer credit disclosure requirements of the FCRA.
Noncompliance with the FCRA can result in enforcement by the Federal Trade
Commission ("FTC") and state attorney generals where they have similar
authority. Willful or negligent noncompliance could result in civil liability to
the subjects of reports. Also, the Americans with Disabilities Act of 1990, or
the "ADA," contains pre-employment inquiry and confidentiality restrictions
designed to prevent discrimination against individuals with disabilities in the
hiring process. Although our business is not directly regulated by the ADA, the
use by our clients of information sold to them is regulated, both as to the type
of information and the timing of its use.
Similarly, there are a number of states which have laws similar to the FCRA, and
some states which have laws more restrictive than the ADA. Further, many state
laws limit the type of information which can be made available to the public. In
addition, some state laws may require us to be licensed in order to conduct
pre-employment screening. Clients in these states can access our Web site, which
may subject us to the laws of those states. We may be subject to the laws of
states in which we have no contacts other than residents of the state ordering
services through our Web site and our delivery of reports to persons within the
state.
Many privacy and consumer advocates and federal regulators have become
increasingly concerned with the use of personal information, particularly
consumer credit reports (which we do not currently provide). For example, where
permitted by law, we search the "credit 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
11
possible other names. We also search these databases to determine if a
customer's social security number is being used by another person. 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. For example, the FTC
has proposed a regulation on the privacy of consumer financial information
implementing Title V of the Gramm-Leach-Bliley Act which may affect
accessibility to certain credit header data.
Licensing Requirements
A number of states require consumer reporting agencies or businesses which
provide investigative services to obtain a license to conduct business within
those states. We may be deemed subject to this licensing requirement because of
our individual profile report search services. As clients in those states access
our Web site, we may become subject to the laws of those states. We may be
subject to the laws of those states as a result of citizens of those states
purchasing our services through our Web site. We intend to apply for the
necessary licenses in each state where we conduct a substantial part of our
business. However, we may not be able to obtain the necessary licenses to do
business in those states. In addition, failure to comply with the privacy laws
of those states could subject us to civil litigation and liability to the
subjects of the search reports issued to our clients. Any violation of these
laws or failure to obtain required licenses could have a material adverse effect
on our business and results of operations.
Risk of Civil Liability
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 FCRA and similar state
laws. 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 or the claims, if made, may not be successfully defended.
Trademarks
We are the owner of registered trademarks for "1-800-USSEARCH" and "Reuniting
America Two People at a Time" and have applied for registered trademark status
for "USSEARCH," "The Public Record Portal," and our logo and service marks. We
have also registered several domain names, including 1800USSEARCH.com and
ussearch.com.
Limited Protection of Proprietary Information and Procedures
Our ability to compete effectively depends on our ability to protect our
proprietary information, including our proprietary methodologies, research,
tools, software code and other information. We rely primarily on a combination
of copyright, trademark, service mark and trade secret laws and confidentiality
procedures to protect our intellectual property rights. We request that our
consultants and employees sign confidentiality agreements and generally limit
access to and distribution of our research, methodologies and software codes.
Steps taken by us to protect our proprietary information may not be adequate to
prevent misappropriation. In addition, the laws of some countries do not protect
or enforce proprietary rights to the same extent as the laws of the United
States. The unauthorized use of our intellectual property could have a material
adverse effect on our business and results of operations. We believe that our
systems and procedures and other proprietary rights do not infringe upon the
proprietary rights of third parties.
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
12
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 and $ 26.4 million in 1999. As of December 31, 1999, we had an
accumulated deficit of approximately $33.2 million. We expect to incur
significant additional losses and continued negative cash flow from operations
for the foreseeable future. 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 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; and
. 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.
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, such as LEXIS- NEXIS, a division of Reed Elsevier Inc., The Dun
& Bradstreet Corporation, Reuters Limited, Avert, Inc. and ChoicePoint, Inc.,
which recently announced a merger with DBT Online, our primary data supplier;
and
. 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 over the Internet, but they may do so
13
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 public record 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 an 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.
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
14
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 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 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.
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 and BeFree 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
15
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 12-month period ended December
31, 1999. 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.
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
16
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 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 consumer and
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 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. As we offer new services and
pursue corporate and professional markets, we will also 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.
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
17
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 55.2% 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
takeover 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.
We depend on attracting qualified employees and responding to employee turnover
for our success
As of March 20, 2000, we had 198 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
18
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
2status 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.
We face significant security risks related to our electronic transmission of
confidential information
We rely on encryption and other technologies to provide system security and
verify users' identities 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
19
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, as we develop new services which may be subject to the
Fair Credit Reporting Act, or the "FCRA," we are in compliance with the FCRA and
similar state laws. 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.
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,
20
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.
Employees
As of March 20, 2000, we had 198 full-time and 12 part-time employees. We
believe that our relations with our employees are good. None of our employees
are represented by a union.
MANAGEMENT
The executive officers and key employees of US SEARCH and their ages as of
March 27, 2000, are as follows:
Name Age Position
---- --- --------
Brent N. Cohen............. 41 President, Chief Executive Officer and Director
William G. Langley......... 50 Vice President--Chief Financial Officer
Karol L.K. Pollock......... 47 Vice President and General Counsel
Robert Anderson............ 42 Vice President -- Marketing
Meg Shea-Chiles............ 45 Vice President--Business Development
Alan S. Mazursky........... 41 Vice President--Finance
Nicholas Matzorkis......... 37 Founder and Senior Strategist
Brent Cohen has served as our President and Chief Executive Officer since
February 2000. Mr. Cohen served on the advisory boards of several Internet
start-up companies from October 1998 through January 2000. From July 1987
through October 1998, Mr. Cohen held senior management positions with Packard
Bell NEC (formerly Packard Bell Electronics), including Chief Operating Officer,
Chief Financial Officer and President- Consumer and International. From January
1980 through December 1982 and from January 1985 through June 1987 Mr. Cohen
held various management positions in both the consulting and auditing practice
of Arthur Young & Company (now Ernst & Young). From January 1983 through
December 1984 Mr. Cohen completed compulsory service in the South African
military. Mr. Cohen holds a Bachelor of Commerce degree, a Graduate Diploma in
Accounting and an MBA from the University of Cape Town in South Africa. He is
also a charted accountant.
William G. Langley has served as our Chief Financial Officer since March
1999. From September 1998 to March 1999, Mr. Langley served as a financial
consultant to FEI Company, a company that designs, manufactures and markets
charged particle beam products. From September 1992 to September 1998, Mr.
Langley served as Chief Financial Officer of FEI Company and between October
1994 and February 1997 held the additional positions of Chief Operating Officer
and President. Mr. Langley was also a director of FEI from October 1994 through
September 1998. He is a member of the Oregon state bar and a certified public
accountant. Mr. Langley holds an LL.M. from New York University School of Law, a
J.D. from Northwestern School of Law of Lewis & Clark College and a B.A. from
Albertson College.
Karol Pollock has served as our Vice President and General Counsel since
October 1999. From September 1996 to October 1999 Ms. Pollock was Regional
Counsel with NASD Regulation, Inc. From March 1993 to July 1996 Ms. Pollock was
General Counsel and Assistant Director of the New Mexico Securities Division.
From September 1990 to September 1992 Ms. Pollock was senior staff attorney with
the Securities and Exchange Commission. Ms Pollock holds a J.D. degree from
Loyola University School of Law in Los Angeles and a B.A. from the University of
Illinois.
21
Robert Anderson has served as our Marketing Vice President since September
1999. From November 1997 to September 1999, Mr. Anderson was an independent
marketing consultant who served as Strategy Director for USWeb/CKS, product
manager for Apple Computer's printer and Macintosh display groups, and Vice
President of Sales and Marketing Parana Supplies, a subsidiary of Seiko Epson
Corporation. From 1995 to 1997 Mr. Anderson co-founded and operated Silver
Hammer, an Emmy Award-winning broadcast design firm. Mr. Anderson holds an MBA
degree from Columbia University and a B.S. in computer science from the
University of Southern California.
Meg Shea-Chiles has served as our Vice President, Business Development since
May 1999. From January 1998 to April 1999, Ms. Shea-Chiles served as a Global
Alliance Executive at IBM, where she also served as Director of Reengineering
and Information Technology from March 1996 to December 1998, and Program
Director of Business Development from May 1995 to March 1996. From December 1994
to May 1995, Ms. Shea-Chiles served as Vice President, Product Design for NBS
Imaging Systems, Inc., a systems integrator and producer of identification and
verification cards. From March 1989 to December 1994, Ms. Shea-Chiles served in
various roles at Network Equipment Technologies, Inc., a manufacturer of
enterprise network equipment, and became its Senior Director of Strategic
Partnership Programs in October 1991. Ms. Shea-Chiles holds a B.S., magna cum
laude, from Boston College and a M.S. from Southern Methodist University.
Alan S. Mazursky has served as our Vice President, Finance since February
1999. Effective February 1998, Kushner-Locke retained Alan Mazursky to provide
consulting services to Kushner-Locke. From May 1998 through July 1998, Kushner-
Locke provided Mr. Mazursky's services to us as a financial consultant. From
August 1998 through May 1999, Mr. Mazursky's services to us were provided as
part of his duties as an employee of Kushner-Locke under the Administrative
Services Agreement. From July 1996 to July 1998, Mr. Mazursky served as an
independent financial consultant. From June 1988 to June 1996, Mr. Mazursky was
Chief Financial Officer of Hard Rock Cafe America, the owner, operator and
franchisor of Hard Rock Cafe restaurants in the western United States and
international territories. From September 1984 to June 1988, Mr. Mazursky was
Corporate Controller of The Federated Group, a 68-store retail consumer
electronics chain, and from September 1980 to August 1984, he was an audit
supervisor for Ernst & Young LLP. Mr. Mazursky is a certified public accountant
and holds a B.S. from the University of California Los Angeles.
Nicholas Matzorkis, a co-founder, serves as our Senior Strategist. From our
inception in November 1994 to September 1998, Mr. Matzorkis served as our
President and one of our directors. From October 1991 to March 1994, Mr.
