**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

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| **(Mark One)** |   |
|----------------|--------|

 
| **ý** | **Quarterly Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934** |
|------------|---------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended March 31, 2002**

 

**OR**

** **
| **o** | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|-------|----------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom        to        **

 

**Commission file number 0-26149**

 

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**US SEARCH.COM INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                   |   | **95-4504143**                          |
|----------------------------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction of incorporation or organization) |   | (I.R.S. Employer 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 (orfor such shorter period that the registrant was required to file suchreports) Yes ý  No o,and (2) has been subject to such filing requirements for the past90 days. Yes ý  No o

 

There were 26,887,971 shares ofoutstanding Common Stock of the registrant as of  May 10,  2002.

 

 

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**US SEARCH.COM INC.**

 

**Form 10-Q for the quarterly period ended March 31,2002**

 

**INDEX**

 
| Part I.            | FINANCIAL INFORMATION |
|--------------------|-----------------------|
|               |                  |   |
|               | Item 1.               | Financial Statements |
|               |                  | Consolidated  Statements of Operations for the three month periods ended March 31, 2002 and  2001 |
|               |                  | Consolidated Balance Sheets  as of March 31, 2002 and December 31, 2001 |
|               |                  | Consolidated  Statements of Cash Flows for the three month periods ended March 31, 2002 and  2001 |
|               |                  | Notes to Consolidated  Financial Statements |
|               | Item  2.         | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |
|               | Item  3.         | Quantitative and Qualitative  Disclosures about Market Risk |
|               |                  |   |
| Part II.           | OTHER INFORMATION     |
|               |                  |   |
|               | Item 1.               | Legal Proceedings |
|               | Item  2.              | Changes  in Securities and Use of Proceeds |
|               | Item 3.               | Defaults Upon  Senior Securities |
|               | Item  4.              | Submission  of Matters to a Vote of Security Holders |
|               | Item 5                | Other Information |
|               | Item 6.               | Exhibits  and Reports on Form 8-K |
|               |                  |   |
| SIGNATURES         |                  |
|               |                  |   |
| INDEX  TO EXHIBITS |

 

2

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**PART I.  FINANCIAL INFORMATION**

 

Item 1.  Financial Statements

 

**US SEARCH.com Inc.**

**CONSOLIDATED STATEMENT OF OPERATIONS**

**(unaudited)**

** **
|                                                                                                                                                                                                               |   | **Three months Ended  March 31, 2002** |       | **Three Months Ended  March 31, 2001** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|----------------------------------------|------------|
|                                                                                                                                                                                                               |   |                                   |       |
|                                                                                                                                                                                                               |   |                                   | ** ** |                                   | ** ** |
| Net revenue                                                                                                                                                                                                        |   | $                                      | 6,663,000  |                                   | $          | 4,941,000 |   |
| Cost of services                                                                                                                                                                                                   |   | 1,988,000                              |       | 1,424,000                              |       |
|                                                                                                                                                                                                               |   |                                   |       |                                   |       |
| Gross  profit                                                                                                                                                                                                      |   | 4,675,000                              |       | 3,517,000                              |       |
|                                                                                                                                                                                                               |   |                                   |       |                                   |       |
| Operating expenses:                                                                                                                                                                                                |   |                                   |       |                                   |       |
| Selling  and marketing                                                                                                                                                                                             |   | 3,262,000                              |       | 3,080,000                              |       |
| Information technology                                                                                                                                                                                             |   | 938,000                                |       | 1,243,000                              |       |
| General and administrative                                                                                                                                                                                         |   | 2,551,000                              |       | 2,000,000                              |       |
|                                                                                                                                                                                                               |   |                                   |       |                                   |       |
| Total  operating expenses                                                                                                                                                                                          |   | 6,751,000                              |       | 6,323,000                              |       |
|                                                                                                                                                                                                               |   |                                   |       |                                   |       |
| Loss from operations                                                                                                                                                                                               |   | (2,076,000                             | )          | (2,806,000                             | )          |
| Interest income (expense), net (including non-cash  charges relating to warrants, convertible notes payable and amortization of  debt issuance costs of $886,000 for the three-month period ended March 31,  2002) |   | (935,000                               | )          | 16,000                                 |       |
| Other income - net                                                                                                                                                                                                 |   | 15,000                                 |       | 2,000                                  |       |
|                                                                                                                                                                                                               |   |                                   |       |                                   |       |
| Loss  before income taxes                                                                                                                                                                                          |   | (2,996,000                             | )          | (2,788,000                             | )          |
| Provision for income taxes                                                                                                                                                                                         |   | 2,000                                  |       | 2,000                                  |       |
|                                                                                                                                                                                                               |   |                                   |       |                                   |       |
| Net  loss                                                                                                                                                                                                          |   | $                                      | (2,998,000 | )                                      | $          | (2,790,000 | ) |
|                                                                                                                                                                                                               |   |                                   |       |                                   |       |
| Accretion of discount on preferred stock                                                                                                                                                                           |   | —                                 |       | 126,000                                |       |
| Accrued preferred stock dividends                                                                                                                                                                                  |   | —                                 |       | 113,000                                |       |
|                                                                                                                                                                                                               |   |                                   |       |                                   |       |
| Net  loss attributable to common stockholders                                                                                                                                                                      |   | $                                      | (2,998,000 | )                                      | $          | (3,029,000 | ) |
| Net  loss per share attributable to common stockholders                                                                                                                                                            |   | $                                      | (0.11      | )                                      | $          | (0.17 | ) |
|                                                                                                                                                                                                               |   |                                   |       |                                   |       |
| Weighted-average shares outstanding used in per share  calculation                                                                                                                                                 |   | 26,610,383                             |       | 17,938,244                             |       |

 

The accompanying notes are an integral part of these statements.

 

3

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**US SEARCH.com Inc.**

**CONSOLIDATED BALANCE SHEETS**

** **
|                                                                                                                                                                         |   | **March 31, 2002** |       | **December 31, 2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|------------|-----------------------|--------|
|                                                                                                                                                                         |   | **(unaudited)**    |       |                  |   |
| **ASSETS:**                                                                                                                                                                  |   |
| Current assets:                                                                                                                                                              |   |               |       |                  |   |
| Cash and cash equivalents                                                                                                                                                    |   | $                  | 6,721,000  |                  | $      | 3,148,000 |   |
| Restricted  cash                                                                                                                                                             |   | 2,000,000          |       | 750,000               |   |
| Accounts receivable, net                                                                                                                                                     |   | 1,318,000          |       | 696,000               |   |
| Other current assets                                                                                                                                                         |   | 1,765,000          |       | 1,854,000             |   |
|                                                                                                                                                                         |   |               |       |                  |   |
| Total  current assets                                                                                                                                                        |   | 11,804,000         |       | 6,448,000             |   |
|                                                                                                                                                                         |   |               |       |                  |   |
| Property  and equipment, net                                                                                                                                                 |   | 9,162,000          |       | 9,409,000             |   |
| Goodwill                                                                                                                                                                     |   | 8,806,000          |       | 8,648,000             |   |
| Intangibles, net                                                                                                                                                             |   | 2,882,000          |       | 2,960,000             |   |
| Other assets                                                                                                                                                                 |   | 270,000            |       | 270,000               |   |
|                                                                                                                                                                         |   |               |       |                  |   |
| Total  assets                                                                                                                                                                |   | $                  | 32,924,000 |                  | $      | 27,735,000 |   |
|                                                                                                                                                                         |   |               |       |                  |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**                                                                                                                               |   |
|                                                                                                                                                                         |   |               |       |                  |   |
| Current Liabilities:                                                                                                                                                         |   |               |       |                  |   |
| Accounts  payable                                                                                                                                                            |   | $                  | 5,647,000  |                  | $      | 7,182,000 |   |
| Accrued liabilities                                                                                                                                                          |   | 1,433,000          |       | 1,930,000             |   |
| PRSI acquisition obligations, current portion                                                                                                                                |   | 545,000            |       | 902,000               |   |
| Bank debt                                                                                                                                                                    |   | 1,185,000          |       | 1,375,000             |   |
| Notes payable, current portion                                                                                                                                               |   | 12,544,000         |       | 3,896,000             |   |
| Capital lease obligations, current portion                                                                                                                                   |   | 236,000            |       | 280,000               |   |
|                                                                                                                                                                         |   |               |       |                  |   |
| Total  current liabilities                                                                                                                                                   |   | 21,590,000         |       | 15,565,000            |   |
|                                                                                                                                                                         |   |               |       |                  |   |
| Notes payable, net of current portion                                                                                                                                        |   | 155,000            |       | —                |   |
| PRSI acquisition obligations                                                                                                                                                 |   | 1,580,000          |       | 1,654,000             |   |
| Capital lease obligations, net of current portion                                                                                                                            |   | 119,000            |       | 156,000               |   |
| Other non-current liabilities                                                                                                                                                |   | 5,000              |       | 5,000                 |   |
|                                                                                                                                                                         |   |               |       |                  |   |
| Total  liabilities                                                                                                                                                           |   | 23,449,000         |       | 17,380,000            |   |
|                                                                                                                                                                         |   |               |       |                  |   |
| Commitments and contingencies                                                                                                                                                |   |               |       |                  |   |
| Stockholders’  equity:                                                                                                                                             |   |               |       |                  |   |
| Preferred  stock $0.001 par value; 650,000 authorized, 203,113 shares issued and  outstanding as of March 31, 2002 and December 31, 2001                                     |   | —             |       | —                |   |
| Common  stock $0.001 par value; authorized 150,000,000 shares; 26,885,326 shares  issued and outstanding as of March 31, 2002 and 26,183,058 shares as of  December 31, 2001 |   | 26,000             |       | 26,000                |   |
| Additional paid-in capital                                                                                                                                                   |   | 86,964,000         |       | 84,847,000            |   |
| Accumulated deficit                                                                                                                                                          |   | (77,515,000        | )          | (74,518,000           | )      |
|                                                                                                                                                                         |   |               |       |                  |   |
| Total stockholders’ equity                                                                                                                                              |   | 9,475,000          |       | 10,355,000            |   |
|                                                                                                                                                                         |   |               |       |                  |   |
| Total liabilities and stockholders’ equity                                                                                                                              |   | $                  | 32,924,000 |                  | $      | 27,735,000 |   |

 

The accompanying notes are an integral part of these statements.

