10-Q 1 0001.txt QUARTERLY REPORT FOR PERIOD ENDED 09/30/00 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2000 or [_] Transition Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934 for the transition period from ______ to ______ Commission File No. 0-26149 US SEARCH.COM INC. (Exact name of registrant as specified in its charter) Delaware 95-4504143 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 5401 Beethoven Street, Los Angeles, CA 90066 (Address of principal executive offices, including zip code) (310) 302-6300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) Yes [X] No [_], and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] There were 18,258,244 shares of outstanding Common Stock of the registrant as of November 13, 2000. 1 US SEARCH.COM INC. Form 10-Q for the quarterly period ended September 30, 2000 INDEX
Page Number Part I FINANCIAL INFORMATION.............................................................................................. 2 Item 1 Financial Statements.................................................................................. 3 Balance Sheets as of September 30, 2000 and December 31, 1999......................................... 3 Statements of Operations for the Three and Nine month periods ended September 30, 2000 and September 30, 1999 ...................................................... 4 Statements of Cash Flows for the Three and Nine month periods ended September 30, 2000 and September 30, 1999....................................................... 5 Notes to Financial Statements......................................................................... 6 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations................. 10 Item 3 Quantitative and Qualitative Disclosures about Market Risks........................................... 24 Part II OTHER INFORMATION Item 1 Legal Proceedings..................................................................................... 25 Item 2 Changes in Securities and Use of Proceeds............................................................. 25 Item 3 Defaults Upon Senior Securities....................................................................... 27 Item 4 Submission of Matters to a Vote of Security Holders................................................... 27 Item 5 Other Information..................................................................................... 27 Item 6 Exhibits and Reports on Form 8-K...................................................................... 27 SIGNATURES.................................................................................................................... 29 INDEX TO EXHIBITS............................................................................................................. 30
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements US SEARCH.COM INC. BALANCE SHEETS
September 30, 2000 December 31, 1999 ------------------ ----------------- (Unaudited) ASSETS: Current assets: Cash and cash equivalents $ 9,238,000 $ 17,382,000 Restricted cash 2,200,000 2,000,000 Accounts receivable, less allowance for doubtful accounts of $63,000 (2000) and $74,000 (1999) 109,000 131,000 Other current assets 1,647,000 3,608,000 ------------ ------------ Total current assets 13,194,000 23,121,000 Property and equipment, net 4,729,000 2,218,000 Other assets 182,000 311,000 ------------ ------------ Total assets $ 18,105,000 $ 25,650,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY: Current liabilities: Accounts payable $ 6,987,000 $ 5,438,000 Accrued liabilities 1,800,000 623,000 Notes payable, current portion 600,000 25,000 Capital lease obligations, current portion 266,000 22,000 ------------ ------------ Total current liabilities 9,653,000 6,108,000 Notes payable, net of current portion 192,000 15,000 Capital lease obligations, net of current portion 278,000 22,000 Other non-current liabilities 4,000 16,000 Total liabilities 10,127,000 6,161,000 Commitments and contingencies (Note 3) Mandatorily redeemable preferred stock $.001 par value; authorized 1,000,000 shares, 350,000 shares designated Series A; 100,000 shares issued and outstanding (liquidation preference - $10,027,000) 5,968,000 - Stockholders' equity: Common stock, $.001 par value; authorized 40,000,000 shares; issued and outstanding 18,258,244 (2000) and 17,421,644 (1999) 18,000 17,000 Additional paid-in capital 60,154,000 53,790,000 Note receivable from officer (491,000) - Unearned deferred compensation (29,000) (1,099,000) Accumulated deficit (57,642,000) (33,219,000) ------------ ------------ Total stockholders' equity 2,010,000 19,489,000 ------------ ------------ Total liabilities and stockholders' equity $ 18,105,000 $ 25,650,000 ============ ============
The accompanying notes are an integral part of these statements. 3 US SEARCH.COM INC. STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended Nine months Ended ------------------ ----------------- September 30, 2000 September 30, 1999 September 30, 2000 September 30, 1999 ------------------- ------------------- ------------------- ------------------- Net Revenue $ 5,213,000 $ 6,163,000 $ 18,581,000 $ 13,442,000 Cost of Services 2,426,000 2,341,000 8,679,000 4,646,000 ------------ ------------ ------------ ------------ Gross Profit 2,787,000 3,822,000 9,902,000 8,796,000 ------------ ------------ ------------ ------------ Operating expenses: Selling and marketing expenses (including non-cash charges of $2,179,000 in 2000) 8,095,000 7,450,000 23,092,000 14,290,000 General and administrative expenses 3,870,000 2,167,000 12,058,000 4,761,000 Charge (credit) for compensation related to stock options (322,000) 305,000 (332,000) 1,834,000 ------------ ------------ ------------ ------------ Total operating expenses 11,643,000 9,922,000 34,818,000 20,885,000 ------------ ------------ ------------ ------------ Loss from operations (8,856,000) (6,100,000) (24,916,000) (12,089,000) Interest income (expense), net 112,000 370,000 494,000 (4,596,000) Amortization of debt issue costs - - - (3,096,000) ------------ ------------ ------------ ------------ Loss before income taxes (8,744,000) (5,730,000) (24,422,000) (19,781,000) Provision for income taxes - - 1,000 - ------------ ------------ ------------ ------------ Net Loss (8,744,000) (5,730,000) (24,423,000) (19,781,000) Beneficial conversion feature on preferred stock 1,029,000 - 1,029,000 - Accretion of warrant costs and other rights 30,000 - 30,000 - Accretion of preferred dividends 27,000 - 27,000 - ------------ ------------ ------------ ------------ Net loss attributable to common stockholders $ (9,830,000) $ (5,730,000) $(25,509,000) $(19,781,000) ============ ============ ============ ============ Basic and diluted net loss per share $(0.54) $(0.33) $(1.42) $(1.61) Weighted-average shares outstanding used in per share calculation 18,258,244 17,421,644 17,943,649 12,280,553
The accompanying notes are an integral part of these statements. 4 US SEARCH.COM INC. STATEMENTS OF CASH FLOWS (unaudited)
Nine months Ended September 30 ------------------------------ 2000 1999 ---- ---- Cash flows from operating activities Net loss $(24,423,000) $ (19,781,000) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 613,000 125,000 Provision for doubtful accounts 195,000 146,000 Charge for warrants and beneficial conversion feature 2,179,000 4,639,000 Amortization (credit) of unearned compensation (332,000) 1,834,000 Amortization of debt issue costs - 2,546,000 Loss on disposal of property and equipment 148,000 - Change in assets and liabilities: Accounts receivable 22,000 (171,000) Accounts payable 1,549,000 (7,000) Accrued liabilities 1,177,000 60,000 Prepaid and other 2,854,000 (2,864,000) ------------ ------------- Net cash used in operating activities (16,018,000) (13,464,000) ------------ ------------- Cash flows from investing activities: Purchase of property and equipment (2,557,000) (489,000) Proceeds from disposal of property and equipment 7,000 - ------------ ------------- Net cash used in investing activities (2,550,000) (489,000) ------------ ------------- Cash flows from financing activities: Increase in restricted cash (200,000) (2,000,000) Repayments of line of credit - (372,000) Repayments of third party notes payable (218,000) (764,000) Advances from related parties - 200,000 Repayments to related parties - (2,782,000) Proceeds from warrant exercise - 2,752,000 Proceeds from initial public offering 36,109,000 Net proceeds from convertible preferred stock 9,463,000 Proceeds from convertible notes - 5,500,000 Repayments of capital lease obligations (222,000) (32,000) Proceeds from stock option exercises 1,601,000 - ------------ ------------- Net cash provided by financing activities 10,424,000 38,611,000 ------------ ------------- Net (decrease)/increase in cash and cash equivalents (8,144,000) 24,658,000 Cash at beginning of period 17,382,000 99,000 ------------ ------------- Cash at end of period $ 9,238,000 $ 24,757,000 ============ ============= Non cash investing and financing activities: Conversion of notes payable to common stock - 5,500,000 Capital lease 703,000 - Exercise of stock options through issuance of note receivable 491,000 - Conversion of accounts payables into notes payable 970,000 -
