Amendment #3 to the S-4
Table of Contents

As filed with the Securities and Exchange Commission on May 6, 2003

Registration No. 333-102565


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

PRE-EFFECTIVE

AMENDMENT NO. 3

TO

FORM S-4

 


 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

FIRST ADVANTAGE CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

(State or Other Jurisdiction of

Incorporation or Organization)

 

7375

(Primary Standard Industrial

Classification Code Number)

 

61-1437565

(I.R.S. Employer

Identification Number)

 

805 Executive Center Drive West

Suite 300

St. Petersburg, Florida 33702

(727) 290-1000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

Kenneth D. DeGiorgio, Esq.

Vice President, General Counsel and Assistant Secretary

First Advantage Corporation

1 First American Way

Santa Ana, California 92707-5913

(714) 800-3000

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)

 

With copies to:

 

Neil W. Rust, Esq.

White & Case LLP

633 West Fifth Street

Los Angeles, California 90071

(213) 620-7700

 

David M. Hernand, Esq.

Latham & Watkins LLP

633 West Fifth Street

Los Angeles, California 90071

(213) 485-1234

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this registration statement is declared effective

and all conditions to the proposed transaction have been satisfied or waived.

 

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                      

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨                      

 

 


 


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CALCULATION OF REGISTRATION FEE

 


Title of Each Class of

Securities to be

Registered

  

Amount

to be

Registered(1)(2)

    

Proposed Maximum Offering Price Per Share

  

Proposed Maximum

Aggregate

Offering Price(3)

    

Amount of Registration Fee(4)(5)


Class A common stock, $.001 par value

  

4,238,698 shares

    

n/a

  

$

83,714,275

    

$

7,702


(1)   Based upon the estimate of the maximum number of shares of First Advantage Corporation’s Class A common stock expected to be issued in connection with the transactions described herein to holders of common stock of US SEARCH.com Inc. The amount is calculated as the product of (a) 105,967,436, which is the sum of (i) 97,018,715 shares of US SEARCH common stock estimated to be outstanding on January 9, 2003, (ii) 5,167,617 shares of US SEARCH common stock issuable pursuant to stock options expected to be exercised before the mergers and (iii) 3,781,104 shares of US SEARCH common stock to be issued pursuant to outstanding warrants expected to be exercised before the mergers, and (b) an exchange ratio of 0.04.
(2)   Pursuant to Rule 416 under the Securities Act, this Registration Statement will include any additional shares of First Advantage’s Class A common stock that may become issuable as a result of any stock split, stock dividend, recapitalization or other similar transaction effected without the receipt of consideration that results in an increase in the number of First Advantage’s outstanding Class A common stock.
(3)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(f)(1) and Rule 457(c) under the Securities Act, based on the maximum number of shares of US SEARCH common stock to be exchanged in the transaction described herein, multiplied by the average of the high and low sales prices of one share of US SEARCH common stock, as reported on the Nasdaq National Market on January 14, 2003.
(4)   Calculated in accordance with Section 6 of the Securities Act and Rule 457 under the Securities Act by multiplying 0.000092 and the proposed maximum aggregate offering price.
(5)   Previously paid.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a) may determine.


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LOGO

To Our Stockholders:

 

You are cordially invited to attend a special meeting of stockholders of US SEARCH.com Inc. to be held at 5401 Beethoven Street, Los Angeles, California 90066 on May 30, 2003 at 9:00 a.m. local time.

 

At the special meeting, US SEARCH will ask you to vote to approve a merger agreement among US SEARCH.com Inc., The First American Corporation and First Advantage Corporation, pursuant to which First Advantage, a newly formed holding company, will acquire US SEARCH and six operating subsidiaries of First American that currently comprise its First American Screening Technologies (FAST) division. The FAST division provides motor vehicle reports, tenant screening, employee background screening and occupational health services. In connection with First Advantage’s acquisition of US SEARCH, each outstanding share of US SEARCH common stock will be converted into the right to receive 0.04 of a share of First Advantage Class A common stock. First American will receive shares of First Advantage Class B common stock. The series of transactions contemplated by the merger agreement will result in US SEARCH stockholders owning approximately 20% of the shares of capital stock of First Advantage and First American owning the remaining 80%, with First American controlling approximately 98% of the voting power of First Advantage. The market value of the First Advantage Class A common stock to be received by US SEARCH stockholders is not known because there is no existing public market for such stock. In determining the relative ownership split between US SEARCH stockholders on the one hand and First American on the other with respect to the shares of First Advantage common stock to be issued in the mergers, US SEARCH evaluated the relative contributions that each of US SEARCH and the FAST division would make to the combined company on the basis of projected financial information and multiples of such projections, and First American made a similar evaluation on the basis of historical and projected financial information and multiples of such projections. See “SUMMARY” on page 8 and “THE MERGERS—Background of the Mergers” on pages 30-36. First Advantage has applied to list the Class A common shares on the Nasdaq National Market under the symbol “FADV.” US SEARCH common stock currently is listed on the Nasdaq National Market under the symbol “SRCH.” On                         , 2003, the closing price of one share of US SEARCH common stock was $        .

 

Our board of directors has approved the merger agreement and the merger of US SEARCH with a subsidiary of First Advantage and believes it is in the best interests of US SEARCH and its stockholders to complete the transactions contemplated by the merger agreement. The board of directors recommends that you vote FOR the proposal to approve the merger agreement and the mergers at the special meeting.

 

The attached notice of special meeting and proxy statement/prospectus explain the proposed mergers and provide specific information concerning the special meeting. Please read these materials carefully. In particular, you should read and consider carefully the discussion in the section entitled “RISK FACTORS” beginning on page 17 of the proxy statement/prospectus. The affirmative vote of the holders of a majority of the outstanding shares of US SEARCH common stock is required to approve the merger agreement and the mergers. Pequot Private Equity Fund II, L.P. is the holder of record of approximately 54.1% of US SEARCH common stock as of May 1, 2003, and has agreed to vote all of its shares in favor of the proposal to approve the merger agreement and the mergers. Accordingly, so long as the parties perform their obligations under the voting agreement and the voting agreement remains in effect, approval of the mergers is assured.

 

Whether or not you plan to attend the special meeting, we urge you to complete, sign and promptly return the enclosed proxy card to assure that your shares will be voted at the special meeting. Failure to return a properly executed proxy card and/or to vote at the special meeting will have the same effect as a vote against approval of the merger agreement and the mergers.

 

Sincerely,

 

Brent N. Cohen

Chief Executive Officer

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the mergers described in this proxy statement/prospectus or the securities to be issued in connection with the mergers or determined if this proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

 

This proxy statement/prospectus is dated                         , 2003 and is expected to be first mailed to US SEARCH stockholders on or about                         , 2003.


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US SEARCH.COM INC.

5401 Beethoven Street

Los Angeles, CA 90066

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held on May 30, 2003

 

To the Stockholders of US SEARCH.com Inc.:

 

A special meeting of stockholders of US SEARCH.com Inc. will be held on May 30, 2003 at 9:00 a.m. local time at 5401 Beethoven Street, Los Angeles, California 90066 for the following purposes:

 

  1.   To consider and vote upon a proposal to approve an Agreement and Plan of Merger, dated as of December 13, 2002, by and among US SEARCH.com Inc., The First American Corporation and First Advantage Corporation, pursuant to which First Advantage, a newly-formed holding company, will acquire US SEARCH and six operating subsidiaries of First American that currently comprise its First American Screening Technology (FAST) division. The FAST division provides motor vehicle reports, tenant screening, employee background screening and occupational health services.

 

       In connection with First Advantage’s acquisition of US SEARCH, each outstanding share of US SEARCH common stock will be converted into the right to receive 0.04 of a share of First Advantage Class A common stock. First American will receive shares of First Advantage Class B common stock in the mergers. The series of transactions contemplated by the merger agreement will result in US SEARCH stockholders owning approximately 20% of the shares of capital stock of First Advantage and First American owning the remaining 80%, with First American controlling approximately 98% of the voting power of First Advantage.

 

  2.   To transact any other business as may properly come before the special meeting or any adjournment or postponement of the special meeting.

 

Our board of directors has approved the merger agreement and the mergers and recommends that you vote FOR approval of the merger agreement and the mergers. The proposal is described in more detail in the accompanying proxy statement/prospectus, which you should read in its entirety before voting. A copy of the merger agreement is attached as Annex A to the accompanying proxy statement/prospectus.

 

US SEARCH is soliciting the vote of its stockholders to approve the merger agreement and the mergers. Only stockholders of record at the close of business on May 1, 2003 are entitled to notice of the special meeting and to vote at the special meeting and at any adjournments thereof. For ten days before the special meeting, a complete list of stockholders entitled to vote at the special meeting will be available for examination by any stockholder for any purpose germane to the special meeting during ordinary business hours at the principal executive offices of US SEARCH located in Los Angeles, California.


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All US SEARCH stockholders are cordially invited to attend the special meeting in person. However, to ensure your representation at the special meeting, you are urged to complete, sign and return the enclosed proxy card as promptly as possible in the enclosed postage-prepaid envelope. You may revoke your proxy in the manner described in the accompanying proxy statement/prospectus at any time before it is voted at the special meeting. If you fail to return a properly executed proxy card or to vote in person at the special meeting, the effect will be a vote against the proposal to approve the merger agreement and the mergers.

 

By Order of the Board of Directors,

 

Brent N. Cohen

Chief Executive Officer

 

Los Angeles, California

                        , 2003


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WHERE YOU CAN FIND MORE INFORMATION

 

First Advantage has filed a registration statement on Form S-4 to register with the SEC the shares of First Advantage Class A common stock to be issued to US SEARCH stockholders in the mergers. This proxy statement/prospectus is a part of that registration statement and constitutes a proxy statement of US SEARCH and a prospectus of First Advantage. The registration statement, including the attached exhibits and schedules, contains additional relevant information about US SEARCH, the FAST division, First Advantage and First Advantage Class A common stock. As allowed by SEC rules, this proxy statement/prospectus does not contain all the information you can find in the registration statement or the exhibits to the registration statement. First American and US SEARCH file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy the registration statement and any reports, statements or other information that First American and US SEARCH file with the SEC at the SEC’s public reference rooms at Public Reference Room, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549.

 

Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. These SEC filings are also available to the public from commercial document retrieval services and at the world wide web site maintained by the SEC at www.sec.gov.

 

None of US SEARCH, First American and First Advantage has authorized anyone to give any information or make any representation about the mergers or our companies that is different from, or in addition to, that contained in this proxy statement/prospectus. Therefore, if anyone does give you information of this sort, you should not rely on it. If you are in a jurisdiction where offers to exchange or sell, or solicitations of offers to exchange or purchase, the securities offered by this proxy statement/prospectus or the solicitation of proxies is unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the offer presented in this proxy statement/prospectus does not extend to you. The information contained in this proxy statement/prospectus is accurate only as of the date of this document unless the information specifically indicates that another date applies.


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TABLE OF CONTENTS

 

    

Page


QUESTIONS AND ANSWERS ABOUT THE MERGERS

  

1

SUMMARY

  

4

The Companies

  

4

The Mergers

  

5

US SEARCH Reasons for the Mergers

  

9

First American Reasons for the Mergers

  

10

Recommendation of US SEARCH’s Board of Directors

  

10

Fairness Opinion of Financial Advisor to US SEARCH’s Board of Directors

  

10

The Merger Agreement and Other Transaction Agreements

  

10

Interests of Certain Persons in the Mergers

  

12

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF US SEARCH AND SUMMARY HISTORICAL COMBINED FINANCIAL INFORMATION OF THE FAST DIVISION

  

14

SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

  

15

COMPARATIVE HISTORICAL AND PRO FORMA COMBINED PER SHARE DATA

  

16

RISK FACTORS

  

17

Risks Relating to the Mergers

  

17

Risks Relating to an Investment in First Advantage

  

19

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

  

25

THE SPECIAL MEETING OF STOCKHOLDERS

  

27

Date, Time and Place

  

27

Purpose of the Special Meeting

  

27

Record date; Stock Entitled to Vote

  

27

Quorum and Vote Required

  

27

Recommendation of the US SEARCH Board of Directors

  

27

Voting, Revocation and Solicitation of Proxies

  

28

Abstentions and Broker Non-Votes

  

28

Adjournments or Postponements

  

29

THE MERGERS

  

30

Background of the Mergers

  

30

US SEARCH Reasons for the Mergers

  

36

Recommendation of the US SEARCH Board of Directors

  

38

Fairness Opinion of Financial Advisor to US SEARCH

  

39

Structure of the Mergers

  

46

Consideration to be Received by US SEARCH Stockholders in the Mergers

  

46

Consideration to be Received by First American in the Mergers

  

47

Effect on US SEARCH Stock Options and Warrants

  

48

Interests of Certain Persons in the Mergers

  

48

Accounting Treatment

  

50

Material United States Federal Income Tax Consequences

  

50

Stock Exchange Listings

  

52

Operations Following the Mergers

  

53

THE MERGER AGREEMENT

  

54

Terms of the Mergers

  

54

Procedures for Exchange of US SEARCH Stock Certificates

  

56

 

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TABLE OF CONTENTS—(Continued)

 

    

Page


Treatment of Stock Options and Warrants

  

56

Representations and Warranties

  

57

Conduct of Business Before Mergers

  

58

Prohibition from Soliciting Other Offers

  

60

Additional Covenants

  

61

Conditions to Completion of the Mergers

  

62

Termination

  

63

Expenses

  

65

Amendment and Waiver

  

65

OTHER AGREEMENTS

  

66

Voting Agreement

  

66

Stockholders Agreement

  

67

Standstill Agreement

  

70

Services Agreement

  

72

Subordinated Secured Promissory Note

  

73

INFORMATION ABOUT US SEARCH

  

75

Business

  

75

Property

  

79

Legal Matters

  

79

INFORMATION ABOUT THE FAST DIVISION

  

81

Business

  

81

Properties

  

85

Legal Matters

  

85

Market Price of and Dividends on Common Equity and Related Stockholder Matters

  

85

INFORMATION ABOUT FIRST ADVANTAGE

  

86

Employee Benefit Plans

  

86

PRICE RANGE OF COMMON STOCK AND DIVIDENDS

  

89

US SEARCH

  

89

First Advantage

  

90

SELECTED HISTORICAL FINANCIAL INFORMATION OF US SEARCH

  

91

US SEARCH MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

92

Overview

  

92

Results of Operations

  

94

Liquidity and Capital Resources

  

97

Contractual Obligations and Commercial Commitments

  

99

Critical Accounting Policies

  

100

Selected Quarterly Financial Data

  

101

Quantitative and Qualitative Disclosures About Market Risk

  

101

SELECTED HISTORICAL FINANCIAL INFORMATION OF THE FAST DIVISION

  

102

FAST DIVISION MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

103

Overview

  

103

Critical Accounting Policies and Estimates

  

103

New Accounting Pronouncements

  

105

Results of Operations

  

105

 

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TABLE OF CONTENTS—(Continued)

 

    

Page


Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

  

105

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

  

106

Liquidity and Capital Resources

  

107

Quantitative and Qualitative Disclosures about Market Risk

  

108

Selected Quarterly Financial Data

  

109

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

  

110

DESCRIPTION OF FIRST ADVANTAGE CAPITAL STOCK

  

117

General

  

117

Class A Common Stock

  

117

Class B Common Stock

  

117

Preferred Stock

  

118

Warrants to Purchase Class A Common Stock

  

118

Registration Rights Relating to Class A Common Stock

  

118

Transfer Agent

  

118

COMPARISON OF STOCKHOLDER RIGHTS

  

119

MANAGEMENT OF FIRST ADVANTAGE

  

124

Directors, Executive Officers and Key Employees

  

124

Executive Compensation; Employment Agreements

  

127

Director Compensation; Committees

  

127

Certain Relationships and Related Transactions

  

127

OWNERSHIP OF US SEARCH COMMON STOCK

  

129

PRO FORMA OWNERSHIP OF FIRST ADVANTAGE COMMON STOCK

  

131

Class A Common Stock

  

131

Class B Common Stock

  

133

EXPERTS

  

134

LEGAL MATTERS

  

135

FUTURE STOCKHOLDER PROPOSALS OF US SEARCH

  

135

INDEX TO FINANCIAL STATEMENTS

  

F-1

ANNEX A—Agreement and Plan of Merger

  

A-1

ANNEX B—Opinion of Lehman Brothers Inc.

  

B-1

ANNEX C—Voting Agreement

  

C-1

ANNEX D—Stockholders Agreement

  

D-1

ANNEX E—Standstill Agreement

  

E-1

ANNEX F—Services Agreement

  

F-1

 

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QUESTIONS AND ANSWERS ABOUT THE MERGERS

 

 

Q:   What am I being asked to vote on?

 

A:   You are being asked to vote in favor of US SEARCH participating in the proposed mergers of US SEARCH and the subsidiaries comprising the First American Screening Technology (FAST) division of The First American Corporation into wholly-owned subsidiaries of First Advantage Corporation, a newly-formed holding company.

 

Q:   What will I receive in the mergers?

 

A:   If we complete the mergers, you will receive in exchange for each share of US SEARCH common stock you hold on the date of the mergers the right to receive 0.04 of a share of First Advantage Class A common stock. We will not issue fractional shares in the mergers. In lieu of fractional shares, you will receive cash based on the average closing price of a share of US SEARCH common stock for the ten trading days ending on the trading day that is three trading days before the date of the special meeting. The shares of Class A common stock received by US SEARCH stockholders will represent approximately 20% of the capital stock of First Advantage.

 

     The number of shares of First Advantage Class A common stock to be received by US SEARCH stockholders was based on the estimated relative contributions US SEARCH and the FAST division would make to the combined entity, as well as the cash to be contributed by First American. See “THE MERGERS—Fairness Opinion of Financial Advisor to US SEARCH” on page 39.

 

     Concurrently with the US SEARCH mergers, First American will receive shares of First Advantage Class B common stock representing approximately 80% of the outstanding capital stock of First Advantage.

 

     For a more complete description of what you will receive in the mergers, see the section entitled “THE MERGERS—Consideration to be Received by US SEARCH Stockholders in the Mergers” on page 46.

 

 

Q:   What is the difference between the Class A common stock and the Class B common stock of First Advantage?

 

A:   The shares of Class A common stock to be received by the former stockholders of US SEARCH in the mergers will be entitled to one vote per share on all matters presented to the stockholders for vote, while the shares of Class B common stock to be received by First American will be entitled to ten votes per share on such matters. As a result, First American will initially control approximately 98% of the voting power of First Advantage. Each share of Class B common stock received by First American will be convertible into one share of Class A common stock at the option of the holder or at such time as the share of Class B common stock is held by someone other than First American (other than in connection with a distribution to First American’s shareholders in a tax-free spinoff of the First Advantage shares). Otherwise the terms of the Class A common stock and the Class B common stock are the same.

 

     For a more complete description of the capital stock of First Advantage, see the section entitled “DESCRIPTION OF FIRST ADVANTAGE CAPITAL STOCK” on page 117.

 

Q:   Will I be taxed on the First Advantage Class A common stock I receive in the mergers?

 

A:   It is expected that your receipt of First Advantage Class A common stock in the mergers generally will be tax-free for U.S. federal income tax purposes (except for taxes resulting from the receipt of cash instead of any fraction of a share of First Advantage Class A common stock). You are urged to carefully read the discussion in the section entitled “THE MERGERS—Material United States Federal Income Tax Consequences” beginning on page 50, and to consult your tax advisor on the consequences of participation in the mergers.

 

 

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Q:   Will I have appraisal rights?

 

A:   No. Under Delaware law, US SEARCH stockholders are not entitled to seek an appraisal of the value of their US SEARCH common shares or to receive cash in lieu of whole First Advantage Class A common shares for their US SEARCH common shares.

 

Q:   Are there risks I should consider in deciding whether to vote for the mergers?

 

A:   Yes. For example, because First Advantage is not yet a publicly traded company, it will be difficult for you to calculate the market value of the shares of Class A common stock of First Advantage that you will receive in exchange for your shares of US SEARCH common stock. In addition, US SEARCH is not permitted to “walk away” from the mergers or resolicit the vote of its stockholders based on changes in the market value of US SEARCH common stock. Thus, even if US SEARCH’s stock price increases, US SEARCH stockholders will only have the right to receive 0.04 of a share of First Advantage Class A common stock for each share of US SEARCH common stock. We urge you to obtain current market quotations of US SEARCH common stock (Nasdaq: SRCH). In evaluating the mergers, you should carefully consider these and other factors discussed in the section entitled “RISK FACTORS—Risks Relating to the Mergers” on page 17.

 

Q:   What do I need to do now?

 

A:   We urge you to read this proxy statement/prospectus carefully, including its annexes, and to consider how the mergers affect you as a stockholder. After reading this proxy statement/ prospectus in its entirety, we ask that you vote on the mergers.

 

Q:   How do I vote?

 

A:   Simply indicate on your proxy card how you want to vote, and sign and mail your proxy card in the enclosed return envelope as soon as possible so that your shares may be represented at the special meeting. If you sign and return a proxy card, but do not include instructions on how to vote your proxy, we will vote your shares “FOR” approval and adoption of the merger agreement and the mergers unless your shares are held in a brokerage account. If you fail to return your proxy card or to vote in person, the effect will be a vote against the merger agreement and the mergers. You may also vote via the Internet. For a more complete description of voting at the meeting, see the section entitled “THE SPECIAL MEETING OF STOCKHOLDERS—Voting, Revocation and Solicitation of Proxies” on page 28.

 

Q:   If my shares are held in “street name” by my broker, will my broker vote my shares for me?

 

A:   Your broker will vote your shares only if you provide instructions on how to vote in accordance with the information and procedures provided to you by your broker. If you do not instruct your broker to vote your shares, it will be equivalent to voting against the merger agreement.

 

     For a more complete description of voting shares held in “street name,” see the section entitled “THE SPECIAL MEETING OF STOCKHOLDERS—Voting, Revocation and Solicitation of Proxies” on page 28.

 

Q:   What do I do if I want to change my vote?

 

A:   If you want to change your vote, send the secretary of US SEARCH a later-dated, signed proxy card before the special meeting with enough time for it to be delivered prior to the special meeting or attend the meeting and vote in person. You may also revoke your proxy by sending written notice to the secretary of US SEARCH before the meeting.

 

     For a more complete description of how to change your vote, see the section entitled “THE SPECIAL MEETING OF STOCKHOLDERS—Voting, Revocation and Solicitation of Proxies” on page 28.

 

 

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Q:   Should I send in my stock certificates now?

 

A:   No. If the mergers are completed, we will send written instructions for exchanging US SEARCH common stock certificates for First Advantage Class A common stock certificates and the cash portion of the merger consideration paid on account of fractional shares, if any, will be paid by check.

 

Q:   When do you expect to complete the mergers?

 

A:   We are working toward completing the mergers as quickly as possible. We hope to complete the mergers during the second quarter of 2003.

 

     For a description of the conditions to completing the mergers, see the section entitled “THE MERGER AGREEMENT—Conditions to Completion of the Mergers” on page 62.

 

Q:   Whom should I call with questions?

 

A:   You should call US SEARCH’s Investor Relations department at (310) 302-6700 with any questions about the mergers.

 

     You may also obtain additional information about US SEARCH, First American and First Advantage from documents filed with the Securities and Exchange Commission, which can be accessed via the internet at www.sec.gov. See “WHERE YOU CAN FIND MORE INFORMATION.”

 

 

 

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SUMMARY

 

This summary highlights selected information from this proxy statement/prospectus and may not contain all the information that is important to you. To better understand the mergers, you should read this entire document carefully, including the Agreement and Plan of Merger attached as Annex A and the other documents to which we refer you.

 

The Companies

 

US SEARCH.com Inc.

5401 Beethoven Street

Los Angeles, California 90066

Telephone: (310) 302-6300

 

US SEARCH is an individual locator and risk management services company, which uses its proprietary software platform and web-based systems to supply consumer and business clients with services such as individual location, identity verification, criminal record checks, employment and education verifications, professional reference checks, credit and motor vehicle record checks, and drug screening. US SEARCH also owns Professional Resource Screening, Inc., an employment screening company.

 

The First American Corporation Screening Technology (FAST) Division

805 Executive Center Drive West

St. Petersburg, Florida 33702

Telephone: (727) 290-1000

 

The FAST division is a leading provider of risk management services to companies, non-profit organizations and governmental agencies throughout the United States. The FAST division provides the following products and services:

 

    Motor Vehicle Reports.    The FAST division provides access to motor vehicle reports in all 50 states and the District of Columbia to clients who are insurance agents, screening companies and transportation carriers.

 

    Tenant Screening.    The FAST division provides landlords and property managers with analysis and information regarding a housing applicant’s credit standing, rental payment history, criminal history, eviction actions and similar background data.

 

    Employee Background Screening.    The FAST division provides comprehensive background screening to employers, including criminal records checks, employment and education verification, reference checks and credit information.

 

    Occupational Health.    The FAST division provides drug testing services and helps clients with the development and implementation of employee support programs.

 

The First American Corporation

1 First American Way

Santa Ana, California 92707

Telephone: (714) 800-3000

 

First American is a diversified provider of business information and related products and services. The First American Family of Companies, many of which command leading market share positions in their respective industries, operate within seven primary business segments including: Title Insurance and Services, Specialty

 

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Insurance, Trust and Other Services, Mortgage Information, Property Information, Credit Information and Screening Information.

 

First American is the current parent of the companies comprising the FAST division. First Advantage does not believe First American will offer services following the mergers that compete in any material respect to those to be offered by First Advantage and its subsidiaries.

 

First Advantage Corporation

805 Executive Center Drive West

St. Petersburg, Florida 33702

Telephone: (727) 290-1000

 

First Advantage is a new holding company formed by First American on December 12, 2002. Following the transactions contemplated by the merger agreement discussed in this proxy statement/prospectus, First Advantage will own as wholly-owned subsidiaries US SEARCH and each of the companies that comprise the FAST division.

 

The Mergers

 

US SEARCH has agreed to be acquired by First Advantage under the terms of the merger agreement that is described in this proxy statement/prospectus. US SEARCH is soliciting the vote of its stockholders to approve the mergers and the merger agreement. Pursuant to the merger agreement, First American also has agreed to cause the FAST division, comprised of American Driving Records, Inc., First American Registry, Inc., SafeRent, Inc., HireCheck, Inc., Employee Health Programs, Inc. and Substance Abuse Management, Inc. to be acquired by First Advantage immediately before the acquisition of US SEARCH. We have attached the merger agreement as Annex A to this proxy statement/prospectus. We encourage you to read the merger agreement in its entirety.

 

To accomplish these acquisitions, the following mergers will occur:

 

    first, six newly-formed, wholly-owned subsidiaries of First Advantage will merge with and into American Driving Records, First American Registry, SafeRent, HireCheck, Employee Health Programs and Substance Abuse Management; and

 

    second, a newly-formed, wholly-owned subsidiary of First Advantage will merge with and into US SEARCH.

 

As a result of the mergers, each of American Driving Records, First American Registry, SafeRent, HireCheck, Employee Health Programs, Substance Abuse Management and US SEARCH will become wholly-owned subsidiaries of First Advantage.

 

Concurrently with the mergers, First American will contribute $15.0 million in cash to First Advantage, less First American’s expenses related to the mergers, the amount of cash remaining in the FAST division companies at closing of the mergers and the amount required to pay in full the amount due by US SEARCH to First American under a $1.4 million promissory note issued by US SEARCH in connection with signing the merger agreement.

 

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The following diagrams depict how the FAST division and US SEARCH are currently structured, how the mergers will occur, and how First Advantage will be structured immediately following the mergers:

 

LOGO

 

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LOGO

 

Upon completion of the mergers, First American will receive a number of shares of First Advantage Class B common stock equal to the sum of:

 

    Four times the number of shares of First Advantage Class A common stock actually issued to US SEARCH stockholders in the mergers;

 

    Up to 405,200 additional shares of Class B common stock to be issued to First American in respect of currently outstanding US SEARCH stock options and warrants that will be converted in the mergers into options and warrants to acquire First Advantage Class A common stock. The specific number of additional shares to be issued to First American is equal to 10,130,000 minus four times the number of shares of US SEARCH common stock issued upon exercise of options and warrants between signing and closing of the merger agreement, multiplied by 0.04 (the exchange ratio), with a minimum of 1,000 additional Class B shares to be issued to First American. The parties anticipate that the actual number of shares of First Advantage Class B common stock to be issued to First American in respect of US SEARCH options and warrants will be approximately 400,000; and

 

    Four times the number of shares of First Advantage Class A common stock required to be issued upon exercise of any options or warrants issued by US SEARCH that are outstanding at the closing of the mergers and were not disclosed to First American in the merger agreement or were issued after the date of the merger agreement. Subsequent to signing of the merger agreement, US SEARCH issued one warrant to acquire a number of shares of its common stock equal to $25,000 divided by the closing price of US SEARCH common stock on the date the mergers are consummated, which will result in First American receiving four times such number of additional shares of First Advantage Class B common stock. US SEARCH does not intend to issue any more options or warrants prior to closing.

 

The number of shares of First Advantage Class B common stock issuable to First American in the mergers is subject to increase if US SEARCH’s indebtedness exceeds $4.4 million (less any cash received from the exercise of outstanding warrants and stock options) at the closing. The number of additional shares will be determined by dividing the amount of US SEARCH indebtedness in excess of $4.4 million by the average closing price of First Advantage Class A common stock over the first ten trading days following closing, multiplied by four. As an example, the following table shows the number of additional shares of First Advantage Class B common stock that would be issued to First American if US SEARCH has indebtedness of $4.4 million, $5.5 million and $6.6 million at the closing of the mergers, and the percentage equity ownership that US SEARCH stockholders would hold in First Advantage. The table also assumes the average closing price of First Advantage Class A common shares is $18.00. The price per share of First Advantage Class A common stock

 

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was determined by dividing the closing price of US SEARCH common stock on April 1, 2003 by the exchange ratio of 0.04, and is not indicative of the actual price that such stock may trade at following closing of the mergers.

 

Amount of

US SEARCH Indebtedness


 

Number Of Additional Shares of First

Advantage Class B Common Stock


  

Percentage Of First Advantage Common

Stock Held By US SEARCH Stockholders


$4,400,000

 

None

  

20.00%

$5,500,000

 

244,444

  

19.36%

$6,600,000

 

488,888

  

19.12%

 

US SEARCH believes that its indebtedness will not exceed $4.4 million at closing of the mergers if such closing occurs before July 1, 2003.

 

The merger agreement also provides that First American would receive additional shares of First Advantage Class B common stock if, after the closing of the mergers, First Advantage is required to issue shares of First Advantage Class A common stock to settle payment obligations of US SEARCH under the agreement pursuant to which US SEARCH previously acquired Professional Resource Screening, but US SEARCH has since reached an agreement with the former shareholders of Professional Resource Screening that will result in no First Advantage shares being issued to such shareholders or First American.

 

The market value of the First Advantage Class A common stock to be received by US SEARCH stockholders is not known because there is no existing public market for such stock. In determining the relative ownership split between US SEARCH stockholders on the one hand and First American on the other with respect to the shares of First Advantage common stock to be issued in the mergers, US SEARCH evaluated the relative contributions that each of US SEARCH and the FAST division would make to the combined company on the basis of projected financial information and multiples of such projections, and First American made a similar evaluation on the basis of historical and projected financial information and multiples of such projections. Each of US SEARCH and First American made its own determination of the relative values of the businesses being contributed to the combined company:

 

    Over a six month period of negotiations, US SEARCH’s management and board of directors considered various ranges of implied valuations for the combined company and the portion of the combined company equity to be issued to US SEARCH stockholders. These valuation ranges were determined by calculating implied market capitalizations based on projected revenues and earnings before interest, taxes, depreciation and amortization (referred to as “EBITDA”) and ranges of revenue and EBITDA multiples for public companies deemed to be closely comparable to the combined company. Each of these analyses indicated a potential range of values for the equity of the combined company to be issued to US SEARCH stockholders that was above US SEARCH’s implied market capitalization based on the then current market price for US SEARCH common stock. US SEARCH’s board of directors ultimately determined to approve the merger agreement on the basis of analyses that indicated a potential range of market capitalization values for the combined company of $275-425 million. This potential range of market capitalization values was derived from projected 2003 EBITDA of $6.0 million for US SEARCH and $23.0 million for the FAST division, plus $6.7 million in estimated synergies, and a range of EBITDA multiples based on a 20% to 35% discount to the EBITDA multiple for a publicly-traded company deemed to be closely comparable to the combined company. The potential range of market capitalization values for the combined company implies a potential range of values for the equity of the combined company to be issued to US SEARCH stockholders of $55-85 million.

 

   

First American likewise considered the relative contributions that each of the FAST division and US SEARCH would make to the combined company. This contribution analysis included analyses of discounted cash flows, projected 2003 EBITDA, projected 2003 net income, and historical cost basis of

 

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investments in each of the FAST division and US SEARCH. The analyses were based on historical financial data provided by management of the FAST division and US SEARCH, projected financial data related to the FAST division provided by management of the FAST division, and projected financial data related to US SEARCH provided by management of US SEARCH, which projections were adjusted to reflect assumptions consistent with assumptions utilized in the FAST division projections. The contribution analysis was based on estimated discounted cash flow of $294 million for the FAST division and $82 million for US SEARCH, projected 2003 EBITDA of $22 million for the FAST division and $5 million for US SEARCH, and projected 2003 net income of $10 million for the FAST division and $1 million for US SEARCH. The cost basis analysis indicated a historical cost basis of $202 million for the FAST division and $52 million for US SEARCH. In addition, a discounted cash flow analysis was prepared which indicated a possible market capitalization value for the combined company of $358 million, based on long-term revenue growth consistent with the average long-term growth of comparable companies, a terminal value multiple of 10x forward EBITDA and a weighted average discount rate of 21.5%.