 

4

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**US SEARCH.com Inc.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(unaudited)**

** **
|                                                                         |   | **Three months Ended March 31,** |       |
|------------------------------------------------------------------------------|--------|----------------------------------|------------|
|                                                                         |   | **2002**                         |       | **2001** |   |
|                                                                         |   |                             |       |   |   |
| Cash flows from operating activities:                                        |   |                             |       |   |   |
| Net loss                                                                     |   | $                                | (2,998,000 | ) | $ | (2,790,000 | ) |
| Adjustments to reconcile net loss to net cash used in  operating activities: |   |                             |       |   |   |
| Depreciation and amortization                                                |   | 830,000                          |       | 301,000 |   |
| Allowance for doubtful accounts                                              |   | —                           |       | 22,000 |   |
| Non-cash Interest                                                            |   | 611,000                          |       | — |   |
| Amortization of debt issuance costs                                          |   | 275,000                          |       | — |   |
| Change in assets and liabilities:                                            |   |                             |       |   |   |
| Accounts receivable                                                          |   | (622,000                         | )          | 6,000 |   |
| Prepaid and other                                                            |   | (126,000                         | )          | (130,000 | ) |
| Accounts payable and accrued expenses                                        |   | (1,912,000                       | )          | (1,274,000 | ) |
|                                                                         |   |                             |       |   |   |
| Net cash used in operating activities                                        |   | (3,942,000                       | )          | (3,865,000 | ) |
|                                                                         |   |                             |       |   |   |
| Cash flows from investing activities:                                        |   |                             |       |   |   |
| Purchase of property and equipment                                           |   | (505,000                         | )          | (1,355,000 | ) |
| Purchase of PRSI                                                             |   | (158,000                         | )          | — |   |
|                                                                         |   |                             |       |   |   |
| Net cash used by investing activities                                        |   | (663,000                         | )          | (1,355,000 | ) |
|                                                                         |   |                             |       |   |   |
| Cash flows from financing activities:                                        |   |                             |       |   |   |
| Increase in restricted cash                                                  |   | (1,250,000                       | )          | — |   |
| Repayments of third party notes payable                                      |   | —                           |       | (408,000 | ) |
| Repayment of acquisition obligation                                          |   | (490,000                         | )          | — |   |
| Repayments of bank debt                                                      |   | (234,000                         | )          | — |   |
| Repayments of capital lease obligations                                      |   | (81,000                          | )          | (53,000 | ) |
| Proceeds from convertible notes payable                                      |   | 10,233,000                       |       | 10,000,000 |   |
|                                                                         |   |                             |       |   |   |
| Net cash provided by financing activities                                    |   | 8,178,000                        |       | 9,539,000 |   |
|                                                                         |   |                             |       |   |   |
| Net increase in cash and cash equivalents                                    |   | 3,573,000                        |       | 4,319,000 |   |
| Cash at beginning of period                                                  |   | 3,148,000                        |       | 2,831,000 |   |
|                                                                         |   |                             |       |   |   |
| Cash at end of period                                                        |   | $                                | 6,721,000  |   | $ | 7,150,000 |   |
|                                                                         |   |                             |       |   |   |   |   |
| Supplemental cash flow disclosure is comprised of:                           |   |                             |       |   |   |   |   |
|                                                                         |   |                             |       |   |   |   |   |
| Non-cash investing and financing activities:                                 |   |                             |       |   |   |   |   |
| Conversion of accounts payable to notes payable                              |   | $                                | —     |   | $ | 241,000 |   |
| Issuance of warrants in connection with convertible  notes payable           |   | $                                | 1,937,000  |   | $ | 250,000 |   |
| Issuance of warrants to third parties                                        |   | $                                | 180,000    |   | $ | — |   |

 

The accompanying notes are an integral part of these statements.

 

5

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**US SEARCH.COM INC.**

**NOTES TO FINANCIAL STATEMENTS**

**(unaudited)**

 

**1.             Organizationand Business:**

 

USSEARCH.com Inc. (the “Company”) provides individual reference services andbackground information about individuals. The Company was formed as a California S Corporation in 1994, andreincorporated as a Delaware corporation in April 1999.  On December 28, 2001 the Company acquiredall of the outstanding stock of Professional Resource Screening, Inc. (“PRSI”),which provides pre-employment screening services primarily to Fortune 500companies in the United States.

 

**2.             Summaryof Significant Accounting Policies:**

 

**Basis of Presentation**

 

Theseunaudited financial statements and accompanying notes prepared in accordancewith instructions to Form 10-Q have been condensed and, therefore, do notcontain certain information included in the Company’s annual financialstatements and accompanying notes. Therefore, you should read these unauditedcondensed financial statements in conjunction with the Company’s annualfinancial statements.

 

Theunaudited condensed financial statements reflect, in the opinion of management,all adjustments which are of a normal recurring nature, necessary to fairlystate the financial position of the Company as of March 31, 2002, and theresults of its operations for the three month periods ended March 31, 2002 and2001. Interim results are not necessarily indicative of results to be expectedfor a full fiscal year.

 

# *Principles of Consolidation.*  The financial statements include theaccounts of US SEARCH.com Inc. and its wholly-owned subsidiary.  All inter-company accounts and transactionshave been eliminated in consolidation.

** **

**Net Loss Per Share**

 

Basicnet loss per common share is computed using the weighted average number ofshares of common stock outstanding and diluted net loss per common share iscomputed using the weighted average number of shares of common stock and commonequivalent shares outstanding. Common equivalent shares related to convertiblepreferred stock, convertible notes payable, stock options and warrants areexcluded from the computation when their effect is antidilutive. As of  March 31, 2002, stock options representing17,734,287 shares of common stock and warrants representing 10,209,427 sharesof common stock have been excluded as their inclusion would beanti-dilutive.  Also excluded are42,107,303 shares issuable on conversion of Series A-1 convertiblepreferred stock.  As of March 31, 2001,there were options representing 12,667,592 shares of common stock and warrantsrepresenting 1,750,000 and 80,000 shares of common and preferred stock,respectively, 5,882,353 common shares issuable on conversion of Series Aconvertible preferred stock and 5,970,588 shares ultimately issuable uponconversion of notes payable, which are excluded from the computation of dilutedearnings per share because their inclusion would have been anti–dilutive.

 

**Management'sPlans**

 

Sinceinception we have experienced negative cash flows from operations. We have aworking capital deficit of $9,800,000 and an accumulated deficit of $77,500,000as of March 31, 2002. Based on our current operating plans, management believesexisting cash resources, including the proceeds from the January and March 2002Convertible Notes, cash forecasted by management to be generated by operationsand proceeds from the April 2002 bank financing arrangement will besufficient to meet working capital and capital requirements through March 31,2003. Also, management’s plans to attain profitability and generate additionalcash flows include, increasing revenues from enterprise and consumer services,focusing on cost reductions and operational efficiencies to be derived fromfurther deployment of US SEARCH’s technologies, and the launch of additionalproducts. There is no assurance that management will be successful with theseplans. However, if events and circumstances occur such that US SEARCH does notmeet its current operating plan as expected, and US SEARCH is unable to raiseadditional financing, US SEARCH may be required to reduce certain discretionaryspending, which could have a material adverse effect on US SEARCH’s ability toachieve our intended business objectives.

 

6

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**Reclassifications**

 

Certainreclassifications have been made to the 2001 financial statements to conformwith the 2002 presentation.

 

**3.             NotesPayable:**

 

OnJanuary 18, 2002, the Company issued 8% Convertible Promissory Notes dueJanuary 17, 2003 in the aggregate principal amount of $4,600,000 and fouryear warrants to purchase up to an aggregate of 1,782,176 shares of commonstock at an initial exercise price of $1.044 per share. These notes areconvertible into the number of shares of common stock calculated by dividingthe amount of principal and accrued but unpaid interest due under the notes bythe lower of i) $0.783 or (ii) 90% of the 10-day average closing bidprice of the Company’s common stock on the Nasdaq National Market for the 10business days prior to the conversion date of the notes. These notes automaticallyconvert into common stock upon receipt of the approval of the stockholders ofthe issuance of the shares of common stock underlying the notes. If the noteshave not converted into common stock prior to January 17, 2003, theCompany must repay the principal and all accrued but unpaid interest. TheCompany expects to present to its stockholders at the 2002 Annual Meeting ofStockholders a proposal to approve the issuance of the shares of common stockunderlying these notes.