The accompanying notes are an integral part of these statements. 5 US SEARCH.COM INC. NOTES TO FINANCIAL STATEMENTS (unaudited) 1. Organization and Business: US SEARCH, Inc. (the "Company") provides individual, corporate and professional clients with a single, comprehensive access point to a broad range of individual reference services and background screening services. Individual reference services include personal identifying information about individuals that can be used to identify, locate or verify the identity and background of an individual. The Company was formed as a California S Corporation in 1994, and reincorporated as a Delaware Corporation in April 1999. In June 1999 the Company completed its initial public offering and sold 4,500,000 shares of common stock raising net proceeds from the offering of $36,109,000. The Company's shares are now traded on the NASDAQ national market system under the symbol "SRCH". 2. Basis of Presentation: These unaudited financial statements and accompanying notes prepared in accordance with instructions to Form 10-Q have been condensed and, therefore, do not contain certain information included in the Company's annual financial statements and accompanying notes. Therefore, you should read these unaudited condensed financial statements in conjunction with the Company's annual financial statements. The unaudited condensed financial statements reflect, in the opinion of management, all adjustments which are of a normal recurring nature, necessary to present fairly the financial position of the Company as of September 30, 2000, and the results of its operations for the three and nine month periods ended September 30, 2000 and 1999. Interim results are not necessarily indicative of results to be expected for a full fiscal year. Restricted Cash As of September 30, 2000, $2,200,000 was pledged as collateral principally in connection with an outstanding letter of credit relating to a building lease agreement. Subsequent to September 30, 2000, restrictions on $1,000,000 were released in connection with a reduction of such letter of credit. Net Loss Per Share Basic net loss per common share is computed using the weighted average number of shares of common stock and diluted net loss per common share is computed using the weighted average number of shares of common stock and common equivalent shares outstanding. Common equivalent shares related to stock options and warrants are excluded from the computation when their effect is antidilutive. As of September 30, 2000 the number of stock options that were antidilutive amounted to 6,690,744. As of September 30, 1999, there were 1,777,324 options which are excluded from the computation of diluted earnings per share because their inclusion would have been antidilutive. 6 US SEARCH.COM INC. NOTES TO FINANCIAL STATEMENTS--(Continued) (unaudited) 3. Commitments And Contingencies: Strategic Alliance Commitments The Company has several cancelable and non-cancelable distribution and marketing agreements with various Internet companies. The terms of these agreements provide for varying levels of exclusivity and minimum and maximum fees payable based on the number of banners, buttons and text links displayed on affiliate web sites. The Company also has committed to purchase television advertising from various media companies. At September 30, 2000, the minimum non-cancelable payments due under these agreements are approximately $2,470,000 for the remainder of 2000, $2,720,000 for 2001 and $600,000 for 2002. Purchase Commitments: In July 1999, the Company entered into an agreement with a supplier of online information services data pursuant to which the Company has committed to purchase approximately $20 million worth of such data and information over a five and one-half year term. The minimum non-cancelable payments due under this agreement are $750,000 for the remainder of 2000, $3,600,000 for 2001 and $4,200,000 for 2002-2004. Lease Agreement In September 1999, the Company entered into a five-year lease for a 52,500 square foot facility located in the Marina Del Rey area of Los Angeles, California. Under the terms of the lease agreement, the Company is committed to make total rental payments of $4.8 million over the remaining term of the lease. Legal Proceedings On April 3, 2000 a tradename and service mark complaint was filed against the Company in the United States District Court for the Eastern District of Virginia, styled U.S. Search, LLC v USSearch.com Inc. Civil Action No. 00- 554-A. The complaint seeks injunctive relief, damages not less than $5 million, costs and other further civil and equitable relief. The Complaint alleges violations of the Lanham Act and common law unfair competition in that the Company's use of the U.S. Search trade name and service mark created actual confusion or likelihood of confusion. The Company has answered the complaint and filed counterclaims against plaintiff U.S. Search LLC for infringement of a federally registered trademark, false designation of origin under section 43(a) of the Lanham Act and common law and unfair competition. The Company believes the suit is without merit and intends to defend itself aggressively. On August 14, 2000 a proposed class action complaint was filed against the Company in the Superior Court of the State of California for the County of Los Angeles, Dorothy Pilkington and Alice Schwartz-Scholl on behalf of themselves, and all other similarly situated, and on behalf of the general public vs. US Search.com, Inc., Case No. BC234858. The Complaint claims damages for breach of contract, violation of Unfair Practices Act, violation of the Consumer Legal Remedies Act, fraud and negligent misrepresentation in connection with the Company's adoption services. The Company has answered the Complaint and is engaged in settlement discussions. 4. Preferred Stock On September 9, 2000, the Company issued 100,000 shares of Series A mandatorily redeemable preferred stock ("Preferred Stock"), stated value $100 per share, and warrants to purchase 75,000 of Preferred Stock to an investor for gross proceeds of $10 million. The warrants are exercisable for $100 per share at any time from the date of issuance through September 2005. The investor is also required to purchase in a second tranche an additional 100,000 shares of Preferred Stock for $100 per share in the event the Company meets certain performance metrics and other requirements. In connection with the offering the Company incurred legal, accounting and other offering expenses of approximately $537,000. The net proceeds of the offering of $9,463,000 has been allocated, based on an estimated relative fair value, between the issuance of Preferred Stock ($5,911,000) and the warrants and right to invest in the second tranche ($3,552,000). The amount ascribed to the warrants and the right to invest in the second tranche is accreted to the carrying value of the Preferred Stock over the redemption period. Accretion for the period from issuance to September 30, 2000 was approximately $30,000. The Preferred Stock has the following rights and preferences: Conversion: The Preferred Stock is convertible into common stock at the option of the holder at any time after issuance at a conversion price of $1.70 per share. The Preferred Stock automatically converts to common stock if the daily market price of common stock exceeds $10.00 for ten days during a 25 day period at any time after the first anniversary and (ii) upon the closing of a firmly underwritten public offering raising more than $25,000,000 at a price not less than $10 per share. 7 The Company has recorded a non-cash charge to the net loss attributable to common stockholders of $1,029,000 relating to a beneficial conversion feature ("BCF"). The beneficial conversion feature has been computed based on the number difference between the fair market value of the stock on the date of close of the agreement ($1.875 on September 9, 2000) and the conversion price of $1.70, multiplied by the number of shares into which the preferred stock is convertible. The Company may record additional BCF charges on the second tranche funding ($10 million) if the fair market value of the Company's common stock on the date of the second closing is greater than $1.70 per share of common stock. Redemption: The Preferred Stock is redeemable at the option of the holders of the Series A Preferred after the fifth anniversary at a redemption price equal to the liquidation price plus any accrued and unpaid dividends. The Company may at its own option, after the fifth anniversary, redeem all, but not less than all, of the then issued and outstanding shares of Preferred Stock for an amount equal to $103 per share plus accrued and unpaid dividends. Dividends: The preferred stockholder is entitled for the period until September 2001, when, as and if declared by the Board, non-cumulative dividends of 6.0% per annum. After September 2001, the preferred stockholders are entitled to receive cumulative dividends, at a rate of 6.0% per annum in the form of additional preferred stock. Liquidation Preference: The liquidation preference is an amount equal to $100 per share. In the event of liquidation the preferred stockholder is entitled to receive the Liquidation preference plus all amounts of declared, accrued and unpaid dividends. Voting: The Preferred Stock has immediate voting rights equivalent to the number of common shares on an as-converted basis. The Preferred Stockholder has the right to elect two directors to the Board and is required to approve payment of other dividends, capital expenditure and amendment of bonus plans. 5. Stock Options and Warrants: During the quarter ended September 30, 2000, 2,287,500 options were granted pursuant to the 1998 Stock Incentive Plan, at an average exercise price of $1.84 and 774,000 options were granted pursuant to the 2000 Stock Incentive Plan at an average exercise price of $2.35. During the quarter ended September 30, 2000, no shares were exercised. As of September 30, 2000, there were 6,690,744 options outstanding of which 905,044 were exercisable. In May 2000, the Company received from its president and chief executive officer a partial recourse note receivable of $491,000 in connection with the exercise of options to purchase 320,000 shares of the Company's common stock. In September 2000, the Company issued warrants to purchase 1,750,000 shares of common stock for $0.01 per share, in connection with the restructuring of one of its online advertising agreements. The non-forfeitable warrants have a ten year term and are exercisable from the date of issuance. The Company has recorded a non-cash charge of approximately $2,179,000 million in connection with these warrants. 8 PART I. FINANCIAL INFORMATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS ABOUT THE COMPANY'S BUSINESS, MANAGEMENT'S BELIEFS AND ASSUMPTIONS MADE BY MANAGEMENT. WORDS SUCH AS "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES," "LIKELY," VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD- LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS AND OUTCOMES MAY DIFFER MATERIALLY FROM WHAT IS EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE THOSE SET FORTH BELOW UNDER "FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION" AND ELSEWHERE IN THIS REPORT AS WELL AS THOSE NOTED IN OUR ANNUAL REPORT ON FORM 10-K (FILE NO. 0-26149) AND OUR OTHER PUBLIC FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD- LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO THESE DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION TITLED "FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION" IN THIS REPORT. Overview We provide 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, http://www.ussearch.com, or by calling our toll free telephone number, 1-800-USSEARCH. We generate revenues by performing individual reference search and background screening 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, where applicable, 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 hour to 10 days, 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. We recognize revenue from our services when we deliver the results to our clients. 