Matzorkis was founder and President of U.S. Bell Long Distance, an aggregator
and reseller of telecommunications services. In addition, from April 1995 to
December 1996, Mr. Matzorkis consulted with companies in the entertainment
industry on Web site development and has served as a promoter of a variety of
music and entertainment ventures. Mr. Matzorkis attended Kent State University.
In 1990, Mr. Matzorkis plead guilty to a fourth degree felony as a result of
providing false identification information in connection with the purchase of an
automobile, was given a suspended sentence and ordered to serve 200 hours of
community service. In 1997, Mr. Matzorkis was arrested for having failed to
complete his community service. Mr. Matzorkis subsequently completed this
community service. Mr. Matzorkis placed all of his shares in an irrevocable
trust for the benefit of his family, other than himself, and does not have
discretionary authority over the administration or control of the trust or the
disposition of the shares held in the trust.
Item 2. Properties
Our headquarters are located in approximately 52,500 square feet of office
space in Marina del Rey, California. The lease terminates on November 30, 2004,
and we have an option to extend the lease for an additional five years.
Item 3. Legal Proceedings
We may from time to time become a party to various legal proceedings arising
in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Security Holders
None.
22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is quoted on the NASDAQ National Market ("NNM") under
the symbol "SRCH." The following table sets forth the range of high and low sale
prices for the Common Stock, as reported on the NNM, for the periods indicated:
Common Stock High Low
------------ ----------------
Fiscal 1999
Second Quarter (ended June 30, 1999)................. $ 8.44 $ 6.44
Third Quarter (ended September 30, 1999)............. $17.38 $ 6.63
Fourth Quarter (ended December 31, 1999)............. $12.38 $ 6.63
Fiscal 2000
First Quarter (through March 27, 2000)............... $11.25 $ 3.69
On March 27, 2000 the last sale price for the Common Stock as reported on the
NNM was $5.75. On March 27, 2000, there were approximately 23 record holders
of the Company's Common Stock
Recent Sales of Unregistered Securities
During the fiscal year ended December 31, 1999, the Registrant has sold and
issued the following unregistered securities:
(1) On January 7, 1999, the Registrant issued a 10% convertible subordinated
note for up to $5,500,000 to The Kushner-Locke Company convertible into shares
of Common Stock at a conversion price of $2.21 per share. This note was
converted in full in connection with the closing of the Company's initial public
offering in June 1999.
(2) On January 7, 1999, the Registrant issued a warrant to purchase up to
906,782 shares of Common Stock to The Kushner-Locke Company at an exercise price
of $2.76 for the first 453,391 shares, and $3.31 for the next 453,391 shares.
This was in consideration for The Kushner-Locke Company agreeing to provide us
advances of up to $5,500,000. This warrant was exercised in full in connection
with the closing of the Company's initial public offering in June 1999.
The issuances of securities in the transactions described in paragraphs (1) and
(2) above were deemed to be exempt from registration under the Securities Act by
virtue of Section 4(2). The purchasers in each case represented their intention
to acquire the securities for investment only and not with a view to the
distribution thereof. Appropriate legends are affixed to the securities issued
in such transactions. All recipients either received adequate information about
the Registrant or had access, through employment or other relationships with the
Registrant, to such information.
Dividends
The Company has never paid any cash dividends and has no present intention
to declare or to pay cash dividends. It is the present policy of the Company to
retain any earnings to finance the growth and development of the Company's
business.
23
Item 6. Selected Financial Data
The selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of US SEARCH and related notes included
elsewhere in this Annual Report. The statements of operations data for each of
the years in the three-year period ended December 31, 1999, and the balance
sheet data at December 31, 1998 and 1999, are derived from financial statements
of US SEARCH audited by PricewaterhouseCoopers LLP, independent accountants,
which are included elsewhere in this Annual Report. The statements of operations
data for the year ended December 31, 1995 and 1996, and the balance sheet data
for December 31, 1995 and 1996 and 1997, are derived from audited financial
statements of US SEARCH (not included in this Annual Report). Historical results
are not necessarily indicative of the results to be expected in the future.
Condensed Statement of Operations Data:
Years Ended December 31,
-------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- -----------
(in thousands, except per share data)
Net revenues.................. $ 899 $ 5,690 $ 2,971 $ 9,245 $ 19,541
Cost of services.............. 551 3,150 1,291 3,149 7,293
---------- ---------- ---------- ---------- -----------
Gross profit.................. 348 2,540 1,680 6,096 12,248
---------- ---------- ---------- ---------- -----------
Operating expenses:
Selling and marketing........ 670 2,772 865 7,627 21,618
General and
administrative.............. 188 1,007 1,165 3,882 7,562
Charge for warrants issued
to majority stockholder(1).. -- -- -- 1,190 --
Charge for compensation
related to stock options.... -- -- -- -- 2,069
---------- ---------- ---------- ---------- -----------
Total operating
expenses..................... 858 3,779 2,030 12,699 31,249
---------- ---------- ---------- ---------- -----------
Loss from operations.......... (510) (1,239) (350) (6,603) (19,001)
Interest expense(2)........... (15) (64) (110) (197) (5,003)
Interest income............... -- -- -- -- 719
Amortization of debt
issue costs.................. -- -- -- -- (3,096)
Other (expense) income,
net.......................... 132 (60) 63 13 5
---------- ---------- ---------- ---------- -----------
Loss before income
taxes........................ (393) (1,363) (397) (6,787) (26,376)
Provision for income
taxes........................ 1 1 2 1 1
---------- ---------- ---------- ---------- -----------
Net loss...................... $ (394) $ (1,364) $ (399) $ (6,788) $ (26,377)
========== ========== ========== ========== ===========
Basic and diluted net
loss per-share(3)............ $ (0.04) $ (0.14) $ (0.04) $ (0.71) $ (1.94)
========== ========== ========== ========== ===========
Weighted-average shares
outstanding used in
per-share calculation(3)..... 9,521,000 9,521,000 9,521,000 9,521,000 13,612,000
As of December 31,
----------------------------------
24
1995 1996 1997 1998 1999
-------- -------- -------- ------- ------
Balance Sheet Data: (in thousands)
Cash and cash equivalents........... $ 7 $ -- $ -- $ 99 $ 17,382
Working capital(deficiency)......... (432) (2,069) (2,363) (7,761) 17,013
Total assets........................ 94 653 547 575 25,650
Long term debt, net of
current portion.................... -- 81 61 343 47
Total debt.......................... 233 850 904 4,001 84
Total stockholders'
equity (deficit)................... (388) (1,752) (2,151) (7,749) 19,489
(1) For a description of the charge for warrants issued to the majority
stockholder, see Note 10 of notes to the financial statements.
(2) Included in interest expense for 1999 is approximately $4.6 million relating
to the beneficial conversion feature of a convertible subordinated note. For a
further description of this charge, see note 7 of notes to the financial
statements.
(3) For a description of the method used to compute basic and diluted net loss
per share and weighted average number of shares outstanding, see Note 2 of notes
to the financial statements.
25
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THIS REPORT ON FROM 10-K 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 ABOVE UNDER "FACTORS AFFECTING OUR
BUSINESS,OPERATING RESULTS AND FINANCIAL CONDITION" AND ELSEWHERE IN THIS REPORT
AS WELL AS THOSE NOTED IN OUR AMENDED REGISTRATION STATEMENT ON FORM S-1 (FILE
NO. 333-76099) 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 SECTIONS TITLED "FACTORS
AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION" AND
"BUSINESS"UNDER ITEM 1 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 apply up to 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 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,
26
especially 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 payment processing costs. In addition, we include an
allocable portion of facilities, 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 public record data to
purchase approximately $20 million worth of such data and public record
information over a five and one-half year term. The minimum non-cancelable
payments under this agreement are $2.7 million for 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 December 31,
1999, the minimum non-cancelable payments required under these agreements are
approximately $9.7 million in 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 and $26.4 million in 1999. At December 31, 1999, we had an
accumulated deficit of approximately $33.2 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 $4.6 million in the
first half 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.
27
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 half of 1999 $2.5 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. This charge was amortized over the six
months the convertible subordinated note was outstanding.
During the first quarter of 1999, we granted certain stock options to
employees and non-employee directors and will continue to grant options under
the 1998 Stock Incentive Plan and the 1999 Non-Employee Directors' Stock Option
Plan. We recorded an unearned deferred compensation expense 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. As a
result, we currently expect to amortize the remaining unearned deferred
compensation at December 31, 1999 as follows: $719,000 in 2000; $307,000 in
2001; $72,000 in 2002; and $1,000 in 2003.
28
Results of Operations
The following table sets forth, for the periods indicated, the relative
percentages that certain income and expense items bear to net revenues:
Years Ended December 31,
-----------------------------
1997 1998 1999
------ ------ -------
Net revenues.................................... 100% 100% 100%
Cost of services................................ 44 34 37
---- ---- ----
Gross profit.................................... 56 66 63
---- ---- ----
Operating expenses:
Selling and marketing..................... 29 82 110
General and administrative.................... 39 42 39
Charge for warrants issued to majority
stockholder.................................. -- 13 --
Charge for compensation related to stock
options...................................... -- -- 11
---- ---- ----
Total operating expenses........................ 68 137 161
---- ---- ----
Loss from operations............................ (12) (71) (97)
Interest expense................................ (4) (2) (26)
Interest income................................ -- -- 4
Amortization of debt issue costs................ -- -- (16)
Other (expense) income, net..................... 3 -- --
---- ---- ----
Loss before income taxes........................ (13) (73) (135)
Provision for income taxes...................... -- -- --
---- ---- ----
Net loss........................................ (13)% (73)% (135)%
==== ==== ====
Comparison of the Year Ended December 31, 1999 to the Year Ended December 31,
1998
Net Revenues. Our net revenues increased 112% to approximately $19.5
million for the year ended December 31, 1999, from approximately $9.2 million
for the year ended December 31, 1998. 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 and the introduction of lower-
priced "Instant Searches" and "Individual Profile Reports". The growth in web
site traffic was primarily driven by increased advertising on a greater number
of Internet search engines and popular Web sites.
