Post-Effective Amendment No. 1 to Form S-4

As filed with the Securities and Exchange Commission on March 23, 2004

Registration No. 333-106680


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

POST-EFFECTIVE AMENDMENT NO. 1 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   7375   61-1437565

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

One Progress Plaza

Suite 2400

St. Petersburg, Florida 33701

(727) 214-3411

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

 


 

Kenneth D. DeGiorgio, Esq.

Executive 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 a copy to:

Neil W. Rust, Esq.

White & Case LLP

633 West Fifth Street

Los Angeles, California 90071

(213) 620-7700

 


 

Approximate date of commencement of proposed sale to the public:    From time to time after this registration statement becomes effective.

 

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.  ¨             

 


 

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.

 



EXPLANATORY NOTE

 

This Post-Effective Amendment No. 1 includes First Advantage’s consolidated financial statements contained in its annual report on Form 10-K for its fiscal year ended December 31, 2003, and updates certain other disclosures contained in the prospectus that makes up a part of this registration statement.


THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE COMPANY MAY NOT OFFER ANY SHARES HEREUNDER AND SELLING SHAREHOLDERS MAY NOT SELL THEIR SHARES PURSUANT TO THIS PROSPECTUS UNTIL THE RELATED REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.

 

SUBJECT TO COMPLETION, DATED MARCH 23, 2004

 

PROSPECTUS

 

LOGO

 

4,000,000 SHARES OF CLASS A COMMON STOCK

 


 

We are offering up to 4,000,000 shares of our Class A common stock, par value $.001 per share, for issuance from time to time as full or partial consideration for the acquisition of businesses, assets or securities of other business entities.

 

People who receive shares of our Class A common stock in connection with an acquisition may be permitted by us to use this prospectus and a prospectus supplement to resell their shares. You should read the section entitled “Selling Shareholders” to find out more information about resales, if any, including the amount of securities being resold.

 

The specific terms of each acquisition will be determined at or near the time of the acquisition by negotiations with the owners of the businesses, assets or securities to be acquired. Shares of our Class A common stock issued hereunder will be valued at approximately the market value at the time the terms of the acquisition are tentatively or finally agreed to, when the acquisition is completed, or during a specific period of time before we deliver the shares.

 

We may be required to provide further information by means of a post-effective amendment to the registration statement of which this prospectus forms a part or a prospectus supplement once we know the actual information concerning a specific acquisition. We urge you to read this prospectus and any accompanying prospectus supplement before you make your investment decision.

 

We do not expect to receive any cash proceeds from the sale of our Class A common stock pursuant to this prospectus, or to use an underwriter or pay underwriting discounts or commissions with respect to such shares.

 

Our Class A common stock is listed on the Nasdaq National Market under the trading symbol “FADV.” On March 19, 2004, the closing price of one share of our Class A common stock on the Nasdaq National Market was $16.60.

 


 

An investment in First Advantage Class A common stock involves a number of risks. You should consider the risks specified in the “RISK FACTORS” section of this prospectus beginning on page 4 before making any investment decision.

 


 

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

 


 

This prospectus is dated March 23, 2004.


WHERE YOU CAN FIND MORE INFORMATION

 

First Advantage has filed a registration statement on Form S-4, of which this prospectus forms a part, to register with the Securities and Exchange Commission the shares of First Advantage Class A common stock to be issued hereunder. As allowed by SEC rules, this prospectus does not contain all the information you can find in the registration statement or the exhibits to the registration statement. First Advantage will 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 Advantage files 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.

 

This information is also available to shareholders and prospective shareholders without charge upon written or oral request to:

 

First Advantage Corporation

Ken Chin

One Progress Plaza

Suite 2400

St. Petersburg, Florida 33701

(727) 214-3411

 

To obtain timely delivery, you must request the information at least five business days before the date on which you must make a decision on whether to invest in First Advantage.

 

First Advantage has not authorized anyone to give any information or make any representation about the shares of Class A common stock or our company that is different from, or in addition to, that contained in this 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 prospectus 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 prospectus does not extend to you. The information contained in this prospectus is accurate only as of the date of this document unless the information specifically indicates that another date applies.

 

i


TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Summary Historical Financial Information of First Advantage Corporation

   3

Risk Factors

   4

Selling Shareholders

   8

Cautionary Statement Regarding Forward-Looking Statements

   10

Information about First Advantage

   11

Price Range of Common Stock and Dividends and Securities Authorized for Issuance under Equity Compensation Plans

   18

Selected Historical Financial Information of First Advantage Corporation

   19

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   20

Description of First Advantage Capital Stock

   28

Experts

   30

Legal Matters

   30

Index to Financial Statements

   F-1

 

ii


PROSPECTUS SUMMARY

 

Our Company

 

First Advantage Corporation is a growing, national provider of risk management solutions. Our Company was formed in the June 5, 2003 merger with The First American Corporation’s screening technology division and US SEARCH.com Inc. On June 6, 2003, First Advantage’s Class A common stock commenced trading on the Nasdaq National Market under the symbol “FADV”.

 

Prior to June 5, 2003, our activities were limited to participation in the business combination transaction contemplated by the Agreement and Plan of Merger dated December 13, 2002 by and among The First American Corporation, US SEARCH, First Advantage and Stockholm Seven Merger Corp.

 

On June 5, 2003, HireCheck, Inc., Employee Health Programs, Inc., SafeRent, Inc., Substance Abuse Management, Inc., American Driving Records, Inc. and First American Registry, Inc., each formerly a wholly-owned subsidiary of First American and collectively comprising the First American Screening Technology division, and US SEARCH, a public company whose common shares were, until June 5, 2003, traded on the Nasdaq National Market under the symbol “SRCH”, became wholly-owned operating subsidiaries of First Advantage.

 

Pursuant to the Merger Agreement, on June 5, 2003, First American received First Advantage Class B common stock representing approximately 80% of the economic interest and 98% of the voting interest of First Advantage. The former shareholders of US SEARCH exchanged their outstanding shares of US SEARCH common stock for First Advantage Class A common stock representing, in the aggregate, approximately 20% of the economic interest and 2% of the voting interest in First Advantage. As of December 31, 2003, First American owned approximately 77% of the economic interest and 97% of the voting interest of First Advantage.

 

A more complete description of First Advantage’s business is found in the section entitled “INFORMATION ABOUT FIRST ADVANTAGE” beginning on page 11 of this prospectus.

 

The full name, address and telephone number of our company is:

 

First Advantage Corporation

One Progress Plaza

Suite 2400

St. Petersburg, Florida 33701

(727) 214-3411

 

About this Prospectus

 

This prospectus and each prospectus supplement (if any) is part of a registration statement on Form S-4 that we filed with the SEC using a “shelf” registration process. Under the shelf registration process, we may offer and sell, from time to time, in one or more offerings, up to a total of 4,000,000 shares of our Class A common stock for use in connection with acquisitions by us of other businesses, assets or securities of other business entities. The consideration offered by us in such acquisitions, in addition to any shares of Class A common stock offered by this prospectus, may include cash, certain assets and/or assumption by First Advantage of liabilities of the businesses, assets or securities being acquired.

 

1


The terms of acquisitions involving the issuance of the Class A common stock covered by this prospectus are expected to be determined by direct negotiations with the owners or controlling persons of the assets, businesses or securities to be acquired. Factors that First Advantage may consider in determining whether to acquire a business include, among other factors, the quality and reputation of the business to be acquired and its management, the strategic market position of the business to be acquired, its proprietary assets, its ability to generate revenues and earnings, its cash flow and growth potential, and the market value of its equity securities when pertinent. It is anticipated that shares of our Class A common stock issued in any such acquisition will be offered at approximately the then current market value of the Class A common stock. The value will be determined either when the terms of the acquisition are tentatively or finally agreed to, when the acquisition is completed, or during a period of time before we deliver the shares.

 

We do not expect to pay underwriting discounts or commissions, although we may pay finders’ fees from time to time in connection with certain acquisitions. Any person receiving finders’ fees may be deemed to be an “underwriter” within the meaning of the Securities Act, and any profit on the resale of shares of Class A common stock purchased by them may be considered underwriting commissions or discounts under the Securities Act.

 

This prospectus provides you with a general description of the securities we may sell. If required, each time we sell securities under this prospectus, we will provide a prospectus supplement that will contain specific information about the terms of that offering. A prospectus supplement may also add, update or change information contained in this prospectus. You should read this prospectus and the applicable prospectus supplement or supplements.

 

We may also permit individuals or entities who have received or will receive shares of our Class A common stock in connection with the acquisitions described above, or their transferees or successors-in-interest, to use this prospectus to cover their resale of such shares. See “Selling Shareholders,” as it may be amended or supplemented from time to time, for a list of those individuals or entities that are authorized to use this prospectus to sell their shares of our Class A common stock.

 

In making your investment decision, you should rely only on the information contained in this prospectus and any prospectus supplement. We have not authorized anyone to provide you with any other information. If you receive any unauthorized information, you must not rely on it. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state or jurisdiction where the offer or sale of these securities is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on which it is released by First Advantage.

 

2


SUMMARY HISTORICAL FINANCIAL INFORMATION OF FIRST ADVANTAGE CORPORATION

 

The table below presents summary financial information of First Advantage for each of the years in the five-year period ended December 31, 2003. This information has been derived from the selected financial data of First Advantage included in this prospectus.

 

First Advantage’s operating results for the year ended December 31, 2003, include results for the FAST division from January 2003 and the results for US SEARCH.com from June 2003. First Advantage’s operating results for the years ended December 31, 2002, 2001, 2000 and 1999 include results for the FAST division only.

 

First Advantage’s operating results for the year ended December 31, 2003, include results of operations for the acquired entities from their respective dates of acquisition. The FAST division’s operating results for the years ended December 31, 2002, 2001, 2000 and 1999 include the combined results for companies acquired in those years from their respective acquisition dates.

 

Certain amounts for the years ended December 31, 2002, 2001, 2000 and 1999 have been reclassified to conform with the 2003 presentation.

 

The selected financial data from which this summary has been derived was itself derived from the audited consolidated financial statements of First Advantage for the year ended December 31, 2003 and the combined financial statements of the FAST division for the four years ended December 31, 2002. The combined financial statements for the FAST division for the years ended December 31, 2000 and 1999 are not included in this document. This information is only a summary and should be read in conjunction with the audited financial statements and accompanying notes included in this prospectus.

 

     Fiscal Year Ended December 31,

 
     2003

   2002

   2001

    2000

   1999

 

Income Statement Data:

                                     

Total revenues

   $ 166,495,000    $ 100,925,000    $ 49,167,000     $ 38,582,000    $ 30,373,000  

Net income (loss)

   $ 2,803,000    $ 2,702,000    $ (579,000 )   $ 51,000    $ (336,000 )

Balance Sheet Data:

                                     

Total Assets

   $ 283,900,000    $ 164,008,000    $ 62,284,000     $ 26,628,000    $ 15,592,000  

Long-term debt

   $ 13,473,000    $ 651,000    $ 1,159,000     $ 2,261,000    $ 1,410,000  

Stockholders’ equity

   $ 240,336,000    $ 145,903,000    $ 53,075,000     $ 18,491,000    $ 12,390,000  

 

3


RISK FACTORS

 

You should carefully consider each of the following risk factors and the other information contained in this prospectus. We face risks other than those listed here, including those that are unknown to us and others of which we may be aware but, at present, consider immaterial. Because of the following factors, as well as other variables affecting our operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

 

We are controlled by First American and as a result other stockholders have little or no influence over stockholders’ decisions.

 

As a result of the June 5, 2003 mergers, First American owns 100% of our Class B common stock, which have ten votes per share compared to one vote per share of our Class A common stock. Consequently, First American has over 95% of the total voting power of First Advantage and, therefore, First American has 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 has the voting power to control the election of our board of directors and is able to cause an amendment of our 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 us or in the best interest of our other stockholders. For example, First American has 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 entered into as part of the June 5, 2003 mergers, First American has the voting power to exercise a controlling influence over our business and affairs and has the ability to make decisions concerning such things as:

 

  mergers or other business combinations;

 

  purchases or sales of assets;

 

  offerings of securities;

 

  indebtedness that we may incur; and

 

  payments of any dividends.

 

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

 

Moreover, under 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 and that the compensation and nomination committees be comprised solely of independent directors. First American owns more than 50% of the voting power of First Advantage and we may take advantage of such exemptions afforded to controlled companies.

 

We have very little operating history as an independent company.

 

Before June 5, 2003, we had no operating history as a separate public company. Due to this lack of operating history as a separate public company, there can be no assurance that our business strategy will be successful on a long-term basis. Several members of our management team have never operated a stand-alone public company.

 

Pursuant to a standstill agreement entered into between First American and First Advantage, a majority of our “disinterested directors” must approve most future transactions between First American and First Advantage.

 

4


We may need additional capital in order to finance operations or pursue acquisitions. Accordingly, we may have to obtain our own financing for operations and perform most of our own administrative functions. There can be no assurance that we will be able to develop successfully the financial and managerial resources and structure necessary to operate as an independent public company, or that our available financing and anticipated cash flow from operations will be sufficient to meet all of our cash requirements.

 

We are dependent on information suppliers. If we are unable to manage successfully our relationships with a number of these suppliers, the quality and availability of our services may be harmed.

 

We obtain some of the data used in our services from third party suppliers and government entities. If a number of suppliers are no longer able or are unwilling to provide us with certain data, we may need to find alternative sources. If we are unable to identify and contract with suitable alternative data suppliers and integrate these data sources into our service offerings, we could experience service disruptions, increased costs and reduced quality of our services. Additionally, if one or more of our suppliers terminates our existing agreements, there is no assurance that we will obtain new agreements with third party suppliers on terms favorable to us, 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 our business, financial condition and results of operations.

 

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

 

Certain data and services we provide are 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 our results of operations or financial condition 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 our operations and could result in substantial regulatory compliance expense, litigation expense and a loss of revenue.

 

We face significant security risks related to our electronic transmission of confidential information.

 

We rely on encryption and other technologies to provide system security to effect secure transmission of confidential or personal information. We may license these technologies from third parties. There is no assurance that our 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 us to liability;

 

  increase our expenses relating to resolution of these breaches;

 

  deter customers from using our services; and

 

  deter suppliers from doing business with us.

 

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

 

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

 

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

 

5


We may not be able to pursue our acquisition strategy.

 

We intend to grow through acquisitions. We may not be able to identify suitable acquisition candidates, obtain the capital necessary to pursue our acquisition strategy or complete acquisitions on satisfactory terms. A number of our competitors also have adopted the strategy of expanding and diversifying through acquisitions. We likely will experience competition in our effort to execute on our acquisition strategy, and we expect the level of competition to increase. As a result, we may be unable to continue to make acquisitions or may be forced to pay more for the companies we are able to acquire.

 

The integration of companies we acquire may be difficult and may result in a failure to realize some of the anticipated potential benefits of our acquisitions.

 

When companies are acquired, we may not be able to integrate or manage these businesses so as to produce returns that justify the investment. Any difficulty in successfully integrating or managing the operations of the businesses could have a material adverse effect on our business, financial condition, results of operations or liquidity, and could lead to a failure to realize any anticipated synergies. Our management also will be required to dedicate substantial time and effort to the integration of our acquisitions. These efforts could divert management’s focus and resources from other strategic opportunities and operational matters.

 

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

 

As of December 31, 2003 we have approximately $205 million of goodwill. We have implemented 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. We will monitor for impairment of goodwill on past and future acquisitions. In the event that the book value of 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 our results of operations. The goodwill valuation is performed by a third party.

 

We currently do not plan to pay dividends.

 

We intend 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, we do not anticipate paying dividends to stockholders for the foreseeable future.

 

Our business depends on technology that may become obsolete.

 

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

 

First American could sell its controlling interest in us and therefore we 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 us to a third party without offering to our other stockholders the opportunity to participate in the transaction. If another party acquires First American’s interest in us, that third party may be able to control us in the same manner that First American is able to control us. A sale to a third party also may adversely affect the market price of our Class A common stock because the change in control may result in a change in management decisions, business policy and our attractiveness to future investors.

 

6


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

 

Although as of December 31, 2003 there were approximately 21 million total shares of First Advantage common stock outstanding, approximately 77% are owned by First American and approximately 10% are held of record by Pequot Private Equity Fund II, L.P. Currently only approximately 13% of our issued and outstanding shares are freely transferable without restriction under the Securities Act. Accordingly, only a small number of shares of First Advantage actually trade – between June 6, 2003 and December 31, 2003 the average daily trading volume of our Class A common stock was approximately 10,000 shares per day. Consequently, our stockholders may have difficulty selling shares of our Class A common stock.

 

Significant stockholders may sell shares of our common stock which may cause our share price to fall.