 

This proxy statement/prospectus includes unaudited pro forma combined financial statements for First Advantage that reflect an estimated purchase price for US SEARCH of $60.2 million, which estimate is required to be made for accounting purposes but does not reflect a specific valuation used or agreed to by the parties in negotiating the terms of the proposed combination. The estimated purchase price for US SEARCH included in the unaudited pro forma combined financial statements for First Advantage is based on an estimate of the fair value of the net assets to be contributed by First American in the mergers, which was determined by First American after date of the merger agreement based on the actual purchase price paid by First American for each of Employee Health Programs and SafeRent in the fourth quarter of 2002 and a valuation of the remaining FAST division companies undertaken as part of impairment testing required by SFAS 142.

 

US SEARCH Reasons for the Mergers

 

In reaching its decision to approve the mergers, the US SEARCH board of directors considered a number of factors, including the value of the per share merger consideration, the complementary nature of the businesses and other strategic considerations, the long term prospects of US SEARCH, US SEARCH’s limited access to capital, the possibility that US SEARCH would be delisted from the Nasdaq National Market System without a strategic transaction or reverse stock split, general economic conditions and the condition of the screening industry as a whole. The US SEARCH board of directors also considered a number of risks, including:

 

    the risk that US SEARCH and the FAST division will not be able to integrate successfully;

 

    the risk that US SEARCH stockholders will own a minority interest in a company controlled by a single large stockholder resulting in US SEARCH stockholders having little or no influence over stockholder decisions;

 

    the risk that if the mergers are not consummated, US SEARCH’s management will have devoted substantial time and resources to the combination at the expense of attending to and growing US SEARCH’s business;

 

    the risk that US SEARCH stockholders will be unable to predict the trading price of the First Advantage Class A common stock they will receive in the mergers due to the lack of a public market for First Advantage Class A common stock prior to the mergers;

 

    the risk that officers and directors of US SEARCH have interests different than those of US SEARCH stockholders, including severance benefits due to Brent Cohen, US SEARCH’s Chief Executive Officer, under certain circumstances, options that will become vested upon consummation of the mergers held by certain officers and directors of US SEARCH, and that Mr. Cohen and Lawrence D. Lenihan, Jr., both current directors of US SEARCH, will continue to serve as directors of First Advantage following the mergers;

 

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    risks associated with the fact that First Advantage has no operating history;

 

    the risk that First Advantage Class A common stock likely will have minimal liquidity due to its small public float; and

 

    the risk that First American or its affiliates may compete directly with the combined entity in the screening industry.

 

See “THE MERGERS—US SEARCH Reasons for the Mergers” on page 36.

 

First American Reasons for the Mergers

 

First American believes the mergers will:

 

    enhance the FAST division’s competitive position by providing it with additional operating scale, a broader scope of services, expanded geographic reach and increased financial strength;

 

    facilitate the FAST division’s growth efforts by giving it a publicly traded security which it can use to acquire companies; and

 

    give the FAST division what First American believes is a state-of-the art work flow and sourcing technology.

 

Recommendation of US SEARCH’s Board of Directors

 

The US SEARCH board of directors believes that the merger agreement and the transactions contemplated by the merger agreement, including the merger of a wholly-owned subsidiary of First Advantage with and into US SEARCH, are fair to and in the best interests of US SEARCH and its stockholders, and recommends that US SEARCH stockholders vote “FOR” approval of the merger agreement and the mergers.

 

Fairness Opinion of Financial Advisor to US SEARCH’s Board of Directors

 

On December 13, 2002, Lehman Brothers Inc., financial advisor to US SEARCH’s board of directors, delivered to the US SEARCH board of directors its oral opinion, which was subsequently confirmed by delivery of a written opinion dated December 13, 2002, that, as of that date, and based upon and subject to certain matters stated in its written opinion, the exchange ratio to be received by the holders of shares of US SEARCH common stock pursuant to the merger agreement was fair to these holders from a financial point of view. The full text of Lehman Brothers’ written opinion is attached to this proxy statement/prospectus as Annex B. You may read this opinion in its entirety for a description of the procedures followed, assumptions made, matters considered and limitations on the review undertaken. Lehman Brothers’ opinion is directed to the US SEARCH board of directors and does not constitute a recommendation to any stockholder as to any matters relating to the mergers. A separate team from Lehman Brothers acted as financial advisor to First American in connection with the mergers with US SEARCH. See “THE MERGERS—Fairness Opinion of Financial Advisor to US SEARCH” on page 39.

 

The Merger Agreement and Other Transaction Agreements

 

The Merger Agreement

 

The parties have entered into an Agreement and Plan of Merger, dated as of December 13, 2002, which sets forth the terms and conditions of the mergers. Among other things, the merger agreement restricts the business conduct of the parties before the closing of the mergers, contains representations and warranties of the parties to the agreement, prohibits US SEARCH from soliciting competing offers, and provides for the payment of a

 

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termination fee of $2.8 million if the merger agreement is terminated for certain reasons. You are urged to read the section entitled “THE MERGER AGREEMENT” on page 54 and the copy of the merger agreement attached hereto as Annex A.

 

The Voting Agreement

 

Pequot Private Equity Fund II, L.P., an affiliate of Pequot Capital Management, Inc., has entered into a voting agreement with First American, pursuant to which Pequot Private Equity Fund II, L.P. has agreed to vote the shares of US SEARCH common stock held by it in favor of the mergers. As of May 1, 2003, Pequot Private Equity Fund II, L.P. held of record 54.1% of the issued and outstanding shares of common stock of US SEARCH. Accordingly, approval of the mergers by the stockholders of US SEARCH is assured as long as the voting agreement remains in effect and the parties perform their obligations thereunder. You are urged to read the section entitled “OTHER AGREEMENTS—Voting Agreement” on page 66 and the copy of the voting agreement attached hereto as Annex C.

 

The Stockholders Agreement

 

Pequot Private Equity Fund II, L.P. has entered into a stockholders agreement with First American and First Advantage. Under the stockholders agreement, in connection with certain transfers of First Advantage capital stock by First American and its affiliates to third parties after the closing of the mergers, Pequot Private Equity Fund II, L.P. has the right under certain circumstances to sell some or all of its shares of First Advantage capital stock on the same terms that First American or its affiliates proposes to sell shares of First Advantage capital stock. Pequot Private Equity Fund II, L.P. also has the right to designate a person to sit on the board of directors of First Advantage so long as Pequot Private Equity Fund II, L.P. maintains a minimum ownership stake in First Advantage, and has the right under certain circumstances to cause First Advantage to register for resale its shares of Class A common stock. You are urged to read the section entitled “OTHER AGREEMENTS—Stockholders Agreement” on page 67 and the copy of the stockholders agreement attached hereto as Annex D.

 

The Standstill Agreement

 

The merger agreement provides that, at the closing of the mergers, First Advantage will enter into a standstill agreement with First American. Under the terms of the standstill agreement, First American will agree not to acquire additional shares of First Advantage capital stock unless such shares are acquired pursuant to a tender offer to all other holders of First Advantage common stock. Such tender offer must be conditioned upon at least two thirds of such shares being tendered, the same consideration being offered to all holders, and on terms approved by a committee consisting solely of disinterested members of the board of directors of First Advantage, after receiving a written opinion from a nationally recognized investment bank to the effect that the tender offer is fair to First Advantage’s stockholders, other than First American and its affiliates. The tender offer also would have to comply with the SEC’s going private rule 13e-3. However, First American may acquire shares of First Advantage capital stock in connection with a capital contribution if approved by a majority of disinterested directors.

 

The standstill agreement also requires that a committee comprised solely of disinterested directors approve any transaction between First Advantage and First American outside the ordinary course of business. The standstill agreement also restricts First American’s ability to transfer voting securities of First Advantage to certain persons unless such persons agree to assume First American’s obligations under the standstill agreement. You are urged to read the section entitled “OTHER AGREEMENTS—Standstill Agreement” on page 70 and the copy of the standstill agreement attached hereto as Annex E.

 

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The Services Agreement

 

The merger agreement provides that, at the closing of the mergers, First Advantage will enter into a services agreement with First American. First American will provide certain business services, such as human resources and payroll services, network services and benefits services, and certain overhead services such as legal and tax support, strategic planning, communication and accounting services pursuant to such agreement. The services agreement also provides that First American may loan up to $1.0 million to First Advantage without obtaining the approval of a committee of disinterested directors of First Advantage. The services agreement does not prevent First American and First Advantage from agreeing to a loan by First American to First Advantage in excess of $1.0 million so long as it is approved by a committee of disinterested directors of First Advantage. You are urged to read the section entitled “OTHER AGREEMENTS—Services Agreement” on page 72 and the copy of the services agreement attached hereto as Annex F.

 

The Subordinated Secured Promissory Note

 

On January 15, 2003, First American loaned US SEARCH $1.4 million pursuant to a subordinated secured promissory note that matures on June 30, 2003. The subordinated secured promissory note bears interest at the lesser of 10.0% and the prime rate plus 4.75% and is secured by all of the real and personal property of US SEARCH. See “OTHER AGREEMENTS—Subordinated Secured Promissory Note” on page 73.

 

Listing of First Advantage Class A Common Stock

 

First Advantage has applied to list its Class A common stock on the Nasdaq National Market under the symbol “FADV.” It is a condition to the completion of the mergers that First Advantage Class A common stock issuable to the US SEARCH stockholders pursuant to the merger agreement be approved for listing on the Nasdaq National Market, subject only to official notice of issuance. Neither US SEARCH nor First American will waive the condition that First Advantage Class A common stock be approved for listing on the Nasdaq National Market.

 

Interests of Certain Persons in the Mergers

 

A number of officers and directors of US SEARCH have existing employment or severance agreements or benefit arrangements, or are expected to enter into agreements providing additional benefits, that provide them with interests in the mergers that may be different from yours. These interests include:

 

    Brent Cohen, US SEARCH’s President and Chief Executive Officer, currently has an employment agreement with US SEARCH which provides cash severance benefits of $800,000 if Mr. Cohen’s employment is terminated other than for “cause,” if Mr. Cohen resigns for “good reason” or if Mr. Cohen does not enter into a new employment agreement with First Advantage within seven days of the effectiveness of the mergers.

 

    It is expected that Mr. Cohen, H. Jake Mendelsohn and David Wachtel, all executive officers of US SEARCH, will enter into new employment agreements with First Advantage, although the terms of such agreements have not yet been determined.

 

    The following executive officers of US SEARCH are owed bonuses for services performed as employees of US SEARCH in 2002, which will be paid half in cash and half in shares of US SEARCH common stock no later than five days after the date on which this proxy statement/prospectus is mailed to US SEARCH stockholders: Mr. Cohen ($400,000), Mr. Mendelsohn ($125,000), Mr. Wachtel ($125,000), Richard Heitzmann ($100,000), Robert Schwartz ($50,000) and Jeffrey Watts ($50,000).

 

    Outstanding stock options to purchase approximately 5,758,265 shares issued to US SEARCH officers and directors that have written agreements will accelerate and be fully vested upon consummating the mergers in accordance with the US SEARCH Amended and Restated 1998 Stock Incentive Plan.

 

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    US SEARCH’s non-employee directors that are asked to resign in connection with the mergers will receive cash payment for their past services as directors of US SEARCH of $10,000 for each year of past service in 2001 and 2002 (pro-rated for partial years), and $5,000 for each quarter in 2003, and a three-year period in which to exercise their stock options following closing of the mergers.

 

    Current officers and directors of US SEARCH will continue to be indemnified by First Advantage following the mergers for acts or omissions that occurred before the mergers.

 

    Brent Cohen and Lawrence Lenihan are expected to be directors of First Advantage.

 

See “THE MERGERS—Interests of Certain Persons in the Mergers” on page 48.

 

Certain members of First American who are expected to serve as directors and officers of First Advantage, including Parker Kennedy, John Long, John Lamson and Kenneth DeGiorgio, will be eligible to participate in certain First Advantage benefit plans. See “INFORMATION ABOUT FIRST ADVANTAGE—Employee Benefit Plans” on page 86.

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF US SEARCH AND SUMMARY HISTORICAL COMBINED FINANCIAL INFORMATION OF THE FAST DIVISION

 

The table below presents summary financial information of the FAST division and US SEARCH for each of the years in the five-year period ended December 31, 2002. This information has been derived from the selected financial data of the FAST division and US SEARCH included in this proxy statement/prospectus. This information is only a summary, and you should read it in conjunction with the audited and unaudited historical financial statements and related notes of the FAST division and US SEARCH attached to this proxy statement/prospectus.

 

US SEARCH

 

   

Fiscal Year Ended December 31,


 
   

2002


   

2001


   

2000


   

1999


   

1998


 

Statement of Operations:

                                       

Total revenue

 

$

    30,341,000

 

 

$

18,399,000

 

 

$

22,363,000

 

 

$

19,541,000

 

 

$

9,245,000

 

Net loss

 

 

(24,076,000

)

 

 

(11,937,000

)

 

 

(29,362,000

)

 

 

(26,377,000

)

 

 

(6,788,000

)

Net loss attributable to common stockholders

 

 

(24,076,000

)

 

 

(24,915,000

)

 

 

(34,443,000

)

 

 

(26,377,000

)

 

 

(6,788,000

)

Basic and Diluted Net Loss Per Common Share:

                                       

Net loss per share attributable to common stockholders

 

$

(0.41

)

 

$

(1.38

)

 

$

(1.93

)

 

$

(1.94

)

 

$

(0.71

)

Balance Sheet:

                                       

Total assets

 

$

31,299,000

 

 

$

27,735,000

 

 

$

12,015,000

 

 

$

25,650,000

 

 

$

575,000

 

Long-term debt, net of current portion

 

 

1,417,000

 

 

 

1,810,000

 

 

 

42,000

 

 

 

37,000

 

 

 

343,000

 

Long-term debt

 

 

3,208,000

 

 

 

8,263,000

 

 

 

1,094,000

 

 

 

84,000

 

 

 

4,001,000

 

Stockholders’ equity (deficit)

 

 

19,524,000

 

 

 

10,355,000

 

 

 

(3,141,000

)

 

 

19,489,000

 

 

 

(7,749,000

)

FAST DIVISION

   

Fiscal Year Ended December 31,


 
   

2002


   

2001


   

2000


   

1999


   

1998


 

Income Statement Data:

                                       

Service revenues

 

$

100,924,598

 

 

$

49,167,057

 

 

$

38,582,074

 

 

$

30,372,638

 

 

$

23,196,975

 

Net income (loss)

 

$

2,702,311

 

 

$

(579,309

)

 

$

50,515

 

 

$

(336,312

)

 

$

1,952,477

 

Balance Sheet Data:

                                       

Total Assets

 

$

164,006,580

 

 

$

62,283,725

 

 

$

26,628,269

 

 

$

15,591,881

 

 

$

5,431,869

 

Long-term debt, net of current portion

 

$

650,906

 

 

$

1,158,713

 

 

$

2,260,899

 

 

$

1,410,425

 

 

$

355,406

 

Stockholders’ equity

 

$

145,902,096

 

 

$

53,075,105

 

 

$

18,491,766

 

 

$

12,390,154

 

 

$

4,372,076

 

 

 

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SUMMARY UNAUDITED PRO FORMA COMBINED FINANCIAL DATA

 

The table below presents selected financial data from the unaudited pro forma combined financial statements of First Advantage included in this proxy statement/prospectus. The unaudited pro forma combined financial statements give effect to the proposed combination of the FAST division and US SEARCH as if the combination had been completed on January 1, 2002 for income statement purposes and on December 31, 2002 for balance sheet purposes. The unaudited pro forma combined financial data is based on the estimates and assumptions set forth in the notes to such statements, which are preliminary and have been made solely for the purposes of developing such pro forma information. First Advantage, First American and US SEARCH do not claim or represent that the following summary unaudited pro forma financial information is indicative of the results that would have been reported had the transactions actually occurred on the dates indicated above, nor is it indicative of future results. The unaudited pro forma combined financial data should be read in conjunction with the unaudited pro forma combined financial statements and related notes of First Advantage, as well as the audited and unaudited historical financial statements and related notes of the FAST division and US SEARCH attached to this proxy statement/prospectus.

 

    

Year Ended December 31, 2002


 

Statement of Operations:

        

Total revenue

  

$

155,227,860

 

Net loss

  

$

(24,469,530

)

Loss per share

  

$

(1.24

)

Shares used in calculation of earnings per share(1)

  

 

19,803,743

 

    

At

December 31, 2002


 

Balance Sheet:

        

Total assets

  

$

237,813,195

 

Long-term debt, net of current portion

  

$

1,437,502

 

Working capital

  

$

6,650,314

 

Stockholder’s equity

  

$

207,210,854

 


(1)   The estimated number of shares of First Advantage common stock issuable in the mergers does not include options or warrants to purchase shares of First Advantage Class A common stock that will be outstanding immediately following the mergers, including options to purchase Class A common stock to be issued to former executives of the FAST division and First American who will serve as executives of First Advantage.

 

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COMPARATIVE HISTORICAL AND PRO FORMA COMBINED PER SHARE DATA

 

The following table presents the audited basic and diluted earnings per share and book value per share data for US SEARCH on a historical basis and the unaudited basic and diluted earnings per share and book value per share data for First Advantage on a pro forma basis. Historical earnings per share and book value per share data for the FAST division is not presented below because the FAST division is comprised of wholly-owned subsidiaries of First American, which makes per share data not meaningful. The unaudited pro forma combined financial data presented below are not necessarily indicative of the financial position had the transaction occurred on December 31, 2002 or operating results that would have been achieved had the transaction been in effect as of the beginning of the period presented, and such data should not be construed as representative of future financial position or operating results of First Advantage. Neither the FAST division nor US SEARCH declared any cash dividends for the periods presented below. The pro forma combined net loss, pro forma stockholders’ equity and the pro forma number of shares of common stock outstanding used in determining the amounts presented below have been derived from unaudited pro forma combined financial statements included in this proxy statement/prospectus. This information is only a summary and should be read in conjunction with the selected historical financial data of the FAST division and US SEARCH, the unaudited pro forma combined financial statements of First Advantage included in this proxy statement/prospectus, and the separate audited and unaudited historical financial statements of the FAST division and US SEARCH and related notes attached to this proxy statement/prospectus.

 

    

Year Ended December 31, 2002


 

Historical—US SEARCH(1)

        

Loss per share:

        

Basic

  

$

(0.41

)

Diluted

  

 

(0.41

)

Book value per share

  

 

0.20

 

Pro forma equivalent—US SEARCH(2):

        

Loss per share:

        

Basic

  

 

(0.05

)

Diluted

  

 

(0.05

)

Book value per share

  

 

0.42

 

Pro forma for First Advantage(3):

        

Loss per share:

        

Basic

  

 

(1.24

)

Diluted

  

 

(1.24

)

Book value per share

  

 

10.46

 


(1)   The historical loss per share for US SEARCH is calculated by dividing, loss attributable to common stockholders of US SEARCH by the weighted-average number of shares of US SEARCH common stock outstanding for the period. The book value per share is calculated by dividing stockholders’ equity by the number of shares of US SEARCH common stock outstanding as of December 31, 2002.
(2)   The pro forma equivalent loss per share for US SEARCH is calculated by multiplying the pro forma loss per share for First Advantage by the merger exchange ratio of 1 share of Class A common stock of First Advantage for every 25 shares of stock of US SEARCH common stock. The pro forma equivalent book value per share is calculated by multiplying the pro forma book value per share for First Advantage by the merger exchange ratio of 1 share of Class A common stock of First Advantage for every 25 shares of stock of US SEARCH.
(3)   The pro forma combined loss per share and book value per share of First Advantage is computed by dividing pro forma loss and stockholders’ equity of First Advantage by 19,803,743 shares of First Advantage common stock expected to be outstanding immediately following the mergers.

 

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RISK FACTORS

 

The mergers, and an investment in First Advantage Class A common stock, involves a number of risks. In addition to the other information we include in this proxy statement/prospectus, you should consider the following risk factors in deciding whether to vote for the mergers.

 

Risks Relating to the Mergers

 

There is no current public market for First Advantage Class A common stock, and there will not be a public market for First Advantage Class A common stock until the closing. As a result, you will not be able to predict the trading price of the shares of First Advantage Class A common stock you will receive in exchange for your US SEARCH common stock when you vote on the merger agreement.

 

As a result of the mergers, US SEARCH stockholders will have the right to receive 0.04 of a share of First Advantage Class A common stock for each share of US SEARCH common stock they own. The board of directors of US SEARCH has determined that the consideration to be received by the US SEARCH stockholders pursuant to the merger agreement is fair and in the best interests of US SEARCH and its stockholders. However, because there is no current public market for shares of First Advantage Class A common stock, you will not be able to predict the market value of the First Advantage Class A common stock you will receive pursuant to the merger agreement. The market price of First Advantage Class A common stock immediately following the closing of the mergers may vary from the value attributed to it by the board of directors of US SEARCH when it determined to enter into the merger agreement. This variation may be caused by a number of factors, including market perception of the value of First Advantage, changes in the businesses, operations or prospects of US SEARCH, the FAST division or First Advantage, the timing of the mergers, regulatory considerations and general market and economic conditions.

 

The integration of US SEARCH and the FAST division following the transactions will be difficult and may result in a failure to realize some of the anticipated potential benefits.

 

The business combination of US SEARCH and the FAST division involves the integration of several businesses that previously operated independently. We cannot assure you that First Advantage will be able to integrate operations of US SEARCH and the FAST division without encountering difficulties. Any difficulty in integrating the operations of the businesses successfully could have a material adverse effect on the business, financial condition, results of operations or liquidity of First Advantage, and could lead to a failure to realize the anticipated synergies of the combination. First Advantage’s management will be required to dedicate substantial time and effort to the integration of US SEARCH and the FAST division. During the integration process, these efforts could divert management’s focus and resources from other strategic opportunities and operational matters.

 

Officers and Directors of US SEARCH may have interests in the mergers that are different from those of US SEARCH’s stockholders.

 

A number of officers and directors of US SEARCH have existing employment or severance agreements or benefit arrangements, or are expected to enter into agreements providing additional benefits, that provide them with interests in the mergers that may be different from yours. Brent Cohen, US SEARCH’s President and Chief Executive Officer, currently has an employment agreement with US SEARCH which provides cash severance benefits of $800,000 if Mr. Cohen’s employment is terminated other than for “cause,” if Mr. Cohen resigns for “good reason” or if Mr. Cohen does not enter into a new employment agreement with First Advantage within seven days of the effectiveness of the mergers. Mr. Cohen’s potential severance benefits create a potential conflict of interest because his interests in voting to adopt the merger agreement and to consummate the mergers are different than your interests as a stockholder of US SEARCH. In connection with the mergers, it is expected that Mr. Cohen, H. Jake Mendelsohn and David Wachtel, all executive officers of US SEARCH, will enter into new employment agreements with First Advantage, although the terms of such agreements have not yet been

 

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determined. Certain executive officers of US SEARCH are owed bonuses for services performed as employees of US SEARCH in 2002:

 

    Mr. Cohen—$400,000;

 

    Mr. Mendelsohn—$125,000;

 

    Mr. Wachtel—$125,000;

 

    Richard Heitzmann—$100,000;

 

    Robert Schwartz—$50,000; and

 

    Jeffrey Watts—$50,000.

 

Such bonuses will be paid half in cash and half in shares of US SEARCH common stock no later than five days after the date on which this proxy statement/prospectus is mailed to US SEARCH stockholders. As a result, Messrs. Cohen, Mendelsohn, Wachtel, Heitzmann, Schwartz and Watts have interests in consummating the mergers that are different from your interests as a stockholder of US SEARCH.

 

Outstanding stock options to purchase approximately 5,758,265 shares issued to US SEARCH officers and directors that have written agreements will accelerate and be fully vested upon consummating the mergers in accordance with the US SEARCH Amended and Restated 1998 Stock Incentive Plan. Assuming the mergers close on May 31, 2003, the following officers and directors of US SEARCH have stock options that will become vested upon completion of the mergers:

 

    Brent N. Cohen—2,166,668;

 

    H. Jake Mendelsohn—508,335;

 

    David Wachtel—515,835;

 

    Harry B. Chandler—18,056;

 

    Richard Heitzmann—937,501;

 

    Peter Locke—18,056;

 

    Alan C. Mendelson—18,056;

 

    Thomas W. Patterson—44,428;

 

    Karol Pollock—78,201;

 

    Robert Schwartz—515,629; and

 

    Jeffrey Watts—937,500.

 

US SEARCH’s non-employee directors that are asked to resign in connection with the mergers also will receive cash payment for their past services as directors of US SEARCH of $10,000 for each year of past service in 2001 and 2002 (pro-rated for partial years), and $5,000 for each quarter in 2003, and a three year period in which to exercise their stock options following closing of the mergers. The accelerated vesting of stock options for the above officers and directors, and the cash payments and extension of stock option exercise periods for non-employee directors, creates a potential conflict of interest because such persons will receive a benefit from the consummation of the mergers different than that received by you as a stockholder of US SEARCH. In addition, the continuation of indemnification arrangements for the current officers and directors of US SEARCH following completion of the mergers, as well as the expected continuation of Brent Cohen and Lawrence Lenihan as directors of First Advantage following the mergers, may influence these persons in making their recommendation that you vote in favor of adoption of the merger agreement.

 

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In considering the opinion by Lehman Brothers to the US SEARCH board regarding the fairness of the exchange ratio, stockholders should be aware of potential conflicts of interest affecting Lehman Brothers.

 

Lehman Brothers was retained by each of US SEARCH and First American to act as its financial advisor for the proposed combination between US SEARCH and the FAST division. US SEARCH stockholders should consider the potential conflict of interest in Lehman Brothers representing both US SEARCH and First American when reviewing Lehman Brothers’ opinion to the US SEARCH board regarding the fairness of the exchange ratio. A significant portion of the fees related to the financial advisory services of Lehman Brothers to First American and US SEARCH in connection with the proposed combination is contingent upon the consummation of the proposed combination. The contingent nature of such fee arrangements might be viewed as giving Lehman Brothers a financial interest in the successful completion of the proposed combination. See “Fairness Opinion of Financial Advisor to US SEARCH.”

 

Risks Relating to an Investment in First Advantage

 

First Advantage will be controlled by First American and as a result other stockholders will have little or no influence over stockholders’ decisions.

 

As a result of the mergers, First American will own 100% of the First Advantage Class B common stock, which shares will have ten votes per share compared to one vote per share of First Advantage Class A common stock. Consequently, First American will have approximately 98% of the total voting power of First Advantage and, therefore, First American will have the right to control the outcome of any matter submitted for the vote or consent of First Advantage’s stockholders, unless a separate class vote is required under Delaware law. First American will have the voting power to control the election of the First Advantage board of directors and it will be able to cause the amendment of First Advantage’s certificate of incorporation or bylaws. First American also may be able to cause changes in the business without seeking the approval of any other party. These changes may not be beneficial to First Advantage or in the best interest of First Advantage’s other stockholders. For example, First American will have the power to prevent, delay or cause a change in control and could take other actions that might be favorable to First American, but not necessarily to other stockholders. Similarly, subject to restrictions contained in the standstill agreement, First American will have the voting power to exercise a controlling influence over First Advantage’s business and affairs and will have the ability to make decisions concerning such things as:

 

    mergers or other business combinations;

 

    purchases or sales of assets;

 

    offerings of securities;

 

    indebtedness that First Advantage may incur; and

 

    payments of any dividends.

 

First Advantage cannot assure you that First American’s ownership of First Advantage common stock or its relationship with First Advantage will not have a material adverse effect on the overall business strategy of First Advantage or on the market price of First Advantage Class A common stock.

 

Moreover, under recently proposed Nasdaq corporate governance rules, if a single stockholder holds more than 50% of the voting power of a company, that company is considered a “controlled company.” A controlled company is exempt from the Nasdaq rules requiring that a majority of the company’s board of directors be independent directors, that independent directors must have regularly scheduled executive sessions and that the compensation and nomination committees must be comprised solely of independent directors. After the consummation of the transactions contemplated by the merger agreement, First American will own more than 50% of the voting power of First Advantage and First Advantage expects to take advantage of such exemptions afforded to controlled companies if the proposed Nasdaq rules are enacted.

 

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First Advantage has no operating history as an independent company.

 

Due to a lack of operating history as a separate public company, there can be no assurance that First Advantage’s business strategy will be successful on a long-term basis. Several members of First Advantage’s management team have never operated a stand-alone public company. Following the mergers, First Advantage will have less financial and other resources than First American. First Advantage may not be able to grow its business as planned and may never become a profitable business. First Advantage’s ability to satisfy obligations and become profitable will be solely dependent upon the future performance of the lines of business it owns and operates, and it will not be able to rely upon the financial and other resources and cash flows of those business lines remaining with First American. For example, in 2000, 2001 and 2002, First American forgave approximately $6.1 million, $35.2 million and $90.1 million, respectively, in amounts used by the FAST division for working capital and acquisition financing. You should consider the prospects of First Advantage based on the risks, expenses and difficulties frequently encountered in the operation of a new public company in a relatively new and evolving industry.

 

The financial statements of the FAST division included in this proxy statement/prospectus may not reflect the results of operations, financial condition and cash flows that would have been achieved had the FAST division been operated independently during the periods and as of the dates presented. Furthermore, historical financial statements may not reflect the costs to the FAST division of borrowing funds as a stand-alone entity. Therefore, the historical consolidated financial information of the FAST division included in this proxy statement/prospectus is not necessarily indicative of First Advantage’s future results of operations, financial position and cash flows.

 

In addition, pursuant to the standstill agreement to be entered into between First American and First Advantage, a majority of First Advantage’s “disinterested directors” must approve most future transactions between First American and First Advantage. First Advantage may need additional capital in order to finance operations or pursue acquisitions. Accordingly, First Advantage will have to obtain its own financing for operations and perform its own administrative functions. There can be no assurance that First Advantage will be able to develop successfully the financial and managerial resources and structure necessary to operate as an independent public company, or that First Advantage’s available financing and anticipated cash flow from operations will be sufficient to meet all of its cash requirements.

 

Prior to the mergers, First American has performed certain administrative functions for the FAST division. Pursuant to the services agreement, First American will continue to provide certain of these services to First Advantage following the closing of the mergers. If the services agreement is terminated, First Advantage will have to find alternative sources for these services. Such alternative sources may be more expensive or provide a different quality of services, which may adversely affect First Advantage’s results of operations.

 

The FAST division will comprise a substantial portion of First Advantage’s assets. The FAST division has historically relied on First American for certain financial, administrative and managerial support, including strategic planning, general management support, legal support, treasury administration, insurance, personal property leasing, communications, corporate income tax administration, human resources, benefits, network services, and accounting and financial management services. The FAST division paid First American approximately $1.9 million, $1.4 million and $1.6 million in 2000, 2001 and 2002, respectively, for these support services. First American will continue to provide certain of these support services to First Advantage under a services agreement. The initial term of the services agreement is for one year and the agreement will renew for successive six-month periods unless either First American or First Advantage gives 30 days notice of the intent to not renew before the end of any six-month period. Until such time as First Advantage can incur the capital expenditures and operating expenses necessary to support the functions covered by the services agreement, First Advantage intends to allow the agreement to renew automatically. However, there can be no assurance that First American will choose to renew the agreement after the initial one-year term. In the event that First American does not renew the agreement, First Advantage would have to arrange alternative sources for these services.

 

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Other sources may be more expensive or be of a different quality, which could have a material adverse effect on the business and results of operations of First Advantage.

 

There is no current public market for First Advantage Class A common stock.

 

Before the closing of the mergers, there will have been no public market for First Advantage Class A common stock. If First Advantage Class A common stock is approved for quotation on the Nasdaq National Market, there can be no assurance that an active trading market for First Advantage Class A common stock will develop or, if a trading market does develop, that it will continue. In the absence of such a market, you may be unable to readily liquidate your investment in First Advantage Class A common stock.

 

First Advantage will be dependent on information suppliers. If First Advantage is unable to manage successfully its relationships with a number of these suppliers, the quality and availability of First Advantage’s services may be harmed.

 

First Advantage will obtain some of the data used in its services from third party suppliers and government agencies. If a number of suppliers are no longer able or are unwilling to provide First Advantage with certain data, First Advantage may need to find alternative sources. If First Advantage is unable to identify and contract with suitable alternative data suppliers and integrate these data sources into its service offerings, First Advantage could experience service disruptions, increased costs and reduced quality of its services. Additionally, if one or more of First Advantage’s suppliers terminates First Advantage’s existing agreements, there is no assurance that First Advantage will obtain new agreements with third party suppliers on terms favorable to First Advantage, if at all. Loss of such access or the availability of data in the future due to increased governmental regulation or otherwise could have a material adverse effect on First Advantage’s business, financial condition and results of operations.

 

First Advantage may be subject to increased regulation regarding the use of personal information.

 

Certain data and services provided by First Advantage will be subject to regulation by various federal, state and local regulatory authorities. Compliance with existing federal, state and local laws and regulations has not had a material adverse effect on the results of operations or financial condition of the FAST division or US SEARCH to date. Nonetheless, federal, state and local laws and regulations in the United States designed to protect the public from the misuse of personal information in the marketplace and adverse publicity or potential litigation concerning the commercial use of such information may increasingly affect the operations of First Advantage, which could result in substantial regulatory compliance expense, litigation expense and a loss of revenue.