Gross Profit. Gross profit increased 101% to approximately $12.2 million
for the year ended December 31, 1999, from approximately $6.1 million for the
year ended December 31, 1998. Gross profit as a percentage of net revenues
decreased to approximately 63% for the year ended December 31, 1999, from
approximately 66% for the year ended December 31, 1998. Cost of services
increased 132% to approximately $7.3 million for the year ended December 31,
1999, from approximately $3.1 million for the year ended December 31, 1998. As a
percentage of net revenues, cost of services increased to 37% for the year ended
December 31, 1999 as compared to 34% for the year ended December 31, 1998. Data
acquisition and fulfillment costs as a percentage of revenues increased due to
the introduction of certain lower- priced products. Telephone costs decreased as
a percentage of net revenues primarily due to lower volume of 900-number
telephone billings. Labor costs decreased as a percentage of net revenues
primarily due to the growth in internet-
29
based transactions which do not require the involvement of a sales
representative.
Selling and Marketing Expenses. Selling and marketing expenses increased
183% to approximately $21.6 million for the year ended December 31, 1999, from
approximately $7.6 million for the year ended December 31, 1998. As a percentage
of net revenues, selling and marketing expenses increased to approximately 110%
for the year ended December 31, 1999, from approximately 82% for the year ended
December 31, 1998. 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 $7.6 million for the year ended December 31, 1999,
from approximately $3.9 million for the year ended December 31, 1998. As a
percentage of net revenues, general and administrative expenses decreased to
approximately 39% for the year ended December 31, 1999, from approximately 42%
for the year ended December 31, 1998. 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 in 1999.
Charge relating to issuance of warrants to majority stockholder. These
charges were $0 in 1999 and $1.2 million in 1998. In September 1998, in
consideration of Kushner-Locke's advances to us, provision of administrative
services to us and guarantees made by Kushner-Locke on our behalf, we issued
Kushner-Locke warrants to purchase 453,391 shares of our common stock at an
aggregate exercise price of $5.00. Accordingly, we recorded a charge of
approximately $1.2 million in 1998, representing the fair market value of the
warrants at the date of grant. The warrants were exercised upon the closing of
the Company's initial public offering in June 1999.
Charge for Compensation Related to Stock Options. During the period ended
December 31, 1999, we granted options to officers, employees and directors under
the 1998 Stock Incentive Plan and the 1999 Non-Employee Directors' Stock Option
Plan. In connection with these grants, approximately $2.1 million of
compensation expense was recorded in the year ended December 31, 1999. No
options were granted in the corresponding year ended December 31, 1998. We
expect to incur a charge of approximately $719,000 for 2000, $307,000 for 2001,
$72,000 for 2002 and $1,000 for 2003 in connection with these options.
Interest Expense. Interest expense increased to $5.0 million for the year
ended December 31, 1999 from $197,000 for the year ended December 31, 1998.
Included in interest expense for the year ended December 31, 1999 is
approximately $4.6 million relating to the beneficial conversion feature on the
convertible subordinated note. The interest expense for the year ended December
31, 1999 also includes interest on outstanding short term and long term debt,
the convertible subordinated note issued to Kushner-Locke and advances and other
inter-company charges from Kushner-Locke. The entire amount outstanding under
the convertible subordinated note was automatically converted into our common
stock on the closing of the company's initial public offering in June 1999. With
the conversion or repayment of substantially all of our borrowings, we expect
interest cost for 2000 to decline significantly from 1999.
Interest Income. Interest income increased to $719,000 for the year ended
December 31, 1999 from $0 for the year ended December 31, 1998 as a result of us
having available interest bearing cash balances following our initial public
offering in June 1999.
Amortization of Debt Issue Costs. In connection with the convertible
subordinated note issued to Kushner-Locke in 1999, we granted to Kushner-Locke
warrants to purchase 906,782 shares of our common stock. Relating to these
warrants we recorded a non-cash charge of $2.5 million in 1999 that was
amortized over the six month period that the convertible subordinated note was
outstanding. Also, the convertible subordinated note included an origination fee
in the amount of $550,000 paid to Kushner-Locke which was fully amortized in the
period.
Income Taxes. As of December 31, 1999 we had approximately $23.8 million of
federal and $13.7 million of state net operating loss carryforwards to offset
future taxable income. Our net operating loss carryforwards expire beginning in
2017 for federal and 2002 for state. Our ability to utilize net operating loss
carryforwards may be limited in the event that a change in ownership, as defined
in the Internal Revenue Code, occurs in the future. We have recorded a full
valuation allowance against our deferred tax assets as we believe that it is
more likely than not that the deferred tax assets will not be
30
realized based upon our expected future results of operations.
Comparison of the Year Ended December 31, 1998 to the Year Ended December 31,
1997
Net Revenues. Our net revenues increased to approximately $9.2 million for
the year ended December 31, 1998 from approximately $3.0 million for the year
ended December 31, 1997. The increase is primarily attributable to increased
advertising, including the initiation of Internet-based advertising, and
improvement in the sales productivity of our operations center.
Gross Profit. Gross profit increased 263% to approximately $6.1 million for
the year ended December 31, 1998 from approximately $1.7 million for the year
ended December 31, 1997. Gross profit as a percentage of net revenues increased
to approximately 66% for the year ended December 31, 1998, from approximately
56% in the year ended December 31, 1997. Cost of services increased to
approximately $3.1 million for the year ended December 31, 1998 from
approximately $1.3 million for the year ended December 31, 1997. As a percentage
of net revenues, cost of services decreased to 34% for the year ended December
31, 1998 from 44% for the year ended December 31, 1997. The decrease is
primarily attributable to lower labor costs resulting from a higher volume of
Internet transactions which generally involve a lower labor component.
Selling and Marketing Expenses. Our selling and marketing expenses
increased 782% to approximately $7.6 million for the year ended December 31,
1998 from $865,000 for the year ended December 31, 1997. As a percentage of net
revenues, selling and marketing expenses increased to approximately 82% for the
year ended December 31, 1998, from approximately 29% for the year ended December
31, 1997. This increase is primarily attributable to initiating Internet-based
advertising and increased television promotional fee advertisements.
General and Administrative Expenses. Our general and administrative
expenses increased 233% to approximately $3.9 million for year ended December
31, 1998 from approximately $1.2 million for the year ended December 31, 1997.
As a percentage of net revenues, general and administrative expenses increased
to approximately 42% for the year ended December 31, 1998, from approximately
39% for the year ended December 31, 1997. This increase is primarily
attributable to professional and advisor fees associated with planned financings
in 1998, increased administrative services charges from Kushner-Locke and an
increase in bad debt expenses. Bad debt expense for the year ended December 31,
1998 increased over the prior year due primarily to the increase in
uncollectible 900-number billings to clients. In addition, general and
administrative expenses in 1998 include a non-recurring charge of $296,000
relating to compensation expenses to a stockholder.
Charge relating to issuance of warrants to majority stockholder. In
September 1998, in consideration of Kushner-Locke's advances to us, provision of
administrative services to us and guarantees made by Kushner-Locke on our
behalf, we issued Kushner-Locke warrants to purchase 453,391 shares of our
common stock at an aggregate exercise price of $5.00. Accordingly, we recorded a
charge of approximately $1.2 million in 1998, representing the fair market value
of the warrants at the date of grant. The warrants were exercised upon the
closing of the Company's initial public offering in June 1999.
Interest Expense. Interest expense results primarily under our credit
facilities and other borrowing. Our interest expense increased 79% to $197,000
for the year ended December 31, 1998, from $110,000 for the year ended December
31, 1997. The increase is primarily attributable to the increased bank
borrowings under a line of credit from Comerica Bank and from interest on the
advances received from Kushner-Locke.
Selected Quarterly Financial Data
The following table sets forth certain unaudited financial data for the
eight quarters ended December 31, 1999. This data has been derived from
unaudited financial statements that, in the opinion of our management, include
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the information when read in conjunction with our annual
audited financial statements and the notes thereto. Certain reclassifications
have been
31
made to prior quarters to conform with current quarter presentations. The
operating results for any quarter are not necessarily indicative of the results
for any future period.
Quarter Ended
----------------------------------------------------------------------------
March 31, 1999 June 30, 1999 September 30, 1999 December 31, 1999
-------------- -------------- ------------------ -----------------
(in thousands except per share data)
Net Sales 3,296 3,983 6,163 6,099
Gross Profit 2,245 2,728 3,823 3,452
Net Loss (6,596) (7,456) (5,730) (6,595)
Loss per share
basic and diluted (.69) (.73) (.34) (.38)
Quarter Ended
----------------------------------------------------------------------------
March 31, 1998 June 30, 1998 September 30, 1998 December 31, 1998
-------------- -------------- ------------------ -----------------
(in thousands except per share data)
Net Sales 1,804 2,436 2,704 2,301
Gross Profit 1,244 1,590 1,793 1,469
Net Loss (54) (935) (3,522) (2,277)
Loss per share
basic and diluted (.01) (.10) (.37) (.24)
In the quarter ended March 1998, net revenues increased approximately $1.0
million from the preceding quarter primarily due to the introduction of our
Internet-based services. In the quarter ended December 1998, net revenues
decreased primarily due to holiday seasonality and customer confusion relating
to a temporary change in our television advertising strategy. In the quarter
ending September 30, 1999 net revenues increased by approximately $2.2 million
from the preceding quarter due to an increase in internet transactions which
resulted from increased web site visitor traffic. In the quarter ending December
1999, revenues declined primarily due to the seasonal factors in which the rise
in consumer online holiday shopping directed attention away from our online
services.
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 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.
. delays and costs associated with unsuccessful service
introductions;
. seasonal patterns of internet usage, for example, the
increase in the percentage of online users shopping for gifts during
the fourth quarter;
. loss of one or more of our database providers; and
32
. 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.
Our business depends largely on our ability to attract new clients through
television and Internet-based advertising as well as other marketing efforts. A
substantial portion of our operating expenses are based on advertising
commitments on television programming and Internet directories and Web sites.