 

Subject to certain restrictions, First American may at any time convert each of its shares of our Class B common stock into a share of Class A common stock. First American or Pequot may transfer shares of our common stock in a privately-negotiated transaction or to affiliates or shareholders. Any transfers, sales or distributions by First American or Pequot of a substantial amount of our 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 our Class A common stock.

 

Conflict of interest may arise because certain of our directors and officers are also directors and officers of First American.

 

Certain persons associated with the Company have a continuing relationship with First American. Parker Kennedy and Kenneth DeGiorgio, Chairman of the Board and General Counsel, respectively, of First Advantage, also serve as executive officers of First American and certain of its affiliates. Mr. Kennedy also serves as President, Chief Executive Officer and Chairman of First American. As such they may have great influence on our business decisions. 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 our business and its operations. Both 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.

 

We are a party to a stockholders agreement which may impact corporate governance.

 

First Advantage, First American and Pequot 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 our board of directors 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 and its affiliates’ collective ownership of First Advantage stock is less than 75% of the holdings Pequot received in the June 5, 2003 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 our board of directors and, consequently, little or no ability to influence the direction or management of First Advantage.

 

7


SELLING SHAREHOLDERS

 

The persons to whom we issue shares of Class A common stock under this prospectus may be able to resell such shares in the public market without further registration and without being required to deliver a prospectus. However, certain persons who receive our Class A common stock may want to resell those securities in distributions that would require the delivery of a prospectus. With our consent, this prospectus may be used by certain shareholders who wish to sell our Class A common stock. As used in this prospectus, “selling shareholders” may include shareholders who receive our Class A common stock hereunder in connection with an acquisition and donees and pledgees selling shares received from such people. We may limit our consent to a specified time period and subject our consent to certain limitations and conditions, which may vary by agreement.

 

Selling shareholders may sell our Class A common stock in any combination of the following:

 

  through the Nasdaq National Market or any national securities exchange on which our Class A common stock has been approved for listing in the future;

 

  directly to purchasers in negotiated transactions;

 

  by or through brokers or dealers, in ordinary brokerage transactions or transactions in which the broker solicits purchases;

 

  in block trades in which the broker or dealer will attempt to sell securities as an agent but may position and resell a portion of the block as principal;

 

  in a transaction in which a broker or dealer purchases as principal for resale for its own account; or

 

  through underwriters and agents.

 

Resales by selling shareholders may be made directly to investors or through securities firms acting as underwriters, brokers or dealers. The fees earned by or paid to the securities firm may be the normal stock exchange commission or negotiated commissions or underwriting discounts to the extent permissible. Shares of our Class A common stock may be sold at a fixed offering price, which may be changed, at the prevailing market price at the time of sale, at prices related to such prevailing market price or at negotiated prices. The securities firm may resell the shares through other securities dealers, and commissions or concessions to those other dealers may be allowed. Such selling shareholders may indemnify any securities firm participating in such transactions against certain liabilities, including liabilities under the Securities Act and to reimburse them for any expenses in connection with an offering or sale of securities.

 

The selling shareholders and any broker-dealers who act in connection with the sale of shares hereunder may be deemed to be an “underwriter” within the meaning of the Securities Act. Any commissions received by them and profit on any resale of such shares as principal may be deemed to be underwriting discounts and commissions under the Securities Act.

 

Selling shareholders may also offer shares of Class A common stock covered by this prospectus by means of prospectuses under other registration statements or pursuant to exemptions from the registration requirements of the Securities Act, including sales that meet the requirements of Rule 144 or Rule 145(d) under the Securities Act. Selling shareholders should seek the advice of their own counsel about the legal requirements for such sales.

 

8


The following table sets forth:

 

  the name of each selling shareholder as of the date of this prospectus;

 

  the number of Class A common shares which such selling shareholder may sell from time to time pursuant to the prospectus; and

 

  the number of Class A common shares beneficially owned by the selling shareholder prior to the offering.

 

Selling Shareholder


   Amount of Class A common shares
that may be sold


   Class A common shares owned
before the offering


William H. Goss

   15,275    0

William Moore III

   104,572    0

Timothy E. Fargo

   14    0

Richard J. Taffet

   9,000    0

George M. Ellis, Jr.

   55,848    0

Bradley Trust, dated May 2, 1991

   26,020    0

Shaw Family Trust, created June 8, 2001

   15,612    0

Dan Cates

   14,041    0

Joni Cates

   10,283    0

Aon Solutions, Inc.

   53,419    0

Lamar Stevens

   25,965    0

Patrick Ryan

   25,965    0

Tom Hollenshead

   108,585    0

Lisa Dolezalik

   25,572    0

Mark Myers

   12,940    0

Shirley Shaffer

   11,829    0

Robby Collins

   6,627    0

Chad Woolery

   6,183    0

Dale Shaffer

   5,977    0

nGenuity Capital, Inc

   6,174    0

George Shaffer

   6,739    0

Richard Hollenshead

   3,370    0

Ken Glazier

   674    0

Ross Spinazzola

   627    0

Vincent Tsang

   30,780    0

Richard Young

   117,464    0

David Cerrone

   39,155    0

 

9


No selling shareholder has held any position or office with, been employed by or otherwise has had any material relationship with First Advantage or First Advantage’s predecessors or affiliates during the three years prior to the date of this prospectus.

 

A selling shareholder may offer all or some portion of the Class A common shares. Accordingly, no estimate can be given as to the amount or percentage of Class A common shares that will be held by the selling shareholders upon termination of sales pursuant to this prospectus. In addition, the selling shareholders may have sold, transferred or disposed of all or a portion of their Class A common shares since the date on which they provided the information regarding their holdings in transactions exempt from the registration requirements of the Securities Act.

 

This prospectus will be further amended or supplemented, if required by the Securities Act and the rules of the SEC, to disclose the identity of additional selling shareholders, the number of shares to be sold by the selling shareholders, any material relationship a selling shareholder may have with us, and other details of the resale to the extent appropriate.

 

We will not receive any part of the proceeds from the resale by the selling shareholders of any shares under this prospectus. We will bear all expenses other than selling discounts and commissions and fees and expenses of the selling shareholders in connection with the registration of the shares being re-offered by the selling shareholders.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

CERTAIN STATEMENTS IN THIS PROSPECTUS, INCLUDING THOSE RELATING TO RELATIONSHIPS WITH DATA SUPPLIERS, TERMINATION OF SUPPLIER RELATIONSHIPS, PRODUCT DEMAND, ACQUISITION TARGETS, RETENTION OF FUTURE EARNINGS, CONSOLIDATION OF OPERATIONS, INTERNATIONAL MARKETS, LITIGATION, EXPENSES, AND CASH FLOW AND LIQUIDITY ARE FORWARD LOOKING. RISKS AND UNCERTAINTIES EXIST THAT MAY CAUSE RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE THE ANTICIPATED RESULTS TO DIFFER FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS INCLUDE: GENERAL VOLATILITY OF THE CAPITAL MARKETS AND THE MARKET PRICE OF FIRST ADVANTAGE’S 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; CHANGES IN APPLICABLE GOVERNMENT REGULATIONS; THE DEGREE AND NATURE OF FIRST ADVANTAGE’S COMPETITION; INCREASES IN FIRST ADVANTAGE’S EXPENSES; CONTINUED CONSOLIDATION AMONG FIRST ADVANTAGE’S COMPETITORS AND CUSTOMERS; UNANTICIPATED TECHNOLOGICAL CHANGES AND REQUIREMENTS; FIRST ADVANTAGE’S ABILITY TO IDENTIFY SUPPLIERS OF QUALITY AND COST-EFFECTIVE DATA; AND OTHER FACTORS DESCRIBED IN THIS PROSPECTUS. THE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE THEY ARE MADE. FIRST ADVANTAGE DOES NOT UNDERTAKE TO UPDATE FORWARD-LOOKING STATEMENTS TO REFLECT CIRCUMSTANCES OR EVENTS THAT OCCUR AFTER THE DATE THE FORWARD-LOOKING STATEMENTS ARE MADE.

 

10


INFORMATION ABOUT FIRST ADVANTAGE

 

First Advantage is a growing, national provider of risk management solutions. Our Company was formed in the June 5, 2003 merger with The First American Corporation’s screening technology division and US SEARCH.com Inc. On June 6, 2003, First Advantage’s Class A common stock commenced trading on the Nasdaq National Market under the symbol “FADV”.

 

Prior to June 5, 2003, our activities were limited to participation in the business combination transaction contemplated by the Agreement and Plan of Merger dated December 13, 2002 by and among The First American Corporation, US SEARCH, First Advantage and Stockholm Seven Merger Corp.

 

On June 5, 2003, HireCheck, Inc., Employee Health Programs, Inc., SafeRent, Inc., Substance Abuse Management, Inc., American Driving Records, Inc. and First American Registry, Inc., each formerly a wholly-owned subsidiary of First American and collectively comprising the First American Screening Technology division, and US SEARCH, a public company whose common shares were, until June 5, 2003, traded on the Nasdaq National Market under the symbol “SRCH”, became wholly-owned operating subsidiaries of First Advantage.

 

Pursuant to the Merger Agreement, on June 5, 2003, First American received First Advantage Class B common stock representing approximately 80% of the economic interest and 98% of the voting interest of First Advantage. The former shareholders of US SEARCH exchanged their outstanding shares of US SEARCH common stock for First Advantage Class A common stock representing, in the aggregate, approximately 20% of the economic interest and 2% of the voting interest in First Advantage. As of December 31, 2003, First American owned approximately 77% of the economic interest and 97% of the voting interest of First Advantage.

 

Business of First Advantage

 

Our operations are organized into three business segments: Enterprise Screening, Risk Mitigation and Consumer Direct.

 

A summary of our revenue, net income (loss) before income taxes and assets for our segments is found in Note 14 to the Consolidated Financial Statements beginning on page F-24 of this prospectus.

 

Enterprise Screening

 

First Advantage’s Enterprise Screening segment helps thousands of companies in the United States manage risk with our employment screening, occupational health and resident screening products. Our Enterprise Screening segment accounted for approximately 67% of our consolidated revenue in 2003.

 

Our employment screening services include the provision of reports about a prospective employee’s criminal record, motor vehicle violations, credit standing and involvement in civil litigation. We also make inquiries of provided references and former employers, verify educational credentials and licenses, verify social security numbers and check industry specific records. A customer can order any of these and other related services individually, as a package with our other employment screening products or with other products we offer. Depending on a customer’s preference, orders may be placed and fulfilled directly from the Company, through a secure Internet connection, software, facsimile or through third party vendors.

 

Our occupational health products generally involve the design and management of a drug testing program, including provision for the collection and testing of specimens and interpretation of the results. We also provide physical examination services to employers. Reports of our findings are generally delivered through a secure Internet connection or through other direct means.

 

11


We also develop and manage employee assistance programs, which provide our customers’ employees with access to confidential counseling services and other resources to assist with personal issues that may affect workplace productivity. 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. First Advantage’s employee assistance programs also provide employers with a number of corporate-focused services, including management counseling, critical incident stress management programs, organizational change consulting and intensive specialty training on issues such as violence in the workplace.

 

Our resident screening offerings involve the provision of reports containing information about a prospective renter’s eviction record, lease and payment performance history, credit standing, references and criminal records to residential property managers and owners operating in the United States. Depending on a customer’s needs, our reports may contain one or any combination of these pieces of information. In serving our customers, we may draw on our database of landlord-tenant records, which is the largest of its kind in the United States, and our database of criminal conviction information, which is one of the largest for use in resident screening in the United States. We also offer a scoring product which assesses risk of default by a prospective renter based on a statistical scoring model developed exclusively for the multifamily housing industry. Customers generally order and receive the segment’s resident screening products through a secure Internet connection or through proprietary software.

 

Our employment screening and occupational health services generally experience seasonality near year-end, which is attributed to decreases in hiring. Our resident screening products experience seasonality during the winter months from November to March.

 

Risk Mitigation

 

First Advantage’s Risk Mitigation segment offers motor vehicle records and investigative services to the insurance industry and other businesses operating in the United States. Our Risk Mitigation segment accounted for approximately 27% of our consolidated revenue in 2003.

 

This segment provides customers with automated access to motor vehicle records from all 50 states and the District of Columbia. Independent insurance agents operating in the United States 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, we receive and fulfill orders through our proprietary Comprise/ZapApp® software, which allows the customer to integrate the process of obtaining motor vehicles reports with other processes utilized by the customer.

 

The segment also provides customers with investigative services designed to detect and expose worker’s compensation, disability and liability insurance fraud. Purchased mostly by insurance carriers, third party administrators and self-insuring companies, these services generally involve field surveillance and interviews conducted by more than 200 full-time licensed staff investigators. This segment receives orders in a variety of ways, including telephonic or other direct contact with the client, facsimile, e-mail or through the Internet. In most cases, investigation reports, including accompanying video, are sent via mail or courier to the client.

 

Demand for our motor vehicle records products usually decreases in November and December as a result of reductions in the insurance and employment markets. Our investigative services experience seasonality December through February as a result of the number of holidays which occur during this period and frequent year-end reorganizations which occur at our insurance clients.

 

Consumer Direct

 

Our Consumer Direct segment provides location, verification and screening services directly to consumers through the Internet. This segment uses a proprietary software platform and web-based systems to supply

 

12


customers with services such as individual location, identity verification, criminal record checks, employment and education verifications. We also offer assisted searches and screening services, both online and through toll-free telephone numbers.

 

This segment 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. We are also adapting this technology for use in our Enterprise Screening segment.

 

Our Consumer Direct segment accounted for approximately 6% of our consolidated revenue in 2003.

 

Historical Growth

 

Prior to the June 5, 2003 mergers, HireCheck, Employee Health Programs, SafeRent, Substance Abuse Management, American Driving Records and First American Registry, now wholly-owned subsidiaries of First Advantage, were wholly-owned subsidiaries of First American and made up The First American Corporation Screening Technology (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.

 

In September 1998, First American began its entry into the employee screening industry by acquiring HireCheck. HireCheck, headquartered in St. Petersburg, Florida, is today the principal subsidiary through which our Enterprise Screening segment provides employment screening services. In this same month First American also entered the resident screening industry by acquiring First American Registry, headquartered in Rockville, Maryland. First American Registry, which we believe to be the largest resident screening company in the United States, is today the principal subsidiary through which our Enterprise Screening segment provides resident screening products.

 

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.

 

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 also enhanced the division’s access to the motor vehicle 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 technology services to American Driving Records and now to all of First Advantage.

 

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, First American believed this reorganization effort would position 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 hoped to focus 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

 

13


sales growth or by acquiring businesses with complementary product offerings. In January 2002, First American formally created the FAST division and began reporting the division 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 an expanded customer base for employee 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.

 

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 personal issues that can affect workplace productivity. Employee Health Programs and Substance Abuse Management are today the principal subsidiaries through which the Enterprise Screening segment provides occupational health services.

 

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

 

June 5, 2003 Mergers

 

In the June 5, 2003 mergers, the companies comprising the FAST division and US SEARCH combined under one umbrella. US SEARCH brought to First Advantage not only many important employment screening customers through its Professional Resource Screening, Inc. subsidiary, but also an opportunity to pursue a new market – consumers – with specially tailored versions of our existing products. Ultimately, Professional Resource Screening was combined with the other companies in our Enterprise Screening segment and the other operations of US SEARCH became our Consumer Direct segment.

 

Strategic Acquisitions

 

Since becoming a public company in June 2003, we have actively pursued our acquisition strategy. In August 2003 we acquired two employment background screening companies, Liberatore Services, Inc. and Total Information Source, Inc., and an occupational health services company, Continental Compliance Systems. In September 2003 we further expanded our occupational health services with the acquisition of Employee Information Services, Inc. In that same month, we acquired Omega Insurance Services, Inc., which brought a new investigative services product to First Advantage. In November 2003 we made three acquisitions: occupational health services company Greystone Health Sciences Corporation; MedTech Diagnostics, Inc., a provider of both occupational health services and employment screening services; and Agency Records, Inc., a provider of motor vehicle records. In December 2003, we acquired Credential Check & Personnel Services, Inc., an employment screening company. In January 2004 we acquired Quantitative Risk Solutions LLC, a provider of cargo loss risk mitigation services and Proudfoot Reports Incorporated, an employment screening company. In February 2004, we acquired MVR’s Inc., a provider of motor vehicle records and Background Information Systems, Inc., an employment screening company. In March 2004 we acquired Infocheck, Ltd., a Canadian employment screening company and Landlord Protect, Inc., a provider of resident screening services.

 

14


Customers

 

First Advantage, through its subsidiaries, serves a wide variety of clients throughout the United States, including nearly a quarter 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, insurance companies, 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 our Risk Mitigation segment’s products. Transportation companies are major consumers of our occupational health products. Multifamily housing property management companies and landlords of all sizes are represented in the resident screening business’ customer base. Larger employers represent the predominant share of the employee background screening business. Individual consumers dominate the customer base for our Consumer Direct segment. We derive a nominal amount of revenue from customers in Canada and Puerto Rico.