 

First Advantage will face significant security risks related to its electronic transmission of confidential information.

 

First Advantage will rely on encryption and other technologies to provide system security to effect secure transmission of confidential or personal information. First Advantage may license these technologies from third parties. There is no assurance that First Advantage’s use of applications designed for data security, or that of third-party contractors will effectively counter evolving security risks. A security or privacy breach could:

 

    expose First Advantage to liability;

 

    increase First Advantage’s expenses relating to resolution of these breaches;

 

    deter customers from using First Advantage’s services; and

 

    deter suppliers from doing business with First Advantage.

 

Any inability to protect the security and privacy of First Advantage’s electronic transactions could have a material adverse effect on the business, financial condition or results of operations of First Advantage.

 

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First Advantage could face liability based on the nature of its services and the content of the materials provided which may not be covered by insurance.

 

First Advantage may face potential liability from individuals, government agencies or businesses for defamation, invasion of privacy, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials that appear or are used in its products or services. Insurance may not be available to cover claims of these types or may not be adequate to cover First Advantage for all risks to which it is exposed. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of First Advantage’s insurance coverage, could have a material adverse effect on First Advantage’s reputation, business and results of operations.

 

First Advantage may not be able to pursue its acquisition strategy.

 

A significant part of the historical growth strategies of the FAST division has been identifying and executing on acquisitions. First Advantage intends to continue to grow through acquisitions. First Advantage may not be able to identify suitable acquisition candidates, obtain the capital necessary to pursue its acquisition strategy or complete acquisitions on satisfactory terms. When companies are acquired, First Advantage may not be able to integrate or manage these businesses so as to produce returns that justify the investment.

 

A number of First Advantage’s competitors also have adopted the strategy of expanding and diversifying through acquisitions. First Advantage likely will experience competition in its effort to execute on its acquisition strategy, and First Advantage expects the level of competition to increase. As a result, First Advantage may be unable to continue to make acquisitions or may be forced to pay more for the companies it is able to acquire.

 

First Advantage may not be able to realize the entire book value of goodwill from acquisitions.

 

First Advantage will have approximately $162.9 million of net goodwill, as of December 31, 2002, including pro forma goodwill attributable to the transactions contemplated by the mergers. First Advantage will implement the provisions of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” which requires that existing goodwill not be amortized, but instead be assessed annually for impairment or sooner if circumstances indicate a possible impairment. First Advantage will monitor for impairment of goodwill from past acquisitions completed by the FAST division and US SEARCH and from future acquisitions. In the event that the book value of net goodwill is impaired, any such impairment would be charged to earnings in the period of impairment. There can be no assurances that future impairment of goodwill under SFAS 142 will not have a material adverse effect on First Advantage’s results of operation.

 

First Advantage currently does not plan to pay dividends.

 

First Advantage intends to retain future earnings, if any, that may be generated from operations to help finance the growth and development of its business. As a result, First Advantage does not anticipate paying dividends to stockholders for the foreseeable future.

 

First Advantage’s business depends on technology that may become obsolete.

 

First Advantage intends to use US SEARCH’s DARWIN technology and other information technology to better serve its clients and reduce costs. These technologies likely will change and may become obsolete as new technologies develop. The future success of First Advantage will depend upon its ability to remain current with the rapid changes in the technologies used in its business, to learn quickly to use new technologies as they emerge and to develop new technology-based solutions as appropriate. If First Advantage is unable to do this, it could be at a competitive disadvantage. First Advantage’s competitors may gain exclusive access to improved technology, which also could put First Advantage at a competitive disadvantage. If First Advantage cannot adapt to these changes, its business may be materially adversely affected.

 

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First American could sell its controlling interest in First Advantage and therefore First Advantage could eventually be controlled by an unknown third party.

 

Subject to certain restrictions, First American could elect to sell all or a substantial or controlling portion of its equity interest in First Advantage to a third party without offering to First Advantage’s other stockholders the opportunity to participate in this transaction. If another party acquires First American’s interest in First Advantage, that third party may be able to control First Advantage in the same manner that First American is able to control First Advantage. A sale to a third party also may adversely affect the market price of First Advantage’s Class A common stock because the change in control may result in a change in management decisions, business policy and First Advantage’s attractiveness to future investors.

 

First Advantage Class A common stock will have minimal liquidity due to its small public float.

 

Although it is expected that there will be approximately 19,803,743 shares of First Advantage common stock outstanding immediately following the mergers, approximately 80% will be owned by First American and approximately 11% will be held of record by Pequot Private Equity Fund II, L.P. Only approximately 9% of First Advantage’s issued and outstanding shares will be freely transferable without restriction under the Securities Act immediately following the closing of the mergers. Accordingly, only a minimal number of shares of First Advantage will actually trade immediately following the closing. As a result, there will likely be less trading volume and therefore less liquidity compared to other companies with similar market capitalization. Consequently, you may have difficulty selling your shares of First Advantage.

 

In addition, First American is entitled to receive additional shares of First Advantage Class B common stock if US SEARCH’s indebtedness exceeds $4.4 million (less any cash received from the exercise of outstanding warrants and stock options) at the closing. The number of additional shares will be determined by dividing the amount of US SEARCH indebtedness in excess of $4.4 million by the average closing price of First Advantage Class A common stock over the first ten trading days following closing, multiplied by four. For example, assuming the average closing price of First Advantage Class A common stock during the first ten trading days following closing is $18.00, an additional 222,222 shares of Class B common shares would be issuable for each $1.0 million in indebtedness of US SEARCH in excess of $4.4 million at closing. US SEARCH does not believe that its indebtedness will exceed $4.4 million at closing of the mergers if such closing occurs prior to July 1, 2003. The price per share of First Advantage Class A common stock was determined by dividing the closing price of US SEARCH common stock on April 1, 2003 by the exchange ratio of 0.04, and is not indicative of the actual price that such stock may trade at following closing of the mergers.

 

Significant stockholders may sell shares of First Advantage common stock which may cause First Advantage’s share price to fall.

 

Subject to certain restrictions, First American may at any time convert each of its shares of First Advantage Class B common stock into a share of Class A common stock. First American or Pequot Private Equity Fund II, L.P. may transfer shares of First Advantage common stock in a privately-negotiated transaction or to affiliates or shareholders. Any transfers, sales or distributions by First American or Pequot Private Equity Fund II, L.P. of a substantial amount of First Advantage’s Class A common stock in the marketplace, or to shareholders, or the market perception that these transfers, sales or distributions could occur, could adversely affect the prevailing market prices for First Advantage Class A common stock.

 

Conflicts of interest may arise because certain directors and officers of First Advantage will also remain directors and officers of First American.

 

Certain persons associated with First Advantage will have a continuing relationship with First American. Parker Kennedy, John Lamson and Kenneth DeGiorgio, expected to be Chairman of the Board, Chief Financial Officer and General Counsel, respectively, of First Advantage, also serve as executive officers of First American

 

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and its affiliates. Mr. Kennedy also serves as President and a Director of First American. As such they may have great influence on business decisions of First Advantage. These persons, currently associated with First American, were asked to serve as directors and/or officers of First Advantage because of their knowledge of and experience with the business of First Advantage and its operations. All three own stock, and options to acquire stock, of First American.

 

These affiliations with both First American and First Advantage could create, or appear to create, potential conflicts of interest when these directors and executive officers are faced with decisions that could have different implications for First American and First Advantage. For example, business decisions made by the board of First American regarding its relationship with First Advantage under the services agreement could adversely affect First Advantage.

 

The stockholders agreement will impact corporate governance.

 

First Advantage, First American and Pequot Private Equity Fund II, L.P., US SEARCH’s majority stockholder, have entered into a stockholders agreement pursuant to which First American has agreed to vote as many of its shares in First Advantage as is necessary to ensure that the board of directors of First Advantage has no more than ten members and that a representative of Pequot that meets certain requirements is elected a director of First Advantage or, at Pequot’s request, a board observer of First Advantage. Pequot’s right to designate a board member or observer will continue until such time as Pequot’s and its affiliates’ collective ownership of First Advantage stock is less than 75% of the holdings Pequot receives in the mergers. As a result of this arrangement and First American’s dominant ownership position in First Advantage, holders of First Advantage Class A common stock (other than Pequot) will have little or no ability to cause a director selected by such holders to be appointed to the board of directors of First Advantage and, consequently, little or no ability to influence the direction or management of First Advantage.

 

There may be risks related to the prior use of Arthur Andersen LLP as the auditor of SafeRent, Inc., one of the FAST division companies.

 

The balance sheets and related statements of operations, owners’ equity and cash flows of SafeRent for the years ended December 31, 2000 and 2001, which have been included in the FAST division financial information in this proxy statement/prospectus, were audited by Arthur Andersen LLP. Despite First Advantage’s reasonable efforts to obtain Andersen’s consent, Andersen has not consented to the inclusion of its report in this proxy statement/prospectus. Under these circumstances, Rule 437a under the Securities Act permits First Advantage to file the registration statement which this proxy statement/prospectus forms a part of without a written consent from Andersen.

 

Section 11(a) of the Securities Act provides that if any part of a registration statement at the time it becomes effective contains an untrue statement of a material fact, or omits a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring a security pursuant to the registration statement (unless it is proved that at the time of the acquisition the person knew of the untruth or omission) may sue, among others, every accountant who has consented to be named as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement in the registration statement, report or valuation which purports to have been prepared or certified by the accountant.

 

As a result of Andersen failing to consent to being named as an expert or to the inclusion of its report in the registration statement of which this proxy statement/prospectus forms a part, you will not be able to recover against Andersen under Section 11(a) of the Securities Act.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This proxy statement/prospectus contains “forward-looking statements.” These forward-looking statements are based on estimates and assumptions made by management of First American, the FAST division or US SEARCH, as the case may be, and take into account only the information available at the time the forward-looking statements are made. Although we each believe our respective estimates and assumptions are and will be reasonable, forward-looking statements involve risks, uncertainties and other factors that could cause our respective actual results to differ materially from those suggested in the forward-looking statements. Forward-looking statements include the information concerning future financial performance, anticipated benefits of the mergers, business strategy, projected plans and objectives of First Advantage, prospective products, sales and marketing efforts, costs and expenses, liquidity, cost savings and the other forward-looking statements contained in this proxy statement/prospectus:

 

    the expected closing date of the mergers;

 

    pro forma financial data for First Advantage, US SEARCH and the FAST division companies;

 

    information concerning the anticipated benefits of the mergers, including the expected benefits of the mergers considered by First American in “SUMMARY—First American Reasons for the Mergers” on page 10;

 

    estimates of the price per share of First Advantage Class A common stock, including in “SUMMARY—The Mergers” on page 7, “RISK FACTORS—First Advantage Class A Common Stock will have minimum liquidity due to its small public float” on page 23, and the unaudited pro forma combined financial statements of First Advantage beginning on page 110;

 

    statements about the expected competitive position and profitability of First Advantage and its future access to capital in “THE MERGERS—Background of the Mergers” on page 31;

 

    information in “THE MERGERS—Background of the Mergers” beginning on page 32;

 

    estimates of the market capitalization and valuation of First Advantage and projected financial results of First Advantage, the FAST division and US SEARCH;

 

    the expected benefits and cost savings expected to result from the mergers considered by The US SEARCH board of directors in “THE MERGERS—US SEARCH Reasons for the Mergers on page 36;

 

    the effect of automation on the quality of services and products and efficiency in “INFORMATION ABOUT US SEARCH—Business” on page 75; and

 

    strategies for future growth described in “INFORMATION ABOUT THE FAST DIVISION—Business—Strategies for Future Growth” on page 84.

 

Forward-looking statements are subject to numerous risks and uncertainties. The following are some important factors that could cause First Advantage’s actual results to differ materially from those in forward-looking statements:

 

    general volatility of the capital markets and the market price of First Advantage Class A common stock;

 

    First Advantage’s ability to successfully raise capital;

 

    First Advantage’s ability to identify and complete acquisitions and successfully integrate businesses it acquires (including the FAST division and US SEARCH);

 

    changes in applicable government regulations;

 

    the degree and nature of First Advantage’s competition;

 

    an increase in First Advantage’s expenses;

 

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    continued consolidation among First Advantage’s competitors and customers;

 

    technological changes may be more difficult or expensive than anticipated; and

 

    other factors described in the section entitled “RISK FACTORS” beginning on page 17.

 

First Advantage’s actual results, performance or achievement could differ materially from those expressed in, or implied by, forward-looking statements and, accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do so, what impact they will have on the results of operations and financial condition of First Advantage. The forward-looking statements speak only as of the date they are made. None of US SEARCH, First American and First Advantage undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

 

 

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THE SPECIAL MEETING OF STOCKHOLDERS

 

We are furnishing this proxy statement/prospectus to stockholders of US SEARCH as part of the solicitation of proxies by US SEARCH’s board of directors for use at a special meeting of US SEARCH stockholders to vote on the mergers. We are first mailing this proxy statement/prospectus and the accompanying form of proxy to US SEARCH stockholders on or about                         , 2003.

 

Date, Time and Place

 

The special meeting of stockholders of US SEARCH will be held on May 30, 2003 at 9:00 a.m. local time at 5401 Beethoven Street, Los Angeles, California 90066.

 

Purpose of the Special Meeting

 

At the special meeting, you will be asked to vote upon a proposal to adopt the merger agreement and the merger of US SEARCH with a wholly-owned subsidiary of First Advantage.

 

Record date; Stock Entitled to Vote

 

The US SEARCH board of directors has fixed the close of business on May 1, 2003 as the record date for the determination of stockholders entitled to notice of, and to vote at, the special meeting. Only holders of record of US SEARCH common stock at the close of business on the record date are entitled to notice of, and to vote at, the special meeting. As of the record date, US SEARCH had outstanding and entitled to vote [                ] shares of US SEARCH common stock.

 

Each holder of record of common stock on such date will be entitled to one vote for each share held on all matters to be voted upon at the special meeting.

 

Quorum and Vote Required

 

A quorum will be present at the special meeting if a majority of the shares of US SEARCH stock issued and outstanding and entitled to vote at the special meeting are represented in person or by a properly executed proxy. If a quorum is not present at the special meeting, we expect that the special meeting will be adjourned or postponed to solicit additional proxies.

 

The affirmative vote of the holders of a majority of the outstanding shares of US SEARCH common stock at the special meeting is required to approve the merger agreement and the mergers. Pequot Private Equity Fund II, L.P., held of record approximately 54.1% of US SEARCH common stock as of May 1, 2003, has agreed to vote all of its shares of common stock in favor of the proposal to approve the merger agreement and the mergers. See “OTHER AGREEMENTS—Voting Agreement” on page 66. Accordingly, so long as the parties perform their obligations under the voting agreement and the voting agreement remains in effect, approval of the proposal to approve the merger agreement and the mergers is assured.

 

Recommendation of the US SEARCH Board of Directors

 

The US SEARCH board of directors met to consider the mergers and the merger agreement and, by a unanimous vote of those directors present, approved the merger agreement and the mergers and determined that the merger agreement and the mergers are advisable, fair to and in the best interests of US SEARCH and its stockholders. One director was absent from the meeting at which the US SEARCH board of directors approved the mergers and the merger agreement, but that director subsequently confirmed in writing to US SEARCH that he supports the mergers and the merger agreement. The US SEARCH board of directors recommends that you vote “FOR” the proposal to adopt the merger agreement and approve the mergers at the special meeting. See “THE MERGERS—US SEARCH Reasons for the Mergers” on page 36.

 

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Voting, Revocation and Solicitation of Proxies

 

All shares of US SEARCH’s common stock represented by properly executed proxies received in time for the special meeting will be voted at the special meeting in the manner specified by US SEARCH’s stockholders giving those proxies. Properly executed proxies that do not contain voting instructions will be voted for the proposal.

 

If you plan to attend the annual meeting and wish to vote in person, you will be given a ballot at the annual meeting. Please note, however, that if your shares are held in “street name,” which means your shares are held of record by a broker, bank or other nominee, and you wish to vote at the annual meeting, you must bring to the annual meeting a proxy from the record holder of the shares authorizing you to vote at the annual meeting.

 

You may vote your shares via the Internet by visiting http://www.eproxy.com/srch/ at any time before 12:00 p.m., Pacific Time, on                     , 2003. Electronic voting, including voting via the Internet, is permitted pursuant to Section 212 of the Delaware General Corporation Law so long as it can be determined that the electronic transmission of the proxy was authorized by the stockholder. The Internet voting procedures are designed to authenticate your identity, to confirm your authorization, to allow you to give your voting instructions and to confirm that your instructions have been properly recorded. To vote via the Internet, you will need to enter the three digit company code and seven digit control number printed on your proxy card. If you vote via the Internet, you should understand that there may be costs associated with electronic access, such as usage charges from Internet access providers and telephone companies, that you must bear.

 

A number of brokers and banks are participating in a program provided through ADP Investor Communication Services that also offers Internet voting options. If your shares are held in an account with a broker or bank participating in the ADP Investor Communication Services program, you may vote those shares via the Internet at ADP Investor Communication Services’ voting website (www.proxyvote.com).

 

Any person giving a proxy pursuant to this solicitation has the power to revoke it at any time before it is voted. It may be revoked by filing with the Secretary of US SEARCH at our principal executive office, 5401 Beethoven Street, Los Angeles, CA 90066, a written notice of revocation or a duly executed proxy bearing a later date, or it may be revoked by attending the meeting and voting in person. Persons voting via the Internet cannot revoke their votes electronically, but rather must notify US SEARCH as specified in the preceding sentence. Attendance at the US SEARCH stockholder meeting will not, by itself, revoke a proxy or vote cast via the Internet. Revoking a proxy and failing to subsequently vote in person, electronically via the Internet or by a later proxy will result in a non-vote.

 

US SEARCH will bear the entire cost of solicitation of proxies, including preparation, assembly, printing and mailing of this proxy statement/prospectus, the proxy card and any additional information furnished to stockholders. Copies of solicitation materials will be furnished to banks, brokerage houses, fiduciaries and custodians holding in their names shares of common stock beneficially owned by others to forward to such beneficial owners. US SEARCH may reimburse persons representing beneficial owners of common stock for their costs of forwarding solicitation materials to such beneficial owners. Original solicitation of proxies by mail may be supplemented by telephone, telegram or personal solicitation by directors, officers or other regular employees of US SEARCH. No additional compensation will be paid to directors, officers or other regular employees for such services.

 

Abstentions and Broker Non-Votes

 

Shares of US SEARCH common stock held by persons attending the special meeting but not voting, and shares of US SEARCH common stock for which US SEARCH has received proxies but with respect to which holders of those shares have abstained from voting, will be counted as present at the special meeting for purposes of determining the presence or absence of a quorum for the transaction of business at the special meeting. Pequot

 

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Private Equity Fund II, L.P. held of record approximately 54.1% of US SEARCH common stock outstanding as of May 1, 2003 and has agreed to vote all of its shares in favor of the proposal to approve the merger agreement and the mergers. Accordingly, so long as the parties perform their obligations under the voting agreement and the voting agreement remains in effect, approval of the proposal to approve the merger agreement and the mergers is assured. Because the affirmative vote of a majority of shares of US SEARCH common stock present or represented by proxy at the special meeting is required, abstentions will have the same effect as votes against the proposal. Abstentions granted via the Internet will be counted towards the tabulation of votes cast on proposals presented to the stockholders and will have the same effect as negative votes.

 

Shares represented by proxies that reflect a broker “non-vote” will be counted for purposes of determining whether a quorum exists. A broker “non-vote” occurs when a nominee holding shares for a beneficial owner has not received instructions from the beneficial owner and does not have discretionary authority to vote the shares. Because the affirmative vote of a majority of shares of US SEARCH common stock present or represented by proxy at the special meeting is required, broker non-votes will have the same effect as votes against the proposal.

 

Adjournments or Postponements

 

US SEARCH does not expect that any matter other than the proposals presented in this proxy statement/prospectus will be brought before the special meeting. However, if other matters are properly presented at the special meeting or any adjournment or postponement of the special meeting, shares represented by the proxies will not be voted on matters unrelated to approving the merger agreement and the mergers. Under the laws of the State of Delaware, no business may be raised at the special meeting unless proper notice to the US SEARCH stockholders has been given.

 

Adjournments may be made for the purpose of reconvening the stockholders meeting to permit a vote to be taken to approve the merger agreement and the mergers, but not for the purpose of soliciting additional proxies. An adjournment may be made from time to time by approval of the holders of shares representing a majority of the votes present in person or by proxy at the special meeting, whether or not a quorum exists, without further notice other than by an announcement made at the special meeting. If the adjournment is for more than 30 days, a notice of the adjourned meeting will be given to each stockholder entitled to vote at the meeting. US SEARCH does not currently intend to seek an adjournment of the special meeting.

 

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THE MERGERS

 

Background of the Mergers

 

On June 7, 2002, Brent N. Cohen, the President and Chief Executive Officer of US SEARCH, received an unsolicited telephone call from John W. Long, President of the FAST division, regarding whether US SEARCH might be interested in combining its business with the FAST division. Mr. Long stated his belief that combining the FAST division and US SEARCH would create a much stronger competitor in the screening services industry that would be profitable from the outset and have greater access to capital and other resources. Mr. Cohen expressed his interest in discussing further the possibility of combining the businesses. This initial discussion was followed by a meeting on June 13, 2002 at US SEARCH’s headquarters in Los Angeles, California among Parker Kennedy, President of First American, Mr. Long, Mr. Cohen and Jeffrey R. Watts, Chief Financial Officer of US SEARCH. The meeting participants discussed how a combination could be structured and the possibility of using relative valuations of the FAST division and US SEARCH as the basis for determining how ownership of the combined company would be allocated among First American and US SEARCH stockholders. On June 17, 2002, First American and US SEARCH executed a mutual nondisclosure agreement for the purpose of facilitating the exchange of confidential information.

 

On June 20, 2002, Mr. Long and other senior executives of First American and the FAST division visited US SEARCH’s headquarters. Mr. Cohen, Mr. Watts and other senior officers of US SEARCH made presentations describing US SEARCH’s business. This meeting was followed by a telephone call between Mr. Cohen and Mr. Long on July 2, 2002 during which the relative strengths and weaknesses of the two businesses were discussed. On July 12, 2002, Mr. Cohen attended a meeting in St. Petersburg, Florida to hear a presentation from Mr. Long and other representatives of the FAST division describing its businesses, and to begin discussions regarding relative valuations of the FAST division and US SEARCH based on financial data exchanged between the parties. US SEARCH initially proposed that First American would receive 60% of the equity of the combined company for contributing the subsidiaries then comprising the FAST division and that the US SEARCH stockholders would receive 40% for US SEARCH; First American initially proposed 85% for the FAST division and 15% for US SEARCH. The initial proposals made by the parties reflected differences in how the parties proposed to value their contributions: US SEARCH’s management believed that more value should be attributed to US SEARCH’s technology platform, management experience and entrepreneurial culture (and related ability to contribute significantly to future growth of the combined company), and First American’s management believed that the valuations should be tied more closely to each business’ financial results. At this time, US SEARCH’s management prepared an analysis indicating a potential range of market capitalization values for the combined company of $280-789 million based on projected 2002 revenue of $33.0 million for US SEARCH and $96.3 million for the FAST division and a range of revenue multiples from 2.1 (US SEARCH’s then current trailing revenue multiple) to 6.1 (the then current revenue multiple for a public company deemed to be closely comparable to the combined company). US SEARCH’s management estimated a market capitalization value for the combined company as high as $1,064 million (at the highest multiple) if the combined company’s revenue included $45.3 million in additional revenue from SafeRent and Employee Health Programs, which were then not included among the assets that First American was proposing to contribute. These projected market capitalization values for the combined company implied a range of values for the portion of the combined company equity to be issued to US SEARCH stockholders of $112-426 million based on US SEARCH’s proposal to receive 40% of such equity and a range of $42-160 million based on First American’s proposal to give US SEARCH stockholders 15%.

 

On July 18, 2002, Mr. Cohen and Mr. Watts met with Mr. Long and Mr. Kennedy in Santa Ana, California. Mr. Kennedy and Mr. Long reiterated their interest in combining the First American subsidiaries then comprising the FAST division (which did not include Employee Health Programs or SafeRent at that time) with US SEARCH.

 

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On July 23, 2002, the board of directors of US SEARCH held a special meeting by telephone. During the meeting, Mr. Cohen summarized the discussions and meetings to date with First American regarding a possible business combination. US SEARCH’s board of directors formed a subcommittee comprised of Mr. Cohen, Lawrence D. Lenihan, Jr. and Alan C. Mendelson to gather more information regarding the proposed combination, participate in negotiating the terms of such combination, and, if appropriate, make a recommendation to the entire board concerning the transaction. The subcommittee agreed to report to the board of directors on July 29, 2002.

 

On July 26, 2002, First American delivered to Mr. Cohen a draft letter of intent setting forth the terms previously discussed with Mr. Kennedy and Mr. Long. The draft letter of intent contemplated that: First American would receive 80% of the capital stock of the combined company on a fully diluted and fully converted basis, with the remaining 20% comprising the shares held by US SEARCH stockholders and shares underlying US SEARCH options and warrants; the combined company would assume any indebtedness incurred by First American in acquiring additional screening businesses between the date the letter of intent was executed and the closing of the combination, or, if First American issued any of its stock in such acquisitions, the combined company would issue a promissory note to First American for the value of such stock; First American would ensure that the FAST division held at least $25,000,000 in cash, less the amount of cash expended by First American to acquire new screening businesses prior to closing; and Pequot Private Equity Fund II, L.P., US SEARCH’s majority stockholder, would be required to enter into a voting agreement to vote its shares of US SEARCH stock in favor of the combination. The draft letter of intent by its terms would have required US SEARCH to agree to exclusive negotiations with First American and not publicly disclose the existence of the draft letter of intent. Mr. Cohen circulated the draft letter of intent to US SEARCH’s board of directors.

 

On July 29, 2002, the board of directors of US SEARCH held a special meeting by telephone. During the meeting, Mr. Cohen summarized First American’s draft letter of intent regarding a possible business combination. The board of directors discussed the draft letter of intent and the possibility of pursuing a strategic combination with subsidiaries of First American as an alternative to growing US SEARCH’s business independently. The board of directors discussed the benefits and risks of US SEARCH continuing operations as a standalone company in light of its limited revenue base, current liquidity needs and limited ability to access additional capital under current market conditions. The board of directors considered the benefits to US SEARCH of joining with the FAST division to form a larger, profitable screening services business with greater access to capital and other resources. The board also reviewed a presentation regarding the potential valuation of a combined US SEARCH/Fast division prepared by Richard Heitzmann, US SEARCH’s Senior Vice President Business Development on the basis of historical and projected financial information for the two businesses. This analysis indicated a potential range of implied market capitalization values for the combined company of $339-847 million based on projected 2002 revenue for the combined company and $252-544 million based on projected 2002 earnings before interest, taxes, depreciation and amortization (referred to as “EBITDA”) for the combined company and ranges of revenue multiples from 2.0 to 5.0 and EBITDA multiples from 20.0 to 40.0 (which were intended to approximate revenue and EBITDA multiples then applicable to other publicly-traded companies deemed to be comparable to the combined company). The projected 2002 revenue and EBITDA for the combined company was based on projected 2002 revenues of $33.0 million for US SEARCH and $136.3 million for the FAST division and projected 2002 EBITDA of $(.02) for US SEARCH and $14.8 million for the FAST division. From the implied market capitalization values for the combined company, the presentation indicated a potential range of implied equity values (market capitalization value less debt of $40 million expected to be incurred in connection with acquisitions of Employee Health Programs and SafeRent by the FAST division prior to closing) for the 20% of the combined company proposed to be issued to US SEARCH stockholders of $60-161 million based on projected 2002 revenue and $50-109 million based on projected 2002 EBITDA. US SEARCH common stock was then trading at a price of $0.39 per share, implying a market capitalization of less than $39 million. After substantial discussion of all the issues described above, the subcommittee previously formed by the board to evaluate the transaction recommended and the board of directors concluded that US SEARCH should not sign First American’s draft letter of intent, but authorized and directed Mr. Cohen to continue negotiations with First American. The board of directors also authorized

 

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Mr. Cohen to enter into discussions with Lehman Brothers about the possibility of Lehman Brothers acting as financial advisor to US SEARCH in connection with the possible combination and, in the event a transaction were to be negotiated, delivering an opinion to the board of directors regarding the fairness from a financial point of view of the consideration to be received by US SEARCH stockholders in such transaction.

 

On August 5, 2002, the board of directors of US SEARCH held a regularly scheduled meeting in US SEARCH’s headquarters. At this meeting, the board of directors considered additional background information about First American and discussed possible structures of a transaction, relative valuations and other strategies for growth available to US SEARCH. The board of directors was informed that negotiations were continuing with Lehman Brothers concerning the possibility of Lehman Brothers advising US SEARCH on the possible combination.

 

From August 5, 2002 through early September, Mr. Cohen and Mr. Long continued discussions concerning the terms of a possible combination and the relative valuations of the FAST division and US SEARCH. Some of these discussions included representatives of Lehman Brothers assisting US SEARCH, and separate representatives of Lehman Brothers that were advising First American in connection with the possible combination. First American previously engaged Lehman Brothers to assist it in structuring a potential transaction and to advise it in evaluating proposed deal terms. First American did not impose any limitations on its Lehman Brothers team’s services. On August 29, 2002, Mr. Cohen, Mr. Kennedy, Mr. Long and Mr. Lenihan met in New York to discuss First American’s vision for the company that would result from combining the FAST division and US SEARCH. This meeting was followed by several telephone discussions between Mr. Cohen and Mr. Long regarding relative valuations for the businesses based on the expected contribution that each business would make to the combined company in terms of revenues, EBITDA, net income and other less-quantifiable assets such as technology, customer base and management experience. On September 14, 2002, Mr. Cohen sent a letter to Mr. Long outlining general terms for a possible combination. The letter contemplated that US SEARCH stockholders would receive 25% of the capital stock of the combined company and be entitled to receive up to an additional 10% as the market capitalization of the combined company increased over time. Mr. Cohen’s letter also contemplated that First American would ensure that the FAST division would be contributed to the combined company without any debt and with $25.0 million of cash on its balance sheet.

 

On September 20, 2002, Mr. Long responded to Mr. Cohen’s September 14, 2002 letter with a written summary of First American’s proposed terms for a possible combination of the FAST division and US SEARCH. This summary contemplated that First American would contribute its screening services subsidiaries (including Employee Health Programs and SafeRent, which were then in the process of being acquired) and $15.0 million in cash to US SEARCH in exchange for 80% of the capital stock of US SEARCH on a fully diluted basis. The shares of US SEARCH common stock currently issued to US SEARCH stockholders and underlying existing US SEARCH stock options and warrants would remain outstanding and together would represent the remaining 20% of US SEARCH’s outstanding capital stock on a fully diluted basis following such a combination. The summary also contemplated that the shares of US SEARCH capital stock received by First American in the business combination would be shares of a new class of stock entitled to ten votes per share (compared to one vote per share for US SEARCH’s existing common stock). The summary further contemplated that executives of the FAST division and US SEARCH (including Mr. Cohen, Mr. Heitzmann, David Wachtel, US SEARCH’s Chief Technology Officer, H. Jake Mendelsohn, US SEARCH’s Chief Information Officer, and Robert Schwartz, Executive Vice President, would continue as executives of the combined company. From September 20, 2002 through September 26, 2002, Mr. Cohen, Mr. Long and their respective financial and legal advisors continued negotiations regarding First American’s proposed terms. By this time, it became clear to US SEARCH’s management that First American viewed obtaining at least 80% of the equity of the combined company at closing as an essential term of the proposed transaction.

 

On September 27, 2002, the board of directors of US SEARCH held a special meeting by telephone during which Mr. Cohen updated the board of directors regarding his recent discussions with Mr. Long and First American’s latest proposed terms for combining US SEARCH and the FAST division. These terms included

 

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those described in First American’s September 20 summary of proposed terms, but also contemplated that US SEARCH stockholders would receive, as additional consideration, warrants to purchase additional shares of US SEARCH common stock at a strike price equal to the anticipated trading price of US SEARCH common stock at closing. In addition, US SEARCH would have a 10 member board of directors following the business combination, of whom one would be Mr. Cohen and one would be designated by Pequot Private Equity Fund II, L.P. The board then reviewed a presentation prepared in consultation with US SEARCH management by Lehman Brothers (which had begun to assist US SEARCH’s management in evaluating the terms of the proposed combination) regarding the terms proposed by First American and preliminary estimates of the range of values to be received by US SEARCH stockholders. This presentation indicated a potential range of implied market capitalization values for the combined company of $330-380 million based on preliminary projected 2003 EBITDA of $6.0 million for US SEARCH and $22.6 million for the FAST division, plus $6.7 million in estimated synergies, and a range of EBITDA multiples based on a 20% to 25% discount to the EBITDA multiple for a publicly-traded company deemed to be closely comparable to the combined company. From such implied market capitalization values, the presentation indicated a potential range of implied values for the 20% of the combined company proposed to be issued to US SEARCH stockholders of $66-76 million without the warrants described above and $70-80 million with such warrants. Such values (with the warrants) represented a 63-86% premium over the then current market value of US SEARCH common stock. Following further board discussion of the proposed terms and valuation issues, the subcommittee previously formed by the board to evaluate the transaction recommended to the full board of directors that it authorize the company’s management to proceed with negotiating a definitive agreement with First American on the basis of the proposed terms. The subcommittee’s recommendation was adopted by the full board of directors. The board of directors also approved formally engaging Lehman Brothers to assist management and the board of directors in evaluating the proposed combination and deliver an opinion to the board of directors with respect to the fairness from a financial point of view of the consideration to be received by US SEARCH stockholders in the possible combination. The board of directors believed Lehman Brothers was best qualified to assist US SEARCH because of Lehman Brothers’ expertise and relationships within the background screening and business services industries, its familiarity with US SEARCH, and its experience with similar transactions. A separate team within Lehman Brothers was also hired to act as financial advisor to First American in connection with the transaction. Lehman Brothers agreed to provide a fairness opinion only to the board of directors of US SEARCH and not to First American.