Many of our advertising arrangements are non-cancelable fixed term contracts. As
a result, a substantial portion of our expenses in any given period is fixed and
based in part on expectations of future revenue and advertising and sales
productivity. We may be unable to generate enough revenues following this
advertising to offset the related cost. We may also be unable to adjust our
spending in a timely manner to compensate for any unexpected revenue shortfall.
From time to time, demand for our services following television or
Internet-based advertising has exceeded our infrastructure and operational
capacity and we were slow or unable to respond to client demand for our
services. When these events occurred, we may have lost clients and our
reputation may have been damaged.
Liquidity And Capital Resources
As of December 31, 1999, cash and cash equivalents have increased to $17.4
million (excluding $2.0 million of restricted cash pledged as collateral in
connection with our new building lease) from $99,000 at December 31, 1998
primarily as a result of the proceeds of the initial public offering.
Cash used in operations increased to $19.1 million for the year ended
December 31, 1999 as compared to $1.4 million for the year ended December 31,
1998. 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 $2.0 million for the year
ended December 31, 1999 as compared to $168,000 for the year ended December 31,
1998. This increase is primarily attributable to increased purchases of computer
hardware and software and other fixtures & equipment.
Cash provided by financing activities increased to approximately $38.4
million for the year ended December 31, 1999 as compared to $1.6 million for the
year ended December 31, 1998. We received approximately $36.1 million as the net
proceeds of our initial public offering in 1999, $5.5 million under convertible
notes issued to Kushner-Locke, and $2.7 million in connection with the exercise
of warrants issued to Kushner-Locke. Partially offsetting these amounts was the
repayment to Kushner-Locke of $2.7 million of plus interest, repayment of
approximately $1.3 million related to our line of credit and other notes payable
and the pledging of restricted cash of $2.0 million as collateral for our new
building lease.
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 at least the
next 12 months. 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
33
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.
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.
Item 7A. Quantitative and qualitative disclosures about market risk
We considered the provision 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 December 31, 1999 and our total
liabilities as of December 31, 1999 consist primarily of notes payable and
accounts payable which have fixed interest rates and were not subject to any
significant market risk.
New Accounting Pronouncements
In December 1999, the Securities and Exchange commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), which provides additional guidance in applying generally accepted
accounting principles to revenue recognition in the financial statements.
Management does not believe the adoption of SAB 101 will have a material effect
on the accompanying consolidated financial statements.
Item 8. Financial Statements and Supplementary Data
The Company's financial statements and supplementary data required by Item 8 are
included in Item 14 of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
34
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item with respect to Directors is
incorporated by reference from the information under the caption "Election of
Directors" contained in the Company's definitive proxy statement in connection
with the solicitation of proxies for the Company's 2000 Annual Meeting of
Stockholders to be held on May 31, 2000 (the "Proxy Statement").
The required information concerning Executive Officers of the Company is
contained in Item 1, Part I of this Report.
Section 16(a) Beneficial Ownership Reporting Compliance
The information required by this section is incorporated by reference from
the similarly named section of the Registrant's Proxy Statement.
Item 11 Executive Compensation
The information required by this item is incorporated by reference from the
similarly named section of the Registrant's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from the
similarly named section of the Registrants Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference from the
similarly named section of the Registrants Proxy Statement.
35
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a)(1) The following financial statements are filed as part of this Annual
Report on Form 10-K:
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants......................................... F-2
Financial Statements:
Balance Sheets as of December 31, 1998 and 1999......................... F-3
Statements of Operations for Each of the Three Years in the Period Ended
December 31, 1999....................................................... F-4
Statements of Stockholders' Equity (Deficit) for Each of the Three Years
in the Period Ended December 31, 1999................................... F-5
Statements of Cash Flows for Each of the Three Years in the Period Ended
December 31, 1999....................................................... F-6
Notes to the Financial Statements....................................... F-8
(a)(2) Financial Statement Schedule:
Report of Independent Accountants on Financial
Statement Schedule...................................................... F-24
Schedule II - Valuation and Qualifying Accounts....................... F-25
(a)(3) Exhibits
See Index to Exhibits following signatures
(b) Reports on Form 8-K
None
36
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants......................................... F-2
Financial Statements:
Balance Sheets as of December 31, 1998 and 1999......................... F-3
Statements of Operations for Each of the Three Years in the Period Ended
December 31, 1999....................................................... F-4
Statements of Stockholders' Equity (Deficit)for Each of the Three Years
in the Period Ended December 31, 1999................................... F-5
Statements of Cash Flows for Each of the Three Years in the Period Ended
December 31, 1999....................................................... F-6
Notes to the Financial Statements....................................... F-8
Report of Independent Accountants on Financial
Statement Schedule...................................................... F-24
Schedule II - Valuation and Qualifying Accounts......................... F-25
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of US SEARCH.com Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' equity (deficit) and cash flows present fairly, in all
material respects, the financial position of US SEARCH.com Inc. (the "Company")
as of December 31, 1998 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
January 25, 2000
F-2
US SEARCH.COM INC.
BALANCE SHEETS
December 31, December 31,
1998 1999
------------ ------------
ASSETS:
Current assets:
Cash and cash
equivalents.............................................................. $ 99,000 $17,382,000
Restricted cash........................................................... --- $ 2,000,000
Accounts receivable, less allowance for
doubtful accounts of $64,000 (1998)
and $74,000 (1999)....................................................... 83,000 131,000
Prepaids and other current assets......................................... 6,000 3,608,000
----------- -----------
Total current assets...................................................... 188,000 23,121,000
Property and equipment, net............................................... 371,000 2,218,000
Other assets.............................................................. 16,000 311,000
----------- -----------
Total assets.............................................................. $ 575,000 $25,650,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts payable.......................................................... $ 3,721,000 $ 5,438,000
Accrued liabilities....................................................... 570,000 623,000
Lines of credit........................................................... 372,000 --
Notes payable, current portion............................................ 693,000 25,000
Capital lease obligations, current
portion.................................................................. 40,000 22,000
Related-party notes payable, current portion.............................. 2,553,000 --
----------- -----------
Total current liabilities................................................. 7,949,000 6,108,000
Notes payable, net of current portion..................................... 269,000 15,000
Related-party notes payable, net of current
portion.................................................................. 29,000 --
Capital lease obligation, net of current portion.......................... 45,000 22,000
Other non-current liabilities............................................. 32,000 16,000
----------- -----------
Total liabilities......................................................... 8,324,000 6,161,000
----------- -----------
Commitments and contingencies (Note 8)
Stockholders' equity (deficit):
Preferred stock, $0.001 per value; authorized 1,000,000
shares; no shares issued and outstanding............................... --- ---
Common stock, $0.001 par value; authorized 40,000,000 shares;
issued and outstanding 9,067,820 shares as of December
31, 1998 and 17,421,644 as of December 31, 1999.......................... 15,000 17,000
Additional paid-in capital................................................ (922,000) 53,790,000
Unearned deferred compensation........................................... -- (1,099,000)
Accumulated deficit....................................................... (6,842,000) (33,219,000)
----------- -----------
Total stockholders' equity (deficit)...................................... (7,749,000) (19,489,000)
----------- -----------
Total liabilities and stockholders' equity (deficit)...................... $ 575,000 $25,650,000
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
US SEARCH.COM INC.
STATEMENTS OF OPERATIONS
Years Ended December 31,
------------------------------------
1997 1998 1999
---------- ---------- -----------
Net revenues............ $2,971,000 $ 9,245,000 $19,541,000
Cost of services........ 1,291,000 3,149,000 7,293,000
---------- ---------- -----------
Gross profit.......... 1,680,000 6,096,000 12,248,000
Operating expenses:
Selling and marketing.. 865,000 7,627,000 21,618,000
General and
administrative........ 1,165,000 3,882,000 7,562,000
Charge for warrants
issued to majority
stockholder........... -- 1,190,000 --
Charge for compensation
related to stock
options............... -- -- 2,069,000
---------- ---------- -----------
Total operating
expenses............. 2,030,000 12,699,000 31,249,000
---------- ---------- -----------
Loss from operations.... (350,000) (6,603,000) (19,001,000)
Interest expense........ (110,000) (197,000) (5,003,000)
Interest income........ -- -- 719,000
Amortization of debt
issue costs............ -- -- (3,096,000)
Other income, net....... 63,000 13,000 5,000
---------- ---------- -----------
Loss before income
taxes................ (397,000) (6,787,000) (26,376,000)
Provision for income
taxes.................. 2,000 1,000 1,000
---------- ---------- -----------
Net loss............... $ (399,000) $(6,788,000)$(26,377,000)
========== ========== ===========
Basic and diluted net
loss per share......... $ (0.04) $ (0.71) $ (1.94)
========== ========== ===========
Weighted-average shares
outstanding used in per
share calculation...... 9,521,211 9,521,211 13,612,120
========== ========== ===========
The accompanying notes are an integral part of these statements.
F-4
US SEARCH.COM INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock Unearned Total
-------------------- Additional Deferred Accumulated Stockholders'
Shares Amount Paid-In Capital Compensation Deficit Equity (Deficit)
--------- -------- --------------- ------------- ------------ ----------------
Balance, December 31, 1996..... 9,067,820 $ 15,000 -- -- $ (1,767,000) $ (1,752,000)
Reclassification of deficit
due to termination of S-
Corporation election.......... -- -- $(2,112,000) -- 2,112,000 --
Net loss...................... -- -- -- -- (399,000) (399,000)
---------- -------- ------------- ------------ ------------ -------------
Balance, December 31, 1997..... 9,067,820 15,000 (2,112,000) -- (54,000) (2,151,000)
Issuance of warrants to
majority stockholder......... -- -- 1,190,000 -- -- 1,190,000
Net loss...................... -- -- -- -- (6,788,000) (6,788,000)
---------- -------- ------------- ------------ ------------ -------------
Balance, December 31, 1998..... 9,067,820 15,000 (922,000) -- (6,842,000) (7,749,000)
Unearned compensation
related to stock options..... -- -- 3,225,000 (3,225,000) -- --
Amortization of unearned
compensation................. -- -- -- 2,099,000 -- 2,099,000
Issuance of warrants
with convertible
subordinated note............ -- -- 2,546,000 -- -- 2,546,000
Beneficial conversion
feature on convertible
subordinated note............ -- -- 4 ,639,000 -- -- 4,639,000
Conversion of $5,500,000
convertible
subordinated note............ 2,493,651 2,000 5,498,000 -- -- 5,500,000
Exercise of warrants........... 1,360,173 1,000 2,751,000 -- -- 2,752,000
Initial public offering
of common stock 4,500,000 5,000 36,104 ,000 -- -- 36,109,000
Reincorporation into
Delaware and change in
par value of common
stock........................ -- (6,000) 6,000 -- -- --
Forfeiture of stock
options...................... -- (57,000) 27,000 -- (30,000)
Net loss....................... (26,377,000) (26,377,000)
---------- -------- ------------- ------------ ------------ -------------
Balance, December 31, 1999..... 17,421,644 $17 ,000 $53,790,000 $(1,099,000) $(33,219,000) $ 19,489,000
========== ======== ============= ============ ============ =============
The accompanying notes are an integral part of these statements.