 

Excluding our Consumer Direct segment, which has a fluid customer base, we have in excess of 25,000 customers. No single customer is responsible for 2 percent or more of our revenue.

 

Suppliers

 

Data represents a key ingredient in most of our products. In obtaining such data, we draw 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 our suppliers provide this data in electronic format. We do not anticipate the termination of any significant relationship with any of our data suppliers. Because we believe we could acquire necessary data from other sources, we do not believe that the termination of any supplier relationship would have a material adverse effect on our financial condition or operating results.

 

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

 

Governmental Regulation

 

Although generally our products or services do not require governmental approvals, our businesses are subject to various federal and state regulations that may impact our products and services. For example, the Federal Fair Credit Reporting Act, the Drivers Privacy Protection Act and various state laws regulate products and services that include disclosure of personal information.

 

Many state and local laws require certain of our subsidiaries and employees engaged in providing our investigative services products to be licensed as private investigators. Some state and local governments require the same with respect to our employee screening companies.

 

Historically, we have been able to comply with existing laws and regulations without incurring substantial costs or restrictions on our business.

 

Competition

 

A number of companies compete with our product offerings. First Advantage’s most significant national competitors in employment screening services include ChoicePoint, Kroll, U.S. Investigative Services and ADP. A number of local and regional competitors also exist. The resident screening industry is highly fragmented, with only approximately 10 other companies providing significant competition on a national level. In our occupational health business, we believe that we have only one significant nationwide competitor, however, there are a significant number of local and regional companies in the industry. In motor vehicle reports, there are

 

15


approximately 10 major competitors to First Advantage, the most predominant of which is ChoicePoint. Three other companies compete with our investigative services products on a national basis, with a broad spectrum of regional and local competitors. In each of these markets, First Advantage competes foremost on the basis of customer service and secondarily on price and product differentiation.

 

The primary competitors to our Consumer Direct segment include telephone companies and other third parties who publish free printed or electronic directories, private investigation firms and web-based companies such as KnowX.com.

 

Intellectual Property

 

First Advantage owns a number of items of intellectual property, including trademarks, tradenames, copyrights, patents, domain names and unregistered trade secrets. First Advantage also owns the US SEARCH DARWIN software platform, which uses advanced technology to access, assimilate, compile, distribute and present data from public and private databases. The patent application for this technology was published on December 19, 2002 and is pending issuance. First Advantage is not dependent upon any single item of intellectual property.

 

Strategies for Future Growth of First Advantage

 

First Advantage believes that as the world becomes increasingly risky for individuals and organizations, demand for our products will grow. Our 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. We intend to accomplish this goal in the following manner:

 

Pursue Strategic Acquisitions. We intend to continue pursuing acquisitions of companies that would enable us to enter new markets as well as increasing our share of those markets in which we are already operating. We will pursue companies with assets that will enhance our ability to fulfill orders, including companies with proprietary databases containing information for use in our products or technology that would make order placement or product delivery more efficient. We also expect to pursue acquisition opportunities which would enable us to enter into related product fields. Our acquisitions of Total Information Source and Employee Information Services are examples of the efforts to increase the volume of transactions performed by First Advantage’s existing businesses through strategic acquisitions. Our acquisition of Omega Insurance Services provides an example of our efforts to enter related product fields (investigation services) through acquisition.

 

Consolidate Operations. We intend to continue our aggressive efforts to consolidate the operations brought together in the June 2003 mergers and the operations of businesses we have since acquired and will acquire. 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 First Advantage can offer its entire menu of services to current and prospective customers.

 

International Expansion. We intend to pursue opportunities to offer our services outside the United States. Given the risks that face businesses around the world, we believe that international markets provide a substantial opportunity for growth. We expect that by expanding our offerings to other countries we will also enhance our ability to compete in the United States for the business of global companies.

 

Employees

 

We employ approximately 1,500 people, most of which are located in the United States. Of this number, approximately 30 are employed in Bangalore, India.

 

16


Properties

 

Our principal executive offices are located in approximately 20,800 square feet of leased office space in St. Petersburg, Florida. The lease expires on November 30, 2006. Current monthly rent is approximately $36,220. First Advantage, through its subsidiaries, maintains 32 other offices in the United States and an office in Bangalore, India. These offices, all of which are leased, comprise a total of approximately 318,000 square feet of space.

 

Legal Matters

 

First Advantage’s subsidiaries are involved in litigation from time to time in the ordinary course of their businesses. We do not believe that the outcome of any pending or threatened litigation involving these entities will have a material adverse effect on our financial position or operating results.

 

17


PRICE RANGE OF COMMON STOCK AND DIVIDENDS AND SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

 

Our Class A common stock is quoted on the Nasdaq National Market under the symbol “FADV”. Our Class A common stock commenced trading on June 6, 2003. The following table sets forth, for the periods indicated, the high and low sale prices of our Class A common stock as reported on the Nasdaq National Market.

 

     Class A Common
Stock Price


     High

   Low

2003

             

Quarter ended June 30, 2003

   $ 40.00    $ 16.39

Quarter ended September 30, 2003

   $ 19.50    $ 14.06

Quarter ended December 31, 2003

   $ 20.65    $ 14.71

 

The approximate number of record holders of Class A common stock on March 5, 2004 was 43.

 

Our Class B common stock is not listed or quoted on any exchange or quotation system. The First American Corporation owns all of our outstanding Class B common stock.

 

We have not paid any dividends on either our Class A common stock or our Class B common stock and we do not anticipate paying any dividends on our common stock in the foreseeable future. We currently intend to retain our future earnings for use in the operation and expansion of our business.

 

The following table describes, as of December 31, 2003, the number of shares of our Class A common stock to be issued or remaining available for future issuance under equity compensation plans:

 

     Number of Securities
to be Issued Upon
Exercise of
Outstanding Options
(a)


  

Weighted-Average
Exercise Price of
Outstanding
Options

(b)


  

Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding
Securities Reflected
in Column (a))

(c)


Equity compensation plan approved by security holders(1)

   2,101,500    $ 18.63    898,500

Equity compensation plan not approved by security holders(2)

   677,437    $ 43.17     

Warrants not approved by security holders(2)

   347,436    $ 21.87     

(1) Consists of the 2003 First Advantage Incentive Compensation Plan. See Note 13 to the Company’s Notes to Consolidated Financial Statements for additional information.

 

(2) Consists of shares relating to all outstanding options and warrants assumed by the Company in connection with the merger with US SEARCH.com Inc. See Note 13 to the Company’s Notes to Consolidated Financial Statements for additional information.

 

18


SELECTED HISTORICAL FINANCIAL INFORMATION

OF FIRST ADVANTAGE CORPORATION

 

First Advantage’s operating results for the year ended December 31, 2003, include results for the FAST division from January 2003 and the results for US SEARCH.com from June 2003. First Advantage’s operating results for the years ended December 31, 2002, 2001, 2000 and 1999 include results for the FAST division only.

 

First Advantage’s operating results for the year ended December 31, 2003, include results of operations for the acquired entities from their respective dates of acquisition. The FAST division’s operating results for the years ended December 31, 2002, 2001, 2000 and 1999 include the combined results for companies acquired in those years from their respective acquisition dates.

 

Certain amounts for the years ended December 31, 2002, 2001, 2000 and 1999 have been reclassified to conform with the 2003 presentation.

 

This selected financial data has been derived from the audited consolidated financial statements of First Advantage for the year ended December 31, 2003 and the combined financial statements of the FAST division for the four years ended December 31, 2002. The combined financial statements for the FAST division for the years ended December 31, 2000 and 1999 are not included in this document. This information is only a summary and should be read in conjunction with the audited financial statements and accompanying notes included in this prospectus.

 

     For the year ended December 31,

 
     2003

    2002

    2001

    2000

    1999

 

Income Statement Data:

                                        

Service revenue

   $ 134,910,000     $ 73,040,000     $ 45,832,000     $ 35,230,000     $ 28,083,000  

Reimbursed government fee revenue

     31,585,000       27,885,000       3,335,000       3,352,000       2,290,000  
    


 


 


 


 


Total revenue

     166,495,000       100,925,000       49,167,000       38,582,000       30,373,000  

Cost of service revenue

     38,154,000       17,534,000       11,280,000       7,776,000       6,122,000  

Government fees paid

     31,585,000       27,885,000       3,335,000       3,352,000       2,290,000  
    


 


 


 


 


Total cost of service

     69,739,000       45,419,000       14,615,000       11,128,000       8,412,000  
    


 


 


 


 


Gross margin

     96,756,000       55,506,000       34,552,000       27,454,000       21,961,000  
    


 


 


 


 


Operating expenses

     90,055,000       51,005,000       35,008,000       26,856,000       22,294,000  

Impairment loss

     1,739,000       —         —         —         —    
    


 


 


 


 


Income (loss) from operations

     4,962,000       4,501,000       (456,000 )     598,000       (333,000 )
    


 


 


 


 


Other (expense) income:

                                        

Interest expense

     (154,000 )     (229,000 )     (241,000 )     (313,000 )     (262,000 )

Interest income

     41,000       59,000       59,000       32,000       21,000  
    


 


 


 


 


Total interest (expense), net

     (113,000 )     (170,000 )     (182,000 )     (281,000 )     (241,000 )
    


 


 


 


 


Income (loss) before income taxes

     4,849,000       4,331,000       (638,000 )     317,000       (574,000 )

Provision (benefit) for income tax

     2,046,000       1,629,000       (59,000 )     266,000       (238,000 )
    


 


 


 


 


Net income (loss)

   $ 2,803,000     $ 2,702,000     $ (579,000 )   $ 51,000     $ (336,000 )
    


 


 


 


 


Balance Sheet Data:

                                        

Total assets

   $ 283,900,000     $ 164,008,000     $ 62,284,000     $ 26,628,000     $ 15,592,000  

Long-term debt

   $ 13,473,000     $ 651,000     $ 1,159,000     $ 2,261,000     $ 1,410,000  

Stockholders’ equity

   $ 240,336,000     $ 145,903,000     $ 53,075,000     $ 18,491,000     $ 12,390,000  

Per Share Information:

                                        

Net income

                                        

Basic

   $ 0.14       N/A       N/A       N/A       N/A  

Diluted

   $ 0.14       N/A       N/A       N/A       N/A  

Weighted average shares outstanding

                                        

Basic

     20,260,854       N/A       N/A       N/A       N/A  

Diluted

     20,397,587       N/A       N/A       N/A       N/A  

Stockholders’ Equity

   $ 11.50       N/A       N/A       N/A       N/A  

Total shares outstanding at December 31, 2003

     20,893,648       N/A       N/A       N/A       N/A  

 

19


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

Overview

 

First Advantage Corporation (Nasdaq: FADV) (“First Advantage” or the “Company”) was created by the June 5, 2003 merger of The First American Corporation’s Screening Technologies (“FAST”) division with US SEARCH.com Inc. (“US SEARCH”). First Advantage provides global risk management screening services to enterprise and consumer customers. The Company operates in three primary business segments: Enterprise Screening, Risk Mitigation and Consumer Direct. First Advantage is headquartered in St. Petersburg, Florida, and has more than 1,400 employees in offices throughout the United States and in Bangalore, India.

 

The Enterprise Screening segment includes employment background screening, occupational health services and resident screening services. The Enterprise Screening segment serves over 20,000 customers, and six of the ten largest multifamily property management companies in the United States. Products and services relating to employment background screening include criminal records searches, employment verification, education verification, motor vehicle records, social security number verification and credit reporting. Occupational health services include drug-free workplace programs, physical examinations and employee assistance programs. Resident screening services include criminal background and eviction records, credit reporting, employment verification and lease performance and payment histories. The Company has a proprietary database of 34 million landlord-tenant records that include eviction court records, rental histories, payment trends and landlord contributed data.

 

The Risk Mitigation segment includes motor vehicle records and investigative services provided to nearly 8,000 customers comprised primarily of insurance companies, agents and brokers. Products and services offered by the Risk Mitigation segment include driver history reports, vehicle registration, surveillance services, field interviews and due diligence reports.

 

The Consumer Direct segment provides consumers with a single, comprehensive access point to a broad range of public information to assist them in locating, verifying and screening people. Consumer Direct segment customers can obtain addresses, aliases, listed phone numbers, property ownership, court records and other public data through the US SEARCH Web site. The services are highly automated utilizing the Company’s US SEARCH DARWIN technology, which automates the data management supply chain by accessing, assimilating and compiling data from disparate sources. US SEARCH completed over 630,000 transactions in 2003.

 

First Advantage intends to continue its efforts to consolidate the operations brought together in the June 2003 mergers and the operations of businesses since acquired. First Advantage also intends to continue pursuing acquisitions of businesses that will enable the Company to enter new markets as well as increase existing market share. First Advantage also expects to pursue acquisition opportunities, which will enable the Company to enter into related product fields.

 

First Advantage generates revenue in the form of fees from the reports generated by searches performed and services provided. First Advantage generally enters into agreements with customers under which they pay a fixed fee per report or for services provided. For purposes of analyzing operating results, gross margin and operating costs are compared to service revenues, excluding reimbursed government fee revenue. Elimination of inter-segment revenue is included in corporate.

 

Cost of sales includes fees paid to vendors or agencies for data procurement, specimen collection, laboratory testing, and investigators’ compensation, benefits and travel expenses.

 

First Advantage’s operating expenses consist primarily of compensation and benefits costs for employees, occupancy and related costs, other selling, general and administrative expenses associated with operating its

 

20


business, depreciation of property and equipment and amortization of intangible assets. First Advantage’s expenses are likely to increase with increasing revenue levels.

 

Critical Accounting Policies and Estimates

 

First Advantage’s discussion and analysis of financial condition and results of operations is based upon its audited consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. First Advantage’s results of operation for the year ended December 31, 2003 include the results of the FAST division from January 2003, and the results for US SEARCH from June 2003. Businesses acquired subsequent to June 2003 are included in First Advantage’s results of operations from the date of acquisition. The results of operations for the years ended December 31, 2002 and 2001 are the results of the FAST division only.

 

First Advantage believes the following are the more critical accounting policies that impact its financial statements, some of which are based on management’s best estimates available at the time of preparation. Other accounting policies also have a significant effect on First Advantage’s consolidated financial statements, and some of these policies also require the use of estimates and assumptions. Although First Advantage believes that its estimates and assumptions are reasonable, actual results may differ.

 

Revenue Recognition

 

Revenue is recognized at the time of delivery of the reports, as First Advantage has no ongoing obligation after delivery. Revenue from investigative services is recognized as services are performed. In accordance with generally accepted accounting principles, the Company includes reimbursed government fees in revenue and in cost of service.

 

Allowance for Uncollectible Receivables

 

The allowance for all probable, uncollectible receivables is based on a combination of historical data, cash payment trends, specific customer issues, write-off trends, general economic conditions and other factors. These factors are continuously monitored by management to arrive at an estimate for the amount of accounts receivable that may ultimately be uncollectible. In circumstances where First Advantage is aware of a specific customer’s inability to meet its financial obligations, First Advantage records a specific allowance for bad debts against amounts due to reduce the net recognized receivable to the amount it reasonably believes will be collected. This analysis requires making significant estimates, and changes in facts and circumstances could result in material changes in the allowance for uncollectible receivables.

 

Capitalized Software Development Costs

 

First Advantage capitalizes costs associated with developing software for internal use, which costs primarily include salaries of developers. Direct costs incurred in the development of software are capitalized once the preliminary project stage is completed, management has committed to funding the project and completion and use of the software for its intended purpose are probable. First Advantage ceases capitalization of development costs once the software has been substantially completed and is ready for its intended use.

 

Database Development Costs

 

Database development costs represent expenditures associated with First Advantage’s databases of information for customer usage. The costs are capitalized from the time technological feasibility is established until the information is ready for use.

 

21


Impairment of Intangible and Long-Lived Assets

 

First Advantage carries intangible and long-lived assets at cost less accumulated amortization (where applicable). Accounting standards require that assets be written down if they become impaired. Intangible and long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset is not recoverable. At such time that an impairment in value of an intangible or long-lived asset is identified, the impairment will be measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Fair value is determined by employing an expected present value technique, which utilizes multiple cash flow scenarios that reflect the range of possible outcomes and an appropriate discount rate. In accordance with SFAS 142, the Company completed a goodwill impairment test, for the year ending December 31, 2003, for all reporting units. A valuation date of September 30, 2003 was used for this impairment test and was performed by a third party. The test determined that each reporting unit had a fair value in excess of carrying value, therefore, no goodwill impairment was recorded.