 

During October 2002, representatives of US SEARCH and First American and their respective financial and legal advisors continued to discuss and negotiate possible terms and transaction structures, exchange comments on drafts of definitive agreements and conduct due diligence. The transaction structures considered by the parties included one that involved merging all of the subsidiaries comprising the FAST division into US SEARCH, which would continue as the public parent of the combined company; and an alternative structure that involved forming a new holding company that would form new subsidiaries into which all the FAST division companies and US SEARCH would merge, resulting in a new public parent company with seven operating subsidiaries. The parties ultimately agreed on the second structure because it better facilitated the desire of First American to implement a dual-class voting structure in the public parent entity and best ensured tax-free receipt of merger consideration by US SEARCH stockholders and First American. During the October 2002 discussions, representatives of US SEARCH also asked First American to consider providing US SEARCH stockholders “minority protections” in connection with First American receiving 80% of the shares of capital stock of the combined company. These requested minority protections included First American agreeing not to purchase additional shares of voting stock of the combined company beyond the shares it would receive in the business combination; engage in related party transactions; or sell control of the combined company to another party unless such party agrees to abide by the same minority protections.

 

On October 17, 2002, US SEARCH received a letter from a third party expressing interest in acquiring US SEARCH. US SEARCH’s management responded by asking the third party to execute a nondisclosure agreement, which was followed by one telephone call between Mr. Cohen and the chief executive officer of the third party. The general discussions of terms and structure suggested that the third party might be interested in acquiring US SEARCH in exchange for stock of the third party at a price per share of less than $0.30.

 

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US SEARCH’s management did not believe such an offer would be sufficient. Moreover, the third party lacked the substantial financial resources and credibility of First American. Other than an initial inquiry, the third party did not make a formal offer or express any further interest in pursuing an acquisition of US SEARCH.

 

On October 22, 2002, the First American board of directors held a regular meeting at which representatives of Lehman Brothers summarized the then current terms of the proposed transaction discussed between the parties, the strategic rationale for entering into the transaction, and the relative contributions of the companies.

 

On October 31, 2002, the US SEARCH board of directors met by telephone for a regularly scheduled board meeting at which Mr. Cohen updated the board of directors regarding the status of negotiations between US SEARCH and First American. At this time, the board of directors became concerned that the protracted negotiations with First American had become a distraction to US SEARCH management, with the potential to harm the company’s business. Board members discussed whether it might be preferable to cease further negotiations with First American and instead resume focusing on growing US SEARCH as a standalone business. The board of directors discussed various factors then affecting US SEARCH, including the company’s limited scale and product set, lack of available capital to significantly grow the business or pursue other acquisitions in a consolidating industry, potential liquidity needs, possible delisting of its common stock from the Nasdaq National Market, and generally unfavorable market conditions. In this regard, the board of directors of US SEARCH discussed moving to the Nasdaq SmallCap Market and significantly decreasing its spending on technology initiatives in order to operate profitably. The US SEARCH board of directors ultimately concluded that pursuing a combination with the FAST division, if such a combination could be concluded on favorable terms, would be a more attractive option than continuing as a standalone business, and the board directed US SEARCH’s management to continue negotiations with First American.

 

On November 18, 2002, Mr. Cohen, Mr. Long, other representatives of US SEARCH and First American and their respective financial and legal advisors met in Los Angeles, California. The purpose of the meeting was to attempt to resolve outstanding issues concerning the proposed combination, including possible adjustments to the consideration that would be payable to US SEARCH stockholders and First American to reflect issues that surfaced in each company’s respective diligence investigation. The representatives of First American proposed that First American should receive additional warrants to purchase a significant number of shares of common stock of the combined company to mirror US SEARCH’s currently outstanding stock options and warrants if such options and warrants were converted in the mergers into options and warrants of the combined company. In addition, the parties also discussed possible terms by which First American would loan up to $1,400,000 to US SEARCH after signing a definitive agreement for the proposed combination, which loan First American offered to address US SEARCH’s concerns that it would need to ensure access to additional capital in the event that there would be significant delay between signing and closing of a combination.

 

Between November 18, 2002 and December 5, 2002, the parties and their respective financial and legal advisors continued negotiating the possible terms of the proposed combination, including: the possibility of eliminating the additional warrants to be issued as merger consideration to US SEARCH stockholders in favor of eliminating mirror warrants proposed to be issued to First American; how the amount of First American’s cash capital contribution would be calculated; whether First Advantage stock options initially issued to former employees of the FAST division following closing of the mergers should be dilutive to First American only; and the minority protections that would restrict First American following the combination. During this same period, the parties substantially completed the due diligence process.

 

On November 22, 2002, the executive committee of the First American board of directors held a meeting attended by representatives of Lehman Brothers to consider the mergers. The committee received an update of the terms of the proposed transaction, an update on the financial condition of the FAST division and US SEARCH, and a financial analysis of the relative contributions proposed to be made by US SEARCH and First American in the combination. The contribution analysis included analyses of discounted cash flows, projected 2003 EBITDA, projected 2003 net income, and historical cost basis of investments in each of the FAST division

 

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and US SEARCH. The analyses were based on historical financial data provided by management of the FAST division and US SEARCH, projected financial data related to the FAST division provided by management of the FAST division, and projected financial data related to US SEARCH provided by management of US SEARCH, which projections were adjusted to reflect assumptions consistent with assumptions utilized in the FAST division projections. The contribution analysis was based on estimated discounted cash flow of $294 million for the FAST division and $82 million for US SEARCH, projected 2003 EBITDA of $22 million for the FAST division and $5 million for US SEARCH, and projected 2003 net income of $10 million for the FAST division and $1 million for US SEARCH. The cost basis analysis indicated a historical cost basis of $202 million for the FAST division and $52 million for US SEARCH. The contribution analysis supported the 80/20 valuation split then proposed. In addition, a discounted cash flow analysis was prepared which indicated a possible market capitalization value for the combined company of $358 million, based on long-term revenue growth consistent with the average long-term growth of comparable companies, a terminal value multiple of 10x forward EBITDA and a weighted average discount rate of 21.5%.

 

On December 5, 2002, representatives of US SEARCH and First American and their respective financial and legal advisors met by telephone to further discuss calculations for eliminating the merger warrants to be issued to US SEARCH stockholders in exchange for eliminating the mirror warrants to be issued to First American. By December 12, 2002, representatives of the parties had agreed to eliminate both the merger warrants and the mirror warrants from the proposed business combination in favor of a structure in which US SEARCH stockholders would receive approximately 20% of the shares of capital stock of the combined company and all existing US SEARCH options and warrants would be converted into options and warrants of the combined company at the same implied exchange ratio. The parties further agreed that future grants of stock options to employees, directors and officers of First Advantage would dilute all First Advantage stockholders in accordance with their respective ownership interests. The parties then agreed on the following methodology to determine the final exchange ratio that would be applicable to the exchange of US SEARCH common stock for shares of First Advantage Class A common stock and calculate the number of shares to be issued to First American for contributing the FAST division:

 

    First, the parties agreed on a target capitalization of 20 million shares for First Advantage based on the goal of establishing an initial trading price and float for First Advantage Class A common stock that would be sufficient to exceed the minimum listing requirements for the Nasdaq National Market and be appropriate for a new registrant effectively completing an initial public offering.

 

    Second, 20% of the 20 million First Advantage shares would be allocated to US SEARCH stockholders, and the exact exchange ratio would be determined by dividing such allocated shares by the aggregate number of shares of US SEARCH common stock issued and outstanding as of the date of the merger agreement.

 

    Third, at closing, First American would receive shares of First Advantage Class B common stock equal to four times the number of shares of First Advantage Class A common stock actually issued to US SEARCH stockholders, plus an additional number of shares of Class B common stock as an offset against the current value of out-of-the money options and warrants to purchase US SEARCH common stock that will convert in the mergers into options and warrants to purchase First Advantage Class A common stock. The exact number of additional shares issuable as such an offset was not agreed upon at this stage, but the parties subsequently agreed on such number and that First American would receive additional shares of First Advantage Class B common stock if US SEARCH incurs indebtedness in excess of $4.4 million, in the event US SEARCH failed to disclose in the merger agreement the existence of options or warrants to acquire US SEARCH stock, and if US SEARCH issued new options or warrants to acquire US SEARCH stock between the signing and closing of the merger agreement.

 

On December 12, 2002, the US SEARCH board of directors held a special meeting by telephone to consider the proposed transaction. All US SEARCH directors, members of management, and representatives of Lehman Brothers and Latham & Watkins LLP, legal counsel to US SEARCH, participated in the meeting. Mr. Cohen reported to the board of directors that the negotiations concerning the combination of US SEARCH and the FAST division were substantially complete, subject to resolving the final calculation of the number of shares of

 

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capital stock of the combined company to be issued to First American at the closing of the transaction and minor business issues. Representatives of Lehman Brothers summarized the principal financial terms of the proposed transaction and described financial analysis performed by Lehman Brothers. Lehman Brothers’ financial analyses concerning the 80/20 ownership split and the exchange ratio derived therefrom reflected potential ranges of market capitalization values for the combined company consistent with the ranges of values in the previous presentations by US SEARCH’s management and Lehman Brothers. Lehman Brothers’ presentation indicated a potential range of market capitalization values for the 20% of the combined company equity to be issued to US SEARCH stockholders of $55-85 million, as well as several additional analyses described in “THE MERGERS—Fairness Opinion of Financial Advisor to US SEARCH” below, which also implied ranges of values for US SEARCH consistent with the ranges of values previously considered by the US SEARCH board of directors. Lehman Brothers did not render its fairness opinion during the December 12 board meeting pending resolution of all remaining open issues on the proposed merger agreement and terms. Latham & Watkins LLP then advised the members of the board of their fiduciary duties with respect to deciding whether to approve the merger agreement and mergers of US SEARCH. After discussion among board members regarding the proposed transaction, the full board voted unanimously to authorize Mr. Cohen to negotiate the unresolved issues concerning the proposed business combination.

 

Over the next day, the parties agreed upon the terms to calculate the number of shares of First Advantage Class B common stock issuable to First American in the mergers, including the number of additional shares issuable to First American as an offset against the current value of currently outstanding US SEARCH stock options and warrants to be converted in the mergers. Specifically, the parties agreed that the number of shares to be issued to First American as such offset would be equal to 10,130,000 minus four times the number of shares of US SEARCH common stock issued upon exercise of options and warrants between signing and closing the merger agreement, multiplied by 0.04 (the exchange ratio), with a minimum of one thousand additional Class B shares to be issued to First American.

 

On December 13, 2002, the US SEARCH board of directors again held a special meeting by telephone, at which all of US SEARCH’s directors, other than Harry Chandler, members of US SEARCH’s senior management and financial and legal advisors were present. At the meeting, Latham & Watkins LLP informed the board that the parties had resolved all remaining issues and reaffirmed the terms of the proposed transaction. Lehman Brothers confirmed that its financial analysis, presented the day before, still applied to the terms of the proposed transaction and delivered its oral opinion, subsequently confirmed in writing, that, as of that date and subject to certain matters stated in the opinion, the exchange ratio for the US SEARCH mergers was fair from a financial point of view to US SEARCH stockholders. Following further discussion regarding the proposed combination, all US SEARCH directors present at the meeting approved the merger agreement and the transactions contemplated by it, including the US SEARCH mergers, and resolved to recommend that the US SEARCH stockholders vote to approve the merger agreement and the US SEARCH mergers. Harry Chandler subsequently confirmed in writing that he also approved of the merger agreement and the transactions contemplated by it.

 

The merger agreement, the voting agreement and the stockholders agreement were executed by the parties later that day.

 

US SEARCH Reasons for the Mergers

 

The US SEARCH board of directors believes that the mergers are in the best interests of US SEARCH stockholders and has approved the merger agreement and determined it to be advisable, and recommends that the US SEARCH stockholders vote “FOR” adopting the merger agreement and approval of the mergers.

 

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In reaching its decision to approve the mergers and the merger agreement, the US SEARCH board of directors consulted with US SEARCH management and its financial and legal advisors, and considered the following factors:

 

    the per share merger consideration, based on valuation models prepared by US SEARCH’s financial advisor and management, in relation to the recent market trading prices for US SEARCH’s common stock;

 

    the complementary nature of the US SEARCH and the FAST division businesses and the strong strategic and synergistic benefits of combining US SEARCH with the FAST division, which benefits will immediately position the combined company as a significant market player in each of the screening segments in which it will participate;

 

    the fact that the combined company will likely be one of the largest screening services companies in the country based on pro forma combined revenues;

 

    US SEARCH’s long term prospects as an independent company, the constraints on US SEARCH’s ability to pursue its strategic objectives due to its limited access to capital and its present size, the current condition of capital markets, and the belief that US SEARCH’s long term prospects would be enhanced by the mergers;

 

    the general condition of the screening industry and the likely benefits to US SEARCH stockholders of consolidating its business with others to create a more significant participant in the industry;

 

    the apparent trend of consolidation in the screening industry and the likelihood that competitors of US SEARCH would participate in this consolidation;

 

    the strength and experience of the management group of the combined company;

 

    the benefits to the combined entity of a continuing relationship with First American, including the benefits of the services to be provided to the combined company by First American pursuant to the services agreement;

 

    the significant cost savings available to the combined company as a result of operational synergies;

 

    the anticipated financial resources of the combined company;

 

    the opinion of Lehman Brothers that, as of the date of its opinion, and based on and subject to certain matters stated therein, the exchange ratio was fair from a financial point of view to US SEARCH stockholders. See “THE MERGERS—Fairness Opinion of Financial Advisor to US SEARCH” on page 39;

 

    the anticipated effectiveness of the mergers in implementing US SEARCH’s strategy of providing diversified screening services to its customers and of expanding beyond its retail consumer business into services for business customers;

 

    the increased scale, scope and financial strength of the combined company, the potential greater liquidity of the combined company and the combined company’s potential for increased access to capital;

 

    the structure of the mergers and the financial and other terms of the merger agreement, including First American’s agreement to cause First Advantage to have $15 million in cash on the closing date (less expenses related to the transaction and amounts owed to First American by US SEARCH);

 

    the restrictions placed upon the conduct of First American in the standstill agreement, including restrictions upon its ability to acquire additional shares of capital stock of the combined company, and a requirement that transactions between First American and the combined company be approved by a committee of the board of directors of the combined company consisting solely of disinterested directors;

 

    the anticipated tax treatment of the mergers to US SEARCH stockholders;

 

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    the ability of US SEARCH under certain circumstances to consider unsolicited alternative proposals, its ability to terminate the merger agreement under certain circumstances including to permit it to accept one of such proposals, and the termination fees payable to First American if the merger agreement is terminated under certain circumstances including US SEARCH’s acceptance of one of such proposals; and

 

    the possibility that US SEARCH’s common stock would be delisted from the Nasdaq National Market System if US SEARCH did not pursue a strategic transaction or a reverse stock split.

 

In addition to these factors, the US SEARCH board of directors also identified and considered the following potentially negative factors in its deliberations concerning the mergers:

 

    the risk that the potential benefits of the mergers may not be realized fully as a result of integration difficulties, negative market perception or public confusion about the mergers, general industry-wide or economic conditions or other factors;

 

    risks associated with US SEARCH stockholders owning a minority interest in a company controlled by a single large shareholder, resulting in US SEARCH stockholders having little or no influence over stockholder decisions;

 

    the risk that if the mergers are not consummated, US SEARCH’s management will have devoted substantial time and resources to the combination at the expense of attending to and growing US SEARCH’s business;

 

    the risk that US SEARCH stockholders will be unable to predict the trading price of the First Advantage Class A common stock they will receive in the mergers due to the lack of a public market for First Advantage Class A common stock;

 

    the risk that officers and directors of US SEARCH have interests different than those of US SEARCH stockholders including severance benefits due to Brent Cohen, US SEARCH’s Chief Executive Officer, under certain circumstances, options that will become vested upon consummation of the mergers held by certain officers and directors of US SEARCH, and that Mr. Cohen and Lawrence D. Lenihan, Jr., both current directors of US SEARCH, will continue to serve as directors of First Advantage following the mergers;

 

    risks associated with the fact that First Advantage has no operating history;

 

    the risk that First Advantage Class A common stock will have minimal liquidity due to its small public float; and

 

    the risk that First American or its affiliates may compete directly with the combined entity in the screening industry.

 

The US SEARCH board of directors ultimately determined that the positive factors outweighed the negative factors in deciding to proceed with the mergers, but the board of directors did not quantify or assign any relative or specific weights to the various factors that it considered. Rather, the US SEARCH board of directors based its recommendation on the totality of the information presented to and considered by it. In addition, individual members of the US SEARCH board of directors may have given different weight to different factors considered in the analysis.

 

Recommendation of the US SEARCH Board of Directors

 

The US SEARCH board of directors has approved the merger agreement and the mergers and determined that the merger agreement and the mergers are advisable, fair to and in the best interests of US SEARCH and its stockholders. The US SEARCH board of directors recommends that you vote “FOR” the proposal to adopt the merger agreement and approve the mergers at the special meeting.

 

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Fairness Opinion of Financial Advisor to US SEARCH

 

On September 27, 2002, the board of directors of US SEARCH engaged Lehman Brothers to act as its financial advisor in connection with the proposed transaction with the FAST division. On December 13, 2002, Lehman Brothers rendered its oral and written opinion to the board of directors of US SEARCH with respect to the proposed transaction, that as of such date and, based upon and subject to certain matters stated therein, the exchange ratio to be received by the stockholders of US SEARCH pursuant to the merger agreement was fair to such stockholders from a financial point of view.

 

This summary of the Lehman Brothers opinion set forth in this proxy statement/prospectus is qualified in its entirety by reference to the full text of the opinion attached as Annex B to this proxy statement/prospectus. US SEARCH stockholders may read the opinion for a discussion of the assumptions made, procedures followed, factors considered and limitations upon the review undertaken by Lehman Brothers in rendering its opinion.

 

Lehman Brothers’ advisory services and opinion were provided for the information and assistance of the US SEARCH board of directors in connection with its consideration of the proposed transaction. The Lehman Brothers opinion is not intended to be and does not constitute a recommendation to any stockholder of US SEARCH as to how such stockholder should vote in connection with the proposed transaction. Lehman Brothers was not requested to opine as to, and the Lehman Brothers opinion does not address, US SEARCH’s underlying business decision to proceed with or effect the proposed transaction. Moreover, Lehman Brothers did not determine or recommend the specific exchange ratio used in the merger agreement, which was determined through negotiation by US SEARCH and First American with Lehman Brothers merely providing assistance in making financial and numerical calculations.

 

No limitations were imposed by US SEARCH on the scope of Lehman Brothers’ investigation or the procedures to be followed by Lehman Brothers in rendering its opinion, except that US SEARCH did not authorize Lehman Brothers to solicit, and Lehman Brothers did not solicit, any formal indications of interest from any third party with respect to the purchase of all or a part of US SEARCH’s business. In arriving at its opinion, Lehman Brothers did not ascribe a specific range of value to US SEARCH or the FAST division, but rather compared the relative value of US SEARCH to the relative value of the FAST division using the financial and comparative analysis described below to determine the fairness from a financial point of view to the stockholders of US SEARCH of the exchange ratio to be received by such stockholders in the proposed transaction. The preparation of this fairness opinion involves various determinations as to the most appropriate and relevant methods of financial and comparative analysis and the application of those methods to the particular circumstances, and therefore, such an opinion is not readily susceptible to summary description. Furthermore, in arriving at its opinion, Lehman Brothers did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Lehman Brothers believes that its analyses must be considered as a whole and that considering any portion of such analyses and factors, without considering all analyses and factors as a whole, could create a misleading or incomplete view of the process underlying its opinion. In its analyses, Lehman Brothers made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of US SEARCH and the FAST division. None of US SEARCH, First American, First Advantage, Lehman Brothers, or any other person assumes responsibility if future results are materially different from those discussed. Any estimates contained in these analyses were not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth therein. In addition, analyses relating to the value of businesses do not purport to be appraisals or to reflect the prices at which businesses actually may be sold.

 

In arriving at its opinion, Lehman Brothers reviewed and analyzed:

 

    the merger agreement and the specific terms of the proposed transaction;

 

   

publicly available information concerning US SEARCH that Lehman Brothers believed to be relevant to its analysis, including US SEARCH’s annual reports on Form 10-K for the fiscal years ended

 

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December 31, 2001 and 2000, and quarterly reports on Form 10-Q for the quarters ended March 31, 2002, June 30, 2002, and September 30, 2002;

 

    financial and operating information with respect to the business, operations and prospects of US SEARCH and the FAST division furnished to Lehman Brothers by US SEARCH and the FAST division, including unaudited historical financial statements for each of the companies then comprising the FAST division for varying periods between January 1, 2000 and September 30, 2002 provided by the FAST division, and unaudited pro forma combined financial statements for the fiscal year ending December 31, 2001 and nine months ending September 30, 2002;

 

    the financial projections for US SEARCH and the FAST division prepared by the management of each entity;

 

    a trading history of US SEARCH’s common stock from June 25, 1999 to the present and a comparison of that trading history with those of other companies that Lehman Brothers deemed relevant;

 

    a comparison of the historical financial results and present financial condition of US SEARCH and the FAST division with those of other companies that Lehman Brothers deemed relevant;

 

    a comparison of the financial terms of the proposed transaction with the financial terms of certain other transactions that Lehman Brothers deemed relevant;

 

    the relative contributions of US SEARCH and the FAST division to the historical and future financial performance of First Advantage on a pro forma basis;

 

    US SEARCH’s near term liquidity requirements and the ability of US SEARCH to meet those requirements in the absence of the proposed transaction;

 

    the results of Lehman Brothers’ informal efforts to solicit interest from third parties with respect to an acquisition of US SEARCH; and

 

    the pro forma impact of the proposed transaction on the current and future financial position of First Advantage.

 

In addition, Lehman Brothers had discussions with the management of US SEARCH and the FAST division concerning their respective businesses, operations, assets, financial condition and prospects and undertook such other studies, analyses and investigations as Lehman Brothers deemed appropriate.

 

In arriving at its opinion, Lehman Brothers assumed and relied upon the accuracy and completeness of the financial and other information used by Lehman Brothers without assuming any responsibility for independent verification of such information and further relied upon the assurances of management of US SEARCH and the FAST division that they were not aware of any facts or circumstances that would make such information inaccurate or misleading. With respect to the financial projections of US SEARCH and the FAST division, upon advice of US SEARCH, Lehman Brothers assumed that such projections had been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of US SEARCH and the FAST division, respectively, as to the future financial performance of US SEARCH and the FAST division. However, for the purpose of its analysis, Lehman Brothers considered certain somewhat more conservative assumptions and estimates which resulted in certain adjustments to the projections of both US SEARCH and the FAST division. Lehman Brothers discussed these adjusted projections with the management of US SEARCH and they agreed with the appropriateness of the use of such adjusted projections in performing the analysis. Upon the advice of US SEARCH and the FAST division, Lehman Brothers assumed that the FAST division unaudited financials materially reflect the financial performance of the FAST division and will be substantially similar to the results reflected in the audited financials for the companies comprising the FAST division. In arriving at its opinion, Lehman Brothers conducted only a limited physical inspection of the properties and facilities of US SEARCH and the FAST division and did not make or obtain any evaluations or appraisals of the assets or liabilities of US SEARCH and the FAST division. In addition, US SEARCH did not authorize Lehman Brothers

 

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to formally solicit, and Lehman Brothers did not so solicit, any indications of interest from any third party with respect to the purchase of all or a part of US SEARCH’s business. The Lehman Brothers opinion necessarily was based upon market, economic and other conditions as they exist on, and can be evaluated as of, the date of the Lehman Brothers opinion.

 

Lehman Brothers expressed no opinion as to the prices at which shares of First Advantage common stock will trade following consummation of the proposed transaction. This opinion should not be viewed as providing any assurance that the market value of the shares of First Advantage common stock after consummation of the proposed transaction will be in excess of the market value of such shares at any time before announcement or consummation of the proposed transaction.

 

The following is a summary of the material financial and comparative analyses used by Lehman Brothers in connection with providing its opinion to the US SEARCH board of directors. Certain of the summaries of financial analyses include information presented in tabular format. In order to fully understand the financial analyses used by Lehman Brothers, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. Accordingly, the analyses listed in the tables and described below must be considered as a whole. Considering any portion of such analyses and of the factors considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying the Lehman Brothers opinion.

 

Comparable Transactions Analysis

 

The comparable transactions analysis provided a market benchmark based on the consideration paid in certain precedent transactions selected by Lehman Brothers. Lehman Brothers reviewed certain publicly available information on seven transactions involving target companies that Lehman Brothers deemed comparable to US SEARCH and the FAST division. The following transactions were included in Lehman Brothers’ analysis:

 

Announcement Date


  

Acquiror Name


  

Target Name


12/05/02

  

Welsh, Carson, Anderson & Stowe

  

US Investigations Services, Inc.

9/10/02

  

US Investigations Services, Inc.

  

Total Information Services, Inc., a division of The Official Information Company

6/18/01

  

Automatic Data Processing, Inc.

  

Avert, Inc.

2/14/00

  

ChoicePoint Inc.

  

DBT Online, Inc.

8/20/99

  

DBT Online, Inc.

  

Information America’s online public records business

5/7/99

  

DBT Online, Inc.

  

I.R.S.C., Inc.

1/21/99

  

Kroll, Inc.

  

Background America, Inc.

 

Lehman Brothers compared enterprise values in the selected transactions as multiples of the latest 12 months revenue, and earnings before interest, taxes, depreciation and amortization (EBITDA). All multiples were based on financial information publicly available at the time the relevant transactions were announced. Lehman Brothers applied a range of selected multiples for the selected transactions to the corresponding financial data of US SEARCH and the FAST division. In the case of the FAST division, the financial data utilized in the comparable transactions analysis as well as the comparable company analysis and contribution analysis described below assumed all acquisitions of the FAST division companies were completed at the beginning of the relevant periods and contained certain pro forma adjustments related to estimated cost savings from certain acquisitions. This analysis indicated an implied equity value reference range for US SEARCH of approximately $49 million to $79 million and an implied equity value reference range for the FAST division of approximately $245 million to $330 million. Lehman Brothers compared the equity value reference ranges for US SEARCH and the FAST division and derived an implied US SEARCH ownership percentage in First Advantage of 13% to 24%, which

 

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corresponds to an implied exchange ratio range of 0.026 to 0.048. The implied percentage ownership of US SEARCH in First Advantage of 20% and the exchange ratio of 0.04 in the proposed transaction fell within these ranges.

 

However, because the reasons for and the circumstances surrounding each of the transactions analyzed were so diverse and because of the inherent differences between the business, operations and prospects of US SEARCH and the FAST division, on the one hand, and the business, operations and prospects of the companies included in the comparable transactions group, on the other hand, Lehman Brothers believed that it was inappropriate to, and therefore did not rely solely on the quantitative results of the comparable transaction analysis. Accordingly, Lehman Brothers also made qualitative judgments concerning differences between the reasons for and the circumstances surrounding the proposed transaction and the transactions included in the comparable transaction analysis that would affect the relative values of US SEARCH and the FAST division, on the one hand, and the parties to the comparable transactions, on the other hand.

 

Comparable Company Analysis

 

The comparable company analysis assessed how the public market values shares of similar publicly traded companies by comparing specific financial and operating data relating to US SEARCH and the FAST division with other publicly traded public records and database companies deemed comparable. The companies that Lehman Brothers deemed comparable to US SEARCH and the FAST division and used in the comparable company analysis were as follows:

 

ChoicePoint Inc.

 

Hoover’s, Inc.

The Dun & Bradstreet Corporation

 

InfoUSA Inc.

Edgar Online, Inc.

 

Kroll Inc.

Equifax Inc.

 

OneSource Information Services, Inc.

Factual Data Corp.

 

TALX Corporation

Harris Interactive Inc.

   

 

Lehman Brothers reviewed enterprise values of the selected public companies with multiples of estimated 2002 and 2003 revenue and EBITDA. All multiples were based on closing stock prices as of December 10, 2002. Estimated financial data for the selected companies was based on publicly available securities analysts’ estimates. Lehman Brothers applied a range of selected multiples for the selected comparable companies to the corresponding financial data of US SEARCH and the FAST division. Estimated financial data for US SEARCH and the FAST division was based on both the management projections and adjusted projections for both companies. This analysis indicated an implied equity value reference range for US SEARCH of approximately $49 million to $64 million and an implied equity value reference range for the FAST division of approximately $215 million to $265 million. Lehman Brothers compared the equity value reference ranges for US SEARCH and the FAST division and derived an implied US SEARCH ownership percentage in First Advantage of 16% to 23%, which corresponds to an implied exchange ratio range of 0.032 to 0.046. The implied percentage ownership of US SEARCH in First Advantage of 20% and the exchange ratio of 0.04 in the proposed transaction fell within these ranges.

 

However, because of the inherent differences between the business, operations and prospects of US SEARCH, the FAST division and the business, operations and prospects of the companies included in the comparable companies, Lehman Brothers believed that it was inappropriate to and therefore did not rely solely on the quantitative results of the comparable company analysis. Accordingly, Lehman Brothers also made qualitative judgments concerning differences between the financial and operating characteristics and prospects of US SEARCH, the FAST division and the companies included in the comparable company analysis that would affect the public trading values of each.

 

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Discounted Cash Flow Analysis

 

The discounted cash flow analysis provided a net present valuation of projections of the after-tax cash flows (defined as operating cash flow available after working capital, capital spending, tax and other operating requirements) based on the respective projections prepared by the managements of US SEARCH and the FAST division, as well as the more conservative adjusted projections. Utilizing such valuations, Lehman Brothers then compared the equity value reference ranges for US SEARCH and the FAST division derived from these models, and arrived at an implied relative percentage ownership in First Advantage.

 

US Search.    Lehman Brothers estimated the present value of the stand-alone, unlevered, after-tax free cash flows that US SEARCH could produce over the fiscal years 2003 through 2012 based on two operating scenarios. The first scenario was based on projections provided by US SEARCH management for fiscal years 2003 through 2006. The second scenario used the more conservative adjusted projections. Lehman Brothers also estimated a range of terminal values as of 2012 calculated based on assumed annual free cash flow growth rates in perpetuity beyond 2012 in the range of 4% to 6%. The free cash flows for 2003 through 2012, as well as the estimated terminal values, were then discounted to present values using a discount rate range of 23% to 27%, which is based on US SEARCH’s estimated weighted average cost of capital. This analysis indicated an overall equity value reference range of $101 million to $134 million based on the management projections, and $55 million to $71 million based on the adjusted projections.

 

The FAST division.    Lehman Brothers estimated the present value of the stand-alone, unlevered, after-tax free cash flows that the FAST division could produce over the fiscal years 2003 through 2012 based on two operating scenarios. The first scenario was based on projections provided by management of the FAST division for fiscal years 2003 through 2005. The second scenario used the more conservative adjusted projections. Lehman Brothers also estimated a range of terminal values as of 2012 calculated based on assumed annual free cash flow growth rates in perpetuity beyond 2012 in the range of 4% to 6%. The free cash flows for 2003 through 2012, as well as the estimated terminal values, were then discounted to present values using a discount rate range of 13% to 15%, which is based on the weighted average cost of capital of companies that Lehman Brothers deemed comparable to the FAST division. This analysis indicated an overall equity value reference range of $246 million to $351 million based on the management projections, and $198 million to $280 million based on the adjusted projections.

 

Summary.    Lehman Brothers compared the equity value reference ranges for US SEARCH and the FAST division in order to arrive at an implied relative percentage ownership in First Advantage. Based on a comparison of the management projections for both companies, the implied relative percentage ownership range for US SEARCH was 22% to 35%, which corresponds to an implied exchange ratio range of 0.044 to 0.07. Based on a comparison of the adjusted projections for both companies, the implied relative percentage ownership range for US SEARCH was 16% to 27%, which corresponds to an implied exchange ratio range of 0.032 to 0.054. The implied percentage ownership of US SEARCH in First Advantage of 20% and the exchange ratio of 0.04 in the proposed transaction fell below the ranges of implied ownership and exchange ratios based on the management projections, and within the ranges based on the adjusted projections.