F-5
US SEARCH.COM INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31,
------------------------------------------
1997 1998 1999
--------- ----------- ------------
Cash flows from operating activities:
Net loss......................................... $ (399,000) $ (6,788,000) $ (26,377,000)
Adjustments to reconcile net loss to
net cash used in
operating activities:
Depreciation and amortization................... 99,000 128,000 195,000
Provision for doubtful accounts................. 153,000 364,000 190,000
Compensation charge............................. -- 296,000 --
Charge for warrants
and beneficial
conversion feature
issued to majority stockholder................. -- 1,190,000 4,639,000
Amortization of unearned compensation........... -- -- 2,069,000
Amortization of debt issue costs................ -- -- 2,546,000
Related-party charges........................... -- 384,000 --
Change in assets and
liabilities:
Accounts receivable............................ (245,000) (270,000) (238,000)
Accounts payable............................... (27,000) 3,193,000 1,71 7,000
Accrued liabilities............................ 108,000 86,000 53,000
Prepaid Expenses............................... -- -- (3,602,000)
Other.......................................... (10,000) 38,000 (311,000)
----------- ------------ -------------
Net cash used in
operating activities............................. (321,000) (1,379,000) (19,119,000)
----------- ------------ -------------
Cash flows from
investing activities:
Additions to property
and equipment................................... (15,000) (168,000) (2,042,000)
Loans to related
parties......................................... (17,000) -- --
----------- ------------ -------------
Net cash used in
investing activities............................. (32,000) (168,000) (2,042,000)
----------- ------------ -------------
The accompanying notes are an integral part of these statements.
F-6
US SEARCH.COM INC.
STATEMENTS OF CASH FLOWS (continued)
For the years ended December 31,
-------------------------------------
1997 1998 1999
----------- ---------- ----------
Cash flows from
financing activities:
Increase (decrease) in
cash overdrafts................. 68,000 (101,000) --
Increase in restricted
cash............................. (2,000,000)
Proceeds from line of
credit.......................... 8,000 1,126,000 --
Repayments of line of
credit.......................... (8,000) (788,000) (372,000)
Repayments of third
party notes payable............. (73,000) (238,000) (922,000)
Advances from related
parties......................... 930,000 1,816,000 200,000
Repayments to related
parties......................... (539,000) (121,000) (1,582,000)
Repayments of capital
lease obligations............... (33,000) (48,000) (41,000)
Proceeds of related-party
convertible notes.............. 4,300,000
Proceeds from exercise
of warrants..................... 2,752,000
Proceeds from initial
public offering................. 36,109,000
-------- --------- -----------
Net cash provided by
financing activities............. 353,000 1,646,000 38,444,000
-------- --------- -----------
Net increase in cash and cash
equivalents...................... -- 99,000 17,283,000
Cash at beginning of
period........................... -- -- 99,000
-------- --------- -----------
Cash at end of period............. $ -- $ 99,000 $17,382,000
======== ========= ===========
The accompanying notes are an integral part of these statements.
F-7
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Business:
US SEARCH.com Inc. (the "Company") provides individual reference services and
background information about individuals. The Company was formed as a California
S Corporation in 1994, and converted to a C Corporation in November 1997.
Accordingly, the accumulated deficit totaling $2,112,000 as of the date of the
termination of the S corporation election was transferred to additional paid-in
capital.
In February 1999, the Board of Directors approved the reincorporation of the
Company in the State of Delaware and a change in the par value of the Company's
common stock which was effected prior to the closing of the initial public
offering in June 1999.
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. Prior to the initial public offering, The Kushner-Locke Company
("Kushner-Locke") owns approximately 86% of the Company's common stock. Kushner-
Locke currently owns approximately 55% of the Company's common stock. The
Company's shares are now traded on the NASDAQ national market system under the
symbol "SRCH".
2. Summary of Significant Accounting Policies:
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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-8
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Restricted Cash
At December 31, 1999 the Company had $2,000,000 in restricted cash related to
deposits pledged as collateral on an outstanding letter of credit issued to the
lessor under the lease of the Company's new office space.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method based upon the estimated
useful lives of the assets. Leasehold improvements and equipment under capital
leases are amortized over the shorter of the estimated useful life or the life
of the lease. Depreciation and amortization periods by asset category are as
follows:
Equipment......................... 3-10 years
Furniture and fixtures............ 7 years
Leasehold improvements............ Shorter of useful life or lease term
Equipment under capital leases.... Shorter of useful life or lease term
Maintenance and repairs are charged to expense as incurred while renewals
and improvements are capitalized. Upon the sale or retirement of property and
equipment, the accounts are relieved of the cost and the related accumulated
depreciation, with any resulting gain or loss included in the Statement of
Operations.
Long-Lived Assets
The Company identifies and records impairment losses on long-lived assets
when events and circumstances indicate that such assets might be impaired. To
date, no such impairment has been recorded.
Fair Value of Financial Instruments
The estimated fair value of cash overdrafts, accounts receivable, accounts
payable, accrued liabilities and notes payable are carried at cost which
approximates their fair market value because of the short-term maturity of these
instruments.
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 anti-
dilutive. The warrants issued to Kushner-Locke in September 1998 were issued for
nominal consideration (see Note 10). For purposes of computing basic and diluted
net loss per share, the common stock issuable pursuant to these warrants is
considered outstanding for all periods presented prior to exercise.
As of December 31, 1999, stock options representing 1,669,873 shares are
excluded from the computation of diluted earnings per share because their
inclusion would have been anti-dilutive. No options were outstanding at December
31, 1998.
F-9
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement established standards for the reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. Comprehensive income generally represents all
changes in stockholders' equity (deficit) during the period except those
resulting from investments by, or distributions to, stockholders. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997, and requires
restatement of earlier periods presented. SFAS No. 130 defines comprehensive
income as net income plus all other changes in equity from non-owner sources.
The Company has no other comprehensive income items and accordingly net income
equals comprehensive income.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees," and complies with the disclosure
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation." Under
APB No. 25, compensation cost, if any, is recognized over the respective vesting
period based on the difference on the date of grant, between the fair value of
the Company's common stock and the grant price.
Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131.
"Disclosures about Segments of an Enterprise and Related Information" for the
year ended December 31, 1998. SFAS No. 131 supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise", replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS No. 131 also requires disclosures about products or
services, geographic areas, and major customers. The Company's management
reporting structure provides for only one segment and accordingly, no separate
segment information is presented. In addition, the Company operates only in the
United States and no single customer accounts for more than 10% of revenues for
all periods presented.
Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and the tax bases of assets and
liabilities using enacted tax rates in effect for the period in which the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
Revenue Recognition
The Company generates revenues by performing various information search
services for customers. Revenue is recognized when the results of the search
services are delivered to clients. The terms of each sale do not provide for
client refunds. For certain search services, where the clients indicate that the
initial search result is unsuccessful, the
F-10
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Company may perform, at no charge to the client, up to three identical searches
during the one year period following the first search. The costs related to such
additional searches are recorded in the period of the initial sale and are based
upon the estimated number of additional searches. In addition, where clients
request to broaden the scope of their fully automated searches, the Company may
apply up to a portion of the cost of the client's fully automated searches
towards the cost of the broader and more extensive searches. The estimated
credits are recorded in the period of the initial sale and are based upon the
amount estimated to be redeemed by clients. To date, the costs of additional
searches and estimated credits to be provided in future periods have not been
material.
Advertising Costs
Advertising production costs are expensed the first time the advertisement
is run. Media costs are expensed in the month the advertising appears.
Advertising expense was approximately $646,000 for the year ended December 31,
1997, $6,944,000 for 1998, and $19,837,000 for 1999, respectively.
Reclassifications
Certain reclassifications have been made to prior years to conform with
current year presentation.
New Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), which provides additional guidance in applying generally accepted
accounting principles to revenue recognition in the financial statements.
Management does not believe the adoption of SAB 101 will have a material effect
on the accompanying consolidated financial statements.
3. Concentrations of Risk:
Credit Risk
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
domestic financial institutions. The Company performs periodic evaluations of
the relative credit standing of these institutions. From time to time, the
Company's cash balances with any one financial institution may exceed Federal
Deposit Insurance Corporation (FDIC) insurance limits.
The Company's customers are concentrated in the United States. The Company
extends minimum levels of credit to customers and does not require collateral.
The Company maintains reserves for potential credit losses which to date have
been within management's expectations.
Business Risk
The Company provides services to its customers using internal and external
computer systems. Operations are currently susceptible to varying degrees of
physical and electronic security as well as varying levels of internal support.
A disruption in security or internal support could cause a delay in the
Company's performance of services which would adversely affect operating
results.
F-11
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment:
Property and equipment is comprised of the following:
December 31,
--------------------
1998 1999
-------- --------
Equipment....................................... $ 405,000 $ 1,541,000
Furniture and fixtures.......................... 40,000 263,000
Leasehold improvements.......................... 38,000 721,000
Equipment under capital leases.................. 191,000 191,000
--------- -----------
674,000 $ 2,716,000
Less:accumulated depreciation, including
capital lease amortization of $56,000,(1998),
and $111,000 (1999) 303,000 498,000
--------- -----------
Property and equipment, net..................... $ 371,000 $ 2,218,000
========= ===========
5. Lines of Credit:
In September 1996, the Company established a $35,000 revolving line of
credit (the "line") with a commercial bank. In fiscal year 1997, the line was
capped at $34,000, converted to a term loan bearing interest at 14.25% at
December 31, 1998, and was not subject to additional borrowings. As of December
31, 1998 the outstanding balance under the line was approximately $27,000. The
Company repaid the outstanding balance during the year ended December 31, 1999.