 

Purchase Accounting

 

First Advantage completed nine acquisitions in 2003. The Company has acquired additional businesses in January, February and March of 2004 and anticipates it will continue with other acquisitions in 2004. The purchase method of accounting requires companies to assign values to assets and liabilities acquired based upon their fair values. In most instances, there is not a readily defined or listed market price for individual assets and liabilities acquired in connection with a business, including intangible assets. The determination of fair value for assets and liabilities in many instances requires a high degree of estimation. The valuation of intangibles assets, in particular, is very subjective. First Advantage generally uses internal cash flow models and, in certain instances, third party valuations in estimating fair values. The use of different valuation techniques and assumptions can change the amounts and useful lives assigned to the assets and liabilities acquired, including goodwill and other intangible assets and related amortization expense. Amounts allocated to certain assets and liabilities as of December 31, 2003 are based on preliminary estimates of fair value and may be revised in 2004. The Company does not anticipate that revisions to the amounts allocated to acquired assets and liabilities, if any, will be significant to the Company’s financial statements.

 

The following is a summary of the operating results by the Company’s business segments for the three years ended December 31, 2003.

 

     Enterprise
Screening


    Risk
Mitigation


    Consumer
Direct


    Corporate
and
Eliminations


    Total

 
2003                                         

Service revenue

   $ 107,580,000     $ 18,285,000     $ 10,525,000     $ (1,480,000 )   $ 134,910,000  

Reimbursed government fee revenue

     4,384,000       27,201,000       —         —         31,585,000  
    


 


 


 


 


Total revenue

     111,964,000       45,486,000       10,525,000       (1,480,000 )     166,495,000  

Cost of service revenue

     33,976,000       4,537,000     $ 1,121,000     $ (1,480,000 )     38,154,000  

Government fees paid

     4,384,000       27,201,000       —         —         31,585,000  
    


 


 


 


 


Total cost of service

     38,360,000       31,738,000       1,121,000       (1,480,000 )     69,739,000  

Gross margin

     73,604,000       13,748,000       9,404,000       —         96,756,000  

Salaries and benefits

     40,191,000       4,976,000       3,031,000       2,980,000       51,178,000  

Other operating expenses

     20,515,000       2,211,000       5,006,000       2,717,000       30,449,000  

Depreciation and amortization

     6,269,000       860,000       1,292,000       7,000       8,428,000  

Impairment loss

     1,739,000       —         —         —         1,739,000  
    


 


 


 


 


Income (loss) from operations

     4,890,000       5,701,000       75,000       (5,704,000 )     4,962,000  
    


 


 


 


 


Gross margin percentage

     68.4 %     75.2 %     89.3 %     N/A       71.7 %

 

22


     Enterprise
Screening


    Risk
Mitigation


    Consumer
Direct


   Corporate
and
Eliminations


    Total

 
2002                                        

Service revenue

   $ 63,310,000     $ 10,570,000     $ —      $ (840,000 )   $ 73,040,000  

Reimbursed government fee revenue

     3,464,000       24,421,000       —        —         27,885,000  
    


 


 

  


 


Total revenue

     66,774,000       34,991,000       —        (840,000 )     100,925,000  

Cost of service revenue

     17,875,000       499,000            $ (840,000 )     17,534,000  

Government fees paid

     3,464,000       24,421,000       —        —         27,885,000  
    


 


 

  


 


Total cost of service

     21,339,000       24,920,000       —        (840,000 )     45,419,000  

Gross margin

     45,435,000       10,071,000       —        —         55,506,000  

Salaries and benefits

     28,851,000       3,012,000       —        —         31,863,000  

Other operating expenses

     13,554,000       1,492,000       —        —         15,046,000  

Depreciation and amortization

     3,497,000       599,000       —        —         4,096,000  
    


 


 

  


 


Income (loss) from operations

     (467,000 )     4,968,000       —        —         4,501,000  
    


 


 

  


 


Gross margin percentage

     71.8 %     95.3 %     N/A      N/A       76.0 %
     Enterprise
Screening


    Risk
Mitigation


    Consumer
Direct


   Corporate
and
Eliminations


    Total

 
2001                                        

Service revenue

   $ 45,832,000     $ —       $ —      $ —       $ 45,832,000  

Reimbursed government fee revenue

     3,335,000       —         —        —         3,335,000  
    


 


 

  


 


Total revenue

     49,167,000       —         —        —         49,167,000  

Cost of service revenue

     11,280,000                              11,280,000  

Government fees paid

     3,335,000       —         —        —         3,335,000  
    


 


 

  


 


Total cost of service

     14,615,000       —         —        —         14,615,000  

Gross margin

     34,552,000       —         —        —         34,552,000  

Salaries and benefits

     21,175,000       —         —        —         21,175,000  

Other operating expenses

     11,342,000       —         —        —         11,342,000  

Depreciation and amortization

     2,491,000       —         —        —         2,491,000  
    


 


 

  


 


(Loss) from operations

     (456,000 )     —         —        —         (456,000 )
    


 


 

  


 


Gross margin percentage

     75.4 %     N/A       N/A      N/A       75.4 %

 

Enterprise Screening Segment

 

2003 Compared to 2002

 

Total service revenue was $107.6 million in 2003, an increase of $44.3 million compared to 2002 service revenue of $63.3 million. Acquisitions accounted for approximately $40.2 million of the revenue increase. Two businesses were acquired in late 2002 and seven businesses in 2003. Revenue increased by $4.1 million, or 6.5%, at businesses owned in 2002. The growth rate of 6.5%, excluding acquisitions, is due to expanded market share and an increase in products and services.

 

The gross margin percentage of service revenue decreased from 71.8% to 68.4% due to a generally lower gross margin on drug screening revenue and generally higher gross margin on resident screening.

 

Salaries and benefits increased by $11.3 million. Salaries and benefits were 37.4% of service revenue in 2003 compared to 45.6% of service revenue in 2002. This decrease reflected economies achieved in 2003 by consolidating certain operations and leveraging databases.

 

23


Other operating expenses increased by $7.0 million and were 19.1% of service revenue in 2003 compared to 21.4% in 2002. This decrease, as a percent of revenue, was the result of economies achieved in 2003 by consolidating certain operations that enabled greater utilization of existing facilities and economies in telecommunication and shipping costs.

 

Depreciation and amortization increased by $2.8 million. Depreciation and amortization was 5.8% of service revenue in 2003 compared to 5.5% in 2002. Intangible assets increased in 2003 due to acquisitions made in the fourth quarter of 2002 and during 2003.

 

An impairment charge of $1.7 million was recorded in 2003 for capitalized software in connection with the integration of operations.

 

Income from operations was $4.9 million in 2003, compared to an operating loss of $.5 million in 2002. The increase in income from operations was the result of increased revenue, primarily from acquisitions. Operating costs as a percent of revenue declined due to consolidation of businesses and leveraging of databases.

 

2002 Compared to 2001

 

Total service revenue was $63.3 million in 2002, an increase of $17.5 million compared to 2001 service revenue of $45.8 million. Acquisitions accounted for $14.1 million of the increase in service revenue. The remaining increase in service revenue of $3.4 million represents a growth rate of 7.4% over 2001. This increase was due primarily to expanded market share in the resident screening business.

 

The gross margin percentage of service revenue decreased from 75.4% in 2001 to 71.8% in 2002 due primarily to the addition of a larger concentration of lower margin drug screening revenue in 2002.

 

Salaries and benefits increased by $7.7 million. Salaries and benefits were 45.6% of service revenue in 2002 and 46.2% in 2001.

 

Other operating expenses increased by $2.2 million. Other operating expenses were 21.4% of service revenue in 2002 compared to 24.7% in 2001. As a percent of service revenue, this decrease was primarily due to operating efficiencies due to revenue growth.

 

Depreciation and amortization increased by $1 million. Depreciation and amortization was 5.5% of service revenue in 2002 compared to 5.4% in 2001. The increase was due primarily to an increase in amortization of intangible assets as a result of acquisitions made in the fourth quarter of 2002 and in August 2001.

 

The segment incurred a loss from operations of $.5 million in 2002 and 2001.

 

Risk Mitigation Segment

 

2003 Compared to 2002

 

Total service revenue was $18.3 million in 2003, an increase of $7.7 million compared to 2002 service revenue of $10.6 million. In September 2003, the Company acquired an investigative service business, which accounts for substantially all of the increase in service revenue.

 

The gross margin percentage of service revenue decreased from 95.3% to 75.2% primarily due to the acquisition of the investigative service business, which generate margin levels lower than the motor vehicle records operations of this segment.

 

Salaries and benefits increased by $2 million. Salaries and benefits were 27.2% of service revenue in 2003 compared to 28.5% in 2002. The percentage decrease is primarily due to the acquisition in 2003.

 

Other operating expenses increased by $.7 million. Other operating expenses were 12.1% of service revenue in 2003 compared to 14.1% in 2002. The change is primarily due to the acquisition in 2003.

 

24


Depreciation and amortization increased by $.3 million due to an increase in amortization of intangible assets as a result of the acquisition.

 

Income from operations was $5.7 million in 2003 compared to $5 million in 2002. Operating income from existing businesses increased by $.2 million.

 

2002 Compared to 2001

 

In January 2002, the Company acquired a motor vehicle reporting business. Prior to that time, the Company operated solely in the Enterprise Screening segment. Service revenue for the year was $10.6 million with a gross margin percentage of service revenue of 95.3%. Income from operations was $5 million.

 

Consumer Direct

 

This segment was formed in connection with the acquisition in June 2003 of US SEARCH. Operating results for this segment are for the period from June 1, 2003 to December 31, 2003. Revenue for this seven month period was $10.5 million. Salaries and benefits were 28.8% of revenue. Other operating expenses totaled $5 million or 47.6% of revenue. Income from operations was $75 thousand.

 

Corporate

 

Corporate expenses were initially incurred when First Advantage was created by the June 5, 2003 merger of the FAST division with US SEARCH. Corporate costs and expenses represent primarily compensation and benefits for senior management and administrative staff and related general and administrative expenses including an administrative fee paid to First American.

 

Consolidated Results

 

2003 Compared to 2002

 

Consolidated service revenue for the year ended December 31, 2003 was $134.9 million, an increase of $61.9 million from 2002. Acquisitions accounted for $58.4 million of the increase.

 

The consolidated gross margin of service revenue was 71.7% in 2003 compared to 76% in 2002.

 

Salaries and benefits were 37.9% of service revenue in 2003 and 43.6% in 2002. The decrease was primarily due to reductions in salaries and benefits as a percentage of revenue in the Enterprise Screening segment offset by an increase in corporate salary and benefits incurred since the creation of First Advantage in June 2003.

 

Other operating expenses were 22.6% of service revenue in 2003 compared to 20.6% in 2002. The increase was due to acquisitions in 2003 in the Consumer Direct and Risk Mitigation segments and corporate expenses incurred in 2003. The increase was offset in part by operating efficiencies in the Enterprise Screening segment.

 

Depreciation and amortization increased by $4.3 million due to an increase in amortization of intangible assets as a result of acquisitions.

 

An impairment charge of $1.7 million was recorded in 2003 for capitalized software in connection with the integration of operations in the Enterprise Screening segment.

 

Income from operations was $5 million in 2003 compared to $4.5 million in 2002. The increase of $.5 million is comprised of an increase in operating income of $5.4 million in the Enterprise Screening segment, an increase in operating income of $.7 million in the Risk Mitigation segment and an increase in operating income of $.1 million in the Consumer Direct segment. Corporate expenses of $5.7 million offset this combined increase of $6.2 million in operating income at the business segments.

 

2002 Compared to 2001

 

Consolidated service revenue for the year ended December 31, 2002 was $73 million, an increase of $27.2 million from 2001. Acquisitions accounted for $23.8 million of the increase.

 

25


The consolidated gross margin of service revenue was 76% in 2002 compared to 75.4% in 2001.

 

Salaries and benefits were 43.6% of service revenue in 2002 and 46.2% in 2001.

 

Other operating expenses were 20.6% of service revenue in 2002 compared to 24.7% in 2001. The decrease was due to the acquisition in the Risk Mitigation segment in 2002 and operating efficiencies in the Enterprise Screening segment in 2002.

 

Depreciation and amortization increased by $1.6 million due to an increase in amortization of intangible assets as a result of acquisitions.

 

Income from operations was $4.5 million in 2002 compared to an operating loss of $.5 million in 2001. The increase of $5 million was due to the acquisition in 2002 in the Risk Mitigation segment.

 

Liquidity and Capital Resources

 

The Company’s primary source of liquidity is cash flow from operations and amounts available under credit lines the Company has established with a bank and with First American. Prior to the June 5, 2003 merger with US SEARCH, contributions from First American were also a primary source of liquidity. As of December 31, 2003, cash and cash equivalents were $5.6 million.

 

Cash provided by operating activities was $1.8 million; $5.5 million and $1.4 million for the years ended December 31, 2003, 2002 and 2001, respectively.

 

Cash provided from operating activities decreased by $3.7 million from 2002 to 2003 while net income was $2.8 million in 2003 and $2.7 million in 2002. The decrease in cash provided from operating activities was due to an increase in depreciation and amortization, an impairment charge totaling $6.1 million, offset by a net cash outflow of $9.9 million due to changes in operating assets and liabilities compared to 2002. The primary changes in operating assets and liabilities were mainly due to reductions in accounts payable, accrued liabilities and income taxes offset by an increase in accrued compensation and other liabilities.

 

Cash provided from operating activities increased by $4.1 million from 2001 to 2002. Net income was $2.7 million in 2002 compared to a loss of $579 thousand in 2001. In addition to the increase in net income of $3.3 million, depreciation and amortization increased by $1.6 million. The change in operating assets and liabilities decreased net cash flow by $.8 million compared to 2001.

 

Cash used in investing activities was $13 million, $4.7 million and $6 million for the years ended December 31, 2003, 2002 and 2001, respectively. In 2003, cash in the amount of $10.9 million was used for acquisitions. Purchases of property and equipment were $1.9 million in 2003 compared to $3.3 million in 2002 and $4.2 million in 2001. Database development costs were $2.2 million in 2003 compared to $2.8 million in 2002 and $2.1 million in 2001.

 

Cash provided by financing activities was $10.3 million, $4.5 million, and $3.0 million for the years ended December 31, 2003, 2002 and 2001, respectively. In 2003, proceeds from bank financing were $9 million. Repayment of debt was $4.3 million in 2003, $1.2 million in 2002 and $1.8 million in 2001. Prior to the June 2003 merger with US SEARCH, cash contributions from First American were $5.3 million in 2003, $5.7 million in 2002 and $4.8 million in 2001.

 

First Advantage also leases certain office facilities, automobiles and equipment under operating leases, which, for the most part, are renewable. The majority of these leases also provide that First Advantage will pay insurance and applicable taxes.

 

During July 2003, First Advantage entered into a $15 million loan agreement with a bank (the “Loan Agreement”). The outstanding principal balance under the related note cannot exceed the lesser of $15 million or 80% of eligible accounts receivable, as defined in the Loan Agreement. The Note bears interest at the one-month

 

26


LIBOR rate plus an applicable margin ranging from 1.25% per annum to 2.5% per annum. The principal balance of the Loan Agreement is payable in July 2005. The Loan Agreement provides that the First Advantage maintain certain financial covenants. One of the financial covenants is the maintenance of a “Funded Debt to EDITDA” ratio not to exceed 2.5 to 1.0. Funded Debt is defined as all outstanding liabilities for borrowed money and other interest bearing liabilities less the non-current portion of subordinated liabilities. EDITDA, as defined in the Loan Agreement, means net income less income or plus losses from discontinued operations and extraordinary items, plus all of the following: income taxes, interest expense, depreciation, amortization, depletion and other non-cash charges. A second financial covenant requires that the company maintain a “Debt Service Coverage Ratio”, as defined in the Loan Agreement, of at least 1.5 to 1. At December 31, 2003, the Company was in compliance with the financial covenants of the Loan Agreement. There was $9 million outstanding on this credit facility at December 31, 2003. An additional $5 million was borrowed subsequent to year-end to fund acquisitions.

 

In July 2003, First Advantage entered into a Promissory Note with The First American Corporation. The loan evidenced by the Promissory Note is a $10 million unsecured revolving loan with interest payable monthly. The principal balance of the Promissory Note is payable on July 31, 2006. The Promissory Note is subordinated to the $15 million bank debt and bears interest at the rate payable under the $15 million bank debt plus 0.5% per annum. There was no balance outstanding as of December 31, 2003. Subsequent to year end, the Company borrowed $4.5 million on this line to fund acquisitions and provide working capital.

 

In January 2004, the Company entered into a ten-year facilities lease. Aggregate minimum lease payments are $11.3 million over the term of the lease.

