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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 agreem