In February 1998, the Company entered into a revolving line of credit (the
"Credit Agreement") with Comerica Bank ("Comerica"). The Credit Agreement was
collateralized by substantially all of the Company's assets and bore interest at
a variable rate of Comerica's base rate plus 2.5% (10.25% at December 31, 1998).
The Credit Agreement required the Company to maintain a cash flow to fixed
charge ratio, as defined, and restrictive covenants including, among other
things, limitations on additional indebtedness, liens, investments, disposition
of assets, mergers, changes in ownership, guarantees, the uses of proceeds,
payment of cash dividends and prepayment of subordinated debt. Kushner-Locke was
a guarantor under the Credit Agreement. In May 1998, Comerica granted a waiver
of non-compliance to the Company. In August 1998, Comerica revised the term of
the Credit Agreement, which was capped at $345,000 (the outstanding balance as
of the date of revision), with repayment of outstanding amounts due on or before
November 15, 1998. In addition, the cash flow to fixed charge ratio was
rescinded. In December 1998, Comerica extended the maturity date to March 1999.
As of December 31, 1998, the outstanding amount under the Credit Agreement was
approximately $345,000. In March 1999, the Company repaid all principal and
interest then due under the Credit Agreement.
F-12
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Accrued Liabilities:
Accrued liabilities is comprised of the following:
December 31,
--------------------
1998 1999
-------- --------
Sales and payroll taxes....................... $ 107,000 $ 29,000
Accrued vacation and payroll.................. 203,000 266,000
Accrued professional fees..................... 70,000 81,000
Other accrued expenses........................ 190,000 247,000
--------- ---------
$ 570,000 $ 623,000
========= =========
F-13
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Notes Payable:
December 31,
---------------------
1998 1999
-------- --------
Note payable to Kushner-Locke, payable on
demand bearing interest at 10% per annum,
repaid in full in 1999............................. $ 2,540,000 --
Note payable to third party, payable July
1999, bearing interest at 12% per annum,
repaid in full in 1999............................. 296,000 --
Notes payable in equal monthly installments of
$3,333 comprising principal and interest
through December 2000 bearing interest at
12.5% per annum, repaid in full in 1999............ 70,000 --
Trade notes payable, due in monthly installments
of $13,583 comprising principal and interest
through November 1999 bearing interest at 10%
per annum, repaid in full in 1999.................. 142,000 --
Trade notes payable, due in blended monthly
installments through May 2000 bearing
interest at 10% per annum, repaid in full
in 1999............................................ 186,000 --
Loan payable to former stockholder/executive
officer of the Company, due in monthly
installments through July 2001, non-interest
bearing............................................ 68,000 40,000
Note payable in equal monthly installments
through December 2000, bearing interest at
12.25% per annum, repaid in full in 1999........... 35,000 --
Loan payable to executive officer of the Company,
payable in monthly installments of $1,100, non-
interest bearing, repaid in full in 1999........... 42,000 --
Other trade notes payable, payable through
2000 bearing interest at 10% per annum, repaid
in full in 1999.................................... 165,000 --
----------- --------
Total notes payable............................. $ 3,544,000 $ 40,000
=========== ========
Related-party notes payable:
Current........................................... $ 2,553,000 --
Non-current....................................... 29,000 --
Other notes payable:
Current........................................... 693,000 $ 25,000
Non-current....................................... 269,000 15,000
----------- --------
Total notes payable............................. $ 3,544,000 $ 40,000
=========== ========
F-14
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The maturities of the third-party notes as of December 31, 1999 are as follows:
2000...................................... $ 25,000
2001...................................... 15,000
--------
Total:............................... $ 40,000
========
Related-Party Convertible Subordinated Note:
In January 1999, Kushner-Locke agreed to provide a credit facility up to
$5,500,000 of bridge financing to the Company in the form of a convertible
subordinated note ("Note") bearing interest at 10% per annum. The Note was
convertible, at the option of Kushner- Locke, into 2,493,651 shares of common
stock at the rate of one share of common stock per $2.21 of principal and/or
accrued and unpaid interest. The Note included a 10% origination fee totaling
$550,000 payable to Kushner-Locke for providing the credit facility. The
origination fee was amortized on a straight line basis over the first six months
of 1999. Notes payable on demand to Kushner-Locke of $1,200,000 outstanding as
of December 31, 1998 were converted to the Note in January 1999. The Note had a
beneficial conversion feature ("BCF") since it was convertible at a discount to
the deemed fair value of the common stock. Since conversion was at the option of
the holder at any time prior to maturity, the value assigned to the BCF was
immediately recorded as interest expense at the date of each borrowing. The BCF
was calculated using the intrinsic value methodology based on the difference
between the deemed fair value of the underlying common stock and the conversion
price on the Note of $2.21. The value assigned to the BCF is limited to the
amount of each borrowing. For the year ended December 31, 1999, the Company has
recorded $4,639,000 as additional interest expense related to the BCF. In June
1999, the note was converted into 2,493,651 shares of common stock.
In connection with the Notes, the Company granted Kushner-Locke warrants to
purchase (i) 453,391 shares of common stock at an exercise price of $2.76 per
share and (ii) 453,391 shares of common stock at an exercise price of $3.31 per
share. The deemed fair value of the warrants of $2,546,000 was recorded as
additional debt issue costs in the year ended December 31, 1999. In June 1999,
these warrants and warrants issued to Kushner-Locke in September 1998
representing an additional 453,391 shares were exercised. The Company received
proceeds from the exercise of approximately $2,752,000.
8. Commitments And Contingencies:
Operating and Capital Lease Commitments
The Company leases its Los Angeles, California headquarters under an
operating lease that expires November 30, 2004, if not renewed. The Company has
an option to renew the lease for a term of 60 months. The Company has operating
lease agreements for other office equipment. The Company also has entered into
capital lease agreements for their telephone system and other office and
computer equipment.
Rent expense pertaining to all operating leases for the years ended
December 31, 1997, 1998 and 1999 was approximately $180,000, $135,000 and
$297,000, respectively.
F-15
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The future minimum lease payments under capital leases and noncancellable
operating leases at December 31, 1999, are as follows:
Capital Operating
Leases Leases
------ ------
2000................................................... $ 35,000 $ 1,152,000
2001................................................... 16,000 1,054,000
2002................................................... -- 1,071,000
2003................................................... -- 1,103,000
Thereafter............................................. -- 1,039,000
--------- -----------
Total minimum obligations.............................. 51,000 $ 5,419,000
===========
Less interest.......................................... (7,000)
---------
Present value of minimum obligations................... 44,000
Less current portion................................... 22,000
---------
Non-current obligations at December 31, 1999........... $ 22,000
=========
Employment And Consulting Agreements
The former president and co-founder of the Company entered into a three-
year employment agreement as Founder and Senior Strategist with the Company
effective in September 1998. The employment agreement provides that following
the completion of permanent financing of at least $10,000,000 the base
compensation increases from $150,000 to $175,000 for the first year, with annual
increases of $25,000 increasing the base compensation to $225,000 for the third
year. The Company will pay the premiums on a $1,000,000 life insurance policy
for the benefit of the employee's designated beneficiaries, and key man life
insurance on the employee's life for the benefit of the Company. In addition,
the Company agreed to assume his $296,000 loan payable to an individual which
resulted in a compensation charge recorded in general and administrative
expenses in the year ended December 31, 1998 (see Note 9).
Employment Agreements
The Company has entered into employment agreements with certain key
management. The agreements provide for base salaries ranging from $150,000 to
$400,000, eligibility for options, performance bonuses and severance payments.
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's minimum non-cancelable payments under these agreements
for the years ending December 31 are as follows: $9,688,000 (2000), $3,920,000
(2001) and $1,000,000 (2002).
F-16
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Purchase Commitments
In 1999, the Company entered into an agreement with a supplier of online
public record 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 2000, $3.6 million for 2001 and $4.2 million per
year for 2002 through 2004.
Litigation
From time to time, the Company has been party to various litigation and
administrative proceedings relating to claims arising in the normal course of
business. Management believes that the resolution of these matters will not have
a material adverse effect on the Company's financial position, results of
operations or cash flows.
9. Related Parties:
Related Party Transactions
On November 21, 1997, Kushner-Locke acquired 80% of the outstanding shares
of the Company in exchange for $100 and the indemnification of various
liabilities not to exceed $670,000.
From May 1997 to October 1997, Peter Locke (co-chairman of the Company and
Kushner-Locke) personally loaned to the Company amounts aggregating
approximately $397,000 (gross of any repayments which occurred during such
period). The loans with interest at 10% per annum were repaid in full. In
addition, the Company paid approximately $40,000 in consulting fees and interest
to Mr. Locke for services rendered through December 31, 1997.
Kushner-Locke provided loans to the Company to fund operations of
$387,000, $1,706,000, and $4,700,000 for the years ended December 31, 1997,
1998, and 1999 respectively. In addition, for the years ended December 31, 1997,
1998, and 1999 Kushner-Locke charged the Company for administrative services,
reimbursement of expenses, interest on the outstanding loan balances and debt
issuance costs of $3,000, $443,000, and $983,000, respectively. In June 1999,
the Company repaid in full to Kushner-Locke all amounts then owed excluding
the amount converted to common stock under the convertible subordinated note
(see Note 7).
The Company loaned approximately $41,000 in 1995, $176,000 in 1996 and
$32,000 in 1997, to an existing stockholder and co-founder (the "Stockholder").