 

First Advantage filed a Registration Statement with the Securities and Exchange Commission for the issuance of up to 4,000,000 shares of our Class A common stock, par value $.001 per share, from time to time as full or partial consideration for the acquisition of businesses, assets or securities of other business entities. The Registration Statement was declared effective on July 14, 2003. A total of 864,082 of the 4,000,000 shares were issued for acquisitions as of December 31, 2003.

 

In 2003, First Advantage sought to acquire other businesses as part of its growth strategy. The Company will continue to evaluate acquisitions in order to achieve economies of scale, expand market share and enter new markets. The extent of future acquisitions, however, is dependent upon the availability of capital and liquidity to fund such acquisitions.

 

While uncertainties within the Company’s industry exist, management is not aware of any trends or events likely to have a material adverse effect on liquidity or the accompanying financial statements. The Company believes that, based on current levels of operations and anticipated growth, the Company’s cash flow from operations, together with available sources of liquidity, will be sufficient to fund operations, anticipated capital expenditures, make required payments of principal and interest on debt, and satisfy other long-term contractual commitments. However, any material adverse change in our operating results from our business plan, or acceleration of existing debt obligations or in the amount of investment in acquisitions, technology or products could require the Company to seek other funding alternatives including raising additional capital.

 

The following is a schedule of long-term contractual commitments (as of December 31, 2003) over the periods in which they are expected to be paid.

 

    2004

  2005

  2006

  2007

  2008

  Thereafter

  Total

Advertising commitments

  $ 600,000   $ 50,000   $ 17,000   $ —     $ —     $ —     $ 667,000

Minimum contract purchase commitments

    486,000     240,000     9,000     1,000     —       —       736,000

Operating leases

    5,100,000     3,492,000     2,399,000     1,119,000     334,000     126,000     12,570,000

Long-term debt

    7,150,000     13,461,000     —       —       —       —       20,611,000

Capital leases

    81,000     12,000     —       —       —       —       93,000
   

 

 

 

 

 

 

Total

  $ 13,417,000   $ 17,255,000   $ 2,425,000   $ 1,120,000   $ 334,000   $ 126,000   $ 34,677,000
   

 

 

 

 

 

 

 

27


DESCRIPTION OF FIRST ADVANTAGE CAPITAL STOCK

 

The following description of the terms of First Advantage’s capital stock does not purport to be complete and is qualified in its entirety by reference to First Advantage’s certificate of incorporation and bylaws, which are included in the Registration Statement of which this prospectus is a part.

 

General

 

First Advantage’s authorized capital stock consists of:

 

  75,000,000 shares of Class A common stock, par value $0.001 per share;

 

  25,000,000 shares of Class B common stock, par value $0.001 per share; and

 

  1,000,000 shares of preferred stock, par value $0.001 per share.

 

Class A Common Stock

 

Holders of First Advantage Class A common stock are entitled to one vote for each share held of record on all matters submitted to a vote of holders of First Advantage common stock. Subject to preferences that may be applicable to any outstanding preferred stock, holders of First Advantage Class A common stock are entitled to dividends as may be declared from time to time by the First Advantage board of directors out of funds legally available for that purpose. Holders of First Advantage Class A common stock have no preemptive, redemption, conversion or sinking fund rights. Upon a liquidation, dissolution or winding up of the affairs of First Advantage, the holders of First Advantage Class A common stock are entitled to share equally and ratably, together with the holders of First Advantage Class B common stock, in the assets of First Advantage, if any, remaining after the payment of all debts and liabilities of First Advantage and the liquidation preference of any First Advantage preferred stock then outstanding.

 

Class B Common Stock

 

Except as otherwise described as follows, the rights, preferences and privileges of the Class B common stock are identical to those of the Class A common stock described above. Holders of First Advantage Class B common stock are entitled to ten votes for each share held of record on all matters submitted to a vote of holders of First Advantage common stock.

 

The First Advantage Class B common stock is convertible into shares of First Advantage Class A common stock at a one-to-one conversion ratio as follows:

 

  the holder of any share of First Advantage Class B common stock may elect at any time, and at such holder’s sole option, to convert such share into one fully paid and nonassessable share of First Advantage Class A common stock;

 

  if at any time First American and its affiliates collectively own less than 28% of the total number of issued and outstanding shares of capital stock of First Advantage, each issued and outstanding share of First Advantage Class B common stock will automatically be converted into one share of Class A common stock; or

 

  upon the transfer of any share of First Advantage Class B common stock to a person other than First American or an affiliate of First American (excluding certain permitted transfers), such share will automatically be converted into one fully paid and nonassessable share of Class A common stock.

 

Notwithstanding the foregoing, First American may transfer shares of Class B common stock (without conversion into Class A common stock) if such transfer is effected as part of a distribution by First American of shares of Class B common stock to its shareholders in a tax-free “spinoff” under Section 355(a) of the Internal Revenue Code of 1986, as amended, and any subsequent transfer of such shares will not cause such shares to convert into Class A common stock.

 

28


Preferred Stock

 

First Advantage’s certificate of incorporation allows its board of directors to issue shares of preferred stock in one or more series without stockholder approval. First Advantage’s board of directors will have discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption rights and liquidation preferences of each series of preferred stock.

 

The purpose of authorizing First Advantage’s board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with stockholder approval of specific issuances. First Advantage has no present plans to issue any of its authorized but unissued shares of preferred stock.

 

Warrants to Purchase Class A Common Stock

 

As a part of the June 5, 2003 mergers, First Advantage assumed the obligations of US SEARCH contained in all warrants to purchase common stock of US SEARCH outstanding on the closing date of the mergers. Pursuant to the merger agreement and the terms of the warrants, after the closing of the mergers the holders of the warrants were entitled to receive upon exercise thereof 0.04 of a share of First Advantage Class A common stock for each share of US SEARCH common stock such warrant holder would have been entitled to receive pursuant to the warrant prior to the closing of the mergers. As of May 31, 2003, US SEARCH had outstanding warrants to purchase up to 8,657,019 shares of its common stock at a weighted average exercise price of $0.87 per share. Following the mergers, such warrants were converted into warrants to purchase 346,280 shares of First Advantage Class A common stock at a weighted average exercise price of $21.75 per share. As of December 31, 2003, First Advantage had outstanding warrants to purchase up to 347,436 shares of its common stock at exercise prices ranging from $.25 to $29.50 per share. Further information is included in the Notes to Consolidated Financial Statements of First Advantage Corporation, at Note 13, beginning at page F-22 of this prospectus.

 

Registration Rights Relating to Class A Common Stock

 

Holders of certain US SEARCH warrants have the right to cause First Advantage to register the resale of the shares of Class A common stock underlying such warrants. First Advantage may be required to register the resale of up to 347,436 shares of Class A common stock underlying these warrants. Pequot Private Equity Fund II, L.P. also has the right to require First Advantage to register the resale of shares of Class A common stock held by it under circumstances specified in the stockholders agreement entered into in connection with the mergers.

 

Transfer Agent

 

The transfer agent and registrar of the First Advantage Class A common stock is Wells Fargo Shareowner Services. First Advantage acts as transfer agent and registrar of the First Advantage Class B common stock.

 

29


EXPERTS

 

The consolidated financial statements of First Advantage as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003, included in this prospectus, have been included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.

 

The consolidated financial statements of US SEARCH as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002, included in this prospectus, have been included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.

 

LEGAL MATTERS

 

The legality of the First Advantage Class A common stock offered by this prospectus has been passed upon for First Advantage by its counsel, White & Case LLP, Los Angeles, California.

 

30


INDEX TO FINANCIAL STATEMENTS

 

     Page

FIRST ADVANTAGE CORPORATION

    

Report of Independent Certified Public Accountants

   F-2

Consolidated Balance Sheets

   F-3

Consolidated Statements of Income (Loss) For the Years Ended December 31, 2003, 2002 and 2001

   F-4

Consolidated Statement of Changes in Stockholders’ Equity For the Years Ended December 31, 2003, 2002 and 2001

   F-5

Consolidated Statements of Cash Flows For the Years Ended December 31, 2003, 2002 and 2001

   F-6

Notes to Consolidated Financial Statements For the Years Ended December 31, 2003, 2002 and 2001

   F-7

Schedule II to Financial Statements: Valuation and Qualifying Accounts

   F-27

CONSOLIDATED FINANCIAL STATEMENTS OF US SEARCH.COM INC.

    

Report of Independent Accountants

   F-28

Consolidated Balance Sheets as of December 31, 2001 and 2002

   F-29

Consolidated Statements of Operations for the Years Ended December 31, 2000, 2001 and 2002

   F-30

Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2000, 2001 and 2002

   F-31

Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 2001 and 2002

   F-32

Notes to Financial Statements

   F-33

 

F-1


Report of Independent Certified Public Accountants

 

To the Board of Directors and

Shareholders of First Advantage Corporation:

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income (loss), of changes in stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of First Advantage Corporation and its subsidiaries (the Company) at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

As further discussed in Note 1 and Note 2 of the Notes to the consolidated financial statements, the initial formation of the Company resulted from the aggregation of several subsidiaries of First American Corporation.

 

/s/ PricewaterhouseCoopers LLP

 

Tampa, Florida

March 8, 2004

 

F-2


First Advantage Corporation

 

Consolidated Balance Sheets

 

    

December 31,

2003


  

December 31,

2002


Assets

             

Current assets:

             

Cash and cash equivalents

   $ 5,637,000    $ 6,514,000

Accounts receivable (less allowance for doubtful accounts of $1,327,000 and $788,000 in 2003 and 2002, respectively)

     23,672,000      13,827,000

Income taxes receivable

     1,282,000      —  

Prepaid expenses and other current assets

     2,512,000      1,332,000
    

  

Total current assets

     33,103,000      21,673,000

Property and equipment, net

     19,719,000      12,535,000

Goodwill

     204,710,000      112,618,000

Intangible assets, net

     18,528,000      10,606,000

Database development costs, net

     7,162,000      6,226,000

Other assets

     678,000      350,000
    

  

Total assets

   $ 283,900,000    $ 164,008,000
    

  

Liabilities and Stockholders’ Equity

             

Current liabilities:

             

Accounts payable

   $ 4,211,000    $ 3,047,000

Accrued compensation

     9,373,000      4,645,000

Accrued liabilities

     6,327,000      3,170,000

Due to affiliates

     992,000      —  

Income taxes payable

     —        1,576,000

Current portion of long-term debt and capital leases

     7,231,000      540,000
    

  

Total current liabilities

     28,134,000      12,978,000

Long-term debt and capital leases, net of current portion

     13,473,000      651,000

Deferred income taxes

     —        4,189,000

Other liabilities

     1,957,000      287,000
    

  

Total liabilities

     43,564,000      18,105,000
    

  

Commitments and contingencies

             

Stockholders’ equity:

             

Preferred stock, $.001 par value; 1,000,000 shares authorized, no shares issued or outstanding

     —        —  

Class A common stock, $.001 par value; 75,000,000 shares authorized; 4,866,362 and 0 shares issued and outstanding as of December 31, 2003 and December 31, 2002, respectively

     5,000      —  

Class B common stock, $.001 par value; 25,000,000 shares authorized; 16,027,286 and 1 shares issued and outstanding as of December 31, 2003 and December 31, 2002, respectively

     16,000      —  

Additional paid-in capital

     233,101,000      141,492,000

Retained earnings

     7,214,000      4,411,000
    

  

Total stockholders’ equity

     240,336,000      145,903,000
    

  

Total liabilities and stockholders’ equity

   $ 283,900,000    $ 164,008,000
    

  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3


First Advantage Corporation

 

Consolidated Statements of Income (Loss)

For the Years Ended December 31, 2003, 2002 and 2001

 

     2003

    2002

    2001

 

Service revenue

   $ 134,910,000     $ 73,040,000     $ 45,832,000  

Reimbursed government fee revenue

     31,585,000       27,885,000       3,335,000  
    


 


 


Total revenue

     166,495,000       100,925,000       49,167,000  
    


 


 


Cost of service revenue

     38,154,000       17,534,000       11,280,000  

Government fees paid

     31,585,000       27,885,000       3,335,000  
    


 


 


Total cost of service

     69,739,000       45,419,000       14,615,000  
    


 


 


Gross margin

     96,756,000       55,506,000       34,552,000  
    


 


 


Salaries and benefits

     51,178,000       31,863,000       21,175,000  

Other operating expenses

     30,449,000       15,046,000       11,342,000  

Depreciation and amortization

     8,428,000       4,096,000       2,491,000  

Impairment loss

     1,739,000       —         —    
    


 


 


Total operating expenses

     91,794,000       51,005,000       35,008,000  
    


 


 


Income (loss) from operations

     4,962,000       4,501,000       (456,000 )
    


 


 


Interest (expense) income:

                        

Interest expense

     (154,000 )     (229,000 )     (241,000 )

Interest income

     41,000       59,000       59,000  
    


 


 


Total interest (expense), net

     (113,000 )     (170,000 )     (182,000 )
    


 


 


Income (loss) before income taxes

     4,849,000       4,331,000       (638,000 )

Provision (benefit) for income taxes

     2,046,000       1,629,000       (59,000 )
    


 


 


Net income (loss)

   $ 2,803,000     $ 2,702,000     $ (579,000 )
    


 


 


Per share amounts:

                        

Basic

   $ 0.14       N/A       N/A  
    


               

Diluted

   $ 0.14       N/A       N/A  
    


               

Weighted-average common shares outstanding:

                        

Basic

     20,260,854       N/A       N/A  

Diluted

     20,397,587       N/A       N/A  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4


First Advantage Corporation

 

Consolidated Statement of Changes in Stockholders’ Equity

For the Years Ended December 31, 2003, 2002 and 2001

 

    

Common

Stock

Shares


  

Common

Stock

Amount


  

Additional

Paid-in

Capital


  

Retained

Earnings


    Total

 

Balance at January 1, 2001

   —      $ —      $ 16,203,000    $ 2,288,000     $ 18,491,000  

Net loss for 2001

                        (579,000 )     (579,000 )

Contribution from First American - Operations

                 30,383,000              30,383,000  

Contribution from First American - Cash

                 4,780,000              4,780,000  
    
  

  

  


 


Balance at December 31, 2001

   —      $ —      $ 51,366,000    $ 1,709,000     $ 53,075,000  

Net income for 2002

                        2,702,000     $ 2,702,000  

Contribution from First American - Operations

                 84,458,000              84,458,000  

Contribution from First American - Cash

                 5,667,000              5,667,000  

Capitalization of entity

   1      —        1,000      —         1,000  
    
  

  

  


 


Balance at December 31, 2002

   1    $ —      $ 141,492,000    $ 4,411,000     $ 145,903,000  

Net income for 2003

          —        —        2,803,000       2,803,000  

Contribution from First American - Operations

          —        10,696,000      —         10,696,000  

Contribution from First American - Cash

          —        5,269,000      —         5,269,000  

Class A Shares issued in connection with US SEARCH.com acquisition

   3,974,761      4,000      60,147,000      —         60,151,000  

Class B Shares issued to First American in connection with US SEARCH.com acquisition

   16,027,285      16,000      —        —         16,000  

Class A Shares issued in connection with other acquisitions

   864,082      1,000      15,149,000      —         15,150,000  

Class A Shares issued in connection with stock option plan and employee stock purchase plan

   27,519      —        348,000      —         348,000  
    
  

  

  


 


Balance at December 31, 2003

   20,893,648    $ 21,000    $ 233,101,000    $ 7,214,000     $ 240,336,000  
    
  

  

  


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5


First Advantage Corporation

 

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2003, 2002 and 2001

 

     2003

    2002

    2001

 

Cash flows from operating activities:

                        

Net income (loss)

   $ 2,803,000     $ 2,702,000     $ (579,000 )

Adjustments to reconcile net income to net cash provided by operating activities:

                        

Depreciation and amortization

     8,428,000       4,096,000       2,491,000  

Impairment loss

     1,739,000       —         —    

Change in operating assets and liabilities, net of acquisitions:

                        

Accounts receivable

     (1,851,000 )     (390,000 )     891,000  

Prepaid expenses and other current assets

     (5,000 )     (82,000 )     73,000  

Other assets

     1,291,000       216,000       560,000  

Accounts payable

     (7,167,000 )     (1,030,000 )     (1,282,000 )

Accrued liabilities

     (7,938,000 )     (6,154,000 )     (1,445,000 )

Due to affiliates

     213,000       —         —    

Income taxes

     (1,798,000 )     2,976,000       585,000  

Accrued compensation and other liabilities

     6,076,000       3,145,000       97,000  
    


 


 


Net cash provided by operating activities

     1,791,000       5,479,000       1,391,000  
    


 


 


Cash flows from investing activities:

                        

Database development costs

     (2,156,000 )     (2,835,000 )     (2,064,000 )

Purchases of property and equipment

     (1,867,000 )     (3,321,000 )     (4,154,000 )