 

Contribution Analysis

 

The contribution analysis analyzed the relative contributions of US SEARCH and the FAST division to First Advantage based on latest twelve months pro forma revenue and EBITDA, and estimated pro forma fiscal year 2002 and 2003 revenue and EBITDA. Using the relative contributions derived in the contribution analysis, Lehman Brothers then developed the implied ownership percentages shown below by adjusting for the net debt of US SEARCH and the FAST division. The last twelve months and projected 2002 figures shown below assume all acquisitions were completed at the beginning of the relevant periods and contain certain pro forma adjustments related to estimated cost savings from certain transactions. 2002 and 2003 management projections for the FAST division were prepared by the individual companies comprising the FAST division, which were

 

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then combined to create the FAST division projections. The US SEARCH management projections were prepared by the management of US SEARCH. US SEARCH does not as a matter of course make public projections as to its future performance or earnings, and First American does not as a matter of course make public projections as to the future performance or earnings of its FAST division. However, in connection with the discussions concerning the proposed combination, US SEARCH and First American exchanged and furnished to Lehman Brothers certain projected financial data for US SEARCH and the FAST division, including earnings before interest, taxes, depreciation and amortization, referred to as “EBITDA.” These projections were not prepared with a view toward public disclosure or compliance with published guidelines of the SEC, U.S. generally accepted accounting principles or other applicable accounting standards, and are included in this proxy statement/prospectus only because they were used by Lehman Brothers in conducting its analyses concerning the combination. Upon the advice of US SEARCH, Lehman Brothers assumed that the projections provided by US SEARCH and the FAST division had been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of US SEARCH and the FAST division, respectively, as to the future financial performance of US SEARCH and the FAST division. However, for the purpose of its analysis, Lehman Brothers considered certain somewhat more conservative assumptions and estimates which resulted in certain adjustments to the projections of both US SEARCH and the FAST division. Lehman Brothers discussed these adjusted projections with the management of US SEARCH and it agreed with the appropriateness of the use of such adjusted projections in performing the analysis. Both the management projections and the adjusted projections were used in the contribution analysis. The results of this analysis are shown below.

 

      

Amount

$ mil


    

Relative Contribution

Percentage


      

Implied Ownership

Percentage


 
      

US SEARCH


    

FAST

division


    

US SEARCH


    

FAST

division


      

US SEARCH


    

FAST

division


 

Last Twelve Months Revenue

    

$

29.0

 

  

$

122.4

    

19

 %

  

81

%

    

18

%

  

82

%

2002E Revenue

    

 

31.0

 

  

 

127.0

    

20

 %

  

80

%

    

19

%

  

81

%

2003E Revenue—management projections

    

 

46.0

 

  

 

144.0

    

24

 %

  

76

%

    

23

%

  

77

%

2003E Revenue—adjusted projections

    

 

42.0

 

  

 

139.0

    

23

 %

  

77

%

    

22

%

  

78

%

Last Twelve Months Pro Forma EBITDA

    

 

(5.7

)

  

 

14.1

    

(67

)%

  

167

%

    

 

  

 

2002E Pro Forma EBITDA

    

 

(2.9

)

  

 

15.8

    

(22

)%

  

122

%

    

 

  

 

2003E EBITDA—management projections

    

 

6.0

 

  

 

23.0

    

21

 %

  

79

%

    

20

%

  

80

%

2003E EBITDA—adjusted projections

    

 

4.3

 

  

 

19.3

    

18

 %

  

82

%

    

17

%

  

83

%

 

Based on the contribution analysis shown above, Lehman Brothers concluded that the implied ownership percentage for US SEARCH in First Advantage was in the range of 17% to 23%, which corresponds to an implied exchange ratio range of 0.034 to 0.046. The implied percentage ownership of US SEARCH in First Advantage of 20% and the exchange ratio of 0.04 in the proposed transaction fell within these ranges.

 

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Implied Premium Analysis

 

Assuming a range of potential trading values for First Advantage, Lehman Brothers calculated the implied premium delivered to US SEARCH stockholders based on the agreed upon US SEARCH ownership percentage in First Advantage of approximately 20%. The following table outlines the implied premium to the US SEARCH share price over various time periods ending December 10, 2002 assuming an illustrative First Advantage market value range of $275 to $425 million.

 

    

First Advantage Illustrative

Market Value ($mil)


 
    

$275


    

$325


    

$375


    

$425


 

Implied Premium to closing share price as of 12/10/02

  

5.0

%

  

23.2

%

  

41.4

%

  

59.5

%

Implied Premium to 10 day average closing price

  

8.0

%

  

27.8

%

  

47.6

%

  

67.4

%

Implied Premium to 30 day average closing price

  

35.0

%

  

59.8

%

  

84.5

%

  

109.3

%

 

Lehman Brothers noted that as a result of the volatility and limited liquidity of US SEARCH’s share price, it was more appropriate to analyze the premium based on longer term average closing share prices, such as the 30 day average closing price premiums shown above. Lehman Brothers then compared the implied premiums shown above to the premiums paid over the stock price for 10 precedent transactions in the business services sector and 17 precedent transactions in the software sector since May of 2000 with transaction values below $300 million. These premiums are shown below.

 

    

Low


    

Mean


      

Median


    

High


 

Business Services

                             

Premium to share price 1 week before announcement

  

8.4

 %

  

74.3

%

    

71.3

%

  

147.3

%

Premium to share price 1 month before announcement

  

(6.2

)%

  

49.1

%

    

56.7

%

  

94.3

%

Software

                             

Premium to share price 1 week before announcement

  

(47.5

)%

  

42.2

%

    

40.3

%

  

109.3

%

Premium to share price 1 month before announcement

  

(61.3

)%

  

51.4

%

    

51.3

%

  

117.8

%

 

Lehman Brothers is an internationally recognized investment banking firm and, as part of its investment banking activities, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements, and valuations for corporate and other purposes. US SEARCH’s board of directors selected Lehman Brothers because of its expertise, reputation, and familiarity with the business services sector and because its investment banking professionals have substantial experience in transactions comparable to the mergers.

 

As compensation for its services in connection with the mergers, US SEARCH has agreed to pay Lehman Brothers a fee of $1.3 million. In addition, US SEARCH has agreed to reimburse Lehman Brothers for reasonable out-of-pocket expenses incurred in connection with the mergers and to indemnify Lehman Brothers for certain liabilities that may arise out of its engagement by US SEARCH and the rendering of the Lehman Brothers opinion. In addition, with the consent of the board of directors of US SEARCH, a separate team within Lehman Brothers also is acting as financial advisor to First American in connection with the mergers, for which Lehman Brothers will be paid a separate fee of $1.0 million. This additional fee will be paid by First American, and offset against the funds that First American is obligated to transfer to First Advantage upon closing of the mergers. The compensation negotiated by Lehman Brothers with each of US SEARCH and First American for its role as financial advisor to both companies is largely contingent on the successful completion of the proposed combination of US SEARCH and the FAST division. The compensation negotiated with each of US SEARCH and First American by Lehman Brothers for its role as financial advisor to each of them is largely contingent on the successful completion of the proposed mergers, which is standard and customary for transactions similar to the proposed combination. The team within Lehman Brothers hired by First American has performed banking

 

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services for First American in the past and was selected by First American’s president, while US SEARCH had no pre-existing relationship with Lehman Brothers. In addition, First American had no role in introducing Lehman Brothers to US SEARCH, and US SEARCH had no role in First American choosing to use Lehman Brothers for the proposed combination.

 

In the ordinary course of its business, Lehman Brothers may trade in the equity securities of US SEARCH and First American for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities.

 

Structure of the Mergers

 

The merger agreement provides for the merger of Stockholm Seven Merger Corp., a newly-formed, wholly-owned subsidiary of First Advantage, with and into US SEARCH. As a result of this merger, US SEARCH will become a wholly-owned subsidiary of First Advantage.

 

The merger agreement also provides that the following mergers will occur immediately before the merger of Stockholm Seven Merger Corp. with and into US SEARCH:

 

    Stockholm One Merger Corp., a newly-formed, wholly-owned subsidiary of First Advantage, will merge with and into SafeRent, Inc., a wholly-owned subsidiary of First American. As a result of this merger, SafeRent will become a wholly-owned subsidiary of First Advantage.

 

    Stockholm Two Merger Corp., a newly-formed, wholly-owned subsidiary of First Advantage, will merge with and into Employee Health Programs, Inc., a wholly-owned subsidiary of First American. As a result of this merger, Employee Health Programs will become a wholly-owned subsidiary of First Advantage.

 

    Stockholm Three Merger Corp., a newly-formed, wholly-owned subsidiary of First Advantage, will merge with and into Substance Abuse Management, Inc., a wholly-owned subsidiary of First American. As a result of this merger, Substance Abuse Management will become a wholly-owned subsidiary of First Advantage.

 

    Stockholm Four Merger Corp., a newly-formed, wholly-owned subsidiary of First Advantage, will merge with and into HireCheck, Inc., a wholly-owned subsidiary of First American. As a result of this merger, HireCheck will become a wholly-owned subsidiary of First Advantage.

 

    Stockholm Five Merger Corp., a newly-formed, wholly-owned subsidiary of First Advantage, will merge with and into American Driving Records, Inc., a wholly-owned subsidiary of First American. As a result of this merger, American Driving Records will become a wholly-owned subsidiary of First Advantage.

 

    Stockholm Six Merger Corp., a newly-formed, wholly-owned subsidiary of First Advantage, will merge with and into First American Registry, Inc., a wholly-owned subsidiary of First American. As a result of this merger, First American Registry will become a wholly-owned subsidiary of First Advantage.

 

First American also has agreed to contribute First American Indian Holdings LLC to First Advantage as part of the transaction.

 

Consideration to be Received by US SEARCH Stockholders in the Mergers

 

At the completion of the mergers, each share of US SEARCH common stock other than treasury stock or shares of common stock held by First American or any of its subsidiaries will be converted into the right to receive 0.04 of a share of First Advantage Class A common stock.

 

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No fraction of a share of First Advantage Class A common stock will be issued. In lieu of fractional shares, each holder of US SEARCH common stock who would otherwise be entitled to receive a fraction of a share of First Advantage Class A common stock will receive from First Advantage, subject to any withholdings required by applicable law, an amount of cash rounded to the nearest whole cent. The amount of cash received will be equal to the product of:

 

    such fraction of a share; and

 

    the average closing price of a share of US SEARCH common stock, as quoted on the Nasdaq National Market (or, if no longer quoted on the Nasdaq National Market or the then principal exchange or market for US SEARCH’s common stock), for the ten trading days ending on the trading day that is three trading days before the date of US SEARCH’s stockholders meeting.

 

Consideration to be Received by First American in the Mergers

 

Upon completion of the mergers, First American will receive a number of shares of First Advantage Class B common stock equal to the sum of:

 

    Four times the number of shares of First Advantage Class A common stock actually issued to US SEARCH stockholders in the mergers;

 

    Up to 405,200 additional shares of Class B common stock to be issued to First American in respect of currently outstanding US SEARCH stock options and warrants that will be converted in the mergers into options and warrants to acquire First Advantage Class A common stock. The specific number of additional shares to be issued to First American is equal to 10,130,000 minus four times the number of shares of US SEARCH common stock issued upon exercise of options and warrants between signing and closing of the merger agreement, multiplied by 0.04 (the exchange ratio), with a minimum of 1,000 additional Class B shares to be issued to First American. The parties anticipate that the actual number of shares of First Advantage Class B common stock to be issued to First American in respect of US SEARCH options and warrants will be approximately 400,000; and

 

    Four times the number of shares of First Advantage Class A common stock required to be issued upon exercise of any options or warrants issued by US SEARCH that are outstanding at the closing of the mergers and were not disclosed to First American in the merger agreement or were issued after the date of the merger agreement. Subsequent to signing of the merger agreement, US SEARCH issued one warrant to acquire a number of shares of its common stock equal to $25,000 divided by the closing price of US SEARCH common stock on the date the mergers are consummated, which will result in First American receiving four times such number of additional shares of First Advantage Class B common stock. US SEARCH does not intend to issue any more options or warrants prior to closing.

 

The number of shares of First Advantage Class B common stock issuable to First American in the mergers is subject to increase if US SEARCH’s indebtedness exceeds $4.4 million at the closing of the mergers (less any cash received by US SEARCH from the exercise of US SEARCH warrants or stock options between signing the merger agreement and closing), First American will be entitled to receive additional shares of First Advantage Class B common stock. The number of additional shares of First Advantage Class B common stock that would be issuable to First American in such event will be equal to four times the amount by which US SEARCH’s indebtedness exceeds $4.4 million (less any cash received by US SEARCH from the exercise of US SEARCH warrants or stock options) divided by the average closing price of First Advantage Class A common stock over the first 10 trading days after closing. US SEARCH does not believe that its indebtedness will exceed $4.4 million at closing of the mergers if such closing occurs prior to July 1, 2003.

 

The merger agreement also provides that First American would receive additional shares of First Advantage Class B common stock if, after the closing of the mergers, First Advantage is required to issue shares of First

 

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Advantage Class A common stock to settle payment obligations of US SEARCH under the agreement pursuant to which US SEARCH previously acquired Professional Resource Screening, but US SEARCH has since reached an agreement with the former shareholders of Professional Resource Screening that will result in no First Advantage shares being issued to such shareholders or First American.

 

Effect on US SEARCH Stock Options and Warrants

 

All outstanding stock options, stock appreciation rights, limited stock appreciation rights and stock purchase rights of US SEARCH will be assumed by First Advantage and converted automatically into options to purchase shares of First Advantage Class A common stock calculated in accordance with the exchange ratio, rounded down to the nearest whole share. The exercise price will be equal to the exercise price per share of US SEARCH common stock divided by the exchange ratio, rounded down to the nearest whole cent. The outstanding stock options, stock appreciation rights, limited stock appreciation rights and stock purchase rights of US SEARCH will otherwise continue to be exercisable and vest subject to the terms and conditions applicable to them before the mergers. However, all outstanding stock options issued to US SEARCH employees and directors pursuant to the US SEARCH Amended and Restated 1998 Stock Incentive Plan and all outstanding stock options issued to US SEARCH’s non-employee directors (other than Lawrence Lenihan) pursuant to the US SEARCH 1999 Non-Employee Directors’ Stock Option Plan will accelerate and be fully vested upon the occurrence of the mergers. In addition, US SEARCH’s non-employee directors that are asked to resign at closing of the mergers will be able to exercise their stock options for an extended period of three years following the closing.

 

Each warrant to purchase a share or shares of US SEARCH common stock outstanding before the mergers will automatically become a warrant entitling the holder to purchase the number of shares of First Advantage Class A common stock such holder would have received pursuant to the merger agreement had such holder exercised such warrant immediately before the mergers, rounded up to the nearest whole share of First Advantage Class A common stock. First Advantage will assume all obligations of US SEARCH with respect to these warrants. Otherwise, each US SEARCH warrant will be subject to the same terms and conditions applicable to it before the mergers.

 

Interests of Certain Persons in the Mergers

 

In considering the recommendation of the US SEARCH board of directors that US SEARCH stockholders vote to adopt the merger agreement and to consummate the mergers, US SEARCH stockholders should be aware that a number of officers and directors of US SEARCH have interests in the mergers that are different from or in addition to the interests of US SEARCH stockholders generally.

 

Employment Agreements

 

Brent Cohen’s current employment agreement with US SEARCH provides severance benefits if Mr. Cohen’s employment is terminated other than for “cause,” if Mr. Cohen resigns for “good reason” or if Mr. Cohen does not enter into a new employment agreement with First Advantage within seven days of the effectiveness of the mergers. Under the employment agreement, upon the occurrence of any such events, Mr. Cohen would be entitled to:

 

    base salary, which currently is $400,000 per year, and benefits for one year;

 

    a bonus equal to 100% of base salary;

 

    medical insurance coverage for a period of one year after the effective date of the termination, or until Mr. Cohen receives medical insurance coverage from another employer, whichever occurs first; and

 

    the accelerated vesting of stock options, and a period of one year to exercise all stock options.

 

In connection with the mergers, it is expected that Mr. Cohen, H. Jake Mendelsohn and David Wachtel, all executive officers of US SEARCH, will enter into new employment agreements with First Advantage, although the terms of such agreements have not yet been determined.

 

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In addition, Messrs. Cohen, Mendelsohn and Wachtel, as well as Richard Heitzmann, all executive officers of US SEARCH, are currently owed bonuses for services performed during 2002 as employees of US SEARCH pursuant to written employment agreements. The bonus amounts owed are $400,000 to Mr. Cohen, $125,000 for each of Messrs. Mendelsohn and Wachtel, and $100,000 to Mr. Heitzmann. In addition, it is expected that Robert Schwartz and Jeffrey Watts, also executive officers of US SEARCH, will each be paid a bonus of $50,000 for services performed in 2002. Although US SEARCH accrued for these amounts as compensation expense in 2002, such bonuses will be paid half in cash and half in shares of US SEARCH common stock, and will be paid no later than five days after the date on which this proxy statement/prospectus is mailed to US SEARCH stockholders.

 

Accelerated Vesting of Options

 

Certain outstanding stock options issued to US SEARCH directors and employees that have written agreements will accelerate and be fully vested upon consummating the mergers in accordance with the terms of the US SEARCH Amended and Restated 1998 Stock Incentive Plan. In addition, outstanding stock options issued to US SEARCH’s non-employee directors (other than Lawrence Lenihan) pursuant to the US SEARCH 1999 Non-Employee Directors’ Stock Option Plan will accelerate and be fully vested upon consummating the mergers. Set forth below is a list of directors and executive officers of US SEARCH and the number of shares underlying options held by each such person that will be unvested as of May 31, 2003, but will become vested upon consummating the mergers:

 

Option Holder


    

Number of

Shares Underlying Options Subject to Acceleration


Harry B. Chandler

    

18,056

Brent Cohen

    

2,166,668

Richard Heitzmann

    

937,501

Peter Locke

    

18,056

Alan C. Mendelson

    

18,056

H. Jake Mendelsohn

    

508,335

Thomas W. Patterson

    

44,428

Karol Pollock

    

78,201

Robert Schwartz

    

515,629

David Wachtel

    

515,835

Jeffrey R. Watts

    

937,500

 

US SEARCH’s non-employee directors that are asked to resign at closing of the mergers will be able to exercise their stock options for an extended period of three years following the closing.

 

Payment of Directors’ Fees to Non-Employee Directors

 

Since 2000, US SEARCH has not paid cash compensation to members of its board of directors for their service on the board. In recognition of the service provided by US SEARCH’s non-employee directors during 2001 and 2002, US SEARCH agreed to pay to each non-employee director that is asked to resign at closing of the mergers a cash payment equal to the sum of $10,000 per year of board service during 2001 and 2002 (pro-rated for partial years), and US SEARCH is currently paying such non-employee directors $5,000 per quarter of board service during 2003. The amounts due for 2001 and 2002 will be paid upon US SEARCH’s receipt of such non-employee director’s resignation in connection with closing the mergers.

 

Persons Designated to be Directors of First Advantage

 

Pursuant to the stockholders agreement among First Advantage, First American and Pequot Private Equity Fund II, L.P., Pequot Private Equity Fund II, L.P. will have the right to designate a director to First Advantage’s

 

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board of directors. Pequot Private Equity Fund II, L.P.’s initial designee will be Lawrence D. Lenihan, Jr., who currently serves as a director of US SEARCH. See “OTHER AGREEMENTS—Stockholders Agreement” on page 67 for more information on the stockholders agreement. Mr. Lenihan is also a managing director of Pequot Capital Management, Inc., an affiliate of Pequot Private Equity Fund II, L.P. Brent Cohen, who also serves as a director of US SEARCH, also is expected to be a director of First Advantage as well as President.

 

Indemnification and Insurance

 

Subject to any limitation imposed from time to time under applicable law, First Advantage will indemnify and hold harmless the present and former officers, directors, employees and agents of US SEARCH and its subsidiaries in respect of acts or omissions occurring on or before the effective time of the mergers. Indemnification will be provided to the extent provided under US SEARCH’s certificate of incorporation and bylaws or any indemnification agreement with US SEARCH’s and its subsidiaries’ officers and directors to which US SEARCH or its subsidiaries is a party that is in effect on the date of the merger agreement.

 

For six years after the effective time of the mergers, First Advantage will use its reasonable best efforts to procure officers’ and directors’ liability insurance in respect of acts or omissions occurring on or before the effective time of the mergers covering each of the present and former officers, directors, employees and agents of US SEARCH and its subsidiaries currently covered by US SEARCH’s or its subsidiaries’ officers’ and directors’ liability insurance policy on terms substantially similar to those of such policy in effect on the date of the merger agreement. However, First American will not be required to cause First Advantage to maintain insurance with respect to a specific officer or director if the premium for obtaining the insurance exceeds 200% of the amount per annum US SEARCH paid in its current fiscal year. If First Advantage is unable to obtain the required insurance, it will obtain as much comparable insurance as possible for an annual premium equal to 200% of the amount per annum US SEARCH paid in its current fiscal year and will permit any such party entitled to insurance to pay the excess amount that may be necessary to maintain such insurance coverage.

 

Other Arrangements

 

Alan C. Mendelson, one of US SEARCH’s directors, also is a partner at Latham & Watkins LLP, US SEARCH’s outside legal counsel with respect to the mergers and other general corporate matters.

 

Accounting Treatment

 

First Advantage will account for the mergers under the purchase method of accounting for business combinations under United States generally accepted accounting principles.

 

Material United States Federal Income Tax Consequences

 

In the opinion of Latham & Watkins LLP, the following is a general summary of the material U.S. federal income tax considerations of the mergers to United States holders (as defined below) of US SEARCH common stock. This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended, Treasury Regulations promulgated under the Internal Revenue Code, administrative rulings and judicial decisions in effect on the date of this proxy statement/prospectus. These authorities may be changed, possibly retroactively, so as to result in U.S. federal income tax consequences different from those set forth below. This summary does not address the tax considerations arising under the laws of any foreign, state or local jurisdiction.

 

For purposes of this discussion, we use the term “United States holder” to mean:

 

    a citizen or resident of the United States;

 

    a corporation, partnership or other entity created or organized under the laws of the United States or any of its political subdivisions;

 

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Table of Contents

 

    a trust that (x) is subject to the supervision of a court within the United States and the control of one or more United States persons or (y) has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person; or

 

    an estate that is subject to U.S. federal income tax on its income regardless of its source.

 

This discussion assumes that you hold your shares of US SEARCH common stock as a capital asset, and this discussion does not address all of the U.S. federal income tax consequences that may be relevant to you in light of your particular circumstances. In addition, it does not present a description of the U.S. federal income tax laws applicable to you if you are subject to special treatment under the U.S. federal income tax laws, including if you are:

 

    a financial institution;

 

    a tax-exempt organization;

 

    an S corporation or other pass-through entity;

 

    an insurance company;

 

    a mutual fund;

 

    a dealer in securities or foreign currencies;

 

    a foreign holder;

 

    a person whose functional currency is not the U.S. dollar;

 

    a trader in securities that elects the mark-to-market method of accounting for your securities;

 

    a holder of US SEARCH common stock who received your US SEARCH common stock through the exercise of employee stock options or otherwise as compensation or through a tax-qualified retirement plan; or

 

    a holder of US SEARCH common stock who holds US SEARCH common stock as part of a hedge, straddle, or other risk reduction strategy or as part of a constructive sale or conversion transaction.

 

No ruling has been or will be sought from the Internal Revenue Service as to the U.S. federal income tax consequences of the mergers, and the following summary is not binding on the Internal Revenue Service.

 

Tax Consequences of the Mergers

 

Completion of the mergers is conditioned upon, among other things, the receipt by US SEARCH of a tax opinion from Latham & Watkins LLP dated as of the closing date, that the merger of Stockholm Seven Merger Corp. with and into US SEARCH qualifies as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code. The condition regarding the receipt of the opinion described in the preceding sentence will not be waived by US SEARCH after the receipt of US SEARCH stockholder approval unless further stockholder approval is obtained with appropriate disclosure. The opinion will be based on customary factual assumptions and factual representations and on representation letters provided by US SEARCH, First Advantage and certain of its subsidiaries to be delivered at the time of closing, all of which must continue to be true and accurate in all respects as of the closing. In addition, the opinion will assume that the mergers will be completed according to the terms of the merger agreement. An opinion of counsel represents counsel’s best legal judgment and is not binding on the Internal Revenue Service or any court.

 

It is the opinion of Latham & Watkins LLP that the material U.S. federal income tax consequences of the mergers are as follows:

 

    US SEARCH will not recognize gain or loss in the mergers;

 

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    you will not recognize gain or loss when you exchange your US SEARCH common stock solely for First Advantage Class A common stock in the mergers, except for gain or loss resulting from cash that you receive instead of a fractional share of First Advantage Class A common stock;

 

    you will recognize capital gain or loss on any cash received instead of a fractional share of First Advantage Class A common stock equal to the difference between the amount of cash received and the portion of the tax basis of US SEARCH common stock allocated to that fractional share interest, and the gain or loss will constitute long-term capital gain or loss if your holding period in the US SEARCH common stock surrendered in the mergers is more than one year as of the date of the mergers;

 

    the aggregate tax basis of the First Advantage Class A common stock you receive will be the same as your aggregate tax basis in the US SEARCH common stock you surrender in exchange, reduced by any tax basis allocable to any fractional share interest exchanged for cash;

 

    the holding period of the First Advantage Class A common stock you receive will include the holding period of the US SEARCH common stock you surrender in exchange; and

 

    you must retain records and file with your U.S. federal income tax returns a statement setting forth facts relating to the mergers.

 

Backup Withholding

 

If you are a noncorporate holder of US SEARCH common stock, you may be subject to backup withholding on any cash payments received instead of a fractional share interest in First Advantage Class A common stock. You will not be subject to backup withholding, however, if you:

 

    furnish a correct taxpayer identification number and certify that you are not subject to backup withholding on the substitute Internal Revenue Service Form W-9 or successor form included in the letter of transmittal to be delivered to you following the completion of the mergers;

 

    provide a certification of foreign status on Internal Revenue Service Form W-8BEN or a successor form; or

 

    are otherwise exempt from backup withholding.

 

Any amounts withheld under the backup withholding rules are not an additional tax and may be allowed as a refund or credit against your U.S. federal income tax liability, provided you furnish the required information to the Internal Revenue Service.

 

Tax matters are very complicated, and the tax consequences of the mergers to you will depend on your particular tax situation. You are urged to consult your tax advisors regarding the specific tax consequences of the mergers, including tax return reporting requirements, the applicability of federal, state, local and foreign tax laws and the effect of any proposed change in the tax laws.

 

Stock Exchange Listings

 

It is a condition to the completion of the mergers that the First Advantage Class A common stock issuable to the US SEARCH stockholders pursuant to the merger agreement be approved for listing on the Nasdaq National Market, subject only to official notice of issuance. Neither First American nor US SEARCH will waive the condition that First Advantage Class A common stock be approved for listing on the Nasdaq National Market. If the mergers are completed, the US SEARCH common stock will be delisted from the Nasdaq National Market and will be deregistered under the Securities Exchange Act of 1934, as amended.

 

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Operations Following the Mergers

 

After the mergers, each of the companies comprising the FAST division and US SEARCH will be a wholly-owned subsidiary of First Advantage. First Advantage will be a holding company that operates through its subsidiaries in the following two segments:

 

    Enterprise, which will offer motor vehicle reports, tenant screening services, employee background services and occupational health services to businesses, non-profit organizations and governmental agencies.

 

    Consumer, which will offer location and verification services to consumers.

 

First Advantage will be headquartered in St. Petersburg, Florida.

 

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THE MERGER AGREEMENT

 

The following summary describes material provisions of the merger agreement, which is attached to this proxy statement/prospectus as Annex A and is incorporated by reference into this proxy statement/prospectus. This summary may not contain all of the information about the merger agreement that is important to you. We encourage you to read the merger agreement carefully in its entirety.

 

Terms of the Mergers

 

Structure of the Mergers

 

The merger agreement provides for the merger of Stockholm Seven Merger Corp., a newly-formed, wholly-owned subsidiary of First Advantage, with and into US SEARCH. As a result of this merger, US SEARCH will become a wholly-owned subsidiary of First Advantage.

 

The merger agreement also provides that the following mergers will occur before the merger of Stockholm Seven Merger Corp. with and into US SEARCH:

 

    Stockholm One Merger Corp., a newly-formed, wholly-owned subsidiary of First Advantage, will merge with and into SafeRent, Inc., a wholly-owned subsidiary of First American. As a result of this merger, SafeRent will become a wholly-owned subsidiary of First Advantage.

 

    Stockholm Two Merger Corp., a newly-formed, wholly-owned subsidiary of First Advantage, will merge with and into Employee Health Programs, Inc., a wholly-owned subsidiary of First American. As a result of this merger, Employee Health Programs will become a wholly-owned subsidiary of First Advantage.

 

    Stockholm Three Merger Corp., a newly-formed, wholly-owned subsidiary of First Advantage, will merge with and into Substance Abuse Management, Inc., a wholly-owned subsidiary of First American. As a result of this merger, Substance Abuse Management will become a wholly-owned subsidiary of First Advantage.

 

    Stockholm Four Merger Corp., a newly-formed, wholly-owned subsidiary of First Advantage, will merge with and into HireCheck, Inc., a wholly-owned subsidiary of First American. As a result of this merger, HireCheck will become a wholly-owned subsidiary of First Advantage.  

 

    Stockholm Five Merger Corp., a newly-formed, wholly-owned subsidiary of First Advantage, will merge with and into American Driving Records, Inc., a wholly-owned subsidiary of First American. As a result of this merger, American Driving Records will become a wholly-owned subsidiary of First Advantage.

 

    Stockholm Six Merger Corp., a newly-formed, wholly-owned subsidiary of First Advantage, will merge with and into First American Registry, Inc., a wholly-owned subsidiary of First American. As a result of this merger, First American Registry will become a wholly-owned subsidiary of First Advantage.

 

First American has also agreed to contribute First American Indian Holdings LLC to First Advantage as part of the transaction.

 

Completion and Effectiveness of the Mergers

 

The closing of the mergers will occur as soon as practicable (and in any event within five business days) after the last of the conditions to completion of the mergers contained in the merger agreement are satisfied or waived unless the parties agree otherwise in writing (see the section entitled “THE MERGER AGREEMENT— Conditions to Completion of the Mergers” below). The mergers will become effective upon the filing of articles or certificates of merger for each of the mergers.

 

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We are working to complete the mergers quickly. We currently expect that the mergers will close in the second quarter of 2003. However, because completion of the mergers is subject to regulatory approvals and other conditions, we cannot predict the actual timing.

 

Merger Consideration

 

At the completion of the mergers, each share of US SEARCH common stock other than treasury stock or shares of common stock held by First American or any of its subsidiaries will be converted into the right to receive 0.04 of a share of First Advantage Class A common stock.

 

No fraction of a share of First Advantage Class A common stock will be issued. In lieu of fractional shares, each holder of US SEARCH common stock who would otherwise be entitled to receive a fraction of a share of First Advantage Class A common stock will receive from First Advantage, subject to any withholdings required by applicable law, an amount of cash rounded to the nearest whole cent. The amount of cash received will be equal to the product of:

 

    such fraction of a share; and

 

    the average closing price of a share of US SEARCH common stock, as quoted on the Nasdaq National Market (or, if no longer quoted on the Nasdaq National Market, the Nasdaq SmallCap Market or the then principal exchange or market for US SEARCH’s common stock), for the ten trading days ending on the trading day that is three trading days before the date of US SEARCH’s stockholders meeting.

 

The merger agreement provides that the exchange ratio used for determining the number of shares of First Advantage Class A common stock issuable to holders of US SEARCH common stock and underlying existing US SEARCH options and warrants will be adjusted proportionately to take into account any stock split, reverse stock split or other recapitalization of US SEARCH common stock.

 

Upon completion of the mergers, First American will receive shares of First Advantage Class B common stock representing approximately 80% of the capital stock of First Advantage. However, if US SEARCH’s indebtedness exceeds $4.4 million at the closing of the mergers (less any cash received by US SEARCH from the exercise of US SEARCH warrants or stock options between signing the merger agreement and closing), First American will be entitled to receive additional shares of First Advantage Class B common stock. The number of additional shares of First Advantage Class B common stock will be equal to four times the amount by which US SEARCH’s indebtedness exceeds $4.4 million (less any cash received by US SEARCH from the exercise of US SEARCH warrants or stock options) divided by the average closing price of First Advantage Class A common stock over the first 10 trading days after closing. US SEARCH does not believe that its indebtedness will exceed $4.4 million at closing of the mergers if such closing occurs prior to July 1, 2003. First Advantage also will issue additional shares of Class B common stock to First American in the event US SEARCH failed to disclose in the merger agreement the existence of options or warrants to acquire US SEARCH stock, or issued new options or warrants to acquire US SEARCH stock between the signing and closing of the merger agreement. The merger agreement also provides that First American would receive additional shares of First Advantage Class B common stock if, after the closing of the mergers, First Advantage is required to issue shares of First Advantage Class A common stock to settle payment obligations of US SEARCH under the agreement pursuant to which US SEARCH previously acquired Professional Resource Screening, but US SEARCH has since reached an agreement with the former shareholders of Professional Resource Screening that will result in no First Advantage shares being issued to such shareholders or First American.

 

Fractional Shares

 

First Advantage will not issue any fractional shares of First Advantage Class A common stock in the merger with Stockholm Seven Merger Corp. Instead, each holder of US SEARCH common stock exchanged in the merger who would otherwise be entitled to receive a fraction of a share of First Advantage Class A common stock will receive cash, without interest, in lieu of a fractional share.

 

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Procedures for Exchange of US SEARCH Stock Certificates

 

Exchange of Certificates

 

Promptly following completion of the mergers, Wells Fargo Shareowner Services, the exchange agent for the mergers, will mail to each record holder of US SEARCH common stock a letter of transmittal and instructions for surrendering the record holder’s stock certificates in exchange for a certificate representing First Advantage Class A common stock. Only those holders of US SEARCH common stock who properly surrender their US SEARCH stock certificates in accordance with the exchange agent’s instructions will receive (a) a certificate (or beneficial interest in a certificate) representing First Advantage Class A common stock and (b) cash in lieu of any fractional share of First Advantage Class A common stock. After the effective time of the mergers, each certificate representing shares of US SEARCH common stock that has not been surrendered will represent only the right to receive upon surrender of that certificate each of the items listed in the preceding sentence. The surrendered certificates representing US SEARCH common stock will be automatically and immediately cancelled. Following completion of the mergers, US SEARCH will not register any transfers of US SEARCH common stock outstanding on its stock transfer books before the mergers.