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 9 additional information they can request to broaden the scope of their "Instant Searches" and we may apply a portion of the cost of the client's "Instant Searches" towards the cost of the more comprehensive search. We are expanding our available services to corporate and professional clients. We expect a longer sales cycle as we collaborate with clients and educate them on the use and benefits of our services. We expect our revenues in the future, especially from corporate and professional clients, to be dependent in large part on our ability to establish relationships with partners that integrate and market our services as part of their own product and service offerings. We have little or no influence over the marketing efforts of these partners and the success of the products and services offered by them. Our partners are generally under no minimum payment obligations. As a result, we have limited ability to evaluate the success of our partnership efforts and predict the realization or timing of any revenues from corporate and professional clients. Our cost of services consists primarily of payroll expenses, data acquisition costs, local and long distance telephone charges associated with providing our services, and an allocable portion of network and technology infrastructure. While our cost of services generally varies with revenues, we believe that as we increase the portion of our business to higher volume corporate accounts, volume discount pricing is likely to offset any reduction we may achieve in data costs and labor as a percentage of net revenues. We have an agreement with a supplier of online information services data to purchase approximately $20 million worth of such data over a five and one- half year term. The minimum non-cancelable payments under this agreement are $750,000 for the remainder of 2000, $3.6 million for 2001 and $4.2 million for 2002-2004. Our operating expenses consist primarily of selling, marketing, general and administrative expenses. We expect certain of our operating expenses to continue to increase substantially as we attempt to expand our sales and marketing force, improve our technology infrastructure and develop new technologies, while we expect other costs will decline or remain at current levels. Selling and marketing expenses constitute the largest portion of our operating expenses. Internet-based advertising expenses comprised over 47% of our total operating expenses for the 3-month period ended September 30, 2000. With the growth of our Internet-based services, an increasing portion of our advertising expenses has consisted of Internet-based advertising such as arrangements with Internet search engines and popular Web sites. We have recently restructured two such arrangements, and have begun to achieve a reduction of sequential quarterly advertising expense. This reduction includes savings from the establishment of revenue-share deals with a number of portal advertising partners, and a reduction in our television advertising to levels which can improve the returns achieved from that medium. We expect to further reduce our advertising expense by reassessing other existing relationships as they expire. 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. While advertising aimed at consumers is being reduced, we expect certain 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 September 30, 2000, the minimum non-cancelable payments required under these agreements are approximately $2.5 million during the remainder of 2000, $2.7 million in 2001, and $600,000 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. Although costs associated with executives and consumer operations overhead are not expected to grow, we expect the trend of increased general and administrative costs to continue in the areas of technology personnel, as well as sales and marketing and personnel to promote services to corporate and professional clients. 10 We incurred significant net losses of approximately $399,000 in 1997, $6.8 million in 1998, $26.4 million in 1999 and $24.4 million for the nine month period ended September 30, 2000. At September 30, 2000, we had an accumulated deficit of approximately $57.6 million. We expect to incur significant additional losses and continued negative cash flow from operations for the foreseeable future. We recorded a non-cash interest charge of approximately $4.6 million in the first nine months of 1999 relating to the beneficial conversion feature of the convertible subordinated note issued to the Kushner-Locke Company ("Kushner-Locke") in January 1999. This charge was calculated using the deemed fair value of common stock on the date each advance was made to us by subtracting the conversion price and multiplying the resulting amount by the number of shares into which the advance is convertible. The value assigned to the beneficial conversion feature was no greater than the amount of each advance made under the convertible subordinated note. We also recorded in the first nine months of 1999 a $2.5 million charge relating to warrants issued to Kushner-Locke in January 1999. This charge represents the deemed fair value of the warrants, which is the per share value derived by applying the Black-Scholes option pricing model to our underlying shares of common stock and multiplying that value by the number of shares of common stock issuable upon exercise of the warrants. In the three month period ended September 30, 2000 we recorded a $2.2 million non-cash charge relating to warrants issued in connection with the restructuring of one of our online advertising agreements. This charge had been recorded in sales and marketing expenses. Since the first quarter of 1999, we have granted certain stock options to employees and non-employee directors and will continue to grant options under the Amended and Restated 1998 Stock Incentive Plan and the 1999 Non-Employee Directors' Stock Option Plan and the 2000 Stock Incentive Plan. In 1999 we recorded unearned deferred compensation of approximately $3.2 million, representing the difference between the deemed fair value of our common stock for accounting purposes and the exercise price of such options at the date of grant. This amount was recorded as a reduction of stockholders' equity and amortized over the vesting period of the applicable options. During the nine months ended September 30, 2000, a credit was recorded to deferred compensation to account for the cancellation of certain options granted in 1999. As a result, we currently expect to amortize the remaining unearned deferred compensation at September 30, 2000 of approximately $30,000 in the fourth quarter of 2000. Results of Operations Comparison of the Three Months Ended September 30, 2000 to the Three Months Ended September 30, 1999 Net Revenues. Our net revenues decreased from approximately $6.2 million for the three months ended September 30, 1999 to approximately $5.2 million for the three months ended September 30, 2000, representing a 15% decrease. The decrease is primarily attributable to a decrease in the number of Internet- based transactions which occurred as a result of decreased web site visitor traffic. The decline in Web site traffic was likely a result of decreased advertising expense (excluding non-cash charges for the restructuring of a certain advertising agreement). Gross Profit. Gross profit decreased from approximately $3.8 million for the three months ended September 30, 1999 to approximately $2.8 million for the three months ended September 30, 2000, representing a 27% decrease. Gross profit as a percentage of net revenues was approximately 53% and 62% for the three month periods ended September 30, 2000, and September 30, 1999, respectively. Cost of services increased to approximately $2.4 million for the three months ended September 30, 2000, or 4%, from approximately $2.3 million for the three months ended September 30, 1999. As a percentage of net revenues, cost of services was approximately 47% and 38% for the three month periods ended September 30, 2000 and September 30, 1999, respectively. Data acquisition and fulfillment costs as a percentage of revenues in 2000 increased compared to 1999 due to the use of a higher cost, higher quality data provider for certain products. Labor costs increased as a percentage of net revenues primarily due to increased hourly wage rates and the incurring of overtime expense incurred in pursuit of improvement in customer service and order fulfillment response time. In addition, refunds increased as a percentage of gross revenues which decreased gross profit. 11 Selling and Marketing Expenses. Selling and marketing expenses increased from approximately $7.5 million for the three months ended September 30, 1999 to approximately $8.1 million for the three months ended September 30, 2000. As a percentage of net revenues, selling and marketing expenses increased to approximately 155% for the three months ended September 30, 2000, from approximately 121% for the three months ended September 30, 1999. This increase is primarily attributable to the recording of a $2.2 million non- cash charge for warrants issued to one of our Internet advertising partners in connection with the termination of a long-term commitment. Excluding such non-cash charge, online advertising declined in the three months ending September 30, 2000 compared to the same period in 1999 due to a reduction in the number of impressions ordered. General and Administrative Expenses. General and administrative expenses increased from approximately $2.2 million for the three months ended September 30, 1999 to approximately $3.9 million for the three months ended September 30, 2000. As a percentage of net revenues, general and administrative expenses increased to approximately 74% for the three months ended September 30, 2000, from approximately 35% for the three months ended September 30, 1999. This increase is primarily attributable to the costs associated with the hiring of additional management, technology and administrative personnel, severance costs on certain terminated executives, as well as an increase in rent expense. Charge(Credit) for compensation related to stock options. During the three month period ended September 30, 2000, a credit of approximately $322,000 was recorded in connection with the cancellation of options (granted in 1999) on the termination of certain employees as compared to a charge of $305,000 for the same period in 1999. We expect to amortize the remaining deferred compensation balance of approximately $30,000 in the fourth quarter. Interest Income(Expense) Net. Interest income, net of interest expense, decreased to $112,000 for the three months ended September 30, 2000 compared to $370,000 for the three months ended September 30, 1999. The decline is