 

OnMarch 15, 2002, the Company sold 8% Convertible Promissory Notes dueDecember 20, 2002 in the aggregate principal amount of $6,075,000($5,700,000 in proceeds net of issuance costs) and five year warrants topurchase up to an aggregate of 2,144,118 shares of our common stock at an initialexercise price of $1.044 per share. These notes are convertible into the numberof shares of common stock calculated by dividing the amount of principal andaccrued but unpaid interest due under the notes by the lower of (i) $0.85and (ii) the 10-day average closing bid price of the Company’s commonstock on the Nasdaq National Market for the 10 business days prior to theconversion date of the notes. These notes automatically convert into commonstock upon receipt of the approval of the Company’s stockholders of theissuance of the shares of common stock underlying the notes. If the notes havenot converted into common stock prior to December 20, 2002, the Companymust repay the principal and all accrued but unpaid interest. The Companyexpects to present to its stockholders at the 2002 Annual Meeting ofStockholders a proposal to approve the issuance of the shares of common stockunderlying the notes.  The Company alsoissued warrants to purchase 714,706 shares of common stock at an exercise priceof $0.85 per share to the principals of the offering placement agent.

 

Inaccordance with Accounting Principles Board Opinion No. 14 “Accounting forConvertible Debt and Debt Issued with Stock Purchase Warrants”, the relativefair value of the warrants issued in conjunction with the January and Marchnotes totaled $730,000 and $892,000, respectively as well as $315,000 forwarrants issued to the placement agent. Such amounts are being recorded as interest expense over the terms ofthe notes.  As of March 31, 2002, theCompany has amortized approximately $246,000. The Company will also record a beneficial conversion feature on both theJanuary and March notes when they become convertible upon stockholder approval.

 

Includedin notes payable is $526,000 net of discount of $55,000 due to a vendor.  In conjunction with the terms of the note,the outstanding balance is due and payable within 90 days of the Companyclosing a financing, as defined, in excess of $10,000,000.  As of March 31, 2002 the Company has closedfinancing in excess of $10,000,000.

 

**4.             Bank Debt**

 

OnApril 1, 2002, the Company entered into an agreement with the bank toamend its existing loan and security agreement (“Amendment Number One”) withComerica Bank. The Comerica facility has been amended to increase the revolvingcredit line to $3,000,000 from $2,000,000, of which $1,000,000 has beendesignated as a borrowing base line. Amounts under the borrowing base line maybe advanced based on up to 80% of eligible receivables as defined in the agreement.Borrowings under the revolving credit line are due and payable onMarch 26, 2003.   Total borrowingsunder the revolving credit facility totaled $1,000,000 at March 31, 2002.

 

TheComerica agreement was also amended to remove the letter of credit sublimitfrom the revolving credit line. Under Amendment Number One, the Company willmaintain a deposit with the bank of $750,000 to collateralize its outstandingstandby letter of credit. The letter of credit and the required deposit willreduce by $83,333 per month and mature on November 30, 2002.  The amount of the letter of credit and thecollateral deposit at May 1, 2002 was $583,000.

 

Significantfinancial covenants with which the Company must comply under Amendment NumberOne include operating performance, minimum EBITDA requirements and adebt/tangible net worth ratio. Effective March 31, 2002, the Company isalso required to maintain not less than $1,250,000 of its unrestricted cash ondeposit with the bank at all times.

 

Inconnection with the waiver and amendment agreement, the Company agreed to issuethe bank a warrant to purchase 55,487 shares of the Company’s common stock atan exercise price of $ 0.85 per share which expires on March 27, 2008.

 

7

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**5.             CapitalStock**

 

Duringthe three months ended March 31, 2002, the Company issued to certain vendors awarrant to purchase 75,000 shares at an exercise price of $1.20 per share whichmatures on March 5, 2007, and a warrant to purchase 137,143 shares at an exerciseprice of $0.01, which matures on January 3, 2005.

 

**6.             CommitmentsAnd Contingencies:**

 

**Strategic Alliance Commitments**

 

TheCompany has several cancelable and non-cancelable distribution and marketingagreements with various Internet companies. The terms of these agreementsprovide for varying levels of exclusivity and minimum and maximum fees payablebased on the number of banners, buttons and text links displayed on affiliateweb sites. At March 31, 2002, the minimum non-cancelable payments due underthese agreements are approximately $2,175,000 for the remainder of 2002.

 

TheCompany has entered into an agreement with a supplier of online public recorddata.  At March 31, 2002, thenon-cancelable payments under this agreement are $621,000 in 2002 and $690,000in 2003.

 

**Legal Proceedings**

 

OnApril 3, 2000, a two count trade name and service mark complaint was filedagainst US SEARCH in the United States District Court for the Eastern Districtof Virginia, styled U.S. Search, LLC v USSearch.com Inc. Civil ActionNo. 00- 554-A. On January 26, 2001, our motion for summary judgmentwas granted and the court ordered that both counts of plaintiff’s complaint bedismissed with prejudice. The Plaintiff has appealed the judgment to the U.S.Court of Appeals, Fourth Circuit. The hearing on appeal has been scheduled forJune 6, 2002.  The parties are awaitingthe outcome of the appeal.

 

InMay 2001, ChoicePoint, Inc., the successor entity to DBTOnline, Inc., filed a complaint against us in Palm Beach County, Floridaalleging breach of contract, fraudulent misrepresentation, unjust enrichment,quantum meruit and breach of the implied covenant of good faith and fairdealing. The Complaint sought approximately $1.5 million in damages, aswell as interest and attorneys’ fees. We removed this action to the UnitedStates District Court for the Southern District of Florida. The United StatesDistrict Court for the Southern District of Florida ordered the matter toarbitration. In arbitration we asserted several counterclaims againstChoicePoint.  An arbitration hearing washeld in April 2002.  We are awaiting theoutcome of the arbitration.  The costsrelated to this litigation to date have been less than $100,000.

 

TheCompany may from time to time become a party to various legal proceedingsarising in the ordinary course of business.

 

**7.             UnauditedPro Forma Results of Operations for the Three Months Ended March 31, 2001**

 

Unauditedproforma consolidated results of operations are presented in the table belowfor the three months ended March 31, 2001. The proforma results of operations reflect the acquisition ofProfessional Resource Screening, Inc., which are not reflected in the March 31,2001 historical results, as if the acquisition was consummated as of January 1,2001.  Historical results for the threemonths ended March 31, 2002, which includes the results of ProfessionalResource Screening, Inc. for the entire period, are presented forcomparability.

 
| **(in thousands)**                                      |   | **Three Months Ended****March 31, 2002Historical** |   | **Three Months Ended  March 31, 2001****Pro Forma** |   |
|---------------------------------------------------------|--------|----------------------------------------------------|--------|-----------------------------------------------------|--------|
| Net revenue                                             |   | $                                                  | 6,663  |                                                | $      | 7,291 |   |
| Net loss                                                |   | $                                                  | 2,998  |                                                | $      | 2,803 |   |
| Net loss attributable to common stockholders            |   | $                                                  | 2,998  |                                                | $      | 3,042 |   |
| Net loss per share attributable to common  stockholders |   | $                                                  | (0.11  | )                                                   | $      | (0.11 | ) |

 

Theseunaudited pro forma results have been prepared for comparative purposes onlyand include material adjustments, such as amortization of identifiableintangible assets and interest on installment obligations.   The results do not purport to be indicativeof the results of operations which actually would have resulted had thecombination been in effect on January 1, 2001, or of future results ofoperations of the consolidated company.

 

8

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**8.             RelatedParty Transactions**

 

Inaccordance with the Agreement and Plan of Merger, dated as of December 28,2001, by and among the Company, Professional Resource Screening, Inc.("PRSI"), Irwin R. Pearlstein, Cheryl Pearlstein-Enos and DavidPearlstein (the "Merger Agreement"), on December 28, 2001, theCompany issued 8,148,148 shares of common stock to the former shareholders ofPRSI.  Pursuant to the Merger Agreementon January 31, 2002 the Company issued an additional 651,852 shares of commonstock to the former shareholders of PRSI.