Cash paid for acquisitions

     (10,930,000 )     —         —    

Net book value of businesses acquired by First American

     —         (2,693,000 )     (275,000 )

Cash balance of companies acquired

     1,967,000       4,111,000       507,000  
    


 


 


Net cash used in investing activities

     (12,986,000 )     (4,738,000 )     (5,986,000 )
    


 


 


Cash flows from financing activities:

                        

Proceeds from long-term debt

     9,000,000       —         —    

Repayment of long-term debt

     (4,299,000 )     (1,182,000 )     (1,775,000 )

Cash contributions from First American

     5,269,000       5,668,000       4,780,000  

Proceeds from class A shares issued in connection with stock option plan and employee stock purchase plan

     348,000       —         —    
    


 


 


Net cash provided by financing activities

     10,318,000       4,486,000       3,005,000  
    


 


 


(Decrease) increase in cash and cash equivalents

     (877,000 )     5,227,000       (1,590,000 )

Cash and cash equivalents at beginning of period

     6,514,000       1,287,000       2,877,000  
    


 


 


Cash and cash equivalents at end of period

   $ 5,637,000     $ 6,514,000     $ 1,287,000  
    


 


 


Supplemental disclosures of cash flow information:

                        

Cash paid for interest

   $ 170,000     $ 116,000     $ 168,000  
    


 


 


Cash paid for income taxes

   $ 62,800     $ —       $ 175,000  
    


 


 


Non-cash investing and financing activities:

                        

Operations contributed by First American

   $ 10,696,000     $ 84,458,000     $ 30,383,000  
    


 


 


Common stock issued in connection with US SEARCH.com acquisition

   $ 60,167,000     $ —       $ —    
    


 


 


Class A shares issued in connection with other acquisitions

   $ 15,150,000     $ —       $ —    
    


 


 


Debt issued in connection with acquisitions

   $ 11,250,000     $ —       $ —    
    


 


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6


First Advantage Corporation

 

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2003, 2002 and 2001

 

1. Organization and Nature of Business

 

In June 2003, First Advantage Corporation (the “Company”), a newly formed holding company, acquired US SEARCH.com and six operating subsidiaries of The First American Corporation (“First American”) that formerly comprised its First American Screening Technologies (“FAST”) division. The operating subsidiaries included HireCheck, Inc., First American Registry, Inc., Substance Abuse Management, Inc., American Driving Records, Inc., Employee Health Programs, Inc., and SafeRent, Inc. First American owns approximately 77% of the shares of capital stock of the Company as of December 31, 2003. The Class B common stock owned by First American is entitled to ten votes per share on all matters presented to the stockholders for vote.

 

The Company provides best-in-class single-source solutions for global risk mitigation and enterprise and consumer screening needs. The Company operates in three primary business segments; Enterprise Screening, Risk Mitigation and Consumer Direct.

 

The Enterprise Screening segment includes employment background screening, occupational health services and resident screening services.

 

The Risk Mitigation segment includes motor vehicle records and investigative services.

 

The Consumer Direct segment provides consumers with a single, comprehensive access point to a broad range of information to assist them in locating people and other public data searches.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The Company’s operating results for the year ended December 31, 2003, include results for the FAST division from January 2003 and the results for US SEARCH.com from June 2003. The Company’s operating results for the years ended December 31, 2002 and 2001, include results for the FAST division only.

 

The Company’s operating results for the year ended December 31, 2003, include results of operations for the acquired entities from their respective dates of acquisition. The FAST division’s operating results for the years ended December 31, 2002 and 2001 include the combined results for companies acquired in 2002 and 2001 from their respective acquisition dates.

 

Certain amounts for the year ended December 31, 2002 and 2001 have been reclassified to conform with the 2003 presentation.

 

Principles of Consolidation

 

The consolidated financial statements for the year ended December 31, 2003 include the accounts of the Company and all majority owned subsidiaries. All significant inter-company transactions and balances have been eliminated.

 

Use of Estimates

 

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the statements. Actual results could differ from the estimates and assumptions used.

 

F-7


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

Fair Value of Financial Instruments

 

The carrying amount of the Company’s financial instruments at December 31, 2003 and 2002, which includes cash and cash equivalents and accounts receivable, approximates fair value because of the short maturity of those instruments. The Company considers the variable rate debt to be representative of current market rates and, accordingly, estimates that the recorded amounts approximate fair market value. Fair value estimates of the fixed rate debt were determined using discounted cash flow methods with a discount rate of 4.0% and 4.25%, which is the rate that similar instruments could be negotiated at December 31, 2003 and 2002, respectively.

 

The estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, are summarized as follows:

 

     December 31, 2003

    December 31, 2002

 
     Carrying
Amount


    Estimated Fair
Value


    Carrying
Amount


    Estimated
Fair Value


 

Cash and cash equivalents

   $ 5,637,000     $ 5,637,000     $ 6,514,000     $ 6,514,000  

Accounts receivable

     23,672,000       23,672,000       13,827,000       13,827,000  

Long-term debt and capital leases

     (20,704,000 )     (20,554,000 )     (1,191,000 )     (1,290,000 )

 

Cash Equivalents

 

The Company considers cash equivalents to be all short-term investments that have an initial maturity of 90 days or less.

 

Accounts Receivable

 

Accounts receivable are due from companies in a broad range of industries located throughout the United States. Credit is extended based on an evaluation of the customer’s financial condition, and generally, collateral normally is not required.

 

The allowance for all probable uncollectible receivables is based on a combination of historical data, cash payment trends, specific customer issues, write-off trends, general economic conditions and other factors. These factors are continuously monitored by management to arrive at the estimate for the amount of accounts receivable that may be ultimately uncollectible. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, the Company records a specific allowance for bad debts against amounts due, to reduce the net recognized receivable to the amount it reasonable believes will be collected. This analysis requires making significant estimates, and changes in facts and circumstances could result in material changes in the allowance for uncollectible receivables. Management believes that the allowance at December 31, 2003 and 2002 is reasonably stated.

 

Property and Equipment

 

Property and equipment are recorded at cost. Property and equipment includes computer software acquired and developed for internal use. Software development costs are capitalized from the time technological feasibility is established until the software is ready for use.

 

The Company follows Statement of Position (SOP) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” SOP 98-1 requires the Company to capitalize interest costs incurred

 

F-8


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

and certain payroll-related costs of employees directly associated with developing software in addition to incremental payments to third parties.

 

Depreciation on leasehold improvements is computed on the straight-line method over the life of the related lease, ranging from 3 to 10 years. Depreciation on data processing equipment and furniture and equipment is computed using the straight-line method over their estimated useful lives ranging from 3 to 10 years. Capitalized software costs are amortized using the straight-line method over estimated useful lives of 3 to 5 years.

 

Database Development Costs

 

Database development costs represent the cost to develop the proprietary databases of information for customer usage. The costs are capitalized from the time technological feasibility is established until the information is ready for use. These costs are amortized using the straight-line method over estimated useful life of 7 years.

 

Goodwill and Other Intangible Assets

 

In 2001, goodwill recognized in business combinations consummated prior to June 30, 2001, was amortized over its estimated useful life of 25 years. Other intangibles, which include customer lists and covenants not to compete, are amortized over their estimated useful lives, ranging from 2 to 20 years. The Company regularly evaluates the amortization period assigned to each intangible asset to ensure that there have not been any events or circumstances that warrant revised estimates of useful lives.

 

In June 2001, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”. This statement addresses financial accounting and reporting for business combinations and supercedes Accounting Principles Board (“APB”) Opinion No. 16, “Business Combinations”. All business combinations in the scope of SFAS 141 are to be accounted for using the purchase method of accounting. The provisions of SFAS 141 apply to all business combinations initiated or closed after June 30, 2001. The adoption of SFAS 141 did not have a material effect on the Company’s financial condition or results of operations.

 

On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”. This statement addresses financial accounting and reporting for goodwill and other intangible assets. In accordance with the provisions of SFAS 142, goodwill is no longer amortized but is rather tested annually for impairment, unless there is a change in circumstances or conditions that may warrant a periodic assessment of impairment. The Company has selected September 30 as the annual valuation date to test goodwill for impairment. The valuation is performed by a third party.

 

The following table presents the results of operations on a comparable basis, after adjustment for goodwill amortization for the years ended December 31:

 

     2003

   2002

   2001

 

Net income (loss), as reported

   $ 2,803,000    $ 2,702,000    $ (579,000 )

Goodwill amortization

     —        —        353,000  
    

  

  


Net income (loss), as adjusted

   $ 2,803,000    $ 2,702,000    $ (226,000 )
    

  

  


 

F-9


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

Purchase Accounting

 

The purchase method of accounting requires companies to assign values to assets and liabilities acquired based upon their fair values. In most instances there is not a readily defined or listed market price for individual assets and liabilities acquired in connection with a business, including intangible assets. The determination of fair value for assets and liabilities in many instances requires a high degree of estimation. The valuation of intangibles assets, in particular is very subjective. The Company generally uses internal cash flow models and in certain instances third party valuations in estimating fair values. The use of different valuation techniques and assumptions could change the amounts and useful lives assigned to the assets and liabilities acquired, including goodwill and other intangible assets and related amortization expense. Amounts allocated to certain assets and liabilities as of December 31, 2003 are based on preliminary estimates of fair value and may be revised in 2004. The Company does not anticipate that revisions to the amounts allocated to acquired assets and liabilities, if any, will be significant to the Company’s financial statements.

 

Income Taxes

 

Taxes are based on income for financial reporting purposes and include deferred taxes applicable to temporary differences between the financial statement carrying amount and the tax basis of certain of the Company’s assets and liabilities. The tax provision has been calculated on a separate return basis. The Company’s income tax returns are filed either as a separate company basis or as part of the consolidated income tax returns of First American, depending on when an operating subsidiary was acquired and the rules of the jurisdiction. The Company has a tax sharing arrangement with First American whereby the Company will fund any tax liabilities due related to its operations and First American will repay any refunds received related to the Company’s operations.

 

Impairment of Long-Lived Assets

 

Effective January 1, 2002, the Company adopted SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS 144 establishes a single accounting model for the impairment or disposal of long-lived assets, including discontinuance of operations. SFAS 144 superseded SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets for Long-Lived Assets to Be Disposed of” and APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”. The initial adoption of this standard did not have a significant impact on financial position or results of operations of the Company.

 

With respect to long-lived assets to be held and used, an asset (or group of assets) will be considered impaired when the expected undiscounted cash flows from use and disposition are less than the asset’s carrying value. The amount of any impairment charge will be based on the difference between the carrying and fair value of the asset. The determination of fair values considers quoted market prices, if available, and prices for similar assets and the results of other valuation techniques.

 

For assets to be sold, an asset (or group of assets) that meets the criteria established by SFAS 144 for classification of assets held for sale will be carried at the lower of carrying amount or fair value less cost to sell.

 

Revenue Recognition

 

Revenue is recognized at the time of delivery of the reports, as the Company has no ongoing obligation after delivery. Revenue from investigative services is recognized as services are performed. In accordance with

 

F-10


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

generally accepted accounting principles, the Company includes reimbursed government fees in revenue and in cost of service.

 

Comprehensive Income

 

SFAS No. 130, “Reporting Comprehensive Income”, governs the financial statement presentation of changes in stockholders’ equity resulting from non-owner sources. Comprehensive income includes all changes in equity except those resulting from investments by owners and distribution to owners. For the years ended December 31, 2003, 2002 and 2001, the Company had no items of comprehensive income (loss) other than net income (loss); therefore, a separate statement of comprehensive income (loss) has not been presented for these periods.

 

Stock Based Compensation

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” which amends SFAS 123, “Accounting for Stock-Based Compensation,” and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. Furthermore, SFAS 148 requires more prominent and frequent disclosures in financial statements about the effects of stock-based compensation. The Company adopted SFAS 148 as of January 1, 2003 with respect to the disclosure requirements. The Company has elected to continue accounting for stock-based compensation using the intrinsic value method prescribed in APB 25 and related interpretations. The fair value for each option grant is estimated using the Black-Scholes pricing model assuming a dividend yield of 0%; expected volatility of 34%; a weighted-average risk free interest rate of 3.24% and an expected life of nine years. If the Company had elected or was required to apply the fair value recognition provisions of SFAS 123 to stock-based employee compensation, net income and net income per share would have been reduced to the pro forma amounts indicated in the following table.

 

    

Year Ended

December 31, 2003


Net income, as reported

   $ 2,803,000

Less: stock based compensation expense, net of tax

     1,428,000
    

Pro forma net income

   $ 1,375,000
    

Earnings per share:

      

Basic, as reported

   $ 0.14

Basic, pro forma

   $ 0.07

Diluted, as reported

   $ 0.14

Diluted, pro forma

   $ 0.07

 

3. Acquisitions

 

In June 2003, the Company acquired US SEARCH.com for a total purchase price of approximately $60.2 million. The purchase price was based upon an estimate of the fair value of the net assets of the FAST division contributed by First American to the Company in the mergers and estimated direct costs of the mergers. The allocation of the purchase price is based upon estimates of the assets and liabilities acquired in accordance with SFAS 141. In connection with the acquisition of US SEARCH.com, approximately $2.4 million of severance costs were accrued and included in net assets acquired in the allocation of the purchase price. In 2003, approximately $1.2 million of these severance costs were paid and charged to the accrual. The balance of the

 

F-11


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

severance costs are expected to be paid in 2004. A full determination of the purchase price allocation was made concurrent with the effective acquisition date based on internal cash flow models and third party valuation analysis of tangible and intangible assets.

 

The purchase price is as follows:

 

Fair value of FAST Division net assets

   $ 173,000,000
    

Fair value of 20% of the FAST Division net assets contributed

   $ 34,600,000

Net cash infusion from First American

     295,000

Merger related closing costs

     6,772,000

Cash loaned to US SEARCH.com by First American

     1,448,000
    

Total consideration paid by First American for 80% of US SEARCH.com

   $ 43,115,000
    

Value of 100% of US SEARCH.com

   $ 53,894,000

Value of vested options and outstanding warrants of US SEARCH.com

     6,273,000
    

Purchase price

   $ 60,167,000
    

 

Since August 2003, the Company has acquired nine businesses. The acquisitions have been included in the Company’s Enterprise Screening and Risk Mitigation segments. The preliminary allocation of the purchase price is based upon estimates of the assets and liabilities acquired in accordance with SFAS 141.

 

The aggregate purchase price of these acquisitions is as follows:

 

Cash

   $ 10,930,000

Notes

     11,250,000

Stock

     15,150,000
    

Purchase price

   $ 37,330,000
    

 

The allocation of the aggregate purchase price of the acquisitions in 2003 is as follows:

 

     US Search

    Other

   Total

 

Goodwill

   $ 54,901,000     $ 27,592,000    $ 82,493,000  

Identifiable intangible assets

     3,032,000       6,113,000      9,145,000  

Reserve for fair value of operating leases

     (1,370,000 )     —        (1,370,000 )

Technology

     5,166,000       —        5,166,000  

Net assets acquired

     (1,562,000 )     3,625,000      2,063,000  
    


 

  


     $ 60,167,000     $ 37,330,000    $ 97,497,000  
    


 

  


 

F-12


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

Goodwill as a result of acquisitions in 2003 was allocated to the following operating segments based on the relative benefits from the synergies, growth and economic potential anticipated from the respective acquisitions. The allocation was based, in part, on a fair value analysis of each of the reporting units by an independent third party. Other adjustments consist primarily of utilization of acquired net operating losses and the payment by First American of a contingent purchase price.

 

Operating Segment


   Balance at
12/31/02


   US Search
Acquisition


   Other
Acquisitions


   Other
Adjustments


    Balance at
12/31/03


Enterprise Screening

   $ 77,120,000    $ 26,266,000    $ 13,221,000    $ (1,012,000 )   $ 115,595,000

Risk Mitigation

     35,498,000      3,059,000      14,371,000      10,611,000       63,539,000

Consumer Direct

     —        25,576,000      —        —         25,576,000
    

  

  

  


 

Consolidated

   $ 112,618,000    $ 54,901,000    $ 27,592,000    $ 9,599,000     $ 204,710,000
    

  

  

  


 

 

In October 2002, First American acquired Employee Health Programs, Inc. and in November 2002, acquired SafeRent, Inc. for a total purchase price of approximately $47 million and contributed both of the operations to the Company. In January 2002, First American acquired American Driving Records, Inc. for approximately $40 million and contributed those operations to the Company. In August 2001, First American acquired the stock of Substance Abuse Management, Inc. for approximately $30 million and contributed the operations to the Company.