 

Holders of US SEARCH common stock should not send in their US SEARCH stock certificates until they receive a letter of transmittal from the exchange agent, with instructions for the surrender of US SEARCH stock certificates.

 

Lost Stock Certificates

 

First Advantage only will issue (a) a First Advantage stock certificate (or beneficial interest in a certificate) and (b) cash in lieu of a fractional share in a name other than the name in which a surrendered US SEARCH stock certificate is registered if the person requesting such exchange presents to the exchange agent all documents required by the exchange agent to show and effect the unrecorded transfer of ownership and to show that such person paid any applicable stock transfer taxes. If a US SEARCH stock certificate is lost, stolen or destroyed, the holder of such certificate may need to execute an affidavit or post a bond before receiving each of the items listed in the preceding sentence.

 

Treatment of Stock Options and Warrants

 

All outstanding stock options, stock appreciation rights, limited stock appreciation rights and stock purchase rights of US SEARCH will be assumed by First Advantage and converted automatically into options to purchase shares of First Advantage Class A common stock calculated in accordance with the exchange ratio, rounded down to the nearest whole share. The exercise price will be equal to the exercise price per share of US SEARCH common stock divided by the exchange ratio, rounded down to the nearest whole cent. The outstanding stock options, stock appreciation rights, limited stock appreciation rights and stock purchase rights of US SEARCH will otherwise continue to be exercisable and vest subject to the terms and conditions applicable to them before the mergers. However, the vesting provisions applicable to all outstanding stock options issued to US SEARCH employees and directors pursuant to the US SEARCH Amended and Restated 1998 Stock Incentive Plan provide that all such options will accelerate and be fully vested upon the occurrence of the mergers in accordance with the terms of such plan.

 

Each warrant to purchase a share or shares of US SEARCH common stock outstanding before the mergers will automatically become a warrant entitling the holder to purchase the number of shares of First Advantage Class A common stock such holder would have received pursuant to the merger agreement had such holder exercised such warrant immediately before the mergers, rounded up to the nearest whole share of First Advantage Class A common stock and the nearest whole warrant. First Advantage will assume all obligations of US SEARCH with respect to these warrants. Otherwise, each US SEARCH warrant will be subject to the same terms and conditions applicable to it before the mergers.

 

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Representations and Warranties

 

The merger agreement contains customary representations and warranties of First American and US SEARCH relating to, among other things:

 

    corporate existence and good standing;

 

    corporate authority;

 

    capital structure;

 

    subsidiaries;

 

    financial statements;

 

    charter documents and corporate books and records;

 

    real property, title to properties and encumbrances on those properties;

 

    leases;

 

    validity and absence of breaches of material contracts;

 

    litigation;

 

    taxes;

 

    insurance;

 

    intellectual property;

 

    required permits and compliance with laws;

 

    absence of conflicts and required filings and consents;

 

    labor and other employment matters;

 

    employee benefit plans;

 

    absence of certain interests in clients, suppliers and others;

 

    absence of certain changes or events since September 30, 2002;

 

    compliance with regulatory laws;

 

    stockholder vote (or, in the case of First American, no stockholder vote) required to complete the mergers;

 

    approval of board of directors;

 

    broker’s or finder’s fees; and

 

    ownership of the assets of the business.

 

The merger agreement also contains representations and warranties by US SEARCH regarding the following matters:

 

    tax matters pertaining to consolidated returns filed by the Kushner-Locke Company in which US SEARCH was included;

 

    SEC filings; and

 

    US SEARCH’s receipt of the opinion of Lehman Brothers.

 

The merger agreement also contains additional representations and warranties of First Advantage relating to the ownership and activities of Stockholm One Merger Corp., Stockholm Two Merger Corp., Stockholm Three

 

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Merger Corp., Stockholm Four Merger Corp., Stockholm Five Merger Corp., Stockholm Six Merger Corp. and Stockholm Seven Merger Corp. and the authorization of First Advantage and the acquisition companies to consummate the mergers.

 

The representations and warranties contained in the merger agreement are subject to materiality qualifications in many respects, and expire at the completion of the mergers.

 

Conduct of Business Before Mergers

 

Introduction

 

US SEARCH and the FAST division have agreed to restrictions on their respective activities until either the completion of the mergers or the termination of the merger agreement. In general, US SEARCH is restricted from taking a number of actions outside the ordinary course of business. The FAST division is also restricted from taking certain actions.

 

Restrictions on US SEARCH’s Interim Operations

 

US SEARCH has agreed that it will:

 

    conduct its operations only according to the ordinary and usual course of business;

 

    accurately maintain its books and records in the manner required by applicable law;

 

    maintain its accounting and other financial records in accordance with applicable accounting requirements, published rules and regulations of the SEC with respect thereto and GAAP;

 

    use reasonable efforts to preserve intact its business organizations, keep available the services of its officers and employees and maintain existing relationships with licensors, suppliers, distributors, customers, landlords, employees, agents and others having business relationships with them;

 

    confer with First American concerning operational matters of a material nature, including the cancellation or waiver of any claim or right in excess of $50,000; and

 

    report periodically to First American concerning its business, operations and finances.

 

In addition, subject to specified exceptions, US SEARCH has agreed that it will:

 

    refrain from amending or modifying its or its subsidiaries’ certificate of incorporation and bylaws;

 

    refrain from paying any bonuses other than bonuses in the ordinary course of business;

 

    refrain from increasing any salaries or other compensation and entering into any employment, severance or similar agreement with any director, officer or employee;

 

    refrain from adopting, amending or increasing any profit sharing, bonus, deferred compensation, savings, insurance, pension, retirement, or other employee benefit plan outside the ordinary course of business;

 

    refrain from entering into any contract or commitment except contracts and commitments in the ordinary course of business;

 

    refrain from increasing its indebtedness for borrowed money;

 

    refrain from canceling or waiving any claim or right of substantial value which individually or in the aggregate is material;

 

    refrain from declaring or paying any dividends or redeeming, purchasing or otherwise acquiring any of its securities;

 

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    refrain from making any material change in accounting methods or practices, except as required by law, the SEC or GAAP;

 

    refrain from selling capital stock or other securities, or re-pricing any existing options, warrants or rights to purchase capital stock;

 

    refrain from selling, leasing or otherwise disposing of any asset or property other than in the ordinary course of business;

 

    refrain from making any capital expenditure, except in the ordinary course of business;

 

    refrain from writing off as uncollectible any notes or accounts receivable, except write-offs in the ordinary course of business;

 

    refrain from taking any action that could reasonably be expected to result in any of the representations and warranties of US SEARCH set forth in merger agreement becoming untrue or, any of the conditions to the mergers not being satisfied;

 

    use reasonable best efforts to refrain from taking actions outside the ordinary course of business that would reasonably be expected to delay the filing of this proxy statement/prospectus or require an amendment thereof or delay the effectiveness of the registration statement of which this proxy statement/prospectus is a part or require a post-effective amendment to such registration statement; and

 

    refrain from agreeing to do any of the foregoing.

 

On April 1, 2003, US SEARCH and First American entered into a letter agreement relating to bonuses paid by US SEARCH during the pendency of the merger agreement. Generally, the letter agreement permits the payment of bonuses awarded to certain executive officers of US SEARCH for services rendered during 2002, and prohibits the payment of any other bonuses by US SEARCH to any employee, executive officer or director of US SEARCH. See “THE MERGERS—Interests of Certain Persons in the Mergers” on page 48.

 

Restrictions on the FAST Division’s Interim Operations

 

First American has agreed that it will cause the FAST division to:

 

    maintain its accounting and other financial records in accordance with applicable accounting requirements, published rules of the SEC and GAAP;

 

    collect its receivables and pay its payables in the ordinary course of business; and

 

    use reasonable efforts to preserve intact its business organizations, keep available the services of its officers and employees and maintain existing relationships with licensors, suppliers, distributors, customers, landlords, employees, agents and others having business relationships with them.

 

In addition, subject to certain exceptions, First American has agreed that it will cause the FAST division to:

 

    refrain from amending or modifying its articles or certificates of incorporation and bylaws;

 

    refrain from making any material change in accounting methods or practices, except as required by law, the SEC or GAAP;

 

    refrain from selling any securities;

 

    refrain from taking any action that could reasonably be expected to result in any of the representations and warranties of First American set forth in the merger agreement becoming untrue or any of the conditions to the mergers not being satisfied;

 

    use reasonable best efforts to refrain from taking actions outside the ordinary course of business that would reasonably be expected to delay the filing of this proxy statement/prospectus or require an amendment thereof or delay the effectiveness of the registration statement of which this proxy statement/prospectus is a part or require a post-effective amendment to such registration statement; and

 

    refrain from agreeing to do any of the foregoing.

 

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Prohibition from Soliciting Other Offers

 

US SEARCH has agreed to furnish a copy of this proxy statement/prospectus to each of its stockholders as promptly as practicable after the registration statement of which it is a part has become effective with the SEC, and thereafter promptly to call, hold and convene a special meeting of its stockholders. US SEARCH has also agreed to use its reasonable best efforts to obtain the required stockholder approval for the mergers.

 

Under the terms of the merger agreement, subject to specific exceptions described below, US SEARCH has agreed that neither it nor any of its subsidiaries will, and that it will not authorize or permit any of its officers, directors or employees, or any financial advisor, attorney, accountant or other advisor or representative retained by it or its subsidiaries, to solicit, initiate, knowingly encourage or facilitate the submission of proposals or offers relating to a takeover proposal or endorse or enter into any agreement with respect to any takeover proposal.

 

A “takeover proposal” means:

 

    any tender or exchange offer, or proposal, other than a proposal by First American or any of its affiliates, for a merger, share exchange or other business combination involving US SEARCH or any of its subsidiaries; or

 

    any proposal or offer to acquire in any manner a substantial equity interest in US SEARCH or any of its subsidiaries or a substantial portion of the assets of US SEARCH or any of its subsidiaries.

 

Under the merger agreement, US SEARCH must promptly advise First American orally and in writing of any takeover proposal or any inquiries or discussions with respect to a takeover proposal and will within two days of receipt, furnish to First American a copy of any written takeover proposal or a written summary of the material terms of any oral takeover proposal.

 

Neither the board of directors of US SEARCH nor any committee of the board will:

 

    withdraw or modify, or propose to withdraw or modify, in a manner adverse to First American, its approval or recommendation of the mergers or the merger agreement; or

 

    approve or recommend, or propose to approve or recommend, any takeover proposal or any other acquisition of outstanding US SEARCH common stock other than pursuant to the mergers or the merger agreement.

 

Notwithstanding the restrictions contained in the merger agreement, US SEARCH may take the following actions, but only to the extent that the board of directors of US SEARCH concludes in good faith after consulting with its outside legal counsel and financial advisor that the failure to take such action would be inconsistent with the discharge of its fiduciary duties:

 

    furnish information pursuant to appropriate terms of confidentiality concerning US SEARCH and its business, properties or assets to a person who has indicated an interest in making a takeover proposal, without any solicitation by US SEARCH or any of its subsidiaries or representatives after the date of the merger agreement;

 

    engage in discussions or negotiations with an unsolicited person;

 

    following receipt of a takeover proposal from an unsolicited person, take and disclose to its stockholders a position contemplated by Rule 14e-2(a) under the Securities Exchange Act of 1934 or otherwise make disclosure to its stockholders;

 

   

following receipt of a takeover proposal from an unsolicited person, fail to make or withdraw or modify its recommendation or declaration of advisability of the mergers or adoption of the merger agreement, and to the extent it does so, refrain from calling, providing notice of or hold the meeting of

 

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its stockholders to approve the mergers and to adopt the merger agreement and from soliciting proxies or consents to secure the vote of its stockholders to adopt the merger agreement; or

 

    waive the provisions of any confidentiality or standstill agreement.

 

In addition, US SEARCH may:

 

    take any action required to be taken by any non-appealable, final order of a court of competent jurisdiction; or

 

    make any disclosure or filing required by applicable law, stock exchange rules or the rules, regulations or order of any governmental entity.

 

Additional Covenants

 

First Advantage Cash Balances

 

First American will contribute to First Advantage immediately before the closing of the mergers $15.0 million, less:

 

    fees and expenses of First American related to the mergers;

 

    the aggregate amount of the consolidated cash balances of the companies comprising the FAST division that will remain following the closing; and

 

    the amount of the total outstanding principal balance, and all accrued interest thereon, due by US SEARCH to First American under the $1.4 million promissory note.

 

FAST Division Acquisition Agreements

 

In the event that First American or any of its affiliates is permitted to reduce or offset against any payment obligation to third parties arising from or relating to any of the agreements by which First American or its affiliates acquired the companies that comprise the FAST division and their subsidiaries from any third parties, First American or its affiliates will contribute an amount of cash equal to such reduction or offset to First Advantage at the time First American or its affiliates recognize such reduction or offset.

 

Indemnification and Insurance

 

Subject to any limitation imposed from time to time under applicable law, First Advantage will indemnify and hold harmless the present and former officers, directors, employees and agents of US SEARCH and its subsidiaries in respect of acts or omissions occurring on or before the effective time of the mergers. Indemnification will be provided to the extent provided under US SEARCH’s certificate of incorporation and bylaws or any indemnification agreement with US SEARCH’s and its subsidiaries’ officers and directors to which US SEARCH or its subsidiaries is a party, in each case in effect on the date of the merger agreement.

 

For six years after the effective time of the mergers, First Advantage will use its reasonable best efforts to procure officers’ and directors’ liability insurance in respect of acts or omissions occurring on or before the effective time of the mergers covering each of the present and former officers, directors, employees and agents of US SEARCH and its subsidiaries currently covered by US SEARCH’s or its subsidiaries’ officers’ and directors’ liability insurance policy on terms substantially similar to those of such policy in effect on the date of the merger agreement. However, First American will not be required to cause First Advantage to maintain insurance with respect to a specific officer or director if the premium for obtaining the insurance exceeds 200% of the amount per annum US SEARCH paid in its current fiscal year. If First Advantage is unable to obtain the required insurance, it will obtain as much comparable insurance as possible for an annual premium equal to 200% of the amount per annum US SEARCH paid in its current fiscal year and will permit any such party entitled to insurance to pay the excess amount that may be necessary to maintain such insurance coverage.

 

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Conditions to Completion of the Mergers

 

The obligations of US SEARCH and First American to complete the mergers are subject to the satisfaction or waiver, if legally permissible, of the following conditions:

 

    the US SEARCH stockholders have approved the merger agreement and the mergers;

 

    the SEC has declared effective the registration statement of which this proxy statement/prospectus is a part;

 

    no stop order suspending the effectiveness of the registration statement or any part thereof has been issued by the SEC and no proceeding for that purpose, and no similar proceeding in respect of this proxy statement/prospectus, has been initiated or threatened by the SEC;

 

    all requests for additional information on the part of the SEC have been complied with;

 

    the First Advantage Class A common stock has been listed for quotation on the Nasdaq National Market, subject only to official notice of issuance;

 

    no temporary, preliminary or permanent injunction or other order issued by a court or other government body or by any public authority to restrain or prohibit or restraining or prohibiting the mergers shall be in effect;

 

    any waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 applicable to the mergers has expired or been terminated (which waiting period has since expired);

 

    no statute, rule, regulation, executive order, decree or order of any kind has been enacted, entered, promulgated or enforced by any court or governmental authority which prohibits the mergers; and

 

    all governmental and other consents and approvals have been received.

 

In addition, the obligations of First American to complete the mergers are subject to the satisfaction or waiver, if legally permissible, of the following conditions:

 

    the representations and warranties of US SEARCH contained in the merger agreement are true and accurate, or, in certain cases, true and accurate in all material respects, as of the date of the merger agreement and as of the closing date;

 

    all of the agreements of US SEARCH to be performed before the closing have been performed in all material respects;

 

    the Chief Executive Officer of US SEARCH has delivered to First American a compliance certificate with certain attachments certifying to US SEARCH’s good standing, qualification to do business, tax status and similar matters;

 

    no law, regulation, interpretation, opinion, order, judgment or decree of any kind (including any privacy, data protection, publicity, advertising or similar federal, state or local law) has been enacted, entered, promulgated, issued, amended or enforced by any court or governmental entity, and no change has occurred, which would reasonably be expected to materially and adversely affect the business, operations, assets, liabilities, financial condition or results of operations of US SEARCH and its subsidiaries, taken as a whole. The exception is any such law, regulation, interpretation, opinion, order, judgment or decree that would affect the United States economy generally without disproportionately affecting the industries in which US SEARCH and its subsidiaries compete;

 

    US SEARCH has not commenced a voluntary case under the bankruptcy laws, and an involuntary case under the bankruptcy laws has not been commenced against US SEARCH which involuntary case is not dismissed before the closing date;

 

    all of the directors of US SEARCH and its subsidiaries and certain officers of US SEARCH and its subsidiaries have resigned effective as of the closing date;

 

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    First American has received a written opinion from its counsel that each of the mergers, other than the merger of Stockholm Seven Merger Corp. with and into US SEARCH, will constitute a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code;

 

    US SEARCH has delivered to First American copies of certain documents, and all other proceedings in connection with the mergers have occurred; and

 

    Any settlement by US SEARCH of its remaining payment obligations owed to the former shareholders of Professional Resource Screening, has been effected solely by the issuance of US SEARCH common stock.

 

In addition, the obligations of US SEARCH to complete the mergers are subject to the satisfaction or waiver, if legally permissible, of the following conditions:

 

    the representations and warranties of First American contained in the merger agreement are true and accurate in all material respects, as of the date of the merger agreement and as of the closing date;

 

    First American has delivered to US SEARCH copies of certain documents, and all other proceedings in connection with the mergers have occurred;

 

    all of the agreements of First American to be performed before the closing have been performed in all material respects;

 

    the President or Chief Executive Officer of First American, First Advantage, each FAST division company and each merger subsidiary must have delivered to US SEARCH a compliance certificate with certain attachments certifying to such company’s good standing, qualification to do business, tax status and similar matters;

 

    no law, regulation, interpretation, opinion, order, judgment or decree of any kind (including any privacy, data protection, publicity, advertising or similar federal, state or local law) has been enacted, entered, promulgated, issued, amended or enforced by any court or governmental entity, and no change has occurred, which would reasonably be expected to materially and adversely affect the business, operations, assets, liabilities, financial condition or results of operations of the FAST division companies and their subsidiaries, taken as a whole;

 

    no FAST division company has commenced a voluntary case under the bankruptcy laws, and an involuntary case under the bankruptcy laws has not been commenced against any such company which involuntary case is not dismissed before the closing date;

 

    the standstill agreement has been executed and delivered by First American;

 

    the services agreement has been executed and delivered by First American;

 

    US SEARCH has received a written opinion from its counsel that the merger of Stockholm Seven Merger Corp. with and into US SEARCH will constitute a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code; and

 

    First Advantage has received the cash contribution required of First American.

 

Termination

 

Termination of Merger Agreement

 

The merger agreement may be terminated at any time before the closing:

 

    by mutual written agreement of the parties;

 

    on or after June 11, 2003 (or such later date as First American and US SEARCH may have agreed to in writing) by First American if the conditions to closing have not been complied with or performed in any material respect and First American has not materially breached any of its representations, warranties, covenants or agreements;

 

    by First American if the board of directors of US SEARCH has withdrawn or adversely modified its approval or recommendation of the mergers;

 

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    on or after June 11, 2003 (or such later date as First American and US SEARCH may have agreed to in writing) by US SEARCH, if the conditions to closing have not been complied with or performed in any material respect and US SEARCH has not materially breached any of its representations, warranties, covenants or agreements;

 

    by either First American or US SEARCH by written notice to the other parties if the mergers contemplated in the merger agreement have not become effective within 30 days after the closing date, so long as the party seeking to terminate has not breached in any material respect any of its covenants and agreements which breach is the proximate cause of the delay;

 

    by First American if US SEARCH fails to call the special meeting of its stockholders to approve the mergers on or before the 45th day after the registration statement of which this proxy statement/prospectus is a part is declared effective by the SEC;

 

    by US SEARCH if a takeover proposal has occurred and the board of directors of US SEARCH withdraws or modifies its approval and recommendation of the mergers and the merger agreement to the extent permitted by the merger agreement in connection with such takeover proposal;

 

    by either First American or US SEARCH if a court of competent jurisdiction or other governmental entity has issued a final, non-appealable order, decree or ruling, or taken any other action, having the effect of permanently restraining, enjoining or otherwise prohibiting the mergers;

 

    by either First American or US SEARCH if at the special meeting of stockholders the stockholders of US SEARCH do not approve the mergers or the merger agreement;

 

    by First American or US SEARCH if Lehman Brothers, US SEARCH’s financial advisor, withdraws its opinion or otherwise notifies the board of directors of US SEARCH that it may no longer rely on such opinion;

 

    by First American if US SEARCH has materially breached any of its covenants and agreements contained in the merger agreement and US SEARCH fails to cure such breach within 10 days after receiving notice from First American;

 

    by First American if US SEARCH breaches the letter agreement, dated April 1, 2003, between First American and US SEARCH relating to the payment of bonuses to US SEARCH employees, executive officers or directors; or

 

    by US SEARCH if First American has materially breached any of its covenants and agreements contained in the merger agreement and First American fails to cure such breach within 10 days after receiving notice from US SEARCH.

 

Termination Fee

 

US SEARCH will promptly pay First American a termination fee of $2.8 million in the event the merger agreement is terminated:

 

    by First American because the board of directors of US SEARCH has withdrawn or adversely modified its approval or recommendation of the mergers;

 

    by First American because US SEARCH failed to call the special meeting of its stockholders to approve the mergers on or before the 45th day after the registration statement of which this proxy statement/prospectus is a part is declared effective by the SEC;

 

    by US SEARCH because a takeover proposal has occurred and the board of directors of US SEARCH withdraws or modifies its approval and recommendation of the mergers and the merger agreement to the extent permitted by the merger agreement, in connection with such takeover proposal; or

 

    by either First American or US SEARCH if at the special meeting of stockholders, the stockholders of US SEARCH do not approve the mergers or the merger agreement and, at such time, a takeover proposal had been made and not rejected by US SEARCH’s board of directors.

 

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Expenses

 

The parties have agreed to pay all of their own expenses relating to the mergers, including the fees and expenses of their respective counsel, auditors and financial advisers. However, following the closing, First Advantage will reimburse First American and its affiliates for all out-of-pocket fees and expenses incurred by any of them in connection with the negotiation and preparation of the merger agreement and the mergers, and First American will be entitled to offset any reimbursement that would otherwise be owed by First Advantage against the $15.0 million capital contribution it is required to make to First Advantage pursuant to the merger agreement.

 

Amendment and Waiver

 

The merger agreement may be amended by First American and US SEARCH, by action taken or authorized by their respective board of directors, at any time before or after approval of the matters presented in connection with the mergers by the stockholders of US SEARCH. However, after approval of US SEARCH’s stockholders, no amendment will be made which by law requires further approval by such stockholders without such further approval. Any such amendment may not be made orally, but only by an agreement in writing signed by the parties.

 

At any time before the completion of the mergers, the parties may:

 

    extend the time for performance of any of the obligations or other acts of the other parties contained in the merger agreement;

 

    waive any inaccuracies in the representations and warranties of the other parties contained in the merger agreement or in any document delivered pursuant to the merger agreement; and/or

 

    waive compliance with any of the agreements or conditions of the other parties contained in the merger agreement.

 

Any agreement on the part of a party to any such extension or waiver is valid only if set forth in writing signed by such party.

 

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OTHER AGREEMENTS

 

Voting Agreement

 

The following summary describes material provisions of the voting agreement, which is attached to this proxy statement/prospectus as Annex C and is incorporated by reference into this proxy statement/prospectus. This summary may not contain all of the information about the voting agreement that is important to you. We encourage you to read the voting agreement carefully in its entirety.

 

Concurrently with the execution and delivery of the merger agreement, First American entered into a voting agreement with Pequot Private Equity Fund II, L.P. As of May 1, 2003, Pequot Private Equity Fund II, L.P. held of record 52,529,702 shares of US SEARCH common stock, representing approximately 54.1% of the outstanding shares of US SEARCH common stock entitled to vote.

 

Under the voting agreement, Pequot Private Equity Fund II, L.P. has agreed that at the special meeting of US SEARCH stockholders it will:

 

    take such actions as are necessary to vote or cause to be voted all of its shares of US SEARCH common stock in favor of the merger of Stockholm Seven Merger Corp. with and into US SEARCH, the execution and delivery by US SEARCH of the merger agreement and the approval of the terms thereof and each of the other actions contemplated by the merger agreement and the voting agreement and any actions reasonably required in furtherance of the merger agreement and the voting agreement; and

 

    not vote or cause or permit to be voted any of its shares of US SEARCH common stock in favor of any takeover proposal (as described below) or any other action or agreement that would in any manner impede, frustrate, prevent or nullify any of the transactions contemplated by the merger agreement (including, without limitation, the merger of Stockholm Seven Merger Corp. with and into US SEARCH) or result in a breach of any covenant, representation or warranty or any other obligation or agreement of US SEARCH under the merger agreement or which would result in any of the conditions to US SEARCH’s or First American’s obligations under the merger agreement not being fulfilled.

 

In addition, Pequot Private Equity Fund II, L.P. also has agreed that it will not:

 

    transfer, or consent to any transfer of, any or all of its shares of US SEARCH common stock or any interest therein if such transfer would result in Pequot Private Equity Fund II, L.P. no longer having the power to vote or cause to be voted such shares in favor of the merger agreement;

 

    enter into any contract, option or other agreement or understanding with respect to any such transfer of any or all of its shares of US SEARCH common stock, or any interest therein if the entering into or performance of any such contract, option or other agreement or understanding would result in Pequot Private Equity Fund II, L.P. no longer having the power to vote or cause to be voted such shares in favor of the merger agreement;

 

    grant any proxy, power-of-attorney or other authorization in or with respect to its shares of US SEARCH common stock (other than for the purpose of fulfilling the terms of the voting agreement);

 

    deposit its shares of US SEARCH common stock into a voting trust or enter into another voting agreement or arrangement with respect to such shares, other than pursuant to the voting agreement; or

 

    take any other action that would in any way restrict, limit or interfere in any material respect with the performance of Pequot Private Equity Fund II, L.P.’s obligations under the voting agreement or the transactions contemplated thereby or by the merger agreement.

 

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Pequot Private Equity Fund II, L.P. has further agreed, in its capacity as a shareholder of US SEARCH, that it will not, directly or indirectly, knowingly encourage, solicit, participate in or initiate discussions or negotiations with, or provide any information to, any person other than First American or any of its affiliates or representatives concerning any takeover proposal.

 

For purposes of the voting agreement, a “takeover proposal” means:

 

    any tender or exchange offer, or proposal, other than a proposal by First American or any of its affiliates, for a merger, share exchange or other business combination involving US SEARCH or any of its subsidiaries; or

 

    any proposal or offer to acquire in any manner a substantial equity interest in US SEARCH or any of its subsidiaries or a substantial portion of the assets of US SEARCH or any of its subsidiaries.

 

The voting agreement will terminate upon the earlier of the termination of the merger agreement or the consummation of the transactions contemplated by the merger agreement.

 

The voting agreement does not limit or affect any actions taken by any member of the US SEARCH board of directors or any officer of US SEARCH in his or her capacity as a director or officer of US SEARCH.

 

Stockholders Agreement

 

The following summary describes material provisions of the stockholders agreement, which is included in this proxy statement/prospectus as Annex D and is incorporated by reference into this proxy statement/prospectus. This summary may not contain all of the information about the stockholders agreement that is important to you. We encourage you to read the stockholders agreement carefully in its entirety.

 

Concurrently with the execution and delivery of the merger agreement, First American entered into a stockholders agreement with Pequot Private Equity Fund II, L.P. and First Advantage.

 

Tag-Along Right.    In the stockholders agreement, First American agreed that it will not, directly or indirectly, transfer any shares of First Advantage capital stock to any party in a transaction or series of related transactions occurring within a three-year period commencing on the effective date of the mergers if, immediately after such transfer, First American and its affiliates would not beneficially own at least 70% of the number of shares of First Advantage capital stock issued to First American and its affiliates at the closing of the mergers unless:

 

    First American delivers a written notice to Pequot Private Equity Fund II, L.P. of such sale, identifying the third party, the number of shares proposed to be transferred, the purchase consideration for the shares, the proposed date of the closing of such sale and the other material terms and conditions of the proposed sale; and

 

    at Pequot Private Equity Fund II, L.P.’s election, First American permits Pequot Private Equity Fund II, L.P. and its affiliates to participate in such sale by selling a number of shares held by Pequot Private Equity Fund II, L.P. equal to the product of (a) a fraction, the numerator of which is the number of shares proposed to be sold by First American and or its affiliates and the denominator of which is the total number of shares then held by First American and its affiliates and (b) the total number of shares then held by Pequot Private Equity Fund II, L.P. and its affiliates.

 

The purchase consideration paid for exercising the tag-along right will be the purchase consideration offered to First American or its affiliates. If First American or any of its affiliates has sold any shares of First Advantage to the other party in the 12 months before delivering the notice to Pequot Private Equity Fund II, L.P. or such sale is part of a series of related transactions, Pequot Private Equity Fund II, L.P. may request to treat all such sales to which Pequot Private Equity Fund II, L.P. has not been granted a tag-along right as a single transaction, and the price per share to be paid will be the weighted average price paid for all such transactions.

 

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Designation of Director.    First American agreed to vote, and cause each of its affiliates to vote, all of its shares of First Advantage, or otherwise take such action, as is necessary to ensure that the size of the board of directors of First Advantage will be no more than 10 directors. In addition, First American and each of its affiliates will cause the election to the board of directors of First Advantage of one representative designated in writing by Pequot Capital Management, Inc., who initially will be Lawrence D. Lenihan, Jr. However, First American and its affiliates are not required to vote their shares in favor of any such representative if:

 

    such representative is an officer, director or employee of a person, that is, directly or through its subsidiaries, materially engaged in an individual background screening business that competes with the individual background screening business owned by First Advantage and its subsidiaries; or

 

    such representative is or has been the subject of any of the matters described in Rule 262(b) promulgated under the Securities Act.

 

In lieu of designating a member of the board of directors, Pequot Private Equity Fund II, L.P. may, subject to execution of a mutually agreed confidentiality agreement, designate a representative to:

 

    attend all regular and special meetings of First Advantage’s board of directors in a non-voting, observer capacity; and

 

    receive all notices and materials provided to members of the board of directors, other than privileged information or information that the board reasonably determines to conflict with such representative’s rights.

 

Registration Rights.    The securities that may be registered under the stockholders agreement are:

 

    any shares of Class A common stock of First Advantage that Pequot Private Equity Fund II, L.P. or any of its affiliates own at the date of closing of the mergers or received or is receivable upon the exercise of warrants held at such closing;

 

    any securities received or receivable as a dividend, stock split or other distribution with respect to other registrable securities;

 

    any securities received or receivable upon specific reorganization, reclassification, merger, consolidation or other similar events; and

 

    any shares of Class A common stock of First Advantage acquired by Pequot Private Equity Fund II, L.P. or its affiliates after the date of stockholders agreement, the transfer of which is restricted under Rule 144 of the Securities Act.

 

Demand Registration Rights.    Pequot Private Equity Fund II, L.P. will have the right, by written notice delivered to First Advantage, to require First Advantage to register under the Securities Act the resale registrable securities (as described above) having an aggregate offering price (before deducting of underwriting discounts and commissions) to the public in excess of $5.0 million. Upon receipt of a notice by Pequot Private Equity Fund II, L.P., First Advantage will effect, as expeditiously as reasonably possible, the registration under the Securities Act of all registrable securities that Pequot Private Equity Fund II, L.P. requests to be registered.

 

If Pequot Private Equity Fund II, L.P. exercises its demand registration rights and intends to distribute the registrable securities covered by its request by means of an underwriting, First Advantage will enter into an underwriting agreement in customary form with an underwriter or underwriters selected for such underwriting by Pequot Private Equity Fund II, L.P. (which underwriter or underwriters will be reasonably acceptable to First Advantage).

 

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First Advantage will not be required to effect any registration based on Pequot Private Equity Fund II, L.P.’s demand registration rights:

 

    before December 13, 2003;

 

    after First Advantage has effected two registration statements pursuant to Pequot Private Equity Fund II, L.P.’s demand registration rights and such registration statements have become effective;

 

    if First Advantage furnishes to Pequot Private Equity Fund II, L.P. a certificate signed by the President or Chief Executive Officer of First Advantage stating that in the good faith judgment of First Advantage’s board of directors, it would be seriously detrimental to First Advantage and its stockholders for such registration statement to be effected at such time. If such event occurs, First Advantage has the right to defer such filing for a period of not more than ninety days after receipt of Pequot Private Equity Fund II, L.P.’s request; provided that such right to delay a request is exercised by First Advantage not more than once in any twelve (12) month period; or

 

    if Pequot Private Equity Fund II, L.P. proposes to dispose of shares of registrable securities that may be registered on a Form S-3.

 

Piggyback Registration.    If First Advantage proposes to file any registration statement under the Securities Act for purposes of a public offering of securities of First Advantage, whether or not for sale for its own account, it will afford Pequot Private Equity Fund II, L.P. and its affiliates an opportunity to include in such registration statement all or part of the registrable securities. If such registration statement is for an underwritten offering, Pequot Private Equity Fund II, L.P. will enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by First Advantage but in no event will any indemnity and/or contribution provisions in such underwriting agreement provide that the indemnity and/or contribution of Pequot Private Equity Fund II, L.P. exceed the net proceeds from the offering received by Pequot Private Equity Fund II, L.P.