 

**Item 2****.  Management's Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**Forward-Looking Statements**

* *

*THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTSTHAT HAVE BEEN MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIESLITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON OURCURRENT 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 TOIDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEESOF FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES ANDASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS ANDOUTCOMES MAY DIFFER MATERIALLY FROM WHAT IS EXPRESSED OR FORECASTED IN ANY SUCHFORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE THOSE SETFORTH BELOW UNDER “FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS ANDFINANCIAL CONDITION” AND OUR OTHER PUBLIC FILINGS WITH THE SECURITIES ANDEXCHANGE COMMISSION. WE UNDERTAKE NO OBLIGATION TO UPDATE PUBLICLY ANYFORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTUREEVENTS OR OTHERWISE.*

 

**Overview**

 

USSEARCH provides a full range of location and verification services toenterprises, consumers and small and medium sized business clients including identity verification,individual location, criminal record checks, employment and educationverifications, professional reference checks, credit and motor vehicle recordchecks, drug screening, and pre-employment screening services.  We are able to deliver location verificationand screening services through our proprietary web-based applications and ourpatent pending US SEARCH DARWIN technology. Our services can be accessed throughour Web sites, USSEARCH.com, ussearch.com/business or prsinet.com or by callingour toll free telephone numbers, 1-800-USSEARCH for consumers, 1-877-327-2410for small and medium businesses or 1–800–232–0247 forenterprises.

 

Ourconsumer and small and medium enterprise products provide direct (Internet andtelephone) individual locator, and other public record searches to consumersand these services and pre-employment screening services to small- andmedium-sized businesses. Our enterprise product provides employment screeningand risk mitigation services to large enterprises and organizations.

 

Dueto the high level of automation, certain of our services can be conductedinstantly online. We also offer assisted searches and screening services, bothonline and through our toll free telephone number.

 

•                                            Enterprisefocused services. We provide businesses, government agencies and otheremployers with a variety of employment screening, background check and riskmitigation products and services via an online, Web-based system that enablesinstant ordering and prompt delivery of results. Customers can customize theirsearch and decision parameters online using a “drag-and-drop” browserinterface. Our employment screening products include social security numbertraces, federal and state felony and misdemeanor record searches, employmentand education verification, and credit histories. We also provide characterreference checks and drug screening via third party providers. We also offer aManagement Services program that provides customers with an outsourced solutionto background investigations, which includes analysis of developedinvestigation data, management of FCRA communications, legal compliance, anddirect applicant contact.

•                                            Consumer-focused services. Weprovide consumer clients with a single, comprehensive access point to a broadrange of information to assist them in locating friends and relatives or tolearn more information about people in their lives. Our consumer clients canobtain public information including addresses, aliases, phone numbers, propertyownership, court records, professional license verification, corporateaffiliations and death record information.

 

Pricesfor our non-instant consumer and small and medium enterprise searches haveranged from approximately $20 to $395 per search. Prices for “Instant Searches”range from approximately $10 to $15 per search. Prices for our enterpriseservices range from $3 to $495. The prices for our services vary based on thenature and amount of information and whether or not the search is assisted by asearch specialist.

 

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Revenuefor our services are recognized when the results are delivered to the client.The terms of sale do not provide for refunds after our services have beendelivered, however, in instances where the clients indicate that the initialsearch result was unsuccessful, we may perform another search or provide arefund at our discretion. In addition, where clients desire additionalinformation they can request to broaden the scope of their “Instant Searches”and we apply up to a portion of the cost of the client’s “Instant Searches”towards the cost of the more comprehensive search.

 

Ourcost of services consists primarily of payroll and benefits, data acquisitioncosts, and local and long distance telephone charges associated with providingour services, and payment processing costs. Our cost of services is likely toincrease with increasing revenue levels. The Company has entered into an agreement with a supplier of onlinepublic record data.  At March 31, 2002,the non-cancelable payments under this agreement are $621,000 in 2002 and$690,000 in 2003.

 

Ouroperating expenses consist primarily of selling, marketing, general andadministrative expenses and information technology costs. We expect ouroperating expenses to increase as we attempt to expand our corporate salesforce and our product lines.

 

Sellingand marketing expenses constitute the largest portion of our operatingexpenses. Internet advertising expenses are the most significant selling andmarketing expense. The Company has several cancelable and non-cancelabledistribution and marketing agreements with various Internet companies. Theterms of these agreements provide for varying levels of exclusivity and minimumand maximum fees payable based on the number of banners, buttons and text linksdisplayed on affiliate web sites.  AtMarch 31, 2002, the minimum non-cancelable payments due under these agreementsare approximately $2,175,000 for the remainder of 2002.

 

Weexpect our selling and marketing expenses to increase as we attempt to expandour products and our market reach in both the consumer and enterprise servicesgroups.

 

Informationtechnology expenses consist primarily of the compensation and benefits foremployees and consultants involved in development, network administration,planning and maintenance of our infrastructure. Certain costs associated withthe development of software for internal use are capitalized.  Information technology costs are expected toincrease with the continuing development of proprietary technology.

 

Ourgeneral and administrative expenses consist primarily of compensation andrelated costs for administrative personnel, our occupancy costs and otheroverhead costs. We expect general and administrative costs to remain flat ordecrease as we continue to manage the size and growth of our organization.

 

 

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**Results of Operations**

 

**Comparison of the Three Months Ended March 31, 2002 to theThree Months Ended March 31, 2001**

 

*Net Revenues.*  Our net revenues increased fromapproximately $4.9 million for the three months ended March 31, 2001 toapproximately $6.7 million for the three months ended March 31, 2002,representing a 35.0% increase. The $1.8 million increase is primarily attributableto our acquisition of PRSI in December 2001.

 

*Gross Profit.*  Gross profit increased fromapproximately $3.5 million for the three months ended March 31, 2001, toapproximately $4.7 million for the three months ended March 31, 2002,representing a 33% increase. Gross profit as a percentage of net revenues wasapproximately 70% and 71% for the three month periods ended March 31, 2002 and2001, respectively. The change in gross profit reflects the change in productmix as a result of the Company’s December 2001 acquisition of PRSI and costreductions in the Company’s consumer business. Data acquisition and fulfillment costs for consumer sales decreasedsignificantly from 14.6% to 10.5% as a percentage of revenues due the use of alower cost data providers for certain products. Increased automation alsocontributed significantly to the increase in gross profit, resulting in areduction in direct labor expense.

 

*Selling and Marketing Expenses.*  Sellingand marketing expenses increased by $182,000 to $3.3 million for the threemonth period ended March 31, 2002 as compared to $3.1 million for the 2001period.  The change is the net result ofan increase of $450,000 due to the December 2001 acquisition of PRSI and$280,000 due to the addition of new Internet advertising providers partiallyoffset by reductions in selling and marketing labor costs.

 

*Information Technology Expenditures.* Information technology expenditures decreased by $305,000 for the threemonth period ended March 31, 2002 as compared to the 2001 period, primarily dueto a reduction in headcount.

 

*General and Administrative Expenses.*  Generaland administrative expenses for the three months ended March 31, 2002 increasedby $551,000 compared to the same period in 2001. The change is the net resultof a $594,000 increase due to the December 2001 acquisition of PRSI and a$232,000 increase in depreciation expense as a result of initial implementationof certain of the Company’s internally developed software, partially offset bya $275,000 decrease in legal fees and other expenses.

 

*Interest Income (Expense) Net.*  Interestexpense, net of interest income, was $935,000 for the three months ended March31, 2002 as compared to interest income of $16,000 for the same period in2001.  Included in interest expense for2002 are non-cash interest charges of $611,000 related to the amortization ofdiscounts on the Company’s convertible and vendor notes payable.  Also included is $275,000 related to theamortization of debt issuance costs incurred in conjunction with the Company’sbank credit facility.

 

**Liquidity and Capital Resources**

 

Asof March 31, 2002, cash and cash equivalents have increased to$6.7 million (excluding $2.0 million of restricted cash pledged ascollateral in connection with the Company’s credit facility) from$3.1 million at December 31, 2001.

 

Cashused in operations totaled $3.9 million for both the three-month periodsended March 31, 2002 and 2001.  Cashused in the 2002 period is the result of continued operating losses and anacceleration of our vendor payments.

 

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Cashused in investing activities totaled $663,000 for the three months ended March31, 2002. This is primarily attributable to the continued investment insoftware development.

 

Cashprovided by financing activities was approximately $8.2 million for thethree months ended March 31, 2002. The cash provided is primarily attributableto $10.2 million in net cash proceeds from issuance of our convertiblenotes payable partially offset by $490,000 of payments made in conjunction withour December 2001 acquisition of PRSI and the reclassification of $1.25 millionin cash as restricted in accordance with our amended credit facility.

 

During2001 we were not in compliance with the minimum liquidity, minimum revenue andmonthly cash burn financial covenants in our credit facility. In December 2001,the bank agreed to suspend financial covenant compliance and forbear fromexercising its rights and remedies under the loan agreement, including terminationof the agreement, until February 28, 2002. On April 1, 2002, weentered into an agreement with the bank to amend our credit facility(“Amendment Number One”), to increase the revolving credit line to $3,000,000from $2,000,000, of which $1,000,000 has been designated as a borrowing baseline. Amounts under the borrowing base line may be advanced based on up to 80%of eligible receivables as defined in the agreement. Borrowings under therevolving credit line are due and payable on March 26, 2003.  As of March 31, 2002, we were in compliancewith our revised bank covenants.  As ofMarch 31, 2002, there is $1.0 million outstanding and $2.0 million availableunder the revolving credit facility.