The Company received repayments of approximately $5,000 in 1995 and $3,000 in
1996 from Stockholder. In June 1997, the Stockholder personally assumed the
Company's obligations under a $296,000 promissory note payable to a former
stockholder (the "Related Loan"). In consideration of the Stockholder's
assumption of the Company's obligations under the Stockholder Loan, the prior
outstanding amounts loaned to this Stockholder were repaid in full and an amount
payable to Stockholder was established to the extent the assumption of the
Related Loan exceeded loans made to the Stockholder. In September 1998, in
connection with the Company's amended and restated employment agreement with the
Stockholder, the Company agreed to assume the Stockholder's obligations on the
Related Loan. The assumption resulted in a $296,000 compensation charge recorded
in general and administrative expenses in the year ended December 31, 1998. The
note was repaid in full in 1999.
F-17
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company borrowed approximately $70,000 in 1995, $143,000 in 1996 and
$22,000 in 1997 from a former stockholder/executive officer. The Company repaid
approximately $24,000 in 1995, $108,000 in 1996, $32,000 in 1997 and $3,000 in
1998. As of December 31, 1998 and 1999 the Company owed approximately $68,000
and $40,000, respectively. The Company entered into a 24 month consulting
agreement with this former stockholder providing for payment of $2,000 per
month. The agreement provided for 10 hours of consulting services to the Company
per week and expired December 1999.
An affiliate of a former stockholder/executive officer of the Company lent
to the Company $50,000 in December 1996 and $50,000 in May 1997, bearing
interest at 20% per annum and payable in six monthly installments of $10,000
each (including interest). The Company subsequently defaulted in its obligations
under these notes. On January 2, 1998, the notes were restructured providing for
the payment of $120,000, including all past and future interest, in 36 equal
monthly installments of approximately $3,333 each, beginning on January 15,
1998, and guaranteed by Kushner-Locke. As of December 31, 1998 the Company owed
approximately $70,000 under this note which was fully repaid in 1999.
Related Party Guarantees
In June 1998, the Company became a guarantor of Kushner-Locke's $60,000,000
Credit, Security, Guaranty, and Pledge Agreement ("credit facility") with The
Chase Manhattan Bank ("Chase"). In connection with the credit facility, the
Company granted to Chase a security interest in all the assets of the Company.
Chase was also granted a security interest in the common stock of the Company
held by Kushner-Locke. The credit facility was amended in May 1999 to release
the Company from its obligations under this credit facility and to release the
common stock of the Company held by Kushner- Locke and the assets of the Company
from the security interest.
Kushner-Locke is a guarantor of certain related-party notes payable of
$120,000, advertising and media buying obligations of $1,334,000. As of December
31, 1998, the Company's obligations on the related-party note was $70,000, the
media buying obligations was $1,026,000, and the Infospace agreement was
$4,092,000. As of December 31, 1999, the Company's obligations on the related-
party note and the certain advertising and media buying obligations were repaid.
Kushner- Locke's guarantee of a $4,500,000 obligation to Infospace expired in
June 1999 upon the completion of the initial public offering.
A former stockholder of the Company has guaranteed various computer and
office equipment lease obligations of the Company.
10. Capitalization:
Preferred Stock
The board of directors has the authority, without further action by the
stockholders, to issue up to 1,000,000 shares of preferred stock, $0.001 per
value, in one or more series and to fix the powers, preferences, rights and
qualifications, limitations or restrictions thereof, including dividend rights,
conversion rights, voting rights, terms of redemption, liquidation preferences
sinking fund terms and the number of shares constituting any series or the
designation of the series. As of December 31, 1999 no shares were issued or
outstanding.
F-18
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock Incentive Plan
In July 1998, the Board adopted, and the stockholders of the Company
subsequently approved, the 1998 Stock Incentive Plan (the "1998 Plan") in order
to attract and retain employees (including officers and employee directors),
directors and independent contractors, and consultants to the Company. An
aggregate of 2,600,650 shares of common stock, subject to adjustment for stock
splits, stock dividends and similar events, has been authorized for issuance
upon exercise of options, stock appreciation rights ("SARs"), restricted stock
awards ("restricted awards"), and performance share awards ("performance
awards").
The 1998 Plan provides for the issuance of nonqualified and incentive stock
options to employees, (including officers and employee directors), directors and
independent contractors, and consultants to the Company. Incentive stock options
may not be granted at less than 100% of the fair market value of the Company's
common stock on the date of grant (110% if granted to an employee who owns 10%
or more of the common stock). Options vest in accordance with the award
agreement and generally expire 10 years after the award date (5 years if granted
to an employee who owns 10% or more of the common stock).
The 1998 Plan provides for the issuance of SARs concurrently or
independently with the grant of options. SARs granted concurrently with an
option vest according to the option terms. SARs granted independently of any
option vest according to the award agreement.
The 1998 Plan provides for the issuance of restricted awards or performance
awards. Participants of restricted awards are entitled to receive dividends and
vote whether or not vested. Restricted awards are nontransferable until vested
and the terms of the restricted awards are determined on the grant date. The
terms of performance awards are determined at the date of grant.
In the event a holder of an option, SAR, restricted award, or performance
award ceases to be employed by the Company: all unvested options and SARs are
forfeited, all vested options and SARs may be exercised within a period not to
exceed 12 months, all vested SARs granted independently of options are
exercisable in accordance with the award agreement, all unvested restricted and
performance awards are forfeited, and all vested restricted and performance
awards are exercisable in accordance with the award agreement. No SARs were
granted as of December 31, 1999 and 1998.
Non-Employee Directors' Stock Option Plan
In February 1999, the Company adopted the 1999 Non-Employee Directors'
Stock Option Plan and reserved 317,373 shares of common stock for issuance
thereunder. Under the plan each non-employee director is granted 35,364 shares
of common stock on the date of initial appointment to the board of directors.
Additionally, each non-employee director will receive an additional grant of
9,067 shares of common stock annually which will be pro rated if the non-
employee director has not served for the entire preceding period.
The options are granted at 100% of fair market value on the date of grant
and have a ten year term. The options vest as follows: initial appointment
grants vest 1/3rd of the shares on each anniversary from the date of grant and
the annual grants vest 1/12th of the shares each month for 12 months after the
date of grant. In the event the services of the holder are terminated, the
holder may only exercise vested options at the date of termination within the
earlier of 12 months from termination (18 months if termination as a result of
the options holder's death) or the expiration of the term of the option.
F-19
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999, options representing 141,458 shares were
outstanding, which are included in the summary table below.
No stock options were granted as of December 31, 1998.
A summary of the changes in the Company's stock options for the year ended
December 31, 1999 is presented below:
Weighted-
Average
Shares Exercise Price
------ --------------
Outstanding at December 31, 1998.................. -- $ --
Granted........................................... 1,803,210 5.23
Forfeited......................................... (103,337) 5.91
---------
Outstanding at December 31, 1999.................. 1,699,873 5.19
=========
Options exercisable at December 31, 1999.......... 189,820 3.10
Options available for future grant................ 1,218,150
The following table summarizes information about stock options outstanding at
December 31, 1999:
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Average
Number Life Exercise Number Exercise
Range of exercise prices Outstanding (years) Price Outstanding Price
------------------------ ----------- ----------- --------- ----------- ---------
$3.10................ 569,459 9.02 $ 3.10 189,820 $3.10
$4.45................ 493,289 9.16 4.45 -- --
$5.69................ 311,933 9.23 5.69 -- --
$6.95................ 35,364 9.27 6.95 -- --
$9.00 - $11.13....... 289,828 9.68 9.82 -- --
--------- -------
1,699,873 189,820
========= =======
Unearned stock-based compensation
In connection with its grants of options, the Company recorded unearned
deferred compensation expense of $3,225,000 during the year ended December 31,
1999. This amount will be amortized over the vesting period ranging from 24 to
48 months from the date of grant; $2,069,000 was expensed during the year ended
December 31, 1999.
F-20
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Fair Value Disclosures
Prior to the Company's initial public offering, the fair value of each
option grant was determined on the date of grant using the minimum value method.
Subsequent to the offering, the fair value was determined using the Black-
Scholes model. The weighted average fair market value of an option granted
during 1999 was $3.27. Except for the volatility assumption which was only used
under the Black-Scholes model, the following range of assumptions was used to
perform the calculations: expected life of 3.5 years; risk-free interest rate
ranges of 5.75% to 6.80%; expected volatility of 80%; and no expected dividend
yield. Because additional stock options are expected to be granted each year,
the following pro forma disclosures below are not representative of pro forma
effects on reported financial results for future years.
The Company accounts for stock-based compensation in accordance with the
provisions of APB 25. Had compensation expense been determined based upon the
fair market value at the grant dates, as prescribed in SFAS 123, the Company's
results for the year ended December 31, 1999 would have been as follows:
Net Loss
As reported $(26,377,000)
Pro forma $(27,042,000)
Loss per share--basic and diluted
As reported $ (1.94)
Proforma $ (1.99)
Warrants
In September 1998, the Company granted to Kushner-Locke warrants to
purchase 453,391 shares of the Company's common stock at an aggregate exercise
price of $5.00. The warrants were issued principally in consideration for
Kushner-Locke's provision of certain guarantees on behalf of the Company,
advances of capital to the Company and provision of administrative services
during the third quarter of 1998. The warrants were exercised in June 1999. In
September 1998, the Company recorded a charge of $1,190,000, representing the
deemed fair value of the warrants at the date of grant using the Black-Scholes
option pricing model. The principal assumptions used in the computation are:
volatility of 80%, 10 year term, dividend yield of 0%, deemed fair value at the
date of issuance of $2.63 per share and risk-free rate of 5%.
In January 1999, in connection with the convertible subordinated note, the
Company granted Kushner-Locke warrants to purchase (i) 453,391 shares of common
stock at an exercise price of $2.76 per share and (ii) 453,391 shares of common
stock at an exercise price of $3.31 per share of common stock. The warrants were
exercised in June 1999. During the first and second quarter of 1999, the Company
recorded a charge in the aggregate amount of $2,546,000 representing the deemed
fair value of the warrants at the date of grant using the Black-Scholes option
pricing model. The principal assumptions used in the computation are: volatility
of 80%, 10 year term, dividend yield of 0%, deemed fair value at the date of
issuance of $3.31 per share and risk free rate of 5%. The charge for these
warrants is recorded as additional debt issue costs and was amortized over the
expected term of the subordinated convertible note of six months.