attributable to the decline in the cash balances available for investment. Comparison of the nine months ended September 30, 2000 to the nine months ended September 30, 1999 Net Revenues. Our net revenues increased from approximately $13.4 million for the nine months ended September 30, 1999 to approximately $18.6 million for the nine months ended September 30, 2000, representing a 38% increase. The increase is primarily attributable to an increase in the number of Internet- based transactions which occurred as a result of increased web site visitor traffic. The growth in web site traffic was driven by increased advertising on a greater number of Internet search engines and popular web sites. Gross Profit. Gross profit increased from approximately $8.8 million for the nine months ended September 30, 1999 to approximately $9.9 million for the nine months ended September 30, 2000, representing a 13% increase. Gross profit as a percentage of net revenues was approximately 53% and 65% for the nine months ended September 30, 2000 and the nine months ended September 30, 1999, respectively. Cost of services increased to approximately $8.7 million for the nine months ended September 30, 2000 from approximately $4.6 million for the nine months ended September 30, 1999. As a percentage of net revenues, cost of services was approximately 47% and 35% for the nine months ended September 30, 2000 and the nine months ended September 30, 1999, respectively. Data acquisition and fulfillment costs as a percentage of revenues increased due to the introduction of certain lower- priced public record report products and the use of a higher cost, higher quality data provider for certain products. Labor costs increased as a percentage of net revenues primarily due to increased hourly wage rates and the growth in personnel involved in handling the increased volume of service requests. In addition, refunds increased as a percentage of gross revenues, which decreased gross profit due to the implementation of new customer service policies. Selling and Marketing Expenses. Our selling and marketing expenses increased from $14.3 million for the nine months ended September 30, 1999 to approximately $23.1 million for the nine months ended September 30, 2000. As a percentage of net revenues, selling and marketing expenses increased to approximately 124% for the nine months ended September 30, 2000, from approximately 106% for the nine months ended September 30, 1999. This increase is primarily attributable to the expansion of Internet-based advertising and increased television promotional fee advertisements, and to the recording of 12 a non-cash charge of $2.2 million for warrants issued in connection with the restructuring of an online advertising agreement. General and Administrative Expenses. Our general and administrative expenses increased from approximately $4.8 million for the nine months ended September 30, 1999 to approximately $12.1 million for the nine months ended September 30, 2000. As a percentage of net revenues, general and administrative expenses increased to approximately 65% for the nine months ended September 30, 2000, from approximately 35% for the nine months ended September 30, 1999. This increase is primarily attributable to severance costs, the hiring of new management, technology and administrative personnel as well as an increase in rent expense. Charge(Credit) for Compensation related to stock options. During the nine month period ended September 30, 2000, a credit of approximately $332,000 was recorded in connection with the cancellation of options (granted in 1999) on the termination of certain employees. We expect to amortize the remaining deferred compensation balance of approximately $30,000 in the remainder of 2000. Interest Income(Expense) Net. Our interest income, increased to $494,000 for the nine months ended September 30, 2000 compared to interest expense of $4.6 million for the nine months ended September 30, 1999. Included in interest expense for the nine months ended September 30, 1999 is approximately $4.6 million relating to the beneficial conversion feature on the convertible subordinated note issued to Kushner-Locke. In addition, the interest expense for the nine months ended September 30, 1999 also includes interest on outstanding short term and long term debts, and other inter- company advances from Kushner-Locke, offset by interest income. Amortization of debt issue costs. In connection with the convertible subordinated note issued to Kushner-Locke, we granted to Kushner-Locke warrants to purchase 906,782 shares of our common stock. Relating to these warrants we have recorded a non-cash charge of $2.5 million that we have amortized over the six month period that the convertible subordinated note was outstanding. Also, the $5,500,000 convertible subordinated note included a $550,000 origination fee in the amount of $550,000 payable to Kushner- Locke, which was fully amortized in the prior-year period. Income Taxes. As of December 31, 1999 we had approximately $23.8 million of federal and $13.7 million of state net operating loss carryforwards to offset future taxable income. Our net operating loss carryforwards expire beginning in 2017 for federal and 2002 for state. Our ability to utilize net operating loss carryforwards may be limited in the event that a change in ownership, as defined in the Internal Revenue Code, occurs in the future. We have recorded a full valuation allowance against our deferred tax assets as we believe that it is more likely than not that the deferred tax assets will not be realized based upon our expected future results of operations. Liquidity and Capital Resources Cash and cash equivalents decreased from $17.4 million at December 31, 1999 to $9.2 million at September 30, 2000 (excluding $2.2 million of restricted cash pledged as collateral principally in connection with our new building lease), primarily as a result of operating losses. Cash used in operations increased from $ 13.5 million for the nine months ended September 30, 1999 to $16.0 million for the nine months ended September 30, 2000. This increase is primarily attributable to increased expenditures on Internet-based advertising and increased general and administrative expenses relating to the hiring of executive personnel and the development of information technology infrastructure. Cash used in investing activities increased from $489,000 for the nine months ended September 30, 1999 to $2.6 million for the nine months ended September 30, 2000. This increase is primarily attributable to increased purchases of computer hardware and software and other fixture and equipment in connection with our new premises. Cash provided by financing activities decreased from $38.6 million for the nine months ended June 30, 1999 to approximately $10.4 million for the nine months ended September 30, 2000. During the nine months ended September 30, 2000 we received $9.5 million from the sale of convertible preferred stock and $1.6 million from the exercise of employee 13 stock options, while during the nine months ended September 30, 1999 we received $36.1 million from the proceeds of our initial public offering of common stock. Since inception we have experienced negative cash flow from operations and expect to continue to experience significant negative cash flow from operations in the foreseeable future. We currently believe that our existing capital resources together with the proceeds of the sale of an additional 100,000 shares of Series A Convertible Preferred Stock to Pequot Private Equity Fund II, L.P. will be sufficient to meet our cash requirements through the next 12 months. Because Pequot Private Equity Fund II, L.P. is not obligated to purchase the additional 100,000 shares of Series A Convertible Preferred Stock if we do not meet certain performance criteria and satisfy certain other conditions, there is no assurance that this additional financing will be consummated. If we do not complete the sale to Pequot Private Equity Fund II, L.P. of the additional 100,000 shares of Series A Convertible Preferred Stock, we will not have sufficient resources, absent additional financing, to meet our cash requirements through the next 12 months without significantly limiting our expenditures. In addition no assurance is given that we will not be required to raise additional financing prior to completing the sale of the additional 100,000 shares of Series A Convertible Preferred Stock to Pequot Private Equity Fund II, L.P.. Furthermore, there is no assurance that additional financing will be available when needed or that, if available, the financing will be on favorable terms. If the financing is not available when required, or is not available on acceptable terms, we may be unable to develop or enhance our services, take advantage of business opportunities, or respond to competitive pressures, any of which could have a material adverse effect on our business, financial condition and results of operations. 14 FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION The following is a discussion of certain risks, uncertainties and other factors that currently impact or may impact our business, operating results and/or financial condition. Anyone evaluating us and making an investment decision with respect to our Common Stock or other securities is cautioned to carefully consider these factors, along with similar factors and cautionary statements contained in our filings with the Securities and Exchange Commission. We have incurred significant net losses and we may never achieve profitability We incurred significant net losses of approximately $399,000 in 1997, $6.8 million in 1998, $26.4 million in 1999 and $24.4 million through the nine months ended September 30, 2000. As of September 30, 2000, we had an accumulated deficit of approximately $57.6 million. We expect to incur significant additional losses and continued negative cash flow from operations for the remainder of 2000. We have never achieved profitability in our consumer business, and to that end, we have reduced our staff and advertising expenses related to that business. 