 

Thecredit facility was also amended to remove the letter of credit sublimit fromthe revolving credit line. Under Amendment Number One, we are required tomaintain a deposit with the bank of $750,000 to collateralize our outstandingstandby letter of credit. The letter of credit and the required deposit willreduce by $83,333 per month and mature on November 30, 2002.  As of March 31, 2002, there is $583,335remaining under the standby letter of credit.

 

Significantfinancial covenants with which we must comply under Amendment Number Oneinclude operating performance, minimum EBITDA requirements and a debt/tangiblenet worth ratio. Effective March 31, 2002, we are also required tomaintain not less than $1,250,000 of its unrestricted cash in deposit with thebank at all times.

 

Inconnection with the Amendment Number One, we agreed to issue the bank a warrantto purchase 55,487 shares of the Company’s common stock at an exercise price of$0.85 per share, which matures on March 27, 2008.

 

InDecember 2001, we issued 8% Convertible Promissory Notes dueDecember 20, 2002 in the aggregate principal amount of $3.5 million.In January 2002, we issued 8% Convertible Promissory Notes dueJanuary 17, 2003 in the aggregate principal amount of $4.6 million.In March 2002, we issued 8% Convertible Promissory Notes dueDecember 20, 2002 in the aggregate principal amount of $6.1 millionwith net proceeds of $5.7 million. These notes automatically convert intocommon stock upon receipt of approval of the Company’s stockholders of theissuance of the shares of common stock underlying the notes. We expect thatthese notes will convert prior to maturity of the notes.

 

Sinceinception we have experienced negative cash flows from operations. We have aworking capital deficit of $9.8 million and an accumulated deficit of$77.5 million as of March 31, 2002. Based on our current operating plans,management believes existing cash resources, including the proceeds from theJanuary and March 2002 sale of 8% Convertible Promissory Notes, cash forecastedby management to be generated by operations and proceeds from theApril 2002 credit facility amendment will be sufficient to meet workingcapital and capital requirements through March 31, 2003. Also, management’splans to attain profitability and generate additional cash flows include, increasingrevenues from enterprise and consumer services, focusing on cost reductions andoperational efficiencies to be derived from further deployment of ourtechnologies, and the launch of additional products. There is no assurance thatmanagement will be successful with these plans. If we are unable to meet ourcurrent operating plan as expected and are unable to raise additionalfinancing, we may be required to reduce certain discretionary spending, whichcould have a material adverse effect on our ability to achieve our intendedbusiness objectives.

 

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*Contractual Obligations and Commercial Commitments.*

 

Thefollowing table summarizes all significant contractual payment obligations asof March 31, 2002, by payment due date:

 
|                         |   | **Payments by Period ($ Thousands)** |   |
|------------------------------|--------|--------------------------------------|--------|
| **Contractual Obligation**   |   | **Total**                            |   | **Remainder of 2002** |   | **2003-2004** |   | **2005-thereafter** |   |
|                         |   |                                 |   |   |   |   |   |   |   |
| Notes payable(a)             |   | $                                    | 14,865 |   | $ | 14,865 |   | $ | — |   | $ | — |   |
| Bank debt                    |   | 1,340                                |   | — |   | 1,340 |   | — |   |
| Advertising commitments      |   | 2,175                                |   | 2,175 |   | — |   | — |   |
| Capital lease obligations    |   | 387                                  |   | 219 |   | 164 |   | 4 |   |
| Operating lease obligations  |   | 4,599                                |   | 1,130 |   | 3,006 |   | 463 |   |
| Minimum purchase commitments |   | 1,311                                |   | 621 |   | 690 |   | — |   |
| PRSI payment obligations(b)  |   | 2,510                                |   | 440 |   | 2,070 |   | — |   |
|                         |   |                                 |   |   |   |   |   |   |   |
| Total                        |   | $                                    | 27,187 |   | $ | 19,450 |   | $ | 7,270 |   | $ | 467 |   |
|                         |   |                                 |   |   |   |   |   |   |   |   |   |   |   |

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| (a)    | Includes  our December 2001, January 2002 and March 2002 8% Convertible promissory  notes in the aggregate principal amount of $14.2 million. These notes  automatically convert into common stock on reciept of approval of our  stockholders.  We believe that these  notes will convert prior to maturity in December 2002 |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                               |
| (b)    | Includes  payment obligations of $1,520,000, payable in equal monthly installments of  $127,000 commencing January 2004. These payments may be accelerated  commencing July 2002 based on the profitability and cash flows of PRSI.                                                                                                |

 

**Risk Factors affecting our Business, Operating Results andFinancial Condition**

 

Thefollowing is a discussion of certain risks, uncertainties and other factorsthat currently impact or may impact our business, operating results and/orfinancial condition. Anyone evaluating us and making an investment decisionwith respect to our Common Stock or other securities is cautioned to carefullyconsider these factors, along with similar factors and cautionary statementscontained in our filings with the Securities and Exchange Commission.

 

*Our acquisition of Professional ResourceScreening, Inc., and future acquisitions, could have a material adverseeffect on our business, results of operations or financial condition.*

 

InDecember 2001, we acquired Professional Resource Screening, Inc. Theacquisition will present numerous challenges to us, including the integrationof the operations and personnel of Professional Resource Screening. We willalso be subject to special risks such as possible unanticipated liabilities andcosts, diversion of management attention and loss of personnel. In addition, wemay not achieve the revenue levels, increased earnings, profitability,efficiencies or synergies that we believe justified the acquisition. Inaddition, while we have no current plan to acquire any specific business orbusinesses in the future, we may, from time to time, pursue other acquisitionsof businesses that complement or expand our existing business including thosethat could be material in size and scope. There can be no assurance that theanticipated economic, operational and other benefits of any future acquisitionwill be achieved. In addition, acquisitions may involve the expenditure ofsignificant funds and dilution of current equity investments, and involve anumber of risks, including diversion of management attention, unanticipatedproblems, liabilities or contingencies and risks of entering markets in whichwe have limited or no direct expertise. We cannot assure you that ProfessionalResource Screening or any businesses we acquire in the future will generatesufficient revenue to offset the associated costs or other adverse effects orthat we will be able to successfully integrate or manage Professional ResourceScreening or any business we acquire in the future. The occurrence of some orall of these events could have a material adverse effect on our business,results of operations or financial condition.

 

 

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*We face risk resulting from our litigation withChoicePoint, Inc.*

 

InMay 2001, ChoicePoint, Inc., the successor entity to DBTOnline, Inc., filed a complaint against us in Palm Beach County, Floridaalleging breach of contract, fraudulent misrepresentation, unjust enrichment,quantum meruit and breach of the implied covenant of good faith and fairdealing. In its complaint, ChoicePoint sought approximately $1.5 millionin damages, as well as interest and attorneys’ fees. We removed this action tothe United States District Court for the Southern District of Florida. TheUnited States District Court for the Southern District of Florida ordered thematter to arbitration.  In arbitration,we asserted several counterclaims against ChoicePoint.  The arbitration hearing was held in April2002.  We are awaiting the outcome ofthe arbitration.  The costs related tothis litigation to date have been less than $100.000.

 

*We face competition from many sources. We may be unable tosuccessfully compete with other companies in our industry.*

 

Themarket in which we operate is highly competitive and highly fragmented.Currently, our competition falls into three categories:

 

•                                          free individual locator and information services,including services offered by Internet search engines, telephone companies andother third parties who publish free printed or electronic directories such asYahoo, Inc. and Infospace, Inc.;

 

•                                          fee-based Internet search services offering comparableservices, such as KnowX.com, and firms offering more comprehensive data andinformation and which are already serving the enterprise market, such asChoicePoint, Inc., LEXIS-NEXIS, a division of Reed Elsevier Inc., TheDun & Bradstreet Corporation, Equifax, Experian, Trans Union, ReutersLimited, and Avert, Inc.; and

 

•                                          local, regional and national private investigationfirms, such as Kroll Inc., and a significant number of companies operatingon either a national scale or a local or regional basis.

 

Thereare no significant barriers that would prevent new companies from entering themarket in which we operate. In addition, some of our current suppliers andcompanies with which we have advertising agreements may compete with us in thefuture, which may make it more difficult to advertise our services effectivelyon their Web sites.

 

Manyof our competitors have greater financial and marketing resources than we doand may have significant competitive advantages through other lines ofbusiness, their existing client base and other business relationships. Thesecompetitors and other potential competitors may undertake more extensivemarketing campaigns, adopt more aggressive pricing policies and devote moreresources to developing information search services, background checks forindividual or corporate clients and internet trust services than we are willingor able to accomplish. Our competitors or potential competitors may developservices that are superior to ours, develop services less expensive than oursor that achieve greater market acceptance than our services. We may not be ableto successfully compete against our current or future competitors with respectto any of these factors. As a response to changes in the competitiveenvironment, we may make pricing, service or marketing decisions such asreducing our prices or increasing our advertising, all of which may affect ouroperating results. If we are unsuccessful in responding to our competitors, ourbusiness, financial condition and results of operations will be materiallyadversely affected.