 

S-3 Registrations.    First Advantage will use its reasonable best efforts to become and remain eligible to register offerings of securities on Form S-3 or its successor form. At all times during which First Advantage is qualified for the use of Form S-3, Pequot Private Equity Fund II, L.P. may request that First Advantage register its registrable securities on Form S-3. However, First Advantage will not be required to effect more than two such registrations during any twelve-month period if such registrations on Form S-3 have been declared or ordered effective and have remained effective until the earlier of 30 days after the date of effectiveness or the date all of the registrable securities registered thereunder have been sold. First Advantage will not be required to effect any S-3 registration:

 

    within 120 days of the effective date of any other registration pursuant to the stockholders agreement; or

 

    unless Pequot Private Equity Fund II, L.P. proposes to dispose registrable securities having an anticipated aggregate price to the public (net of underwriting discounts and expenses of sale, if any) of at least $2.0 million.

 

Once in any 12 month period, First Advantage may defer filing such S-3 registration statement for a period of not more than 90 days following the requested filing date if First Advantage furnishes to Pequot Private Equity Fund II, L.P. a certificate signed by the President or Chief Executive Officer of First Advantage stating that in the good faith judgment of First Advantage’s board of directors it would be seriously detrimental to First Advantage and its stockholders for a registration statement to be filed at the time requested. Subject to the foregoing, First Advantage will use its reasonable best efforts to promptly effect such registration on Form S-3 to the extent requested by Pequot Private Equity Fund II, L.P. under the stockholders agreement.

 

Expenses Related to Registrations.    First Advantage will pay all expenses related to any registration under the stockholders agreement, other than underwriting fees, discounts, commissions or transfer taxes related to

 

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Pequot Private Equity Fund II, L.P.’s shares of Class A common stock sold under such registration and will pay fees of one special counsel to Pequot Private Equity Fund II, L.P. or its affiliates of up to $25,000. First Advantage and Pequot Private Equity Fund II, L.P. have agreed to indemnify each other for third party claims arising out of securities law violations under customary circumstances.

 

Termination.    No party has any obligations under the stockholders agreement before the effective time. After the effective time, the provisions of the stockholders agreement terminate as follows:

 

    The tag-along rights terminate on the earlier of:

 

    the first date on which Pequot Private Equity Fund II, L.P. and its affiliates beneficially own less than 5% of the total number of shares of First Advantage’s common stock issued and outstanding immediately following the closing of the mergers; and

 

    the third anniversary of the effective time of the mergers.

 

    The registration rights will terminate on the earlier of:

 

    the fourth anniversary of the effective date; and

 

    the first date following the effective date on which:

 

    First Advantage is then providing current public information within the meaning of Rule 144(c)(1) promulgated under the Securities Act;

 

    no representative designated by Pequot Private Equity Fund II, L.P. pursuant to the stockholders agreement is a member of the board of First Advantage; and

 

    Pequot Private Equity Fund II, L.P. and its affiliates are able to sell all of their registrable securities without restriction under Rules 144 and 145 promulgated under the Securities Act during a three-month period.

 

    The director designation right will terminate on the first date on which Pequot Private Equity Fund II, L.P. owns less than 75% of all of the shares of First Advantage Class A common stock issued to Pequot Private Equity Fund II, L.P. and its affiliates at the closing of the mergers.

 

Standstill Agreement

 

The following summary describes material provisions of the standstill agreement, which is attached to this proxy statement/prospectus as Annex E and is incorporated by reference into this proxy statement/prospectus. This summary may not contain all of the information about the standstill agreement that is important to you. We encourage you to read the standstill agreement carefully in its entirety.

 

Pursuant to the merger agreement, at the closing of the mergers First American will enter into a standstill agreement with First Advantage. The standstill agreement will provide that First American will not and will not permit any of its affiliates to, acquire, offer, or propose or agree to acquire, beneficial ownership of any voting securities of First Advantage or securities of any subsidiary of First Advantage other than:

 

    the securities of First Advantage issued to First American at the closing of the mergers or securities issued upon exchange, exercise or conversion thereof;

 

    as a result of the transfer of beneficial ownership of securities of First Advantage from First American or its affiliates to an affiliate of First American or to First American; provided, that the acquiring person agrees in writing to assume all of the obligations of First American under the standstill agreement; and

 

    securities issued to First American or an affiliate of First American as a result of a capital contribution made by First American or such affiliate to First Advantage and approved by a majority of disinterested directors of First Advantage.

 

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First American may also acquire, offer or propose or agree to acquire the beneficial ownership of securities of First Advantage if pursuant to a tender offer made by First American or an affiliate of First American for outstanding securities of US SEARCH:

 

    to all of First Advantage’s stockholders (other than First American and its affiliates);

 

    conditioned on at least two-thirds of the outstanding common stock of First Advantage (other than common stock of First Advantage beneficially owned by First American and its affiliates) being tendered; and

 

    in which the same consideration is offered to all holders of First Advantage common stock.

 

In addition, the tender offer must be approved by a special committee of First Advantage’s board of directors created to consider the tender offer and consisting only of disinterested directors, after receiving a written opinion from a nationally recognized investment bank that the tender offer is fair to First Advantage’s stockholders (other than First American and its affiliates).

 

In addition, without the prior written approval of a majority of disinterested directors of First Advantage, First American will not and will not cause or permit any of its subsidiaries to enter into any transaction with First Advantage or any subsidiary of First Advantage (other than transactions expressly contemplated by the merger agreement), except transactions engaged in by First Advantage or its subsidiary in the ordinary course of business.

 

First American has also agreed that it will not and will not cause or permit any of its subsidiaries to transfer First Advantage voting securities to any person or group of persons, unless such person or group acquiring such shares agrees in writing to assume all of the obligations of First American under the standstill agreement, if such transfer results in:

 

    such person or group beneficially owning more than 50% of the issued and outstanding voting securities of First Advantage immediately after such transaction; and

 

    either the transfer is made to a person or group in which First American or any of its affiliates has an economic interest in excess of $20.0 million or the voting securities being transferred, together with any voting securities previously transferred by First American or any of its affiliates to such person or group, represent 25% or more of the issued and outstanding voting securities of First Advantage.

 

For purposes of the standstill agreement, “disinterested director” means any member of First Advantage’s board of directors that is not:

 

    an officer or employee of First Advantage;

 

    an officer, director or employee of First American or any affiliate (excluding First Advantage) thereof;

 

    a person who controls or is under common control with First American or any affiliate of First American; or

 

    a person who otherwise would fail to qualify as an “independent director” under the applicable rules of the Nasdaq National Market as then in effect (other than any person designated by Pequot Private Equity Fund II, L.P. in accordance with the stockholders agreement, who will not be disqualified as a disinterested director if such designee otherwise fails to so qualify).

 

For purposes of the standstill agreement, “voting securities” means, collectively, the First Advantage Class A common stock, the First Advantage Class B common stock and any other securities entitled, or that are entitled in the future, to vote generally for the election of members of First Advantage’s board of directors.

 

The standstill agreement will terminate on the earlier to occur of the fourth anniversary of the effective date and the date on which First American no longer controls First Advantage.

 

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Services Agreement

 

The following summary describes material provisions of the services agreement, which is attached to this proxy statement/prospectus as Annex F and is incorporated by reference into this proxy statement/prospectus. This summary may not contain all of the information about the services agreement that is important to you. We encourage you to read the services agreement carefully in its entirety.

 

At the closing of the mergers First Advantage and First American will enter into a services agreement pursuant to which First American will provide certain business services and overhead services to First Advantage.

 

The following business services will be provided to First Advantage at the rates set forth below:

 

   

 

Human Resources Systems and Payroll Systems

  

$150,000 per year

   

 

Network Services

  

$100,000 per year

   

 

Oracle Financial Systems

  

$50,000 per year

   

 

401(k) Expenses

  

Actual Cost

   

 

Pension Expenses

  

Actual Cost

   

 

Insurance Allocation

  

Actual Cost

   

 

Medical Insurance Allocation

  

Actual Cost

   

 

Company Car Program

  

Actual Cost

   

 

Personal Property Leasing

  

Comparable pricing given to similarly situated affiliates of First American

 

The following overhead services will be provided to First Advantage for a fee of $50,000 per month and reasonable out-of-pocket expenses:

 

    Legal support;

 

    Tax support;

 

    Strategic planning;

 

    Corporate communications support;

 

    Investor relations support;

 

    Accounting/financial management support;

 

    Human resources support; and

 

    General management support.

 

The following additional services with respect to Indian operations will be provided by First Advantage to First American and its affiliates at actual cost:

 

    Leasing of real and personal property;

 

    Management support;

 

    Human resources/payroll support; and

 

    Services incidental to the foregoing.

 

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First Advantage will, and will cause its affiliates to, provide First American and its affiliates with products and services offered by or through First Advantage or its affiliates from time to time at rates and on terms no less favorable than those generally offered by First Advantage and its affiliates to third parties.

 

Pursuant to the services agreement, First American may make one or more loans to First Advantage on terms mutually agreeable to First American and First Advantage without obtaining the consent of a committee of disinterested directors of First Advantage, provided that:

 

    such loan or loans bear interest at a rate per annum no greater than the prime rate in effect from time to time plus 2.75%; and

 

    the aggregate amount of all such loans at any date of determination will not exceed $1.0 million.

 

The services agreement does not prevent First American and First Advantage from agreeing to a loan by First American to First Advantage in excess of the above principal and interest amounts so long as it is approved by a committee of disinterested directors of First Advantage.

 

In addition, First American may offer to provide First Advantage or its affiliates, and First Advantage or its affiliates may purchase, products and services offered by or through First American in the ordinary course of business at rates and on terms then offered by First American to comparable third parties.

 

The services agreement will commence on the effective date of the mergers and terminate on the one year anniversary of such date, unless renewed. The services agreement will continue for successive 180-day periods unless either First American or First Advantage advises the other in writing, no later than thirty days before such date, that the services agreement will not be extended.

 

Subordinated Secured Promissory Note

 

The following summary describes material provisions of the subordinated secured promissory note, which is included as an exhibit to the registration statement of which this proxy statement/prospectus forms part. The terms of the subordinated secured promissory note are incorporated by reference into this proxy statement/prospectus. This summary may not contain all of the information about the subordinated secured promissory note that is important to you. We encourage you to read the subordinated secured promissory note carefully in its entirety. See “WHERE YOU CAN FIND MORE INFORMATION” for instructions on how to obtain the registration statement and exhibits.

 

In connection with the merger agreement, on January 15, 2003, First American loaned US SEARCH $1.4 million pursuant to a subordinated secured promissory note. The note matures on June 30, 2003 and bears interest at a rate equal to the lesser of 10.0% and the prime rate plus 4.75%. If an event of default occurs under the note, all principal and accrued interest will become immediately due and payable and the interest rate will increase to the lesser of 10.0% and the prime rate plus 6.75%. The obligations evidenced by the note are secured by all real and personal property of US SEARCH pursuant to a security agreement between First American and US SEARCH.

 

The following occurrences are events of default under the note:

 

    default in the payment when due of any principal or interest due under the note or any other amounts owing thereunder if such default continues unremedied for three or more business days;

 

    any representation, warranty or statement made by or on behalf of US SEARCH in the note or any security document or in any certificate proves to be untrue in any material respect on the date as of which made or deemed made;

 

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    default in the due performance or observance of any other term, covenant or agreement contained in the note or the security agreement and such default continues unremedied for a period of the lesser of ten business days and the grace period provided for in the security agreement with respect to such default, if any;

 

    default in the payment when due, whether by acceleration or otherwise, of any debt for borrowed money of US SEARCH under the Loan and Security Agreement, dated September 12, 2001, as amended, between Comerica Bank, as successor to Imperial Bank, and US SEARCH or default in the performance or observance of any obligation or condition with respect to such debt if the effect of such default is to accelerate the maturity of any such debt or such default continues unremedied for any applicable period of time sufficient to permit the holder or holders of such debt, or any trustee or agent for such holders, to cause such debt to become due and payable before its stated maturity;

 

    US SEARCH or any of its subsidiaries institutes or consents to the institution of any proceeding under the federal bankruptcy statutes or any other debtor relief law, or makes an assignment for the benefit of creditors;

 

    US SEARCH or any of its subsidiaries applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its property;

 

    any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of US SEARCH or any of its subsidiaries and the appointment continues undischarged or unstayed for 60 calendar days;

 

    any proceeding under the federal bankruptcy statutes or any other debtor relief law relating to any such person or to all or any part of its property is instituted without the consent of US SEARCH or any of its subsidiaries and continues undismissed or unstayed for 60 calendar days, or an order for relief is entered in any such proceeding;

 

    if, without the express prior written consent of First American, title to any of the collateral, or any part thereof or interest therein, is (or is attempted to be) sold, conveyed, transferred or further encumbered by US SEARCH in favor of any other person, firm, corporation or other entity, whether by operation of law, agreement or otherwise, except as expressly permitted by the security agreement;

 

    any judgment or order for the payment of money in excess of $2.0 million (taking into account any insurance proceeds payable under a policy where the insurer has accepted coverage without reservation) is rendered against US SEARCH and either:

 

    enforcement proceedings have been commenced by any creditor upon such judgment or order; or

 

    there has been any period of fifteen (15) consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, is not in effect; or

 

    the security documents or any provision thereof ceases to be in full force and effect, or ceases to give First American the liens, rights, powers and privileges purported to be created thereby, or US SEARCH or any other person obligated under any security document (other than First American) defaults in the performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to such security documents or US SEARCH or any person purporting to act by or on behalf of US SEARCH denies or disaffirms US SEARCH’S obligations under any security document.

 

 

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INFORMATION ABOUT US SEARCH

 

Business

 

Overview

 

US SEARCH is an individual locator and risk management services company, which uses its proprietary software platform and web-based systems to supply consumer and business clients with services such as individual location, identity verification, criminal record checks, employment and education verifications. US SEARCH, through its wholly-owned subsidiary, Professional Resource Screening, provides employment screening services, including identity verification, criminal record checks, employment and education verifications professional reference checks, credit and motor vehicle record checks, and drug screening. Professional Resource Screening has more than 500 large business clients, including AT&T Wireless, The AIG Life Companies, Bell South Corporation, Charles Schwab and DHL Worldwide Express.

 

US SEARCH’s services can be accessed through its websites, www.ussearch.com for consumers, www.ussearch.com/business for small and medium businesses, or www.prsinet.com for large businesses. US SEARCH makes its periodic and current reports available, free of charge, at www.ussearch.com as soon as reasonably practicable after such material is filed with the Securities and Exchange Commission. US SEARCH was founded in 1994 and incorporated in Delaware in 1999.

 

US SEARCH has developed US SEARCH DARWIN patent-pending technology, which automates the data management supply chain by accessing, assimilating, and compiling data from disparate sources. The current applications of the technology focus on individual locator and profile services. US SEARCH has developed the technology’s application to employment screening services and expects that it will be in production for US SEARCH’s business customers in 2003. By automating the fulfillment process for employment screening, US SEARCH believes it will be able to deliver a superior quality product more quickly and more efficiently.

 

Growth in the Security, Certification and Verification Services Sector

 

US SEARCH believes that background screening and certification services industries will grow due to an increased awareness of security issues. US SEARCH expects that companies will perform more comprehensive background checks on their employees. US SEARCH provides a range of employment screening and background check services, including criminal record checks, employment and education verifications, professional reference checks, credit and motor vehicle record checks, and drug screening.

 

US SEARCH believes that security and risk mitigation have become important issues for businesses, government and other organizations. US SEARCH believes that employers will require better information about the backgrounds of their prospective and current employees to conform, in certain industries, to new regulations and guidelines, to obtain insurance coverage, to reduce the risk of legal liability for negligent hiring and to manage risk. Information technology has provided individual employees with greater potential access to corporate assets.

 

While services and technologies have developed to provide remote access to information sources, US SEARCH believes that existing screening companies either provide only limited information or employ limited amounts of automation. For example, credit reporting services make available only limited types of information for specific purposes, such as verifying individual credit records. More comprehensive search and background checks are available through private investigation firms, but they draw on limited datasets, require significant human intervention, do not generate instantaneous results, and are costly. The employment screening industry has historically been fragmented and regional in nature, with over 100 providers in the United States, most with sales of less than $20.0 million annually. US SEARCH believes that small- and medium-sized businesses have not generally used pre-employment screening services due to prohibitive costs. As these services

 

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become more common, US SEARCH believes that there will be a need for a screening company that generates fast results and is highly accurate and scalable. According to the U.S. Bureau of National Affairs, the average monthly employee turnover rate for 2001 was approximately 1.1% of the U.S. workforce. Many companies must fill thousands of positions a year, screening multiple candidates for each open position.

 

US SEARCH Services

 

US SEARCH offers a variety of products and services to provide accurate and timely, background information. US SEARCH’s services are highly automated—its clients online can conduct many of US SEARCH’s services instantly. US SEARCH also offers assisted searches and screening services, both online and through toll free telephone numbers. US SEARCH constantly evaluates its data sources and other information sources to ensure the availability of timely, accurate and comprehensive data and background information to its clients.

 

    Large Business Services.    Through US SEARCH’s subsidiary, Professional Resource Screening, US SEARCH provides large businesses, government agencies and other employers with a variety of employment screening, individual and business background check and risk mitigation products and services via an online, web-based system that enables instant ordering and prompt delivery of results. Customers can customize the search and decision parameters online using a “drag-and-drop” browser interface. Employment screening products include Social Security Number Trace, Federal and State Felony and Misdemeanor Record Searches, Employment and Education Verification, Motor Vehicle Records and Credit History. US SEARCH also provides character reference checks and drug screening via third party providers. US SEARCH also offers a Management Services program that provides customers with an outsourced solution to background investigations, which includes analysis of developed investigation data, management of Fair Credit Reporting Act communications, legal compliance, and direct applicant contact. Finally, US SEARCH recently developed ApplyDirect, a web-based application tool designed to reduce recruiting costs and improve time-to-hire by allowing job candidates to electronically complete and sign employment application forms. The online application is easily customized to match a client’s paper based form in content and design and incorporates digital signature technology allowing applicants to authorize a background screen.

 

    Small and Medium Business Services.    US SEARCH provides small and medium businesses with a variety of services including individual locator, individual and business background checks and employment screening. Small and medium business clients may use US SEARCH’s services to find missing beneficiaries, debtors, alumni, witnesses, shareholders and pension plan participants, perform due diligence on individuals and businesses before entering into a business or financial relationship, research identity fraud, verify property ownership or screen employees before making a hiring decision. US SEARCH’s customers may access a new small and medium business website at www.ussearch.com/business.

 

    Consumer Services.    US SEARCH provides consumer clients with a single, comprehensive access point to a broad range of information to assist them in locating friends and relatives or learn more information about people in their lives. US SEARCH’s clients can obtain addresses, aliases, listed phone numbers, property ownership, court records, judgments, professional license verification, corporate affiliations and date of death information. Searches are performed by electronically accessing multiple, geographically dispersed public record databases. US SEARCH aggregates this information, then formats and presents the search results to make them easy to read and understand.

 

US SEARCH Strategy

 

US SEARCH’s objective is to become the leading provider of Internet-based employment screening and background information services to businesses, governments and individuals. US SEARCH believes that pre-employment and verification services will become automated through technology in a similar manner to how

 

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payroll processing and applicant tracking were automated in the past. US SEARCH makes it possible to not merely screen employees before they are hired, but to perform periodic checks on an automated basis. To accomplish these objectives, US SEARCH intends to:

 

    Expand the number of customers using its technology. Through Professional Resource Screening, US SEARCH has over 500 customers for whom it is providing employment screening. During 2003, US SEARCH will continue to focus on converting existing customers from regional or divisional accounts to national accounts. In addition, US SEARCH will focus on expanding the scope of services provided to customers and winning new customers in industry verticals where there is a need for background screening, including transportation, retail, insurance, financial services, healthcare, telecommunications, and technology.

 

    Complete the integration of Professional Resource Screening to US SEARCH’s back-end automated fulfillment platform. Because US SEARCH DARWIN technology makes it possible to introduce automation into portions of the fulfillment of background searches, US SEARCH expects to improve productivity and increase operating efficiency as it completes the integration of Professional Resource Screening’s operations. In addition, US SEARCH believes it will be able to significantly increase the range of services offered to Professional Resource Screening’s existing customer base.

 

    Establish strategic partnerships with leading IT consultants, systems integrators, HR information systems vendors and HR outsourcing companies. US SEARCH intends to develop relationships with leading consulting companies, systems integrators and HR outsourcing companies that will enable it to provide services to their existing client base. US SEARCH also intends to develop partnerships with leading HR Information Systems and Enterprise Resource Planning vendors to integrate its web-enabled software with their systems and make automated screening and background checks available as a value-added feature of their systems.

 

    Continue to grow the consumer business. US SEARCH intends to deepen and strengthen its channel partnerships and continue to introduce new products and services to expand its market position in the consumer business.

 

Marketing and Brand Awareness

 

US SEARCH markets its services through a direct sales force, strategic partnerships and Internet advertising featuring the US SEARCH brand. Given the current attention being paid to security issues, US SEARCH intends to develop channel relationships with leading management consultants, systems integrators, HR information systems providers and HR outsourcing companies to make US SEARCH DARWIN technology and services available as a component of their offerings.

 

US SEARCH intends to continue to strengthen its brand through Internet advertising programs, direct mail, e-mail campaigns, and public relations programs. US SEARCH plans to target an increasing portion of marketing and advertising programs and related expenditures toward business and professional clients rather than consumers.

 

Marketing to Corporate and Professional Clients.    US SEARCH has established a direct business sales force and a team of research specialists to promote and increase the marketing of its services to prospective professional and corporate clients and to address the specific needs of each corporate and professional client. US SEARCH is targeting certain industries, such as transportation, retail, healthcare, financial services, and insurance markets for its employment screening services.

 

Internet Advertising

 

US SEARCH believes that marketing agreements with Internet search engines and popular websites have increased brand recognition and attracted clients. US SEARCH generates visitors to its website from various

 

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forms of Internet advertising, such as banners, buttons, text links and integrated order forms. US SEARCH maintains marketing agreements with leading Internet search engines and popular websites, and has placement on major websites such as AOL.com, Yahoo.com, Google.com, MSN.com, InfoSpace.com, Netscape.com, Lycos.com, Whitepages.com, Classmates.com, and Overture.com. US SEARCH believes that these sites reach a growing base of Internet users that engage in both business and consumer transactions.

 

US SEARCH plans to continue to use Internet advertising to acquire clients. During 2002, US SEARCH endeavored to negotiate Internet advertising placements that were targeted to achieve customer acquisition and continued to negotiate performance based payment models. In addition, US SEARCH developed lower-cost supplemental client acquisition programs, including its affiliate marketing program that works with a wide variety of smaller websites, commissioning these affiliates on revenue share basis. US SEARCH also intends to develop strategic marketing relationships with other companies based upon traffic patterns, customer profiles and related services, to increase its revenue from the Internet, primarily on a revenue share or other performance basis.

 

Competition

 

The data and information service industry is highly competitive and currently fragmented, although there has been a recent trend toward consolidation. US SEARCH’s primary competitors for business services include ADP, ChoicePoint, Inc., Kroll, USIS and TALX. Currently, US SEARCH’s primary competitors in the area of individual locator searches include telephone companies and other third parties, who publish free printed or electronic directories, private investigation firms and KnowX.com. US SEARCH does not presently consider major Internet search directories or websites as competitors. In fact, US SEARCH views them as lead generators through their search directories and other services, and US SEARCH presently benefits from strategic advertising arrangements with several of the major Internet search engines and websites.

 

Third Party Suppliers

 

US SEARCH does not independently maintain most of the databases from which it gathers information for its current services, but instead relies on a limited number of third party suppliers. If one or more of US SEARCH’s current data suppliers terminates existing agreements, US SEARCH may not be able to obtain new agreements with third party suppliers on favorable terms, if at all. Therefore, US SEARCH continually seeks additional data sources with the goal of adding new products and services and decreasing its dependence on a limited number of suppliers of data for its current products and services.

 

Technology and Infrastructure

 

During 2002, US SEARCH implemented its DARWIN proprietary software platform, which uses advanced technology to access, assimilate, compile, distribute and present data from disparate public and private databases. US SEARCH’s patent application on this technology was published on December 19, 2002.

 

During 2002, US SEARCH completed development of the initial phase of its Corporate Services Platform that provides support for customers of its screening services. US SEARCH believes this platform automates many of the activities of the screening business and enhances fulfillment productivity and accuracy. In addition, US SEARCH has further enhanced its eCommerce, Customer Relationship Management and proprietary technology developments which utilize the industry standard J2EE technology platform to enhance the interoperability of its software systems, provide improved scaling capability and provide further efficiencies in the software development group by standardizing on a single development platform. US SEARCH’s XML-based messaging framework enables seamless exchange of data with client-partner systems.

 

US SEARCH has scaled its hardware infrastructure to accommodate the increased traffic to its sites and has attempted to provide redundancy at all levels of the architecture in an effort to minimize unanticipated processing interruption.

 

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Patents and Trademarks

 

US SEARCH’s patent application on its US SEARCH DARWIN technology was published on December 19, 2002 and is pending issuance. US SEARCH is the owner of registered trademarks for “1-800-USSEARCH”, “The Public Record Portal,” its logo, “Reuniting America Two People at a Time,” “VeroTrust,” “FraudIdentity,” and “TrustIdentity” and has applied for registered trademark status for “US SEARCH.com.” US SEARCH has also registered several domain names, including 1800USSEARCH.com, ussearch.com, prsinet.com and verotrust.com.

 

Employees

 

As of December 31, 2002, US SEARCH and Professional Resource Screening had 198 full-time and 32 temporary employees. US SEARCH and Professional Resource Screening believe that relations with their employees are good. None of US SEARCH’s nor Professional Resource Screening’s employees are represented by a union or are a party to any collective bargaining agreement.

 

Governmental Regulation

 

Although none of US SEARCH’s products or services require US SEARCH to obtain governmental approvals, US SEARCH is subject to various federal and state regulations that impact its products and services. For example, employment screening is regulated by the federal Fair Credit Reporting Act (FCRA), various state law equivalents, as well as federal and state laws and regulations intended to prevent employment discrimination. US SEARCH’s consumer business is affected by the Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (GLB). Federal preemption of privacy laws has been discussed at the federal level since the passage of the GLB. Presently, however, state legislatures, attorneys general, and state regulatory bodies are responding to a perceived need for increased privacy protection in the absence of strong federal legislation that is preemptive. States have taken increased action on privacy-related legislation. For example, Minnesota passed an Internet privacy bill, which has a March implementation date and California has made repeated efforts to pass a financial privacy bill that would be stronger than the GLB.

 

Research and Development Activities

 

Over the last three years US SEARCH has spent considerable funds developing its proprietary technology and websites. In fiscal years 2000, 2001 and 2002, respectively US SEARCH spent $6.0 million, $7.8 million and $5.4 million on research and development activities.

 

Property

 

US SEARCH’s headquarters are located in approximately 52,500 square feet of office space in Los Angeles, California. US SEARCH leases its headquarters at a monthly rate of $91,707. The lease terminates on November 30, 2004, and US SEARCH has an option to extend the lease for an additional five years. Professional Resource Screening leases approximately 26,000 square feet of office space in Concord, California at a monthly rate of $35,103. The lease terminates on October 31, 2005.

 

Legal Matters

 

In May 2001, ChoicePoint, Inc., the successor entity to DBT Online, Inc., US SEARCH’s former data provider, filed a complaint against US SEARCH in Palm Beach County, Florida alleging breach of contract, fraudulent misrepresentation, unjust enrichment, quantum meruit and breach of the implied covenant of good faith and fair dealing. The complaint sought approximately $1.5 million relating to disputed invoices, as well as interest and attorneys’ fees. US SEARCH removed this action to the United States District Court for the Southern District of Florida. The United States District Court for the Southern District of Florida ordered the matter to

 

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arbitration. In arbitration US SEARCH alleged that ChoicePoint breached the contract by providing inferior data. An arbitration hearing was held in April 2002 and in June 2002 the arbitrator found that ChoicePoint had provided inferior data and awarded US SEARCH a credit of $297,671 to be deducted from invoices of $1.4 million. ChoicePoint filed a Motion to Confirm the Arbitration Award and US SEARCH has filed a Motion to modify and correct the Arbitration Award to provide additional credits based on a calculation error by the arbitrator. US SEARCH is awaiting the District Court’s ruling on these motions. US SEARCH has paid ChoicePoint $300,000 of the award. US SEARCH has approximately $780,000 accrued for this liability as of December 31, 2002. To date US SEARCH has incurred less than $100,000 in costs and legal fees in connection with this litigation which have been accrued and paid.

 

On June 25, 2002, a complaint seeking $434,000 in damages was filed against Professional Resource Screening in Superior Court of California, County of Contra Costa, styled Wood Warren & Co. v. Professional Resource Screening, Inc., No. C02-01816, alleging breach of an oral agreement relating to fees for investment banking services in connection with the merger of Professional Resource Screening and US SEARCH, negligent misrepresentation, promissory estoppel, equitable estoppel and quantum meruit. Plaintiff Wood Warren admits that there was no written contract for investment banking services between Professional Resource Screening and Wood Warren in effect at the time of the merger. Professional Resource Screening denies that there was any oral agreement. Although it is too early to predict the outcome, US SEARCH believes it has meritorious defenses to plaintiff’s claims.

 

US SEARCH may from time to time become a party to various legal proceedings arising in the ordinary course of business.

 

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INFORMATION ABOUT THE FAST DIVISION

 

B usiness

 

Introduction

 

The FAST division of First American is a leading provider of background screening and verification services in the United States. These services include motor vehicle reports, tenant screening, employee background screening and occupational health.

 

Services

 

Motor Vehicle Reports.    The FAST division provides automated access to driving records from all 50 states and the District of Columbia. Insurance companies represent the core of the customer base for this product, which they use for underwriting purposes. Employers also utilize the product to manage risk associated with employees that require the use of a vehicle in the performance of their duties. For most customers, the division receives and fulfills orders through its proprietary software known as Comprise/ZapApp software, which allows the customer to integrate the process of obtaining motor vehicles reports with other processes utilized by the customer. Generally, demand for this product decreases in November and December as a result of seasonal reductions in the insurance and employment markets.

 

Tenant Screening.    The FAST division provides tenant screening services to landlords and managers of multifamily residential properties. These services include reports containing information derived from the FAST division’s database of eviction records, major credit bureaus, provided references and criminal records. Depending on a customer’s needs, reports can draw on any combination of these sources. One of the division’s products, for example, provides customers with a comprehensive report of rental history and eviction filings drawn on the division’s proprietary database. Customers also can order products which assess risk of default by a potential tenant based on a statistical model. Customers generally order and receive the division’s tenant screening products through a secure Internet connection or through software. In these services the division experiences moderate seasonality, with a slightly disproportionate share of revenue being generated from March through October.

 

Employee Background Screening.    The FAST division provides employee background screening services to thousands of companies in the United States. These services include reports about a prospective employee’s criminal record, motor vehicle violations, credit standing and involvement in civil litigation. The FAST division also makes inquiries of provided references and former employers, verifies educational credentials and licenses and checks industry specific records. A customer can order any of these and other related services individually or as a package. Depending on a customer’s preference, orders may be placed and fulfilled directly from the FAST division, through a secure Internet connection, via facsimile or through third party vendors. Because of the diverse clientele for the employee background screening products, seasonality is minimal. Generally, the division experiences any lull in the demand for its screening products near year end and during the summer, when employers typically slow their hiring pace.

 

Occupational Health.    The FAST division also provides its customers with a comprehensive set of occupational health services, which helps employers manage occupational health issues with respect to both prospective and existing employees. Generally, these products involve first the design and implementation of a drug testing program, including provision for the collection and testing of specimens. Through its staff of doctors, the division then interprets the results. Ultimately, a report is delivered to customers through a secure Internet connection or through other direct means.

 

The FAST division also develops and manages employee assistance programs, which provide troubled employees with access to confidential counseling services. These programs cover a wide range of personal and workplace issues, including alcohol and drug abuse, marital problems, family matters, bereavement management, depression, stress, retirement and downsizing. The division’s employee assistance programs also provide

 

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employers with a number of corporate-focused services, including critical incident stress management programs, organizational change consulting and intensive specialty training on issues such as violence in the workplace.

 

Approximately 75% of the division’s occupational health business is derived from employment screening, with the balance attributable to ongoing drug testing programs and employee assistance programs.

 

As with its employee background screening products, any seasonality in the demand for the division’s occupational health products generally is attributable to decreases in hiring which occur near year end and during the summer.

 

First American has also agreed to contribute First American Indian Holdings LLC to First Advantage as part of the mergers for no additional consideration. First American Indian Holdings and American Driving Records own ZapApp India Private Limited, a company that provides software development services to the FAST division. Following the mergers, First Advantage will own 100% of the voting and economic interest in First American Indian Holdings.

 

Historical Growth of the FAST Division

 

In the late 1990s, First American initiated a diversification strategy which called for, among other things, the combination of one of its core competencies—data management and analysis—with businesses that are counter-cyclical to its long-standing real estate related products and services. First American also sought businesses that were complementary to its rapidly growing credit reporting business, First American CREDCO. First American management initially focused on the background screening industry—an information-intensive business with a heavy demand for credit reports and a relatively tangential tie to the real estate market.