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; . fluctuations in the cost of television, radio, print and Internet-based advertising; . the inability to maintain or develop relationships with, or continue advertising on, various key Internet companies and popular Web sites; . delays and costs associated with unsuccessful service introductions; . loss of or service interruptions from one or more of our database providers; . service interruptions from one or more of our credit card processing companies; . anticipating and responding to the introduction of new or enhanced services by our competitors, or more generally to increase demand for our services; and . service interruption and delays or inability to access our services as a result of problems with our internal hardware, software, and/or coding, computer viruses, physical or electronic break-ins and similar disruption. We face competition from many sources The market in which we operate is highly competitive and highly fragmented. Currently, our competition falls into four categories: . free individual locator and information services, including services offered by Internet search engines, telephone companies and other third parties who publish free printed or electronic directories; . fee-based Internet search services offering comparable services, such as KnowX.com, which, during the quarter ending September 30, 1999 was acquired by DBT Online, our primary data supplier; firms offering more comprehensive data and information, and which are already serving the business to business market, such as ChoicePoint, Inc., (which merged with DBT Online); LEXIS- NEXIS, a division of Reed Elsevier Inc., The Dun & Bradstreet Corporation, 15 Equifax, Experian, Trans Union, Reuters Limited and Avert, Inc. . local, regional and national private investigation firms, such as Kroll- O'Gara Company, Pinkerton, the Proudfoot Reports Division of ASI solutions, Inc., and a significant number of companies operating on either a national scale or a local or regional basis. There are no significant barriers that would prevent new companies from entering the market in which we operate. In addition, some of our current suppliers and companies with which we have advertising agreements may compete with us in the future, which may make it more difficult to advertise our services effectively on their Web sites. We may be unable to respond to the competitive efforts of other companies Many of our competitors have greater financial and marketing resources than we do and may have significant competitive advantages through other lines of business, their existing client base and other business relationships. These competitors and other potential competitors may undertake more extensive marketing campaigns, adopt more aggressive pricing policies and devote more resources to developing information search services and background checks for individual or corporate clients than we are willing or able to accomplish. Our competitors or potential competitors may develop services that are superior to ours, develop services less expensive than ours or that achieve greater market acceptance than our services. We may not be able to successfully compete against our current or future competitors with respect to any of these factors. As a response to changes in the competitive environment, we may make pricing, service or marketing decisions such as reducing our prices or increasing our advertising, all of which may affect our operating results. If we are unsuccessful in responding to our competitors, our business, financial condition and results of operations will be materially adversely affected. We are dependent on a limited number of third party database and other information suppliers for information used in our services We obtain data used in our services from a limited number of third party suppliers. Some of these suppliers offer services that may compete with ours. Our primary data supplier, DBT Online, acquired Know-X.com, which provides fee-based Internet search services comparable to some of our service offerings. Moreover, DBT Online recently 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 customer complaints concerning the quality of our services directly 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. 16 Our business and financial performance may suffer if we are unsuccessful in expanding our service offerings Our strategy includes expanding the market awareness of our existing services. We intend to offer a greater number of new services available through our Web site and to develop and promote service offerings to address the needs of corporate and professional clients. We have very limited experience in providing services to corporate and professional clients. Attracting these clients will require us to hire new sales and marketing personnel and spend money to develop and promote these new services. We may fail in our efforts to provide these new services in a timely and cost- effective manner. If individual or corporate clients are unwilling to pay for the aggregation of data and information, or if the market for our services fails to develop or develops more slowly than anticipated, our business and prospects will be materially adversely affected. Implementing these measures will substantially increase our operating expenses and will place considerable strain on our existing management and operational resources. We will incur a substantial portion of these expenses before we achieve any meaningful revenues or market acceptance of new services. Our new services may not achieve a sustainable level of market acceptance or ever become profitable. If a new service is unsuccessful, our reputation and brand position may be damaged and this may make it more difficult to sell our existing services. A significant amount of our future growth depends on our ability to offer these new services. We depend on a limited number of service offerings for a significant portion of our revenues We have historically derived a substantial portion of our revenues from a small number of service offerings, particularly our individual locator, individual profile reports and "Instant Searches" services. If we are unable to continue to offer these services or if our costs of providing these services increase such that we can no longer offer these services at competitive prices, our business, financial condition, 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, financial condition, and results of operations. In September 2000 we sold 100,000 shares of Series A Convertible Preferred Stock to Pequot Private Equity Fund II, L.P. for an aggregate purchase price of $10.0 million. We may sell an additional $10 million of Series A Convertible Preferred Stock to Pequot Private Equity Fund II, L.P. if we meet certain financial performance objectives and satisfy certain other conditions. We may receive an additional $7.5 million if Pequot Private Equity Fund II, L.C. fully exercises its outstanding warrants to purchase common stock. We may not meet the financial performance objectives or satisfy the other conditions required to sell the additional shares of Series A Convertible Preferred Stock to Pequot Private Equity Fund II, L.P. Further we can give no assurance that Pequot Private Equity Fund II, L.P. will exercise in full its warrants to purchase shares of our common stock. If we raise additional capital through a debt financing, it may involve covenants limiting, or restricting our operations or future opportunities. We are dependent upon the success of the products and services offered by our partners In our efforts to increase the market acceptance of our services and to more effectively market our services to corporate and professional clients, we intend to continue to develop and establish relationships with key partners and enter into affiliate and co-marketing programs. Our intent is that these partners will promote our services or incorporate our services into their products and services intended for the corporate and professional markets. We have little or no ability to influence the marketing efforts of these partners and these partners may fail to dedicate adequate resources necessary to successfully develop and market products which incorporate our services. As a result, our success in the corporate and professional market is dependent in part on factors which are outside our control which include the performance of our partners and the market acceptance of our partners' products and services. 17 Agreements with partners may not result in any increase in our revenues or improvement in our operations or financial conditions Existing arrangements with partners such as InfoSpace, Inc., NetHot Development, BeFree and Employee Matters generally do not contain minimum purchase commitments or payment obligations. Similarly, new agreements with additional partners may not contain any minimum purchase commitments or payment obligations or may be limited to a pilot or test program. As a result, existing agreements and new agreements, if any, with partners may not result in any meaningful increase in our revenues, or any improvement in our operations or financial condition. We have substantial fixed costs which may not be offset by our revenues A substantial portion of our operating expenses are related to management personnel, administrative support and our advertising agreements. Our advertising is typically conducted under non-cancelable fixed term contracts. We also have minimum payment obligations under the agreement with our key database and information supplier. As a result, a substantial portion of our expenses in any given period is fixed and based in part on our expectations of future revenues and advertising and sales productivity. We may be unable to adjust our spending in a timely manner to compensate for any unexpected revenue shortfall. If we are unable to generate sufficient revenues to offset our advertising costs or the minimum payment obligations under the agreement with our key database and information supplier, or if we are unable to lower our advertising costs to respond to lower than expected revenues, our results of operations will suffer and the market price of our common stock could fall. Our senior executive officers are relatively new to US SEARCH Our Chief Executive Officer, Brent N. Cohen, joined US SEARCH in February 2000. In addition, several other members of our executive management team joined us after March 1, 2000, 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 financial condition, 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. We currently anticipate that these expenses will continue to constitute a significant portion of our total operating expenses in future periods although we are examining various ways of controlling these costs. 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 MSN Web sites, independent of any agreements with AOL or MSN. Our advertising on these Web sites depends on the continued relationship InfoSpace has with companies such as AOL and MSN. 