 

*We are dependent on a limited number of third party databaseand other information suppliers. If we are unable to manage successfully ourrelationships with these suppliers, the quality and availability of ourservices may be harmed.*

 

Wedo not independently maintain most of the databases from which we gatherinformation. We obtain the data used in our services from a limited number ofthird party suppliers. If our current suppliers raise their prices, or are nolonger able, due to government regulations or contractual arrangements, or areunwilling to provide us with certain data, we may need to find alternativesources of information. If we are unable to identify and contract with suitablealternative data suppliers and integrate these data sources into our serviceofferings, we could experience service disruptions, increased costs and reducedquality of our services. Additionally, if one or more of our suppliersterminates our existing agreements, we cannot assure you that we will be ableto obtain new agreements with third party suppliers on terms favorable to us,if at all. If one or more of these events were to occur, our business,financial condition and results of operations could be materially adversely affectedby increased costs, reduced revenue and lower profit margins.

 

 

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*We may incur liability based on consumer complaints*

 

Asubstantial amount of our business involves sales of services to consumers. Wehave received customer complaints concerning the quality of our servicesdirectly and have received inquiries from consumer agencies such as the BetterBusiness Bureau and state attorney general consumer divisions. We could in thefuture experience similar complaints and inquiries from consumers andgovernmental and consumer agencies. If we are unable to resolve existing andfuture complaints and inquiries, we could be subject to governmental regulatoryaction as well as civil liability which may have a material adverse effect onour business, financial condition and results of operations.

 

*We depend on a limited number of service offerings for asignificant portion of our revenues*

 

Wehave historically derived a substantial portion of our revenues from a smallnumber of service offerings, particularly our individual locator, individualprofile reports and “Instant Searches” services. With the acquisition ofProfessional Resource Screening, approximately one-third of our revenue isderived from employment screening services. If we are unable to continue to offer these services or if our costs ofproviding these services increase such that we can no longer offer theseservices at competitive prices, our business, financial condition, and resultsof operations may be materially adversely affected.

 

*We have substantial fixed costs which may not be offset byour revenues.*

 

Asubstantial portion of our operating expenses are related to managementpersonnel, administrative support and our advertising agreements. Many of theseagreements have non-cancelable fixed terms and minimum payment obligations. Asa result, a substantial portion of our expenses in any given period are fixedcosts. If we are unable to generate sufficient revenues to offset our operatingcosts or if we are unable to lower our advertising costs to respond to lowerthan expected revenues, our results of operations would be materially adverselyaffected.

 

Ourminimum non-cancelable payments under certain distribution and marketingagreements with various Internet companies is $2.2 million for the year endingMarch 31, 2002.

 

*We depend on our marketing agreements with Internetcompanies.*

 

Animportant element of our current consumer business strategy is to maintainrelationships with a number of Internet search engines and popular Web sitesfor advertising and to direct and attract traffic to our Web site.  The most significant of these agreements arewith Yahoo!, Inc. and InfoSpace, Inc. Our agreement with Yahoo! expires on July 31, 2002 and our agreementwith InfoSpace expires on September 30, 2003, although either party may cancelthe last year of the InfoSpace agreement by giving written notice on or beforeAugust 1, 2002.  These advertisingagreements constitute a significant portion of our operating expenses.  If the costs associated with theseadvertising agreements increases, we may not be able to maintain our existingmarketing relationships or enter into future marketing relationships with otherInternet companies.  Any termination ofexisting agreements or failure to enter into new agreements with Internetcompanies on terms favorable to us could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

*Our access to key Internet advertising depends on marketingagreements between other Internet companies that are beyond our control*

 

Advertisingarrangements with one Internet company may provide us access to anothercompany’s Web site. For example, our arrangement with InfoSpace provides uswith advertising within the white page directories of the AOL and MSN Websites, independent of any agreements with AOL or MSN. Our advertising on theseWeb sites depends on the continued relationship InfoSpace has with companiessuch as AOL and MSN. If this relationship is terminated for any reason and ifwe are either unable to enter into an agreement with these companies or unableto enter into an agreement with another company that has an agreement providingaccess to AOL and/or MSN, our advertising will no longer appear on their Websites. This could significantly reduce our advertising reach and, consequently,lower the number of potential clients visiting our Web site, which could inturn materially adversely affect our business, financial condition and resultsof operations.

 

 

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*Service interruptions may have a negative impact on ourrevenues and may damage our reputation and decrease our ability to attractclients*

 

Wedepend on the satisfactory performance, reliability and availability of our Website and telecommunications infrastructure to attract clients and generatesales. We cannot assure you that we will be able to protect our operations froma system outage or data loss by events beyond our control. Events that couldcause system interruptions include:

 

•                                          fire;

 

•                                          earthquake;

 

•                                          terrorist attacks;

 

•                                          natural disasters;

 

•                                          computer viruses;

 

•                                          unauthorized entry;

 

•                                          telecommunications failure; and

 

•                                          power loss and California rolling blackouts.

 

Wehave experienced unanticipated system interruptions in the past and, althoughwe have upgraded our infrastructure, these interruptions may occur again in thefuture. During the past twelve months our system interruptions have beenlimited to less than two hours and have included a denial of service attack,after which we installed a Network Intrusion Detection System, and a powermanagement module outage at Exodus, our co-location facility.  Substantially all of our computer andcommunications hardware is currently located at facilities in California, whichis an area susceptible to earthquakes. We do not carry business interruptioninsurance sufficient to compensate fully for all losses, and in some cases, anylosses from any or all these types of events. The occurrence of any of theseevents may have a material adverse effect on our business, financial conditionand results of operations.

 

*We may be subject to federal and state laws relating to theuse of personal information and privacy rights*

 

Inconnection with services we provide, particularly employment screening, we maybe considered a “consumer reporting agency” as such term is used in the FairCredit Reporting Act (“FCRA”‘) and, therefore, we are required to comply withthe various consumer credit disclosure requirements of the FCRA. Noncompliancewith the FCRA can result in enforcement by the Federal Trade Commission (“FTC”)and state attorney generals. Willful or negligent noncompliance could result incivil liability to the subject of reports. Also, the Americans withDisabilities Act of 1990 (“ADA”) and the Equal Employment OpportunityCommission (“EEOC”) require pre–employment inquiry and confidentialityrestrictions designed to prevent discrimination against individuals withdisabilities in the hiring process. Although our business is not directlyregulated by the ADA or the EEOC, the use by our clients of information sold tothem is regulated, both as to the type of information and the timing of itsuse.

 

Similarly,there are a number of states that have laws similar to or more restrictive thanthe FCRA, the ADA or the EEOC regulations. Further, many state laws limit thetype of information that can be made available to the public. In addition, somestate laws may require us to be licensed in order to conduct employmentscreening. Clients in these states can access our Web site, which may subjectus to the laws of those states. We may be subject to the laws of states inwhich we have no contacts other than residents of the state ordering servicesthrough our Web site and our delivery of reports to persons within the state.

 

Manyprivacy and consumer advocates and federal regulators have become increasinglyconcerned with the use of personal information, particularly consumer creditreports. For example, where permitted by law, we search the “credit header”information contained in various consumer credit reporting agencies’ databasesto find, among other items, current and previous addresses, social securitynumbers used by an individual, or possible other names. We also search thesedatabases to determine if a customer’s social security number is being used byanother person. Attempts have been made and can be expected to continue to bemade by various federal regulators and organized groups to adopt new or additionalfederal and state legislation to regulate the use of personal information. Forexample, in July 2001 the FTC’s regulation with respect to privacy of consumerfinancial information pursuant to Title V of the Gramm-Leach-Bliley Actwas implemented, which will affect accessibility to certain credit header data.

 

 

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*We depend on our key management personnel for our futuresuccess*

 

Oursuccess depends to a significant degree upon the continued contributions of ourexecutive management team and its ability to effectively manage the anticipatedgrowth of our operations and personnel. The loss of any member of ourmanagement team, but most particularly our CEO, Brent Cohen, and our ChiefTechnical Officer, David Wachtel, and the inability to hire additional seniormanagement, if necessary, could have a material adverse effect on our businessand results of operations. In addition, increased costs of new personnel,including members of executive management, could have a material adverse effecton our business and operating results.

 

*The Internet may fail to support the growth of electroniccommerce*

 

Therapid rise in the number of Internet users and the growth of electroniccommerce and applications for the Internet have placed increasing strains onthe Internet’s communications and transmissions infrastructure. This could leadto significant deterioration in transmission speeds and the reliability of theInternet as a commercial medium and, consequently, could reduce the use of theInternet by businesses and individuals. The Internet may not be able to supportthe demands placed upon it by this continued growth. Any failure of theInternet to support growth due to inadequate infrastructure or for any other reasonwould seriously limit its development as a viable source of commercial andinteractive content and services. This could materially adversely affect theacceptance of our services and our business.

 

*Our success depends on our ability to protect and enforceour trademarks and other proprietary rights*

 

Werely on a combination of patent, trademark, service mark, copyright and tradesecret laws, restrictions on disclosure and transferring title and othermethods to protect our proprietary rights. We also generally enter intoconfidentiality agreements with our employees, business partners and/or othersto protect our proprietary rights. It may be possible for a third party to copyor otherwise obtain and use our proprietary information without authorizationor to develop similar technology independently.