 

The allocation of the purchase price of the acquisitions consummated in 2002 and 2001 is as follows:

 

     2002

   2001

     ADR

   EHP

    SafeRent

   Total

   Total

Goodwill

   $ 35,498,000    $ 19,408,000     $ 20,901,000    $ 75,807,000    $ 27,224,000

Identifiable intangible assets

     3,300,000      4,000,000       1,200,000      8,500,000      2,501,000

Technology

     —        500,000       1,200,000      1,700,000      —  

Net assets acquired

     1,202,000      (908,000 )     699,000      993,000      275,000
    

  


 

  

  

Total Purchase Price

   $ 40,000,000    $ 23,000,000     $ 24,000,000    $ 87,000,000    $ 30,000,000
    

  


 

  

  

 

In applying the purchase method of accounting, management undertook a comprehensive review of the acquired entities to ensure that all identifiable assets and liabilities are properly recorded at their fair value. The acquisition of these companies is based on management’s consideration of past and expected future performance as well as the potential strategic fit with the long-term goals of First Advantage. The expected long-term growth, market position and expected synergies to be generated by inclusion of these companies are the primary factors which gave rise to an acquisition price which resulted in the recognition of goodwill.

 

In determining fair value, the Company utilizes a variety of valuation techniques including discounted cash flow analysis and outside appraisals to the extent necessary given materiality and complexity. All excess purchase price is appropriately recorded as goodwill. The useful lives for all assets recorded in purchase accounting are based on market conditions, contractual terms and other appropriate factors.

 

F-13


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

Unaudited pro forma results of operations assuming all of the acquisitions were consummated on January 1, 2002 are as follows:

 

     2003

   2002

 

Total revenue

   $ 203,688,000    $ 193,344,000  
    

  


Net income (loss)

   $ 929,000    $ (16,369,000 )
    

  


Earnings per share:

               

Basic

   $ 0.04      N/A  
    

        

Diluted

   $ 0.04      N/A  
    

        

Weighted-average common shares outstanding:

               

Basic

     20,882,450      N/A  

Diluted

     21,019,263      N/A  

 

4. Goodwill and Intangible Assets

 

On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets”. This statement addresses financial accounting and reporting for goodwill and other intangibles and supercedes APB Opinion No. 17, “Intangible Assets.” SFAS 142 addresses how goodwill and other intangible assets should be accounted for in the financial statements. Pursuant to SFAS 142, the Company’s goodwill and intangible assets that have indefinite lives will not be amortized but rather will be tested at least annually for impairment. SFAS 142 requires that goodwill and other intangible assets be allocated to various reporting units, which are either operating segments or one reporting unit below the operating segment. The Company’s reporting units for purposes of allocating goodwill and testing for impairment are employment background screening and occupational health services, resident screening, risk mitigation services and consumer direct.

 

The SFAS 142 impairment testing process includes two phases. The first phase (Test 1) compares the fair value of each reporting unit to its book value. The fair value of each reporting unit is determined by using discounted cash flow analysis, market approach valuations and third-party valuation advisors. If the fair value of the reporting unit exceeds its book value, the goodwill is not considered impaired and no additional analysis is required. However, if the book value is greater than the fair value, a second test (Test 2) must be completed to determine if the fair value of the goodwill exceeds the book value of the goodwill. The fair value of the goodwill is determined by discounted cash flow analysis and appraised values. If the fair value is less than the book value, an impairment is considered to exist and, in the initial year of adoption, would be recorded as a cumulative effect of a change in accounting principle.

 

In accordance with the adoption of SFAS 142, the Company completed the transitional goodwill impairment test for all reporting units and determined that each reporting unit had a fair value in excess of carrying value, therefore, no goodwill impairment was recorded. The annual test for impairment was again performed in 2003, by a third party (using the September 30 valuation date) and the results were the same. Each reporting unit had a fair value in excess of carrying value and no goodwill impairment was recorded.

 

The Company has $18.5 million of intangible assets at December 31, 2003, with definite lives ranging from 2 to 20 years. These assets, comprised primarily of customer lists and non-compete agreements, are being amortized in a manner consistent with periods prior to adoption of SFAS 142.

 

F-14


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

Goodwill and other intangible assets for the years ended December 31, 2003 and 2002 are as follows:

 

     2003

    2002

 

Goodwill

   $ 204,710,000     $ 112,618,000  
    


 


Intangible assets:

                

Customer lists

   $ 19,191,000     $ 10,448,000  

Noncompete agreements

     1,306,000       875,000  
    


 


       20,497,000       11,323,000  

Less accumulated amortization

     (1,969,000 )     (717,000 )
    


 


Intangible assets, net

   $ 18,528,000     $ 10,606,000  
    


 


 

Goodwill amortization expense was $0, $0 and $353,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Amortization expense of other intangible assets was $1,310,000, $390,000 and $89,000 for the years ended December 31, 2003, 2002 and 2001, respectively. Amortization expense relating to intangible asset balances as of December 31, 2003 is expected to be as follows over the next five years:

 

Year ending December 31,


    

2004

   $ 1,976,000

2005

     1,949,000

2006

     1,705,000

2007

     1,631,000

2008

     1,627,000

Thereafter

     9,640,000
    

     $ 18,528,000
    

 

The change in the carrying amount of intangible assets is as follows for the year ending December 31, 2003:

 

     Intangible
Assets


 

Balance, at December 31, 2002

   $ 10,606,000  

Acquisitions

     9,145,000  

Amortization

     (1,310,000 )

Other adjustments

     87,000  
    


Balance, at December 31, 2003

   $ 18,528,000  
    


 

F-15


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

5. Property and Equipment

 

As of December 31, 2003 and 2002, property and equipment is as follows:

 

     2003

    2002

 

Furniture and equipment

   $ 4,737,000     $ 2,632,000  

Data processing equipment

     6,639,000       3,936,000  

Capitalized software

     19,407,000       11,416,000  

Leasehold improvements

     2,230,000       854,000  
    


 


       33,013,000       18,838,000  

Less accumulated depreciation

     (13,294,000 )     (6,303,000 )
    


 


Property and equipment, net

   $ 19,719,000     $ 12,535,000  
    


 


 

Depreciation and amortization expense was $5,767,000, $2,708,000 and $1,305,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

 

An impairment charge of $1.7 million was recorded in 2003 for capitalized software that is in the process of being replaced by a new operating system for the Enterprise Screening segment. The carrying value of the software was reduced to $524,000, its estimated fair value. There is no active market for this proprietary software. The fair value was determined by management and is based upon estimated replacement cost and the remaining useful life of the software.

 

The capitalized cost of equipment under capital leases, which is included in data processing equipment in the accompanying consolidated balance sheets, was as follows at December 31:

 

     2003

    2002

 

Property and equipment

   $ 619,000     $ 619,000  

Less accumulated depreciation

     (530,000 )     (464,000 )
    


 


     $ 89,000     $ 155,000  
    


 


 

6. Database Development Costs

 

Database development costs for the years ended December 31, 2003 and 2002 are as follows:

 

     2003

    2002

 

Eviction data

   $ 9,617,000     $ 7,873,000  

Criminal data

     1,586,000       1,045,000  

Less accumulated amortization

     (4,041,000 )     (2,692,000 )
    


 


Database development costs

   $ 7,162,000     $ 6,226,000  
    


 


 

Amortization expense relating to database development costs was $1,351,000, $998,000 and $744,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

 

F-16


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

7. Debt

 

On July 31, 2003, the Company entered into a $15 million loan agreement with a bank (the “Loan Agreement”). The outstanding principal balance under the related Note cannot exceed the lesser of $15 million or 80% of eligible accounts receivable, as defined in the Loan Agreement. The Note bears interest at the 30-day LIBOR rate plus an applicable margin ranging from 1.25% per annum to 2.5% per annum. The Loan Agreement provides that the Company must adhere to certain financial covenants. One of the financial covenants requires the maintenance of a “Funded Debt to EBITDA” ratio not to exceed 2.5 to 1.0. Funded Debt is defined as all outstanding liabilities for borrowed money and other interest bearing liabilities less the non-current portion of subordinated liabilities. EBITDA, as defined in the Loan Agreement, means net income less income or plus losses from discontinued operations and extraordinary items, plus all of the following: income taxes, interest expense, depreciation, amortization, depletion and other non-cash charges. A second financial covenant requires that the Company maintain a “Debt Service Coverage Ratio”, as defined in the Loan Agreement, of at least 1.5 to 1. At December 31, 2003, the Company was in compliance with the financial covenants of the Loan Agreement.

 

On July 31, 2003, the Company entered into a Promissory Note with First American. The loan evidenced by the Promissory Note is a $10 million unsecured revolving loan, with interest payable monthly. The principal balance of the Promissory Note is payable on July 31, 2006. The Promissory Note is subordinated to the $15 million bank debt and bears interest at the rate payable under the $15 million bank debt plus 0.5% per annum. There was no balance outstanding as of December 31, 2003.

 

Long-term debt consists of the following at December 31:

 

     2003

   2002

Acquisition debt:

             

Weighted average interest rate of 2.4% with maturities through 2005

   $ 10,031,000    $ —  

Loan Agreement:

             

Interest at 30-day LIBOR plus 1.39% (2.51% at December 31, 2003), matures July 2005

     9,000,000      —  

Promissory Note (related to US SEARCH.com acquisition):

             

Interest rate of 5%, principal and interest payments monthly of $127,000, matures December 2004

     1,430,000      —  

Capital leases and other debt:

             

Various interest rates with maturities through 2005

     243,000      1,080,000

Term note with related party:

             

Interest at prime (4.25% at December 31, 2002) principal payments annually at $750,000, matured April 2003

     —        111,000
    

  

Total long-term debt and capital leases

     20,704,000      1,191,000

Less current portion of long-term debt and capital leases

     7,231,000      540,000
    

  

Long-term debt and capital leases, net of current portion

   $ 13,473,000    $ 651,000
    

  

 

F-17


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

Aggregate maturities of long-term borrowings over the next two years are as follows:

 

Year ending December 31,


    

2004

   $ 7,231,000

2005

     13,473,000
    

Total

   $ 20,704,000
    

 

8. Income Taxes

 

The provision (benefit) for income taxes are summarized as follows:

 

     2003

    2002

    2001

 

Current:

                        

Federal

   $ (653,000 )   $ 1,036,000     $ (1,070,000 )

State

     535,000       540,000       11,000  
    


 


 


       (118,000 )     1,576,000       (1,059,000 )
    


 


 


Deferred:

                        

Federal

     2,272,000       171,000       955,000  

State

     (108,000 )     (118,000 )     45,000  
    


 


 


       2,164,000       53,000       1,000,000  
    


 


 


Total Current and deferred

   $ 2,046,000     $ 1,629,000     $ (59,000 )
    


 


 


 

Income taxes differ from the amounts computed by applying the federal income tax rate of 35.0%. A reconciliation of the difference is as follows:

 

     2003

    2002

    2001

 

Taxes calculated at federal rate

   $ 1,697,000     $ 1,516,000     $ (223,000 )

Amortization expense

     (12,000 )     —         93,000  

State taxes, net of federal benefit

     278,000       274,000       37,000  

Exclusion of certain meals and entertainment expenses

     121,000       74,000       30,000  

Other items, net

     (38,000 )     (235,000 )     4,000  
    


 


 


     $ 2,046,000     $ 1,629,000     $ (59,000 )
    


 


 


 

F-18


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

The primary components of temporary differences that give rise to the Company’s net deferred tax liability is as follows:

 

     2003

    2002

 

Deferred tax assets:

                

Federal net operating loss carryforwards

   $ 40,174,000     $ 5,199,000  

State net operating loss carryforwards

     6,892,000       387,000  

Bad debt reserves

     557,000       292,000  

Employee benefits

     549,000       —    

Accrued expenses and loss reserves

     1,115,000       811,000  

Less: valuation allowance

     (38,279,000 )     (5,199,000 )
    


 


       11,008,000       1,490,000  
    


 


Deferred tax liabilities:

                

Depreciable and amortizable assets

     9,156,000       6,022,000  

State tax

     1,852,000       —    

Other

     —         (343,000 )
    


 


       11,008,000       5,679,000  
    


 


Net deferred tax liability

   $ —       $ 4,189,000  
    


 


 

As of December 31, 2003, the Company has federal and state net operating losses of approximately $114.8 million and $86.4 million, respectively. The $114.8 million federal and $71.4 of state net operating losses were generated by various subsidiaries prior to their acquisition by the Company. The use of these acquired net operating losses is subject to limitations imposed by the Internal Revenue Code and state jurisdictions. The net operating losses begin to expire at various times beginning in 2008. Management’s assessment is that the character and nature of the future taxable income may not allow the Company to realize certain tax benefits of net operating losses within the prescribed carryforward periods. Accordingly, an appropriate valuation allowance has been made. To the extent that the acquired net operating losses are used to offset future taxable income, an adjustment to goodwill will be recorded.

 

9. Employee Benefits

 

Employees of the Company are included in the benefit plans of First American. Employees of the Company are eligible to participate in The First American Corporation 401(k) Savings Plan (the Savings Plan), which is available to substantially all employees. The Savings Plan allows for employee-elective contributions up to the maximum deductible amount as determined by the Internal Revenue Code. The Company makes contributions to the Savings Plan based on profitability, as well as contributions of the participants. The Company’s expense related to the Savings Plan amounted to $1,506,000, $652,000 and $163,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

 

Effective January 1, 2004, the Company created the First Advantage Corporation 401(k) Plan. All employees of the Company who participated in the First American Corporation 401(k) Savings Plan were transferred into the Company’s 401(k) plan. A total of 2.0 million shares of First Advantage Class A common stock is reserved for issuance in connection with the Company’s 401(k) plan.

 

Certain employees of the Company are also included as part of First American’s pension plan. The Company charged to expense payments to the pension plan of approximately $210,000, $228,000 and $136,000

 

F-19


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

for the years ended December 31, 2003, 2002 and 2001, respectively. The actuarial present value of accumulated plan benefits and net assets available for benefits to the Company’s employees under this plan is not readily available.

 

In August 2003, the Company’s board of directors 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 is reserved for issuance under the plan. A total of 3,492 shares have been issued in connection with the plan for the year ended December 31, 2003.

 

10. Related Parties

 

First American and certain affiliates provide legal, financial, technology and other administrative services to the Company. The Company recognized other operating expenses of $457,000, $1,565,000 and $1,378,000 in 2003, 2002 and 2001, respectively, relating to these services. Prior to April 1, 2003, the amounts allocated to the Company were based on reasonable assumptions (primarily usage, time incurred and number of employees) as to the proportion of the services used by the Company in relation to the actual costs incurred by the First American and affiliates in providing the services.

 

On the effective date of the merger with US SEARCH.com, the Company and First American entered into a services agreement pursuant to which First American provides certain financial, administrative and managerial support services to the Company. Human resources systems and payroll systems and support, network services and financial systems will be provided at an annual cost of $150,000, $100,000 and $50,000, respectively. Legal and tax support, human resources support, investor relations and corporate communications support, accounting and financial management support, strategic planning and general management support are provided at an annual cost of $600,000 plus reasonable out of pocket expenses. The Company incurred $675,000 in service fees for the year ended December 31, 2003. In addition, certain other services including pension and 401(k) expenses, corporate and medical insurance, personal property leasing and company car programs are provided at actual cost. The agreement was implemented on April 1, 2003 and continued through December 31, 2003.

 

An amended and restated services agreement was entered into on January 1, 2004. Under the terms of the new agreement, human resources systems and payroll systems and support, network services and financial systems will be provided at an annual cost of $300,000. In addition, certain other services including pension and 401(k) expenses, corporate and medical insurance, personal property leasing and company car programs will be provided at actual cost. The term of the agreement is for one year.

 

Effective January 1, 2003, the Company and a subsidiary of First American entered into an agreement whereby the Company will act as an agent in selling renters insurance. The Company receives a commission of 12% of the insurance premiums and 20% of the profits (as defined in the agreement) of the insurance premiums written. Commissions earned in 2003 were $11,000.

 

F-20


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

The Company performs employment screening services for First American. Total revenue from First American was $353,000, $249,000 and $214,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

 

Prior to June 2003, First American contributed certain operations relating to businesses acquired and has also forgiven certain amounts owed by the Company in connection with the acquisitions and in the funding of operations of the Company. Net assets, in connection with acquisitions, contributed to the Company by First American totaled $10,696,000, $84,458,000 and $30,383,000 in 2003, 2002 and 2001, respectively. These amounts have been treated as additional paid-in capital in the accompanying financial statements.

 

Amounts contributed to the Company by First American to fund operations are as follows:

 

     2003

   2002

   2001

Allocated selling, general & administrative expenses

   $ 457,000    $ 1,565,000    $ 1,378,000

Cash advances

     809,000      2,776,000      1,085,000

Other, net

     5,621,000      1,327,000      2,317,000
    

  

  

     $ 5,269,000    $ 5,668,000    $ 4,780,000
    

  

  

 

These amounts have been treated as additional paid-in capital in the accompanying financial statements. Historically, First American has not charged any interest to the Company on intercompany balances.