F-21
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Income Taxes:
Prior to November 22, 1997 (termination of the S Corporation election), the
Company elected to file its income tax returns under the S Corporation
provisions of the Internal Revenue Code and for California Franchise tax
purposes. In accordance with the Federal income tax provisions, corporate
earnings flow to, and are taxed solely at, the stockholder level. Under the
provisions of the California Franchise tax law, S Corporation earnings are
subject to a reduced state income tax rate (minimum $800) with the remainder
taxed at the individual shareholder level.
The provision for income taxes reflects the minimum California Franchise tax for
1997, 1998 and 1999. From the date the Company was founded until November 21,
1997, the Company operated as an S Corporation.
Since November 22, 1997, the Company has been subject to corporate taxation
as a C Corporation. For the period of November 22, 1997 through December 31,
1999, the Company had a net operating loss.
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred taxes consisted of the following at December 31, 1998 and
1999:
December 31,
--------------------------
1998 1999
--------- ---------
Deferred tax assets:
Net operating loss carryforwards............... 1,375,000 $ 9,316,000
Allowance for doubtful accounts................ 26,000 30,000
Accounts payable and accrued liabilities....... 2,001,000 1,745,000
----------- ------------
Total deferred tax assets.................... 3,402,000 11,091,000
Less, Valuation allowance...................... (3,343,000) (10,477,000)
----------- ------------
Net deferred tax assets...................... 59,000 614,000
Deferred tax liabilities:
State taxes.................................... (59,000) (499,000)
Depreciation and amortization.................. -- (115,000)
----------- ------------
Net deferred tax liabilities................. (59,000) (614,000)
----------- ------------
Net deferred tax............................. $ -- $ --
=========== ============
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. Based upon the level of historical losses and
projections of future taxable income over the periods in which the deferred tax
assets are deductible, a full valuation allowance has been provided as
management believes that it is more likely than not based upon available
evidence that the deferred tax assets will not be realized.
F-22
US SEARCH.COM INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1999, the Company has federal and state net operating
loss carryforwards of approximately $23,830,000 and $13,719,000, respectively.
The federal net operating loss carryforwards will begin to expire in 2017, and
the state net operating loss carryforwards will begin to expire in 2002. The
Company's ability to utilize net operating loss carryforwards may be limited in
the event that a change in ownership, as defined in the Internal Revenue Code,
occurs in the future.
The Company's effective tax rate for the fiscal year ended December 31,
1998 and 1999 differ from the statutory federal income tax rate as follows:
1998 1999
---- ----
Tax provision at the statutory rate..................... (34%) (34.0%)
State taxes, net of federal benefit..................... (6%) 0.3%
Change in valuation allowance........................... 40% 33.7%
---- ----
-- --
==== ====
12. Supplemental Cash Flow Disclosure:
Supplemental cash flow disclosure is comprised of:
1997 1998 1999
------- -------- --------
Cash paid during the year for:
Interest...................................... $ 106,000 $ 195,000 $ 358,000
Income taxes.................................. 1,000 1,000 1,000
Non-cash investing and financing activities:
Inception of capital leases................... 1,900 30,000
Conversion of trade payable to Note payable... 637,000 -- --
Conversion of notes payable to common stock... -- -- 5,500,000
During the year ended December 31, 1997, a stockholder loan from the
Company in the amount of $234,000 was extinguished through his personal
assumption of a $296,000 notes payable of the Company. In the year ended
December 31, 1998, the Company re-assumed the debt from the stockholder (see
Note 9).
F-23
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of US Search.com Inc.:
Our report on the financial statements of US Search.com is included on page F-2
of this Form 10-K. In connection with our audits of such financial statements,
we have audited the related financial statement schedule as of December 31,
1999, 1998 and 1997 and for each of the three years in the period ended December
31, 1999 as listed on the index on page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
January 25, 2000
F-24
US SEARCH.COM INC.
SCHEDULE II
Valuation and Qualifying Accounts
Years Ended December 31, 1999, 1998, 1997
Year Item Balance at Additions Deductions Balance at
Ended beginning of charged to end of year
year expenses
1999 Allowance for doubtful accounts $ 64,000 $ 190,000 $ (180,000) $ 74,000
1998 Allowance for doubtful accounts $ 87,000 $ 364,000 $ (387,000) $ 64,000
1997 Allowance for doubtful accounts $ - $ 153,000 $ (66,000) $ 87,000
F-25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
US SEARCH.COM.INC
(Registrant)
Dated: March 29, 2000
/s/ BRENT N. COHEN
Brent N. Cohen, Chief Executive
Officer and Director
Dated: March 29, 2000
/s/ WILLIAM G. LANGLEY
William G. Langley
Vice President and Chief Financial
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Brent N. Cohen and William G. Langley, or
either of them, his or her attorney-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report, and to file the same, with exhibits thereto and other documents
in connections therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his or her
substitute or substitutes, may do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates stated.
US SEARCH.COM INC.
(Registrant)
Dated: March 29, 2000
/s/ PETER LOCKE
Peter Locke
Co-Chairman of the Board
Dated: March 29, 2000
/s/ DONALD KUSHNER
Donald Kushner
Co-Chairman of the Board
Dated: March 29, 2000
/s/ BRENT N. COHEN
Brent N. Cohen
Chief Executive Officer and
Director
Dated: March 29, 2000
/s/ WILLIAM G. LANGLEY
William G. Langley
Vice President and
Chief Financial Officer
Dated: March 29, 2000
/s/ ALAN S. MAZURSKY
Alan S. Mazursky
Vice President and Financial
Principal Accounting Officer
Dated: March 29, 2000
/s/ ALAN C. MENDELSON
Alan C. Mendelson
Director
Dated: March 29, 2000
/s/ NICHOLAS ROCKEFELLER
Nicholas Rockefeller
Director
Dated: March 29, 2000
/s/ HARRY CHANDLER
Harry Chandler
Director
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
4.2* Warrant to purchase up to 453,391 shares of Common Stock, dated
September 14, 1998, issued by US SEARCH to The Kushner-Locke
Company
4.3* 10% Convertible Subordinated Notes for up to $5,500,000, dated
January 7, 1999, issued by US SEARCH to The Kushner-Locke Company
4.4* Warrant to purchase up to 906,782 shares of Common Stock, dated
January 7, 1999, issued by US SEARCH to The Kushner-Locke Company
10.1* Form of Indemnity Agreement between US SEARCH and its directors
and officers
10.2* 1998 Amended and Restated Stock Incentive Plan
10.2.1* Form of 1998 Stock Incentive Plan Stock Option Award Agreement
between US SEARCH and its employees, directors, and consultants
10.3* 1999 Non-Employee Directors' Stock Option Plan
10.3.1* Form of 1999 Non-Employee Directors' Stock Option Plan
Nonstatutory Stock Option between US SEARCH and its non-employee
directors
10.3.2* Form of 1999 Non-Employee Directors' Stock Option Plan Notice of
Exercise between US SEARCH and its non-employee directors
10.4* Standard Office Lease - Gross, dated January 24 1996, between US
SEARCH and Daishin U.S. A. Co., Ltd.
10.4.1* Addendum to Standard Lease - Option(s) to Extend, dated January
24, 1996, between US SEARCH and Daishin U.S.A. Co., Ltd.
10.5* Amended and Restated Employment Agreement, date September 14,
1998, between US SEARCH and Nicholas Matzorkis
10.6* Employment Agreement, dated February 3, 1999, between US SEARCH
and C. Nicholas Keating, Jr.
10.7* Employment Agreement, dated March 18, 1999, between US SEARCH and
William G. Langley
10.8* Employment Agreement, dated March 17, 1999, between US SEARCH and
Robert J. Richards
10.9* Employment Agreement, dated March 18, 1999, between US SEARCH and
Meg Shea-Chiles
10.10* Administrative Services Agreement, dated July 1, 1998, between
The Kushner-Locke Company and US SEARCH
10.11+* Addendum to Lycos, Inc. Advertising Contract, dated March 1,
1999, between US SEARCH and Lycos, Inc.
10.11.1+* Lycos, Inc. Advertising Contract, dated February 1, 1999, between
Lycos, Inc. and US SEARCH
INDEX TO EXHIBITS (continued)
Exhibit No. Description
- ---------- -----------
10.12+* Amended and Restated Content Provider Agreement dated as of
August 24, 1998, between InfoSpace, Inc., US SEARCH and The
Kushner-Locke Company (the "InfoSpace Agreement")
10.13* Settlement Agreement, dated September 14, 1998, by and among The
Kushner-Locke Company, Nicholas Matzorkis and US SEARCH.
10.14* Shareholders' Agreement dated September 14, 1998, by The Kushner-
Locke Company and Nicholas Matzorkis.
10.15+* Amendment to the InfoSpace Agreement dated March 15, 1999
10.16+* Advertising Agreement and Insertion Orders date September 4,
1998, between InfoSeek Corporation and US SEARCH
10.17+* Terms and Conditions and Sponsorship Proposal dated March 2,
1999, and Addendum to contract dated March 11, 1999, between
Snap! LLC and US SEARCH
10.18+* Advertising and Promotion Agreement dated June 7, 1999 between
Yahoo! Inc. and US SEARCH.
10.19+** Data Processing Service Agreement dated July 1, 1999 between DBT
Online, Inc. and US SEARCH.com Inc.
10.20*** Lease Agreement dated September 9, 1999 between US SEARCH.com
Inc. and The Mortensen Trust
10.21 Employment Agreement, dated February 3, 2000, between US SEARCH
and Brent N. Cohen
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (see signature page)
27.1 Financial Data Schedule
__________
* Filed with the Company's Registration Statement on Form 1, File No. 333-
76099, declared effective on June 24, 1999, incorporated herein by
reference.
** Filed with the Company's Quarterly Report on Form 10-Q for the period
ending June 30, 1999, incorporated herein by reference.
*** Filed with the Company's Quarterly Report on Form 10-Q for the period
ending September 30, 1999, incorporated herein by reference.
+ Confidentiality granted with respect to certain portions.