 

Ourregistered trademarks include: “1-800 U.S. SEARCH”, our logo, “The PublicRecord Portal”, and “Reuniting America Two People at a Time”. In addition, wehave applied for a patent on our DARWINTM technology and for registeredtrademark status for “US SEARCH.com”, TrustIdentity”, “FraudIdentity”, and“VeroTrust” service marks in the United States and intend to pursueregistration internationally through applications. Effective patent, trademark,service mark, copyright and trade secret protection may not be available inevery country in which our products and services are made available, online orotherwise. Also, policing unauthorized use of our patent, trademark, servicemark or other proprietary rights might be difficult and expensive and we may beunable to protect our brand, patents, and trademarks from third partychallenges. Our brand may suffer and our business and results of operationscould be materially and adversely affected if we are unable to effectivelyprotect or enforce our patent, trademark, service marks or other proprietaryrights.

 

*We may be unable to prevent third parties from developingWeb sites and acquiring domain names similar to ours*

 

Wehave registered several domain names, including 1800USSEARCH.com, ussearch.comand verotrust.com and prsinet.com. Competitors may obtain a corporate name anddomain name similar to ours which may cause confusion on the part of potentialclients. We may be unable to prevent third parties from acquiring domain namesthat are similar to, infringe upon or otherwise decrease the value of ourtrademarks and other proprietary rights and we may be required to file lawsuits to protect our interests. This would be costly and time consuming and ourbusiness could suffer.

 

*We face significant security risks related to our electronictransmission of confidential information*

 

Werely on encryption and other technologies to provide system security to effectsecure transmission of confidential information, such as credit card numbers.We license these technologies from third parties. We cannot assure you that ouruse of applications designed for data security, or that of our third–partycontractors will effectively counter evolving security risks. A security orprivacy breach could:

 

•                                          expose us to additional liability;

 

•                                          increase our expenses relating to resolution ofthese breaches; and

 

•                                          deter customers from using our services.

 

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Anyinability to protect the security and privacy of our electronic transactionscould have a material adverse effect on our profitability.

 

*We face risks related to chargebacks processed from ourmerchant bank*

 

Likemany other service providers who accept credit card information without asignature over the telephone or Internet, we have issued credits as a result oforders placed with fraudulent credit card information. We may suffer losses ordamage to our reputation as a result of fraudulent use of credit cardinformation in the future. Moreover, because we offer services over theInternet and accept credit card information without a signature, a certainpercentage of our transactions are automatically charged back by the creditcard companies pursuant to their policies if the customer disputes the validityof the charge. Our chargeback rate has exceeded the permissible rates in ourMerchant Card Agreements, and we have been subject to significant fines. Lossof credit card processing rights could materially adversely affect our businessand results of operations. In addition, pursuant to the terms of our bankcredit facility, we agreed to reduce our chargeback rate to bring it within thepermissible rates in our merchant card agreements.   To accomplish this we have introduced several fraud preventionfeatures, most notably CVV2 checks and we only accept VISA transactions, whichpass these checks.  CVV2 is a newauthentication procedure established by credit card companies, which requires acardholder to enter the CVV2 number (the last 3 digits after the credit cardnumber in the signature area of the card) at transaction time to verify thatthe card is on hand

 

*We could face liability based on the nature of our servicesand the content of the materials that we provide which may not be covered byinsurance*

 

Wemay face potential liability from individuals, government agencies orbusinesses for defamation, invasion of privacy, negligence, copyright, patentor trademark infringement and other claims based on the nature and content ofthe materials that appear on our Web site or in our search reports. We alsoface potential liability to clients and/or the subjects of individual searchreports prepared by us for inaccurate information or misuse of the information.Although we carry a limited amount of general liability insurance, ourinsurance may not cover claims of these types or may not be adequate toindemnify us for all liability that may be imposed. In addition, this insurancemay not remain available to us on acceptable terms. Additionally, we do notcurrently maintain liability insurance to cover claims by clients or thesubjects of reports. Any imposition of liability, particularly liability thatis not covered by insurance or is in excess of our insurance coverage, couldhave a material adverse effect on our reputation and our business and resultsof operations.

 

*Our stock price could be adversely affected by sharesbecoming available for sale as a result of registration rights agreements wehave entered into with some of our stockholders*

 

Ourcurrent stockholders hold a substantial number of shares, which they will beable to sell in the public market immediately or in the near future. A largenumber of our shares will be registered for sale pursuant to a registrationstatement. Further, Pequot Private Equity Fund II, L.P. holds shares of our Series A-1Convertible Preferred Stock which, as of March 31, 2002, were convertibleinto 42,107,303 shares of our Common Stock and a warrant to purchase additionalshares of our Series A-1 Convertible Preferred Stock which, if exercisedin full, would be convertible into 1,036,549 shares of our Common Stock as ofMarch 1, 2002. The Kushner–Locke Company held, as of March 1,2002, 6,108,080 shares of our Common Stock. We have entered into a RegistrationRights Agreement with Pequot and Kushner–Locke, pursuant to which Pequotand Kushner–Locke each has the right to require us to register the resaleof these shares of Common Stock. In addition the former shareholders of PRSIhold 8,800,000 shares of our common stock, which was partial consideration forthe acquisition of PRSI. If our shareholders approve the issuance of 8%Convertible Promissory Notes (“8% Notes”) and the issuance of shares of CommonStock underlying the 8% Notes, that were sold on December 20, 2001,January 18, 2002 and March 15, 2002, the 8% Notes are convertible intotal into 17,557,634 shares of Common Stock. In connection with the 8% Noteswarrants to purchase 5,267,278 shares of our Common Stock were issued. Sales ofa substantial number of shares of our common stock, or the perception that thesesales could occur, could cause our common stock price to fall and could impairour ability to raise capital through the sale of additional equity securities.In addition, we have entered into registration rights agreements with otherinvestors that entitle these investors to have their shares registered for salein the public market. The exercise of these rights could affect the marketprice of our common stock.

 

 

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*Our stock price may be volatile, and you may lose all orpart of your investment*

 

Themarket price of our common stock has fluctuated significantly.  Since going public in June 1999, the closingprice of our common stock on Nasdaq has ranged from a high of $17.375 to a lowof $0.1888.  During the last twelvemonths, the closing price of our common stock has ranged from a high of $2.25to a low of $0.610.  On May 1-, 2002,the closing price of our common stock was $0.98.  The market price of our common stock could continue to be subjectto significant fluctuations as a result of numerous factors, many of which arebeyond our control. Among the factors that could affect our stock price are:

 

•                                          quarterly variations in our operating results;

 

•                                          changes in revenue or earnings estimates orpublication of research reports by analysts;

 

•                                          speculation in the press or investment communityabout our business;

 

•                                          fluctuations in stock market prices and volumes,particularly any similar companies;

 

•                                          changes in market valuations of similar companies;

 

•                                          strategic actions by us or our competitors such asacquisitions or restructurings;

 

•                                          regulatory developments;

 

•                                          additions or departures of key personnel;

 

•                                          general market conditions, including the effect ofmarket conditions on our customers and suppliers; and

 

•                                          domestic and international economic factorsunrelated to our performance.

 

Thestock markets in general, and the markets for technology stocks in particular,have experienced extreme volatility that has often been unrelated to theoperating performance of particular companies. These broad market fluctuationsmay adversely affect the trading price of our common stock. We have experiencedprevious fluctuations in our common stock in the past and the price of ourstock remains volatile.  InFebruary 2001, we received a Nasdaq Staff Determination indicating thatthe we were not in compliance with the $1 per share minimum bid price, as setforth in Nasdaq’s Marketplace Rule 4450(a)(5), and that our securities weresubject to delisting from The Nasdaq National Market. In March 2001, weparticipated in a hearing with the Nasdaq Listing Qualifications Panel toappeal the Nasdaq Staff Determination. At the hearing, the Company’s managementalso addressed the Company’s noncompliance with the net tangible assetsrequirement of Marketplace Rule 4450(a)(3) and the market value of thepublic float requirement of Marketplace Rule 4450(a)(2).  In June2001 the Registrant received notification from The Nasdaq StockMarket, Inc., that the Nasdaq Listing Qualifications Panel made adetermination that he Registrant regained compliance with the $1.00 bid priceand $5,000,000 market value of the public float requirements of MarketplaceRule 4450(a). Additionally, the Panel acknowledged that the Registrantappeared to have regained compliance with the $4,000,000 net tangible assetsrequirement.

 

Asof May 10, 2002, the trading price of our common stock was below $1.00 pershare.  If the trading price of commonstock remains below $1.00 per share, we may be delisted from the NasdaqNational Market.  If our common stock isdelisted from the Nasdaq National Market, you may be unable to dispose of yourshares.