 

Employee Background Screening.    In September 1998, First American began its entry into the background screening industry by acquiring HireCheck. HireCheck, headquartered in St. Petersburg, Florida, provides a wide range of employee screening services for a diverse group of companies. Depending on the type of product ordered, the reports generated by HireCheck provide information about a prospective employee from a number of sources, including criminal records, motor vehicle reports, credit reports, civil litigation records, prior employers, educational institutions, licensing authorities, employee references and certain other records specific to the industry in which the customer operates.

 

Tenant Screening.    In September 1998, First American also entered the tenant screening industry by acquiring First American Registry, headquartered in Rockville, Maryland. First American Registry, the largest tenant screening company in the United States, gives property managers and landlords in the multifamily housing industry the tools required to evaluate prospective tenants. These tools include access to First American Registry’s database of landlord-tenant court records, which is the largest of its kind in the United States, and its database of criminal conviction information, which is one of the largest for use in tenant screening in the country. These tools also include access to credit reports, a credit scoring model developed exclusively for the multifamily housing industry and reference checking.

 

Occupational Health.    Continuing its efforts to provide a comprehensive set of risk management tools to its customers, in August 2001, First American entered the occupational health services business by acquiring Milwaukee, Wisconsin-based Substance Abuse Management. This company manages for employers the collection of drug test specimens, the actual testing of the specimens and the interpretation and delivery of results.

 

Motor Vehicle Reports.    Five months later, in January 2002, First American further added to the menu of services offered by the FAST division by acquiring American Driving Records, a Rancho Cordova, California-based provider of motor vehicle reports. One of the largest competitors in its industry, American Driving Records brought to the FAST division not only a formidable player in a key area of the risk management industry, but

 

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also enhanced access to the driving records of almost every state in the United States. With American Driving Records, First American purchased ZapApp India Private Limited, a Bangalore, India-based private limited company that provides web development services to American Driving Records.

 

Consolidation

 

In an effort to improve the profitability of the companies then comprising the FAST division, in the second quarter of 2001, First American reorganized the division’s management structure by dedicating a single management group to the oversight of all operations. By emphasizing the group as a whole, this reorganization effort positioned the FAST division to pursue cross-selling opportunities, take advantage of mutual supplier relationships and leverage technological developments and resources across the entire division. It also had the effect of focusing management on efforts to improve the division’s operating margins by increasing the volume of transactions performed using the division’s existing systems, whether through internal sales growth or by acquiring businesses with complementary product offerings. In January 2002, First American formally created the FAST division and began reporting it as a segment in its financial statements.

 

Strategic Acquisitions Following 2001 Reorganization

 

First American supplemented the division’s employee background screening operations by acquiring Factual Business Information, Inc., headquartered in Miami, Florida, in August 2001 and Pretiem Corporation, headquartered in Princeton Junction, New Jersey, in December of 2001. These acquisitions provided the division with a customer base for employee background screening services in three important employment markets: the Miami metropolitan area, New Jersey and New York State.

 

In the last quarter of 2002, the FAST division completed acquisitions of Employee Health Programs in October and SafeRent in November.

 

Employee Health Programs.    A competitor of Substance Abuse Management, the Bethesda, Maryland-based Employee Health Programs brought critical volume to the FAST division’s occupational health business. Through the acquisition of Employee Health Programs, the FAST division also expanded the scope of its existing services to include employee assistance programs, which are designed to help troubled employees resolve behavioral and/or emotional problems and achieve their full productive capability.

 

SafeRent.    SafeRent, headquartered in Denver, Colorado, brought many new customers to the FAST division’s leading tenant screening business and increased the division’s penetration in key markets, in particular markets in the western United States.

 

Customers

 

The FAST division serves a wide variety of clients throughout the United States, including a substantial percentage of those businesses comprising the Fortune 1000, many major real estate investment trusts and property management companies, a number of the top providers of transportation services, governmental agencies, non-profit organizations and health care providers. Dominant categories of customers vary depending on the type of product. Insurance carriers and agents, for example, purchase a substantial proportion of the FAST division’s driving record products. Transportation companies are major consumers of the division’s occupational health products. Multifamily housing property management companies and landlords of all sizes are represented in the tenant screening business’ customer base. Larger employers represent the predominant share of the division’s employee background screening business. The FAST division derives a nominal amount of revenue from customers in Canada and Puerto Rico.

 

The division has in excess of 10,000 customers. No single customer is responsible for 2 percent or more of the revenue of the entire division.

 

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Suppliers

 

Data represents a key ingredient of the FAST division’s background screening, tenant screening and driving records products. In obtaining such data, the FAST division draws upon a wide variety of sources, including governmental agencies, credit reporting agencies, third parties which compile public record information and on-line search services. Many of the division’s suppliers provide this data in electronic format. The FAST division does not anticipate the termination of any signification relationship with any of its data suppliers. Because the FAST division believes it could acquire necessary data from other sources, the FAST division does not believe that the termination of any supplier relationship would have a material adverse effect on the division’s financial condition or operating results.

 

In connection with its occupational health services, the FAST division depends upon services provided by specimen collection agencies and laboratories. There is significant competition among suppliers of these services and, consequently, the FAST division does not believe the termination of its relationship with any of these suppliers would have a material adverse effect on its financial condition or operating results.

 

The FAST division has historically relied on First American for certain financial, administrative and managerial support, including strategic planning, general management support, legal support, treasury administration, insurance administration, corporate income tax administration, human resources, benefits, network services, and certain accounting and financial management services. The FAST division paid First American approximately $1.9 million, $1.4 million and $1.5 million in 2000, 2001 and 2002, respectively, for these support services. First American will continue to provide certain of these support services to First Advantage under a services agreement. See “OTHER AGREEMENTS—Services Agreement” on page 72.

 

Governmental Regulation

 

Although none of the FAST division’s products or services requires governmental approvals, the FAST division is subject to various federal and state regulations that may impact its products and services. For example, the federal Fair Credit Reporting Act and various state laws regulate products and services that include disclosure of personal information. Historically, the FAST division has been able to comply with existing laws and regulations without incurring substantial costs or restrictions on it business.

 

Strategies for Future Growth

 

The FAST division believes that as the world becomes increasingly risky for individuals and organizations, demand for the risk management products offered by the FAST division will grow. The FAST division’s primary goal is to be well positioned to capture not only a substantial portion of the existing market, but also a substantial share of the expected growth. The FAST division plans to accomplish this goal in the following manner:

 

Consolidate Operations.    The FAST division intends to continue its aggressive efforts to consolidate its operations. This includes efforts not only to capture synergies by eliminating personnel and systems duplication, but also to exploit cross-selling opportunities by providing a single platform on which the division can offer its entire menu of services to current and prospective customers. In the short term, we believe these efforts could result in the elimination of up to 5% of the FAST division total employee base.

 

Pursue Strategic Acquisitions.    The FAST division also intends to continue pursuing acquisitions of companies that would enable it to enter new markets as well as increasing its share of those markets in which it is already operating. It will pursue companies with assets that will enhance the division’s ability to fulfill orders, including companies with proprietary databases containing information for use in its products or technology that would make order placement or product delivery more efficient. The FAST division also expects to pursue acquisition opportunities which would enable it to enter into related product fields. Its recent acquisitions of Employee Health Programs and SafeRent are examples of the division’s efforts to increase the volume of

 

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transactions performed by its existing businesses through strategic acquisitions. The proposed transaction with US SEARCH provides an example of the FAST division’s efforts to enhance its technology (through US SEARCH’s DARWIN platform) and to enter related product fields (location services) through acquisition.

 

Overseas Production.    To cut costs, the FAST division intends to expand its production efforts overseas. Currently, the division’s operations in Bangalore, India provide a portion of its software development needs. The division plans to expand the software development activities of its Bangalore facility and to examine other potential cost saving opportunities it may provide, such as the performance of certain back office functions and the running of a customer service call center.

 

Competition

 

A number of companies compete with the FAST division’s product offerings. The division’s most significant national competitors in employee background screening include ChoicePoint, Kroll, U.S. Investigative Services and ADP. A number of local and regional competitors also exist. The tenant screening industry is highly fragmented, with only approximately 10 other companies providing significant competition on a national level. In its occupational health business, the division has one significant nationwide competitor, however, there are a significant number of relatively local and regional companies in the industry. In motor vehicle reports, there are approximately 10 major competitors to the division, the most predominant of which is ChoicePoint. In each of its markets, the division competes foremost on the basis of customer service and secondarily on price and product differentiation.

 

Employees

 

The FAST division employs over 700 people, most of which are located in the United States. The division employs 12 people at its development facility in Bangalore, India.

 

Intellectual Property

 

The FAST division owns a number of items of intellectual property, including trademarks, tradenames, copyrights, patents, domain names and unregistered trade secrets. The FAST division is not dependent upon any single item of intellectual property.

 

Currently, the web site of the FAST division is www.firstam.com. Following the mergers, the First Advantage web site will be www.firstadvantagecorp.com.

 

Properties

 

The FAST division’s principal executive offices are located in 30,000 square feet of leased office space in St. Petersburg, Florida. The lease expires on February 29, 2008 with no option to renew. Monthly rent is approximately $62,000. The division maintains 16 other offices in the United States and an office in Bangalore, India. These offices, all of which are leased, comprise a total of approximately 110,000 square feet of space.

 

Legal Matters

 

The FAST division is involved in litigation from time to time in the ordinary course of its business. The FAST division does not believe that the outcome of any pending or threatened litigation will have a material adverse effect on its financial position or operating results.

 

Market Price of and Dividends on Common Equity and Related Stockholder Matters

 

There is no established public trading market for the securities of the companies comprising the FAST division. First American beneficially owns all of the outstanding capital stock of the FAST division companies.

 

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INFORMATION ABOUT FIRST ADVANTAGE

 

First Advantage, a wholly owned subsidiary of First American, has not conducted any business activities to date other than those incident to its formation, execution of the merger agreement and related agreements and participation in the preparation of this proxy statement/prospectus. Immediately following the mergers, First Advantage will operate US SEARCH and the companies that currently comprise the FAST division and will own, directly and indirectly, all of the outstanding capital stock of such entities. Accordingly, the business of First Advantage, operated through its wholly-owned subsidiaries, will be the businesses currently conducted by US SEARCH and the FAST division. See “INFORMATION ABOUT US SEARCH—Business” on page 75 and “INFORMATION ABOUT THE FAST DIVISION—Business” on page 81.

 

Employee Benefit Plans

 

First Advantage will honor all outstanding stock options, stock appreciation rights, limited stock appreciation rights, stock purchase rights and warrants of US SEARCH outstanding before the mergers. See “THE MERGERS—Effect on US SEARCH Stock Options and Warrants” on page 48. First Advantage intends to offer its employees participation in certain of First American’s benefit plans for a period of time following the closing of the mergers. Non-employee directors and certain employees and consultants of First Advantage and its subsidiaries also will be eligible to participate in the First Advantage Corporation 2003 Incentive Compensation Plan. Participation in the First Advantage Corporation 2003 Employee Stock Purchase Plan will be offered to eligible employees of First Advantage. First Advantage expects eligible designees to begin participation in the incentive compensation plan and the employee stock purchase plan shortly after closing of the mergers.

 

First American Benefit Plans

 

First Advantage employees may elect to participate in a selection of medical plans to fit their needs as well as a dental plan, a vision plan, various coverage levels of life and disability benefits. Employees are eligible to participate in these plans after completion of 30 days of continuous active service and if such employees are regularly scheduled to work at least 30 hours a week. The First American 401(k) Plan, a defined contribution plan intended to qualify under Section 401(k) of the United States Internal Revenue Code, is available to employees of First Advantage who complete at least 30 days of continuous active service and are at least 21 years old. Each participant will be able to elect to defer from 1% to 15% of the participant’s pretax annual compensation, subject to certain limits, which are prescribed by the Internal Revenue Code and adjusted for inflation periodically. Matching contributions and profit-sharing contributions may be made under the plan. Elective deferral and employer contributions will be fully vested at all times. Upon retirement or other termination of employment, a participant’s account balance will be distributable to the participant (or to the participant’s beneficiary) in accordance with the participant’s election. Distributions of a participant’s account balance may be withdrawn during their employment in order to satisfy an immediate and heavy financial need that cannot reasonably be satisfied from other sources. The 401(k) Plan will permit participants to borrow a portion of their vested account balances pursuant to a uniform and non-discriminatory loan program.

 

Current employees of the FAST division who are participants in First American’s defined benefit pension plan and who will become employees of First Advantage in connection with the mergers generally will be permitted to continue their participation in the plan, to the extent available to employees of First American. No new participants will be permitted to participate in the defined benefit pension plan.

 

First American maintains an executive supplemental benefit plan and a management supplemental benefit plan that it believes assists in attracting and retaining highly qualified individuals for upper management positions. Both plans provide retirement benefits for, and pre-retirement death benefits with respect to, certain key management personnel selected by First American’s board of directors, and may include executives of First Advantage at and to the extent selected by First American’s board of directors. Under the executive plan, upon retirement at normal retirement date (the later of age 65 or, unless waived by First American’s board of directors, completion of 10 years of service), a participant receives a joint life and 50% survivor annuity benefit equal to 35% of “final average compensation.” Under the management plan, upon retirement at normal retirement date

 

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(the later of age 65 or, unless waived by First American’s board of directors, completion of 10 years of service), a participant receives a joint life and 50% survivor annuity benefit equal to 15% of “final average compensation.” “Final average compensation” under both plans is the average annual compensation, composed of base salary, plus cash and stock bonuses, for those three calendar years out of the last 10 years of employment preceding retirement in which such compensation is the highest. The benefit under the executive plan is reduced by 5% for each year before normal retirement date in which retirement occurs and, until age 70, increased by 5% (compounded in order to approximate the annuitized value of the benefit had retirement occurred at age 65) for each year after such date in which retirement occurs. With respect to such postponed retirement, the executive plan takes into account covered compensation received until age 70, so that the retirement benefit of an executive who retires after normal retirement date is equal to the greater of the annuitized benefit or the benefit calculated using final average compensation until age 70. The retirement benefit under the management plan does not take into account compensation received after the normal retirement date, and no benefit is payable to a participant who retires prior to the normal retirement date unless the participant has been employed by First American or a subsidiary for at least 15 years and the First American board grants consent. To be eligible to receive benefits under the plans, a participant must be at least age 55, have been an employee of First American, or an employee of one of its subsidiaries, for at least 10 years and, unless waived by First American’s board of directors, covered by the plan for at least five years. A pre-retirement death benefit is provided under both plans consisting of 10 annual payments, each of which equals 50% of final average compensation. Vesting of rights under the plan is accelerated in the event of a change in control (as defined in the plan) of First American. Both of the plans are unfunded. First American purchases insurance, of which First American is the owner and beneficiary, on the lives of the participants in the plans. This insurance is designed to recover, over the life of each plan, First American’s costs incurred with respect to the plan. Currently, only 48 employees have been selected by the First American board to participate in the executive plan, and only 61 employees have been selected by the First American board to participate in the management plan.

 

First American’s deferred compensation plan offers to a select group of management and highly compensated employees of First American and its subsidiaries (including First Advantage) the opportunity to elect to defer portions of salary, commissions and bonuses. A committee appointed by First American’s board is responsible for administering the plan, which became effective January 1, 1998. First American maintains a deferral account for each participating employee on a fully vested basis for all deferrals. Participants can choose to receive cash benefits in one lump sum or in quarterly payments upon termination of employment or death. Subject to the terms and conditions of the plan, participants also may elect to schedule in-service withdrawals of deferred compensation and the earnings and losses attributable thereto. For all participants who joined the plan prior to December 31, 2001, the plan provides a pre-retirement life insurance benefit equal to the lesser of 15 times the amount deferred in a participant’s first year of participation or $2.0 million. The life insurance benefit is reduced beginning at age 61 by 20% per year. Participants who join the plan after December 31, 2001, are not eligible for any life insurance benefit. First American pays the premiums for such life insurance benefits. The plan is unfunded and unsecured.

 

First Advantage Corporation 2003 Incentive Compensation Plan

 

First Advantage’s board of directors has adopted, and First American as the sole stockholder of First Advantage has approved, the 2003 First Advantage Incentive Compensation Plan. The plan is intended to promote the long-term success of First Advantage and increase stockholder value by attracting, motivating, and retaining key employees of First Advantage and its subsidiaries and affiliates, and by motivating consultants who provide significant services to First Advantage and its subsidiaries and affiliates. To achieve this purpose, the plan allows the granting of stock options, stock appreciation rights, restricted stock awards, performance unit awards, performance share awards and cash-based awards to eligible persons.

 

Subject to adjustment for certain changes in First Advantage’s capitalization, a total of 3.0 million shares of First Advantage Class A common stock will be available for issuance under the plan. First American and US SEARCH currently intend that First Advantage, in connection with the closing of the mergers, will issue options

 

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under the plan to purchase approximately 800,000 shares of First Advantage Class A common stock to executives of the FAST division and First American who will serve as senior executives of First Advantage following the mergers.

 

The plan will be administered by the compensation committee of the board of directors of First Advantage, or another committee appointed by the First Advantage board. The committee will have the exclusive discretionary authority to operate, manage and administer the plan in accordance with its terms. Subject to the terms of the plan, the committee has the sole discretion to determine the employees and consultants who will be granted awards, the size and types of such awards, and the terms and conditions of such awards. The committee will determine the form and content of award agreements that grant awards under the plan. The committee will interpret the plan and award agreements thereunder and will have authority to correct any errors, supply any omissions and reconcile any inconsistencies in the plan and/or any award agreements. The committee’s decisions and actions concerning the plan will be final and conclusive. Non-employee directors of First Advantage will receive automatic grants of a set number of options upon initial election and re-election to the First Advantage board.

 

Upon the occurrence of a change of control transaction (as defined in the plan), generally all awards under the plan accelerate, all restrictions are lifted and all performance goals are achieved, subject to certain limitations. The committee may provide that any award, the payment of which was deferred under the plan, will be paid or distributed as of, or promptly following, a change of control transaction. The committee may also provide that any awards subject to any such acceleration, payment, adjustment or conversion cannot be exercised after, or will terminate as of, a change of control transaction.

 

First Advantage Corporation 2003 Employee Stock Purchase Plan

 

The board of directors and stockholder of First Advantage have also approved the First Advantage Corporation 2003 Employee Stock Purchase Plan. The plan, which is intended to qualify under Section 423 of the Internal Revenue Code, allows eligible employees to purchase First Advantage Class A common stock through payroll deductions for 85% of the fair market value of the First Advantage Class A common stock. Participation in the plan is voluntary. Eligible employees may participate by authorizing payroll deductions of up to 15% of their base pay for each payroll period. At the end of each one-month offering period, each participant will receive an amount of First Advantage Class A common stock equal to the sum of that participant’s payroll deductions during such period divided by 85% of the fair market value of the common stock at the end of the period. No employee may participate in the plan if such employee owns or would own after the purchase of options under the plan, 5% or more of the voting power of all classes of First Advantage stock. Shares of First Advantage Class A common stock issued under the plan must be held for a period of one year. A total of 1.0 million shares of First Advantage Class A common stock will be reserved for issuance under the plan.

 

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PRICE RANGE OF COMMON STOCK AND DIVIDENDS

 

US SEARCH

 

US SEARCH’s common stock is quoted on the Nasdaq National Market under the ticker symbol “SRCH.” On May 1, 2003, there were approximately 105 record holders of US SEARCH’s common stock. The equity of the FAST division, comprised of wholly-owned subsidiaries of First American, is not publicly traded.

 

The table below sets forth, for the calendar quarters indicated, the high and low sale prices per share of US SEARCH’s common stock as reported on the Nasdaq National Market.

 

    

US SEARCH’s Common Stock


    

High


  

Low


2000

             

First Quarter

  

$

11.25

  

$

3.69

Second Quarter

  

 

5.19

  

 

1.44

Third Quarter

  

 

3.63

  

 

1.00

Fourth Quarter

  

 

1.31

  

 

0.19

2001

             

First Quarter

  

$

0.969

  

$

0.188

Second Quarter

  

 

2.250

  

 

0.350

Third Quarter

  

 

2.100

  

 

0.630

Fourth Quarter

  

 

1.950

  

 

0.690

2002

             

First Quarter

  

$

1.840

  

$

0.840

Second Quarter

  

 

1.250

  

 

0.590

Third Quarter

  

 

0.800

  

 

0.260

Fourth Quarter

  

 

1.160

  

 

0.190

2003

             

First Quarter

  

$

0.890

  

$

0.570

Second Quarter (through May 5, 2003)

  

 

0.820

  

 

0.590

 

US SEARCH has never paid any cash dividends and it has no present intention to declare or to pay cash dividends. It is US SEARCH’s present policy to retain earnings, if any, to finance the growth and development of its business. US SEARCH currently is subject to delisting from the Nasdaq National Market because US SEARCH has not been in compliance with Nasdaq’s $1.00 minimum bid requirement.

 

The following table sets forth the closing price of US SEARCH’s common stock as reported on the Nasdaq National Market on November 14, 2002, 30 days before the date of public announcement of the merger agreement, December 13, 2002, the last full trading day before the public announcement of the merger agreement, and [                ], 2003, the last full trading day for which the closing price was available at the time of the printing of this proxy statement/prospectus.

 

Date


    

US SEARCH’s Common Stock


 

November 14, 2002

    

$

0.350

 

December 13, 2002

    

$

0.790

 

[                ], 2003

    

$

[        

]

 

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First Advantage

 

The First Advantage Class A common stock will not be issued until completion of the transactions, which cannot occur before the time the US SEARCH stockholders vote on approval of the merger agreement and the transactions contemplated by the merger agreement. Consequently, market prices for the First Advantage Class A common stock will not be available at or before the time of the special meeting. We expect that there will be approximately 105 holders of record and approximately 3,200 beneficial holders of First Advantage Class A common stock upon completion of the mergers. First Advantage has applied to the Nasdaq National Market to list its Class A common stock under the symbol “FADV.”

 

First Advantage has never paid any cash dividends, and does not presently intend to pay dividends following completion of the mergers.

 

 

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SELECTED HISTORICAL FINANCIAL INFORMATION OF US SEARCH

 

US SEARCH is providing the following financial information to aid you in your analysis of the financial aspects of the transactions. The selected financial data of US SEARCH has been derived from the consolidated financial statements and related notes of US SEARCH for each of the years in the five-year period ended December 31, 2002. This information is only a summary, and you should read it in conjunction with the historical consolidated financial statements of US SEARCH and the related notes attached to this proxy statement/prospectus.

    

Fiscal Year Ended December 31,


 
    

2002


    

2001


    

2000


    

1999


    

1998


 

Statement of Operations:

                                            

Net revenue

  

$

30,341,000

 

  

$

18,399,000

 

  

$

22,363,000

 

  

$

19,541,000

 

  

$

9,245,000

 

Cost of services

  

 

9,450,000

 

  

 

4,494,000

 

  

 

10,392,000

 

  

 

7,293,000

 

  

 

3,149,000

 

    


  


  


  


  


Gross profit

  

 

20,891,000

 

  

 

13,905,000

 

  

 

11,971,000

 

  

 

12,248,000

 

  

 

6,096,000

 

Operating expenses:

                                            

Selling and marketing (1)

  

 

11,237,000

 

  

 

10,069,000

 

  

 

25,890,000

 

  

 

22,246,000

 

  

 

7,627,000

 

Information technology

  

 

3,296,000

 

  

 

4,397,000

 

  

 

3,777,000

 

  

 

1,074,000

 

  

 

—  

 

General and administrative (2)

  

 

14,175,000

 

  

 

10,016,000

 

  

 

12,220,000

 

  

 

7,929,000

 

  

 

3,882,000

 

Charge for warrants issued to majority stockholder

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

—  

 

  

 

1,190,000

 

    


  


  


  


  


Total operating expenses

  

 

28,708,000

 

  

 

24,482,000

 

  

 

41,887,000

 

  

 

31,249,000

 

  

 

12,699,000

 

    


  


  


  


  


Loss from operations

  

 

(7,817,000

)

  

 

(10,577,000

)

  

 

(29,916,000

)

  

 

(19,001,000

)

  

 

(6,603,000

)

Interest expense and amortization of debt issue costs (3)

  

 

(16,212,000

)

  

 

(1,522,000

)

  

 

(108,000

)

  

 

(8,099,000

)

  

 

(197,000

)

Interest income

  

 

68,000

 

  

 

167,000

 

  

 

663,000

 

  

 

719,000

 

  

 

—  

 

Other (expense) income, net

  

 

(110,000

)

  

 

—  

 

  

 

—  

 

  

 

5,000

 

  

 

13,000

 

    


  


  


  


  


Loss before income taxes

  

 

(24,071,000

)

  

 

(11,932,000

)

  

 

(29,361,000

)

  

 

(26,376,000

)

  

 

(6,787,000

)

Provision for income taxes

  

 

5,000

 

  

 

5,000

 

  

 

1,000

 

  

 

1,000

 

  

 

1,000

 

    


  


  


  


  


Net loss

  

$

(24,076,000

)

  

$

(11,937,000

)

  

$

(29,362,000

)

  

$

(26,377,000

)

  

$

(6,788,000

)

    


  


  


  


  


Net income (loss) attributable to common stockholders

  

$

(24,076,000

)

  

$

(24,915,000

)

  

$

(34,443,000

)

  

$

(26,377,000

)

  

$

(6,788,000

)

Basic and Diluted net loss Per Common Share:

                                            

Net loss per-share attributable to common stockholders (4)

  

$

(0.41

)

  

$

(1.38

)

  

$

(1.93

)

  

$

(1.94

)

  

$

(0.71

)

Weighted-average shares outstanding used in per-share calculation (4)

  

 

58,711,000

 

  

 

18,054,000

 

  

 

17,836,000

 

  

 

13,612,000

 

  

 

9,521,000

 

    

December 31,


 
    

2002


    

2001


    

2000


    

1999


    

1998


 

Balance Sheet:

                                            

Cash and cash equivalents

  

$

2,254,000

 

  

$

3,148,000

 

  

$

2,831,000

 

  

$

17,382,000

 

  

$

99,000

 

Working capital (deficiency)

  

 

(4,510,000

)

  

 

(9,117,000

)

  

 

(3,540,000

)

  

 

17,013,000

 

  

 

(7,761,000

)

Total assets

  

 

31,299,000

 

  

 

27,735,000

 

  

 

12,015,000

 

  

 

25,650,000

 

  

 

575,000

 

Long term debt, net of current portion

  

 

1,417,000

 

  

 

1,810,000

 

  

 

42,000

 

  

 

37,000

 

  

 

343,000

 

Total debt (5)

  

 

3,208,000

 

  

 

8,263,000

 

  

 

1,094,000

 

  

 

84,000

 

  

 

4,001,000

 

Redeemable Series A preferred stock

  

 

—  

 

  

 

—  

 

  

 

6,209,000

 

  

 

—  

 

  

 

—  

 

Total stockholders’ equity (deficit)

  

$

19,524,000

 

  

$

10,355,000

 

  

$

(3,141,000

)

  

$

19,489,000

 

  

$

(7,749,000

)


(1)   Includes non-cash charges relating to options and warrants of $627,000 in 1999 and $1,846,000 in 2000.
(2)   Includes non-cash charges relating to options and warrants of $1,190,000 in 1998 and of $1,442,000 in 1999.
(3)   Included in interest expense for 1999, 2001, and 2002 is approximately $4.6 million, $455,000 and $11,749,000 respectively, relating to beneficial conversion features, and amortization of debt issue costs of $3,098,000, $720,000, and $4,217,000 for 1999, 2001 and 2002, respectively.
(4)   For a description of the method used to compute basic and diluted net loss per share and weighted average number of shares outstanding, see Note 3 of Notes to the Consolidated Financial Statements of US SEARCH.
(5)   Total debt includes $2.6 million and $1.8 million in Professional Resource Screening acquisition obligations at December 31, 2001 and 2002, respectively, and $3.1 million convertible notes payable in conjunction with the December 2001 financing at December 31, 2001.

 

 

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US SEARCH MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

The following discussion of results of operations and financial condition should be read in conjunction with US SEARCH’s consolidated financial statements and related notes attached to this proxy statement/prospectus.

 

Overview

 

US SEARCH provides employment screening services to large businesses and a range of location and risk management services to consumers and small and medium sized business clients including identity verification, individual location, criminal record checks, employment and education verifications, professional reference checks, credit and motor vehicle record checks, drug screening, and pre-employment screening services. US SEARCH is able to deliver location verification and screening services through its proprietary web-based applications and patent pending US SEARCH DARWIN technology. US SEARCH’s services can be accessed through its websites, USSEARCH.com, ussearch.com/business or prsinet.com, or by calling toll free telephone numbers, 1-800-USSEARCH for consumers, 1-877-327-2410 for small and medium businesses or 1-800-232-0247 for large businesses.

 

US SEARCH’s consumer and small and medium business products provide direct (Internet and telephone) individual locator, and other public record searches to consumers and these services and pre-employment screening services to small and medium-sized businesses. US SEARCH’s business product provides employment screening and risk mitigation services to large businesses and organizations.

 

Due to the high level of automation, certain of US SEARCH’s services can be conducted instantly online. US SEARCH also offers assisted searches and screening services, both online and through a toll free telephone number.

 

Large Business Services.    US SEARCH provides large businesses, government agencies and other large employers with a variety of employment screening, background check and risk mitigation products and services via an online, web-based system that enables instant ordering and prompt delivery of results. Customers can customize their search and decision parameters online using a “drag-and-drop” browser interface. US SEARCH’s employment screening products include social security number traces, federal and state felony and misdemeanor record searches, employment and education verification, and credit histories. US SEARCH also provides character reference checks and drug screening via third party providers. In addition, US SEARCH offers a Management Services program that provides customers with an outsourced solution to background investigations, which includes analysis of developed investigation data, management of Fair Credit Reporting Act communications, legal compliance, and direct applicant contact.

 

Consumer-Focused Services.    US SEARCH provides consumer clients and small and medium sized businesses with a single, comprehensive access point to a broad range of information to assist them in locating individuals or to learn more information about people in their lives or with whom they do business. US SEARCH’s consumer clients can obtain public information including addresses, aliases, phone numbers, property ownership, court records, professional license verification, corporate affiliations and death record information. US SEARCH also offers nanny and contractor background check services for consumers and employment screening for small businesses.

 

Prices for US SEARCH’s non-instant consumer and small and medium business services have ranged from approximately $20 to $395 per search. Prices for “Instant Searches” range from approximately $10 to $15 per search. Prices for large business services range from $3 to $495. The prices for services vary based on the nature and amount of information and whether or not the search is assisted by a search specialist.

 

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Revenue for US SEARCH’s services is recognized when the results are delivered to the client. The terms of sale do not provide for refunds after services have been delivered, however, in instances where the clients indicate that the initial search result was unsuccessful, US SEARCH may perform another search or provide a refund at the customer’s discretion. In addition, where clients desire additional information they can request to broaden the scope of their “Instant Searches” and US SEARCH applies up to a portion of the cost of the client’s “Instant Searches” towards the cost of the more comprehensive search.

 

US SEARCH’s cost of services consists primarily of payroll and benefits, data acquisition costs, local and long distance telephone charges associated with providing its services, and payment processing costs. US SEARCH’s cost of services is likely to increase with increasing revenue levels. US SEARCH has entered into an agreement with Confi-Check Inc., a supplier of online public record data. This agreement, which permits US SEARCH representatives and customers access to Confi-Check’s information databases, will remain in effect following the closing of the mergers. It expires in October 2003 and is renewable at US SEARCH’s option for up to five additional one-year periods. On December 31, 2002, the non-cancelable payments under this agreement were $690,000 in 2003.

 

US SEARCH’s operating expenses consist primarily of selling, marketing, general and administrative expenses and information technology costs. US SEARCH expects operating expenses to increase as it attempts to expand its corporate sales force and product lines.

 

Selling and marketing expenses are a significant portion of US SEARCH’s operating expenses. Internet advertising expenses are the most significant selling and marketing expense. US SEARCH has several cancelable and non-cancelable distribution and marketing agreements with various Internet companies including Yahoo!, Inc. The terms of these agreements provide for varying levels of exclusivity and minimum and maximum fees payable based on the number of banners, buttons and text links displayed on affiliate websites. On December 31, 2002, the minimum non-cancelable payments due under these agreements were approximately $3.3 million for 2003, and $550,000 for 2004.

 

US SEARCH expects selling and marketing expenses to increase as it attempts to expand its products and market reach in both the consumer and business services groups.

 

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

 

General and administrative expenses consist primarily of compensation and related costs for administrative personnel, occupancy costs and other overhead costs. US SEARCH expects general and administrative costs to remain flat or decrease as it continues to manage the size and growth of its organization.

 

Interest expense, net of interest income, consists of interest on outstanding short term and long term debt, and convertible notes payable. Interest expense also includes non-cash charges resulting from beneficial conversion features on US SEARCH’s convertible notes payable, and the amortization of discounts and issuance costs on US SEARCH’s convertible notes payable, and bank credit facility. Upon the conversion of all remaining convertible notes payable into US SEARCH common stock, US SEARCH recognized all remaining beneficial conversion feature charges and wrote off all remaining discounts and issuance cost related to the convertible notes payable. Consequently, US SEARCH expects interest expense to decrease.

 

Acquisition of Professional Resource Screening.    In December 2001, US SEARCH acquired Professional Resource Screening, Inc. Pursuant to the terms and conditions contained in the acquisition agreement, US SEARCH issued 8.8 million shares of common stock to the former shareholders of Professional Resource Screening. In addition, US SEARCH was obligated to pay to the former shareholders of Professional Resource