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 MSN, our advertising will no longer appear on their Web 18 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 systems and networks are subject to unanticipated downtimes due to national disasters, power outages and similar events. Our servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions, delays, loss of data or the inability to accept and fulfill client orders. The occurrence of any of these events may have a material adverse effect on our business, financial condition and results of operations. Our limited experience offering business services on the Internet could make it difficult for us to expand this business Our success and future growth depends on our ability to expand the nature and number of our services offered on the Internet especially our business to business product offerings. Initially, we offered our services primarily through our toll free telephone number, 1-800 U.S. SEARCH. Since December 1998, we began offering our Internet-based "Instant Searches." Additionally, we intend to increase the number and range of business services and "Instant Searches" available on our Web site. Our limited experience may make it difficult for us to continually increase Internet traffic and transactions on our Web site. In particular, it may be difficult for us to adequately predict business response to our Internet advertising, causing us to spend more on Internet advertising than planned. Our Internet advertising may also be ineffective in strengthening our brand, increasing awareness of our business services, particularly our business to business services, or generating additional traffic or sales. The loss of one or more marketing relationships with Internet companies could adversely impact our ability to generate additional traffic or sales. If we fail to generate additional traffic, or if we fail to increase demand for our Internet-based services as a result of any additional traffic, our business, financial condition and results of operations could be materially adversely affected. If we are unable to expand and improve our infrastructure and operational capacity, we will be unable to grow and our business and our financial condition will suffer The recent growth of our business has placed significant strain on our communication and networking infrastructure. From time to time, demand for our services following television or Internet-based advertising has exceeded our infrastructure and operational capacity. Clients may experience delays during times when demand for our services exceeds our operational capacity. These instances are independent of any service interruptions related to disruption of our Web site or other systems. For example, we have in the past experienced longer response times to client telephone calls during periods of high calling volume because we lacked adequate capacity through our telephone systems and operations and support personnel to handle the increased number of calls. Similarly, we have experienced slower Web site response times during periods of high traffic because our Internet servers lacked adequate capacity. If these events occur again, we may lose clients and our reputation may be damaged. This growth has also increased the demands on our management team and technical, sales and operational resources. We anticipate that continued growth will require us to implement and improve our operational, financial and management information systems. In addition, we are and will continue to invest in new and expanded computer, telecommunication and information systems that address our existing capacity constraints. We have relocated to a larger facility that better addresses our operational and personnel needs. We have also added executive personnel to manage our infrastructure. Significant improvements have already been made to our infrastructure, including relocating our customer facing data center to Exodus, upgrading our internal and external communications capabilities and increasing capacity and redundancy in our SUN/Oracle environment. As we offer new services and pursue corporate and professional markets, we will need to increase our executive and sales and support personnel. Our business and results of operations will be adversely affected if we are unable to expand and continually improve our infrastructure. 19 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 so- called credit header information. For certain qualified business customers, we use the social security numbers of individuals to search various databases, including those of consumer credit reporting agencies. For example, we search the "header" information contained in various consumer credit reporting agencies' databases to find, among other items, current and previous addresses, social security numbers used by an individual, or possible other names (such as maiden names, married names, etc.). "Header" information consists of such information as the name, social security number, date of birth, and current and previous addresses on a consumer credit report. We also search these databases to determine if a customer's social security number is being used by any other party. Attempts have been made and can be expected to continue to be made by various federal regulators and organized groups to adopt new or additional federal and state legislation to regulate the use of personal information. If federal and/or state laws are amended or enacted in the future relating to access and use of personal information, in particular, and privacy and civil rights, in general, there could be a material adverse effect on our business financial condition, and results of operations. 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 September 30, 2000, we had 224 full-time employees and 36 part-time employees. Although we have announced and intend to implement a 22% staff reduction, we nonetheless anticipate that the number of employees may increase significantly during the next 12 months if we are successful in we expanding our existing service offerings and introducing and marketing 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. Further, our efforts to implement a 22% staff reduction may result in a decrease in staff morale which may result in the loss of other employees or absenteeism, and which may make the hiring of additional employees more difficult. 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, financial condition and results of operations. The Internet may fail to support the growth of electronic commerce The rapid rise in the number of Internet users and the growth of electronic commerce and applications for the Internet have placed increasing strains on the Internet's communications and transmissions infrastructure. This could lead to significant deterioration in transmission speeds and the reliability of the Internet as a commercial medium and, consequently, could reduce the use of the Internet by businesses and individuals. The Internet may not be able to support the demands placed upon it by this continued growth. Any failure of the Internet to support growth due to inadequate infrastructure or for any other reason would seriously limit its development as a viable source of commercial and interactive content and services. This could materially adversely affect the acceptance of our services and our business. 20 Our success depends on our ability to protect and enforce our trademarks and other proprietary rights We rely on a combination of trademark, service mark, copyright and trade secret laws, restrictions on disclosure and transferring title and other methods to protect our proprietary rights. We also generally enter into confidentiality agreements with our employees, business partners and/or others to protect our proprietary rights. It may be possible for a third party to copy or otherwise obtain and use our proprietary information without authorization or to develop similar technology independently. "1-800 U.S. SEARCH" and "Reuniting America Two People at a Time" are our registered trademarks. In addition, we have applied for registered trademark status for "US SEARCH", "The Public Record Portal" and our logo and service marks in the United States and intend to pursue registration internationally through applications. Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our products and services are made available, online or otherwise. Also, policing unauthorized use of our trademark, service mark or other proprietary rights might be difficult and expensive and we may be unable to protect our brand and our trademarks from third party challenges. Our US SEARCH brand may suffer and our business and results of operations could be materially and adversely affected if we are unable to effectively protect or enforce our trademark, service marks or other proprietary rights. We may be unable to prevent third parties from developing Web sites and acquiring domain names similar to ours We have registered several domain names, including 1800USSEARCH.com and ussearch.com. We know of at least two competitors that have a corporate name and domain name similar to ours. These competitors also have 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, financial condition, and results of operations. We have sent several cease-and-desist letters to these competitors and have engaged in settlement discussions. If these discussions do not result in resolution, we may be required to file lawsuits to protect our interests. 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 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 or check-by-phone checking account information without a signature over the telephone or Internet or who provide 900 telephone service, we have issued credits as a result of orders placed with fraudulent credit card information. We may suffer losses as a result of fraudulent use of credit card information or the continued reliance on 900 telephone service in the future. We could face liability based on the nature of our services and the content of the materials that we provide We may face potential liability from individuals, government agencies or businesses for defamation, invasion of privacy, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials 21 that appear on our Web site or in our search reports sent to consumers. Although we carry a limited amount of general liability insurance, our insurance may not cover claims of these types or may not be adequate to indemnify us for all liability that may be imposed. In addition, this insurance may not remain available to us on acceptable terms. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of our insurance coverage, could have a material adverse effect on our reputation and our business and results of operations. We could face claims from clients or the subjects of our search reports that are not covered by insurance We could be held liable to clients and/or to the subjects of individual search reports prepared by us for inaccurate information or misuse of the information. We have internal practices designed to help ensure that information contained in our services meet industry standards for accuracy. We have retained counsel to ensure that we are in compliance with the Fair Credit Reporting Act and similar state laws with respect to our pre- employment screening services. However, we do not currently maintain liability insurance to cover claims by clients or the subjects of reports. Based on our research, losses from these claims are either uninsurable or the insurance that is available is so limited in coverage that it is not economically practicable. We intend to continue our efforts to obtain insurance coverage for these types of claims but adequate insurance coverage may not be available on terms acceptable to us. Claims of violations of the FCRA or similar state laws may be made against us in the future and the claims, if made, may not be successfully defended. Uninsured losses from claims could materially adversely affect our business and results of operations. We face risks associated with government regulation and legal uncertainties relating to the Internet We are subject to regulations applicable to businesses generally and laws or regulations specifically applicable to electronic commerce. Due to concerns arising in connection with the increasing popularity and use of the Internet, a number of new or changed laws, governmental policies and/or regulations may be adopted, or cases may be decided, with respect to the Internet or commercial online services covering issues such as property ownership, user privacy, libel, pricing, acceptable content, copyrights, trademarks and/or other intellectual property rights, distribution, taxation, access charges and other fees, and quality of products and services. Cost increases relating to this government regulation could result in these increased costs being passed along to 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. In September 2000 we sold 100,000 shares of Series A Preferred Stock to Pequot Private Equity II, L.P. Because Series A Preferred Stock was issued with voting, liquidation, dividend and other rights superior to those of the common stock, the rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of the Series A Preferred Stock and any preferred stock that may be issued in the future. 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 22 stockholders to act by written consent without a meeting and procedures required for director nomination and stockholder proposal. The holder of our Series A Convertible Preferred Stock may acquire voting control upon the occurrence of certain events In September 2000 we sold 100,000 newly-issued shares of our Series A Convertible Preferred Stock to Pequot Private Equity Fund II, L.P., a Delaware limited partnership for an aggregate purchase price of $10 million and issued to Pequot Private Equity Fund II, L.P. a warrant to purchase up to 75,000 additional shares of our Series A Convertible Preferred Stock. Pequot Private Equity Fund II, L.P. has also agreed to purchase an additional 100,000 shares of our Series A Convertible Preferred Stock for $10 million if certain performance criteria and other conditions are satisfied. The Series A Convertible Preferred Stock has a stated value of $100 per share and is convertible into Common Stock of the Company at $1.70 per share of Common Stock. In October 2000 Pequot Private Equity Fund II, L.P. purchased from The Kushner-Locke Company 3.5 million shares of our Common Stock at a purchase price of $1.20 per share. The Kushner-Locke Company also granted Pequot Private Equity Fund II, L.P. a right of first refusal with respect to the remaining shares of our Common Stock held by The Kushner-Locke Company. Pequot Private Equity Fund II, L.P. currently beneficially hold 46.8% of our Common Stock of the Company, assuming an immediate conversion of the Series A Convertible Preferred Stock currently held by it, exercise in full of the warrant and an immediate conversion of the Series A Convertible Preferred Stock underlying the warrant. If certain performance criteria and other conditions are satisfied and, as a result, Pequot Private Equity Fund II, L.P. acquires an additional 100,000 shares of our Series A Convertible Preferred Stock, Pequot Private Equity Fund II, L.P. will beneficially hold, as of the date thereof, 55.7% of our Common Stock, assuming immediate conversion of all Series A Convertible Preferred Stock, an exercise in full of the warrant and an immediate conversion of the Series A Convertible Preferred Stock underlying the warrant. We have also entered into a Stockholders Agreement, with Pequot Private Equity Fund II, L.P. and The Kushner-Locke Company. The Stockholders Agreement provides, among other things, that Pequot Private Equity Fund II, L.P. and The Kushner-Locke Company will vote the shares of capital stock held by them in favor of (i) one member of the Board of Directors being nominated by Kushner-Locke, (ii) one member, if Pequot Private Equity Fund II, L.P. owns between 10 and 35% of the shares of Common Stock issued upon conversion of the Series A Preferred Stock, or two members, if Pequot Private Equity Fund II, L.P. owns at least 35% of the shares of Common Stock issued upon conversion of the Series A Preferred Stock, of the Board of Directors being nominated by Pequot Private Equity Fund II, L.P., (iii) our the Chief Executive Officer as a member of our Board of Directors, and (iv) three independent members of the Board of Directors, each of which shall be nominated for election by the consent of the Board Members nominated by Pequot Private Equity Fund II, L.P. and a majority of all other members of the Board of Directors other than Board Member nominated by The Kushner-Locke Company. If certain performance criteria and other conditions are satisfied and, as a result, Pequot Private Equity Fund II, L.P. acquires an additional 100,000 shares of our Series A Convertible Preferred Stock, Pequot Private Equity Fund II, L.P. will be able to exercise voting control over issues presented to our stockholders for approval. Further, by virtue of the Stockholders Agreement and the rights, preferences and privileges of the Series A Convertible Preferred Stock, Pequot Private Equity Fund II, L.P. possesses certain special voting and approval rights which could prevent us from taking certain major corporate actions such as the issuance of additional securities, the payment of dividends, or the merger of us with or into another entity or sale of substantially all of our assets. If the trading price per share of our common stock remains below $1.00, we may be delisted from The Nasdaq National Market The closing sale price of our Common Stock on November 10, 2000 was $0.625 per share. Under the rules and regulations of The Nasdaq Stock Market, Inc., to maintain listing on the Nasdaq National Market System we must maintain a trading price 23 per share of more than $1.00. If the trading price per share of our common stock remains below $1.00, we may be delisted from the Nasdaq National Market System. If we were delisted from the Nasdaq National Market System, trading in our common stock, if any, may have to be conducted in the over-the-counter market in so-called "pink sheets" or, if then available, the OTC Bulletin Board. As a result, the holders of our common stock would find it more difficult to dispose of, or to obtain accurate quotations as to the market value of, our common stock. If our common stock is delisted from trading on The Nasdaq Stock Market and the trading price is less than $5.00 per share, trading in our common stock would also be subject to the requirements of Rule 15g-9 promulgated under the Securities Exchange Act of 1934. Under such rule, broker/dealers who recommend these low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trades involving a stock defined as a penny stock (generally any equity security not traded on an exchange or quoted on The Nasdaq Stock Market that has a market price of less than $5.00 per share, subject to certain exceptions), including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated with the penny stock market. These requirements would likely severely limit the market liquidity of our common stock and the ability of our shareholders to dispose of their shares, particularly in a declining market. PART I. FINANCIAL INFORMATION Item 3. Quantitative and qualitative disclosures about market risk We considered the provisions of Financial Reporting Release No. 48 "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent In Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments." We had no holdings of derivative financial instruments at September 30, 2000 and our total liabilities as of September 30, 2000 consist primarily of notes payable and accounts payable which have fixed interest rates and were not subject to any significant market risk. 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings On April 3, 2000 a tradename and service mark complaint was filed against the Company in the United States District Court for the Eastern District of Virginia, styled U.S. Search, LLC v US Search.com Inc. Civil Action No. 00-554-A. The complaint seeks injunctive relief, damages not less than $5 million, costs and other further civil and equitable relief. The Complaint alleges violations of the Lanham Act and common law unfair competition in that the Company's use of the U.S. Search trade name and service mark created actual confusion or likelihood of confusion. The Company has answered the complaint and filed counterclaims against plaintiff U.S. Search LLC for infringement of a federally registered trademark, false designation of origin under section 43(a) of the Lanham Act and common law and unfair competition. The Company believes the suit is without merit and intends to defend itself aggressively. On August 14, 2000 a proposed class action complaint was filed against the Company in the Superior Court of the State of California for the County of Los Angeles, Dorothy Pilkington and Alice Schwartz-Scholl on behalf of themselves, and all other similarly situated, and on behalf of the general public vs. US Search.com, Inc., Case No. BC234858. The Complaint claims damages for breach of contract, violation of Unfair Practices Act, violation of the Consumer Legal Remedies Act, fraud and negligent misrepresentation in connection with the Company's adoption services. The Company has answered the Complaint and is engaged in settlement discussions. Item 2. Changes in Securities and Use of Proceeds. (a) Not Applicable (b) and (c) On September 7, 2000 the Company sold 100,000 newly-issued shares (the "Series A Shares") of its Series A Convertible Preferred Stock to Pequot Private Equity Fund II, L.P., a Delaware limited partnership (the "Purchaser") for an aggregate purchase price of $10 million and issued to the Purchaser a warrant to purchase up to 75,000 shares of Series A Convertible Preferred Stock (the "Warrant") pursuant to a Purchase Agreement, dated as of September 7, 2000, by and between the Company and the Purchaser (the "Agreement"). The Purchaser has also agreed to purchase an additional 100,000 shares of Series A Convertible Preferred Stock of the Company if certain conditions set forth in the Agreement, including performance criteria of the Company, are satisfied, for an additional purchase price of $10 million (the "Additional Purchase"). If the Warrant is exercised in full by the Purchaser, the Company will receive an additional $7.5 million upon exercise thereof. The Series A Convertible Preferred Stock has a stated value of $100 per share and is convertible into Common Stock of the Company at $1.70 per share of Common Stock. The issuance and sale of the Series A Shares to the Purchaser was exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act") by virtue of Section 4(2) of the Act and Rule 506 of Regulation D promulgated thereunder. The following is a summary of the principal terms of the Series A Convertible Preferred Stock and is qualified in its entirety by reference to the Amended Certificate of Designations of Series A Convertible Preferred Stock of the Company filed as an exhibit to the Company's Current Report on Form 8-K filed September 15, 2000. Dividends --------- From the date of original issuance of the Series A Convertible Preferred Stock through September 7, 2001, the holders of such preferred stock, in preference to the holders of shares of any class or series of capital stock of the Company with respect to dividends, shall be entitled to receive, when, as and if declared by the Board of Directors of the Company, non-cumulative cash dividends at an annual rate of 6%. After September 7, 2001, the holders of Series A Convertible Preferred Stock shall receive cumulative dividends at an annual rate of 6%, which dividends shall be paid quarterly in the form of additional shares of Series A Convertible Preferred Stock. In addition, in the event any dividends are 25 declared with respect to the Common Stock of the Company, the holders of Series A Convertible Preferred Stock shall be entitled to receive as additional dividends an amount equal to the amount of dividends that each such holder would have received had the Series A Convertible Preferred Stock been converted into Common Stock as of the date immediately prior to the record date of such dividend. Liquidation Preference ---------------------- In the event of a liquidation, dissolution or winding up of the affairs of the Company, the holders of Series A Convertible Preferred Stock shall be entitled to receive out of the assets of the Company an amount equal to $100 per share of Series A Convertible Preferred Stock plus an amount equal to all declared and unpaid and any accrued and unpaid dividends through the date of the distribution before any payment is made or assets distributed to the holders of any class or series of the Common Stock of the Company or any other class or series of the Company's capital stock ranking junior to the Series A Convertible Preferred Stock with respect to liquidation. The acquisition of the Company resulting in a transfer of more than 50% of the outstanding voting power of the Company or the sale of all or substantially all of the assets of the Company shall be treated as a liquidation of the Company unless the holders of a majority-in- interest of the Series A Convertible Preferred Stock shall agree not to treat such event as a liquidation. Redemption ---------- At any time after September 7, 2005 at the request of a majority-in- interest of the holders of the Series A Convertible Preferred Stock, the Company shall redeem for cash the then issued and outstanding shares of Series A Convertible Preferred Stock in accordance with the following schedule: (i) one third (33.33%) of the then issued and outstanding shares of Series A Convertible Preferred Stock within 120 days of receipt of notice from the holders of the Series A Convertible Preferred Stock (the "First Redemption"), (ii) one half (50%) of the then outstanding shares of Series A Convertible Preferred Stock on the first anniversary of the First Redemption, and (iii) all (100%) of the then issued and outstanding shares of Series A Convertible Preferred Stock on the second anniversary of the First Redemption. At any time after September 7, 2005 the Company may redeem all, but not less than all, of the then issued and outstanding shares of Series A Convertible Preferred Stock for an amount equal to $103.00 per share plus all accrued and unpaid dividends. Voting Rights ------------- The holders of Series A Convertible Preferred Stock shall be entitled to vote together with the holders of Common Stock on all maters submitted for a vote of the stockholders of the Company, including the election of directors. The holders of Series A Convertible Preferred Stock shall also have the right, voting separately as a single class, to elect up to 2 members of the Board of Directors of the Company (the "Series A Directors"). If there shall occur certain material events with respect to the Company, including, among other events, the Company's failure to timely declare or pay the required dividends on the Series A Convertible Preferred Stock, or any obligation of the Company, whether as principal, guarantor, surety or other obligor for the payment of indebtedness or borrowed money in excess of $5,000,000 becoming or being declared due and payable prior to the express maturity thereof and not being paid when due or within any grace period and such default remaining uncured for 15 days, the holders of Series A Convertible Preferred Stock shall have the right, voting as a separate class, to elect a sufficient number of additional directors of the Company to such that the Series A Directors constitute a majority of the Board of Directors of the Company. This right shall terminate upon the curing of the event which gave rise to it. Preemptive Rights ----------------- In the event that the Company proposes to issue any shares of its Common Stock or securities convertible into or exchangeable or exercisable for shares of Common Stock in any transaction (other than certain specified exceptions) each holder of Series A Convertible Preferred Stock shall have the right to purchase its pro rata amount of such shares (computed on an as-converted and fully diluted basis). Conversion ---------- The conversion price per share of the Series A Convertible Preferred Stock shall be $1.70, subject to adjustment under certain circumstances. 26 Special Approval Rights ----------------------- As long as the Purchaser and/or its affiliates, in the aggregate, hold more than 25% of the Series A Convertible Preferred Stock, the Company will not take certain actions without the consent of the Board of Directors and the consent of the Series A Directors. (d) Not applicable Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit No. Description --------------------------------- 3.1* Certificate of Incorporation 3.1.1* Certificate of Amendment of Certificate of Incorporation, dated May 12, 1999, changing corporate name to US SEARCH.com Inc. 3.1.2** Amended Certificate of Designations of Series A Convertible Preferred Stock of US SEARCH.com Inc. 3.2* Bylaws 4.1* Form of Common Stock Certificate 10.1. Contract Cancellation, Settlement and Release Agreement, dated as of September 29, 2000, by and between US SEARCH.com Inc., and The Kushner-Locke Company, and InfoSpace, Inc. 10.2 Sales Agency Agreement, dated as of October 1, 2000, by and between US SEARCH.com Inc. and InfoSpace, Inc. *** 10.3 Registration Rights Agreement, dated as of September 29, 2000, by and between US SEARCH.com Inc. and InfoSpace, Inc. 10.4 Warrant, dated September 29, 2000, by US SEARCH.com Inc. in favor of InfoSpace, Inc. 10.5 Promissory Note, dated August 23, 2000, by US SEARCH.com Inc. in favor of Lycos, Inc. 27.1 Financial Data Schedule * Filed with the Company's Registration Statement on Form S-1, File No. 333-76099, declared effective on June 24, 1999, incorporated herein by reference. ** Filed as exhibit 3.1 of the Company's Report on Form 8-K filed September 15, 2000, incorporated herein by reference. *** CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR AN ORDER GRANTING CONFIDENTIAL TREATMENT OF SUCH INFORMATION IN ACCORDANCE WITH RULE 24b-2 PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED 27 (b) Reports on Form 8-K: On September 15, 2000, the Company filed a Report on Form 8-K with the Securities and Exchange Commission under Item 5 to report the sale of 100,000 shares of Series A Preferred Stock to Pequot Private Equity Fund II, L.P.. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. US SEARCH.COM INC. (Registrant) Date: November 14, 2000 By: /s/ Brent N. Cohen -------------------- ----------------------------------- Brent N. Cohen President and Chief Executive Officer By: /s/ Alan S. Mazursky ----------------------------------- Alan S. Mazursky Vice President, Finance and Interim Chief Financial Officer (Principal Financial and Accounting Officer)
29 INDEX TO EXHIBITS Exhibit No. Description ----------------------- 3.1* Certificate of Incorporation 3.1.1* Certificate of Amendment of Certificate of Incorporation, dated May 12, 1999, changing corporate name to US SEARCH.com Inc. 3.1.2** Amended Certificate of Designations of Series A Convertible Preferred Stock of US SEARCH.com Inc. 3.2* Bylaws 4.1* Form of Common Stock Certificate 10.1. Contract Cancellation, Settlement and Release Agreement, dated as of September 29, 2000, by and between US SEARCH.com Inc., and The Kushner-Locke Company, and InfoSpace, Inc. 10.2 Sales Agency Agreement, dated as of October 1, 2000, by and between US SEARCH.com Inc. and InfoSpace, Inc. *** 10.3 Registration Rights Agreement, dated as of September 29, 2000, by and between US SEARCH.com Inc. and InfoSpace, Inc. 10.4 Warrant, dated September 29, 2000, by US SEARCH.com Inc. in favor of InfoSpace, Inc. 10.5 Promissory Note, dated August 23, 2000, by US SEARCH.com Inc. in favor of Lycos, Inc. 27.1 Financial Data Schedule * Filed with the Company's Registration Statement on Form S-1, File No. 333-76099, declared effective on June 24, 1999, incorporated herein by reference. ** Filed as exhibit 3.1 of the Company's Report on Form 8-K filed September 15, 2000, incorporated herein by reference. *** CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR AN ORDER GRANTING CONFIDENTIAL TREATMENT OF SUCH INFORMATION IN ACCORDANCE WITH RULE 24b-2 PROMULGATED UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED 30