 

*Our certificate of incorporation, bylaws and Delaware lawcontain provisions that could discourage a third party from acquiring us andconsequently decrease the market value of our common stock*

 

Ourcertificate of incorporation grants our board of directors the authority toissue up to 650,000 shares of preferred stock, and to determine the price,rights, preferences, privileges and restrictions, including voting rights ofthese shares without any further vote or action by the stockholders. InJune 2001, we issued 203,113 shares of Series A-1 ConvertiblePreferred Stock to Pequot Private Equity Fund II, L.P. The Series A-1 ConvertiblePreferred Stock was issued with voting, liquidation, dividend and other rightssuperior to those of the common stock. The rights of the holders of commonstock will be subject to, and maybe adversely affected by, the rights of theSeries A-1 Convertible Preferred Stock and any preferred stock that may beissued in the future. The issuance of preferred stock could have the effect ofmaking it more difficult for a third party to acquire a majority of ouroutstanding voting stock which could decrease the market value of our stock.Further, provisions in our certificate of incorporation and bylaws and Delawarelaw could have the effect of delaying or preventing a third party fromacquiring us, even if a change in control would be in the best interest of ourstockholders. These provisions include the inability of stockholders to act bywritten consent without a meeting and procedures required for directornomination and stockholder proposal. The holder of our Series A-1Convertible Preferred Stock may acquire voting control upon the occurrence ofcertain events.

 

PequotPrivate Equity Fund II, L.P. currently beneficially holds approximately 63% ofour common stock, assuming an immediate conversion of the Series A-1Convertible Preferred Stock currently held by it, exercise in full of thewarrant and an immediate conversion of the Series A-1 ConvertiblePreferred Stock underlying the warrant.

 

 

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Wehave also entered into a Stockholders Agreement with Pequot Private Equity FundII, L.P. and The Kushner–Locke Company. The Stockholders Agreementprovides, among other things, that Pequot Private Equity Fund II, L.P. and TheKushner–Locke Company will vote the shares of capital stock held by themin favor of (i) one member of the Board of Directors being nominated byKushner– Locke, (ii) one member, if Pequot Private Equity Fund II,L.P. owns between 10-35% of the shares of common stock issued upon conversionof the Series A-1 Convertible Preferred Stock, or two members, if PequotPrivate Equity Fund II, L.P. owns at least 35% of the shares of common stockissued upon conversion of the Series A-1 Convertible Preferred Stock, ofthe Board of Directors being nominated by Pequot Private Equity Fund II, L.P.,(iii) our Chief Executive Officer as a member of our Board of Directors,and (iv) three independent members of the Board of Directors, each ofwhich shall be nominated for election by the consent of the Board Membersnominated by Pequot Private Equity Fund II, L.P. and a majority of all othermembers of the Board of Directors other than Board Member nominated by TheKushner-Locke Company.

 

PequotPrivate Equity Fund II, L.P. will be able to exercise voting control overissues presented to our stockholders for approval. Further, by virtue of theStockholders Agreement and the rights, preferences and privileges of theSeries A-1 Convertible Preferred Stock, Pequot Private Equity Fund II,L.P. possesses certain special voting and approval rights which could preventus from taking certain major corporate actions such as the issuance ofadditional securities, the payment of dividends, or the merger of us with orinto another entity or sale of substantially all of our assets.

 

*Our directors, executive officers and existing stockholdersand their affiliates will continue to have substantial control over ourcompany, and their interests may differ from and conflict with yours*

 

Ourexecutive officers, directors and principal stockholders beneficially own, intotal, 89% of our outstanding common stock. As a result, these stockholders mayhave interests that are different from and may conflict with yours, and will beable to influence matters requiring stockholder approval, including theelection of directors and approval of significant corporate transactions. Thiscould have the effect of delaying or preventing a change of control of ourcompany or otherwise cause us to take action that may not be in the bestinterests of all stockholders, either of which in turn could reduce the marketprice per share of our common stock or prevent you from receiving a premium insuch transaction. This concentration of stock ownership may adversely affectthe trading price of our common stock due to investors’ perception thatconflicts of interest may exist or arise.

 

*Your ownership interest may be materially diluted uponexercise of options and warrants*

 

Asof March 31, 2002, we had granted options and warrants to purchase an aggregateof approximately 27,943,714 (?) shares of common stock at exercise pricesranging from $0.01 per share to $11.13 per share. To the extent that the stockoptions are exercised, material dilution of the ownership interest of ourstockholders will occur. We also expect that in the ordinary course of ourbusiness we will issue additional warrants and grant additional stock optionsincluding, but not limited to, options granted pursuant to our stock optionplans.

 

**Item 3****.Quantitative and qualitative disclosures about market risk**

** **

We considered theprovision of Financial Reporting Release No. 48 “Disclosure of AccountingPolicies for Derivative Financial Instruments and Derivative CommodityInstruments, and Disclosure of Quantitative and Qualitative Information aboutMarket Risk Inherent In Derivative Financial Instruments, Other FinancialInstruments and Derivative Commodity Instruments.”  We had no holdings of derivative financial instruments at March31, 2002 and our total liabilities as of March 31, 2002 consist primarily ofnotes payable and accounts payable that have fixed interest rates and were notsubject to any significant market risk.

 

**PART II.  OTHER INFORMATION**

 

**Item 1.    Legal Proceedings**

 

On April 3, 2000 atwo count tradename and service mark complaint was filed against the Company inthe United States District Court for the Eastern District of Virginia, styledU.S. Search, LLC v USSearch.com Inc. Civil Action No. 00-554-A. OnJanuary 26, 2001, our motion for summary judgment was granted and thecourt ordered that both counts of plaintiff’s complaint be dismissed withprejudice. Plaintiff has appealed this matter to the U.S. Court of Appeals,Fourth Circuit.  The hearing on appealis scheduled for June 6, 2002.

 

In May 2001,ChoicePoint, Inc., the successor entity to DBT Online, Inc., filed acomplaint against us in Palm Beach County, Florida alleging breach of contract,fraudulent misrepresentation, unjust enrichment, quantum meruit and breach ofthe implied covenant of good faith and fair dealing. ChoicePoint soughtapproximately $1.5 million in damages, as well as interest and attorneys’fees. US SEARCH removed this action to the United States District Court for theSouthern District of Florida. The United States District Court for the SouthernDistrict of Florida ordered the matter to arbitration.  In arbitration we filed counterclaimsagainst ChoicePoint.  The arbitrationhearing was held in April 2002 and we are awaiting the decision of thearbitrator, which is expected in June 2002. The costs related to this litigation, including the fees and costs ofour attorneys and other litigation support professionals, have been less than$100.000.

 

We may from time to timebecome a party to various legal proceedings arising in the ordinary course ofbusiness.

 

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**Item 2.    Changes in Securities and Use of Proceeds.**

 

On January 18, 2002, andMarch 15, 2002, the Company sold to thirty-eight purchasers (the “Purchasers”),8% Convertible Promissory Notes due January 17, 2002 and December 20,2002, respectively, in the principal amount of $10,726,480 (the “Notes”) andfive year warrants to purchase up to an aggregate of 3,926,294 shares of CommonStock at an initial exercise price of $1.044 per share (the “Warrants”). TheJanuary Notes are convertible into the number of shares of Common Stockcalculated by dividing the amount of principal and accrued but unpaid interestdue under the January Notes by the lower of (i) $0.783 and (ii) theten day average closing bid price for the Company’s Common Stock on the NasdaqNational Market for the ten business days prior to the conversion date of theJanuary Notes.  The March Notes areconvertible into the number of shares of Common Stock calculated by dividingthe amount of principal and accrued but unpaid interest due under the March Notesby the lower of (i) $0.85 and (ii) the ten day average closing bidprice for the Company’s Common Stock on the Nasdaq National Market for the tenbusiness days prior to the conversion date of the March Notes.  The Notes automatically convert into CommonStock upon receipt of the approval of the Company’s stockholders of theissuance of the Notes and the issuance of the shares of Common Stock underlyingthe Notes. If the Notes have not converted into shares of Common Stock prior totheir due dates, the Company must repay the principal and all accrued butunpaid interest. The issuance and sale of the Notes and the Warrants was exemptfrom the registration requirements of the Act pursuant to Rule 506 ofRegulation D promulgated thereunder.

 

**Item 3.    Defaults upon Senior Securities**

 

None

 

**Item 4.    Submission of Matters to a Vote of SecurityHolders.**

 

None

 

**Item 5.    Other Information**

 

None

 

**Item 6.    Exhibits and Reports on Form 8-K**

 

(a)  Exhibits: Exhibit 10.1  Waiver andAmendment Number One to Loan and Security Agreement

 

(b)  Reports on Form 8-K:

 

During the quarter endedMarch 31, 2002, we filed current reports on Form 8-K on the following dates:

 

     •     January3, 2002 (Item 5. Other Events);

     •     January10, 2002, as amended on March 15, 2002 (Item 2. Acquisition or Disposition ofAssets; and

     •     February4, 2002 (Item 5. Other Events).

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                | US SEARCH.COM INC. |                                                        |
|---------------------|--------------------|-------------------------------------------------------------|
|                | (Registrant)       |
|                |               |
| Date:  May 15, 2002 | By:                | /s/  BRENT N. COHEN                                         |
|                |               |                                                        |
|                |               | Brent N. Cohen*President and Chief  Executive Officer* |
|                |               |                                                        |
|                | By:                | /s/  JEFFREY R. WATTS                                       |
|                |               |                                                        |
|                |               | Jeffrey R. Watts*Chief Financial  Officer*                  |
|                     |                    |                                                             |  |

 

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