 

The following is a summary of the FAST division’s net equity by operating subsidiary at December 31, 2002:

 

     2002

HireCheck, Inc.

   $ 10,322,000

First American Registry, Inc.

     14,882,000

Substance Abuse Management, Inc.

     32,088,000

American Driving Records, Inc.

     40,387,000

Employee Health Programs, Inc.

     23,785,000

SafeRent, Inc.

     24,438,000
    

     $ 145,902,000
    

 

11. Commitments and Contingencies

 

Operating Leases

 

The Company leases certain office facilities, automobiles and equipment under operating leases, which, for the most part, are renewable. The majority of these leases also provide that the Company will pay insurance and taxes. Rent expense under operating leases was $5,082,000, $2,860,000 and $1,869,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

 

F-21


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

Future minimum rental payments under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2003, are as follows:

 

Year ending December 31,


    

2004

   $ 5,100,000

2005

     3,492,000

2006

     2,399,000

2007

     1,119,000

2008

     334,000

Thereafter

     126,000
    

     $ 12,570,000
    

 

Litigation

 

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

 

12. Earnings Per Share

 

Pursuant to the provisions of SFAS 128 “Earnings Per Share”, basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Dilutive common stock equivalents represent shares issuable upon assumed exercise of stock options and warrants. Options and warrants totaling 2,140,712 were excluded from the weighted average diluted shares outstanding as they were antidilutive.

 

A reconciliation of earnings per share and weighted-average shares outstanding is as follows:

 

     2003

Net Income - numerator for basic and fully diluted earnings per share

   $ 2,803,000

Denominator:

      

Weighted-average shares for basic earnings per share

     20,260,854

Effect of dilutive securities - employee stock options and warrants

     136,733
    

Denominator for diluted earnings per share

     20,397,587
    

Earnings per share:

      

Basic

   $ 0.14

Diluted

   $ 0.14

 

13. Stock Option Plans

 

Incentive Compensation Plan

 

The Company’s board of directors has adopted the 2003 First Advantage Incentive Compensation Plan. The plan is intended to promote the long-term success of the Company and increase stockholder value by attracting, motivating, and retaining key employees of the Company and its subsidiaries and affiliates, and by motivating

 

F-22


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

consultants who provide significant services to the Company 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 the Company’s capitalization, a total of 3.0 million shares of First Advantage Class A common stock is available for issuance under the plan. The plan is administered by the compensation committee of the board of directors of the Company.

 

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.

 

At December 31, 2003, stock options to purchase 2,116,500 shares of the Company’s common stock were granted under the First Advantage Corporation 2003 Incentive Compensation Plan, Inc. The Company accounts for these stock options in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related Interpretations. Accordingly, the Company does not recognize compensation cost in connection with these plans, as all options granted under these plans had an exercise price equal to the market value of the Company’s common stock on the date of grant.

 

Warrants and Options to Purchase Class A Common Stock, Assumed in the Merger

 

The Company agreed to assume the obligations of US SEARCH.com contained in all warrants to purchase common stock of US SEARCH.com outstanding on the closing date of the merger. Pursuant to the merger agreement and the terms of the warrants, the holders of the warrants are entitled to receive upon exercise thereof 0.04 of a share of First Advantage Class A common stock for each share of US SEARCH.com common stock that such warrant holder would have been entitled to receive pursuant to the warrant prior to the closing of the merger. As of December 31, 2003, the Company had outstanding warrants to purchase up to 347,436 shares of its common stock at exercise prices ranging from $0.25 to $29.50 per share.

 

All outstanding stock options, stock appreciation rights, limited stock appreciation rights and stock purchase rights of US SEARCH.com were assumed by the Company 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 is equal to the exercise price per share of US SEARCH.com 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.com 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.com employees and directors pursuant to the US SEARCH.com Amended and Restated 1998 Stock Incentive Plan and all outstanding stock options issued to US SEARCH.com’s non-employee directors pursuant to the US SEARCH.com 1999 Non-Employee Directors’ Stock Option Plan accelerated and became fully vested upon the occurrence of the mergers. As of December 31, 2003, the Company had outstanding options (previously issued by US SEARCH.com) to purchase up to 677,437 shares of its common stock at exercise prices ranging from $7.00 to $242.25 per share.

 

F-23


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

A total of 11,716 options were exercised at an average price of $12.08 and 132,250 options were forfeited at an average price of $33.07.

 

The following table summarizes information about stock options and warrants outstanding at December 31, 2003:

 

     Options Outstanding

   Options Exercisable

Range of Exercise Prices


   Shares

   Weighted Avg
Remaining Contractual
Life in Years


   Weighted
Average
Exercise Price


   Shares

   Weighted
Average
Exercise Price


$  7.00 - $  12.50

   166,951    2.4    $ 11.88    158,038    $ 11.94

$12.51 - $  25.00

   2,393,152    9.0    $ 19.11    275,281    $ 22.63

$25.01 - $  50.00

   126,253    4.3    $ 40.13    123,077    $ 40.44

$50.01 - $242.25

   92,581    2.3    $ 168.56    92,572    $ 168.55
    
  
  

  
  

     2,778,937                648,968       
    
              
      

 

     Warrants Outstanding and Exercisable

Range of Exercise Prices


   Shares

   Weighted Avg
Remaining Contractual
Life in Years


   Weighted
Average
Exercise Price


$  0.25 - $22.50

   128,021    5.05    $ 14.54

$22.51 - $26.00

   216,415    2.52    $ 26.10

$26.01 - $29.50

   3,000    3.15    $ 29.38
    
  
  

     347,436            
    
           

 

14. Segment Information

 

The Company operates in three primary business segments: Enterprise Screening, Risk Mitigation and Consumer Direct.

 

The Enterprise Screening segment includes employment background screening, occupational health services and resident screening services. Products and services relating to employment background screening include criminal records searches, employment and education verification, social security number verification and credit reporting. Occupational health services include drug-free workplace programs, physical examinations and employee assistance programs. Resident screening services include criminal background and eviction searches, credit reporting, employment verification and lease performance and payment histories. Revenue for the Enterprise Screening segment includes $16,000 of sales to the Risk Mitigation segment in 2003.

 

The Risk Mitigation segment includes motor vehicle records and investigative services. Products and services provided by the Risk Mitigation segment include: driver history reports, vehicle registration, financial responsibility filings, surveillance services, statements and field interviews and due diligence reports. Revenue for the Risk Mitigation segment includes $1,447,000 and $840,000 of sales to the Enterprise Screening segment in 2003 and 2002, respectively.

 

The Consumer Direct segment provides consumers with a single, comprehensive access point to a broad range of information to assist them in locating people and other public data searches. Revenue for the Consumer Direct segment includes $17,000 of sales to the Enterprise Screening segment in 2003.

 

F-24


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

The elimination of inter-segment revenue and cost of service revenue is included in Corporate. These transactions are recorded at cost.

 

Selected financial information for the Company’s operations by segment for each of the past three years is as follows:

 

     Revenue

    Depreciation
and Amortization


   Income (loss)
before income taxes


    Assets

2003

                             

Enterprise Screening

   $ 111,964,000     $ 6,269,000    $ 4,818,000     $ 163,146,000

Risk Mitigation

     45,486,000       860,000      5,714,000       79,810,000

Consumer Direct

     10,525,000       1,292,000      61,000       39,861,000

Corporate and Eliminations

     (1,480,000 )     7,000      (5,744,000 )     1,083,000
    


 

  


 

Consolidated

   $ 166,495,000     $ 8,428,000    $ 4,849,000     $ 283,900,000
    


 

  


 

2002

                             

Enterprise Screening

   $ 66,774,000     $ 3,497,000    $ (667,000 )   $ 117,864,000

Risk Mitigation

     34,991,000       599,000      4,998,000       46,143,000

Consumer Direct

     —         —        —         —  

Corporate and Eliminations

     (840,000 )     —        —         1,000
    


 

  


 

Consolidated

   $ 100,925,000     $ 4,096,000    $ 4,331,000     $ 164,008,000
    


 

  


 

2001

                             

Enterprise Screening

   $ 49,167,000     $ 2,491,000    $ (638,000 )   $ 62,284,000

Risk Mitigation

     —         —        —         —  

Consumer Direct

     —         —        —         —  

Corporate and Eliminations

     —         —        —         —  
    


 

  


 

Consolidated

   $ 49,167,000     $ 2,491,000    $ (638,000 )   $ 62,284,000
    


 

  


 

 

15. Subsequent Events

 

Subsequent to December 31, 2003, the Company acquired six businesses for an aggregate purchase price of $23,476,000, comprised of $7,178,000 in cash, $7,600,000 in acquisition debt and $8,698,000 in the Company’s common stock. The cash portion of the purchase price was funded with additional borrowings under existing credit facilities with a bank and First American.

 

In January 2004, the Company entered into a ten-year facilities lease for operations in the Enterprise Screening segment. Aggregate minimum lease payments are $11.3 million over the term of the lease.

 

The following table sets forth certain unaudited financial data of First Advantage for the eight quarters in the period ended December 31, 2003. First Advantage’s results of operation for the four quarters in the year ended December 31, 2003 include the results of the FAST division from January 2003, and the results for US SEARCH from June 2003. Businesses acquired subsequent to June 2003 are included in First Advantage’s financial data from date of acquisition. The financial data for the four quarters in the year ended December 31, 2002 are the results of the FAST division only.

 

This data has been derived from unaudited financial statements of the Company and the FAST division that, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments)

 

F-25


First Advantage Corporation

 

Notes to Consolidated Financial Statements—(Continued)

For the Years Ended December 31, 2003, 2002 and 2001

 

necessary for a fair statement of the information when read in conjunction with the Company’s audited financial statements and the notes thereto. The operating results for any quarter are not necessarily indicative of the results for any future period.

 

     For the quarters ended

 
     3/31/2003

   6/30/2003

   9/30/2003

   12/31/2003

 

Total revenue

   $ 31,541,000    $ 37,431,000    $ 47,634,000    $ 49,889,000  
    

  

  

  


Gross margin

   $ 17,722,000    $ 22,613,000    $ 28,894,000    $ 27,527,000  
    

  

  

  


Net income (loss)

   $ 330,000    $ 2,051,000    $ 1,429,000    $ (1,007,000 )
    

  

  

  


Per share amounts:

                             

Basic

     N/A    $ 0.10    $ 0.07      ($0.05 )

Diluted

     N/A    $ 0.10    $ 0.07      ($0.05 )

Weighted-average common shares outstanding:

                             

Basic

     N/A      20,002,126      20,203,955      20,828,429  

Diluted

     N/A      20,122,023      20,337,947      21,020,537  
     For the quarters ended

 
     3/31/2002

   6/30/2002

   9/30/2002

   12/31/2002

 

Total revenue

   $ 22,647,000    $ 24,715,000    $ 26,914,000    $ 26,649,000  
    

  

  

  


Gross margin

   $ 12,360,000    $ 14,424,000    $ 14,480,000    $ 14,242,000  
    

  

  

  


Net income (loss)

   $ 778,000    $ 1,495,000    $ 976,000    $ (547,000 )
    

  

  

  


Per share amounts:

                             

Basic

     N/A      N/A      N/A      N/A  

Diluted

     N/A      N/A      N/A      N/A  

Weighted-average common share outstanding:

                             

Basic

     N/A      N/A      N/A      N/A  

Diluted

     N/A      N/A      N/A      N/A  

 

 

F-26


SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

For the Years Ended December 31, 2003, 2002 and 2001

 

     Balance at
Beginning
of Period


   Charged to
Costs and
Expenses


   Charged to
Other
Accounts (1)


   Deductions

    Balance at
End of
Period


Year ended December 31, 2003

   $ 788,000    317,000    559,000    (337,000 )   $ 1,327,000

Year ended December 31, 2002

   $ 717,000    266,000    164,000    (359,000 )   $ 788,000

Year ended December 31, 2001

   $ 461,000    281,000    200,000    (225,000 )   $ 717,000

(1) Allowances established as a result of acquisitions

 

F-27


REPORT OF INDEPENDENT ACCOUNTANTS

 

To the Board of Directors and Stockholders of US SEARCH.com Inc.:

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows present fairly, in all material respects, the financial position of US Search.com Inc. and its subsidiary at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2, the Company has incurred significant operating losses and negative cash flows from operations since inception and has negative working capital at December 31, 2002. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ PRICEWATERHOUSECOOPERS LLP

 

Los Angeles, California

March 24 , 2003 except for the subsequent events in Note 16 as to which the date is April 1, 2003

 

F-28


US SEARCH.COM INC.

 

CONSOLIDATED BALANCE SHEETS

 

    

December 31,

2001


   

December 31,

2002


 
ASSETS:                 

Current assets:

                

Cash and cash equivalents

   $ 3,148,000     $ 2,254,000  

Restricted cash

     750,000       575,000  

Accounts receivable, less allowance for doubtful accounts of $24,000 (2001) and $72,000 (2002)

     696,000       1,864,000  

Prepaids and other current assets

     1,854,000       1,150,000  
    


 


Total current assets

     6,448,000       5,843,000  

Property and equipment, net

     9,409,000       9,028,000  

Goodwill

     8,648,000       13,529,000  

Intangible assets, net

     2,960,000       2,650,000  

Other assets

     270,000       249,000  
    


 


Total assets

   $ 27,735,000     $ 31,299,000  
    


 


LIABILITIES AND STOCKHOLDERS’ EQUITY:                 

Current Liabilities:

                

Accounts payable

   $ 7,182,000     $ 5,604,000  

Accrued liabilities

     1,930,000       2,958,000  

PRSI acquisition obligations, current portion

     902,000       474,000  

Bank debt, current portion

     1,375,000       1,142,000  

Notes payable, current portion

     3,896,000       50,000  

Capital lease obligations, current portion

     280,000       125,000  
    


 


Total current liabilities

     15,565,000       10,353,000  

PRSI acquisition obligations

     1,654,000       1,370,000  

Bank debt, net of current portion

     —         20,000  

Capital lease obligation, net of current portion

     156,000       27,000  

Other non-current liabilities

     5,000       5,000  
    


 


Total liabilities

     17,380,000       11,775,000  

Commitments and contingencies (Note 12)

                

Stockholders’ equity:

                

Preferred stock, $0.001 par value; authorized 1,000,000 shares; 203,113 and 0 issued and outstanding as of December 31, 2001 and 2002, respectively

     —         —    

Common stock, $0.001 par value; authorized 300,000,000 shares; issued and outstanding 26,183,058 as of December 31, 2001 and 97,018,716 as of December 31, 2002

     26,000       97,000  

Additional paid-in capital

     84,847,000       118,021,000  

Accumulated deficit

     (74,518,000 )     (98,594,000 )
    


 


Total stockholders’ equity

     10,355,000       19,524,000  
    


 


Total liabilities and stockholders’ equity

   $ 27,735,000     $ 31,299,000  
    


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-29


US SEARCH.COM INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

For The Years Ended December 31,

 

     2000

    2001

    2002

 

Net revenues

   $ 22,363,000     $ 18,399,000     $ 30,341,000  

Cost of services

     10,392,000       4,494,000       9,450,000  
    


 


 


Gross profit

     11,971,000       13,905,000       20,891,000  

Operating expenses:

                        

Selling and marketing

     25,890,000       10,069,000       11,237,000  

General and administrative

     12,220,000       10,016,000       14,175,000  

Information technology

     3,777,000       4,397,000       3,296,000  
    


 


 


Total operating expenses

     41,887,000       24,482,000       28,708,000  
    


 


 


Loss from operations

     (29,916,000 )     (10,577,000 )     (7,817,000 )

Interest expense (includes non-cash charges relating to warrants, beneficial conversion features, and amortization of debt issuance costs of $1,165,000 in 2001 and $15,966,000 in 2002)

     (108,000 )     (1,522,000 )     (16,212,000 )

Interest income

     663,000       167,000       68,000  

Other expense, net

     —         —         (110,000 )
    


 


 


Loss before income taxes

     (29,361,000 )     (11,932,000 )     (24,071,000 )

Provision for income taxes

     1,000       5,000       5,000  
    


 


 


Net loss

     (29,362,000 )     (11,937,000 )     (24,076,000 )

Beneficial conversion feature on preferred stock

     (1,029,000 )     —         —    

Deemed dividend on exchange of preferred stock

     —         (12,575,000 )     —    

Accretion of discount on preferred stock

     (156,000 )     (203,000 )     —    

Accrued preferred stock dividends

     (142,000 )     (200,000 )     —    
    


 


 


Net loss attributable to common stockholders before cumulative effect of accounting change

     (30,689,000 )     (24,915,000 )     (24,076,000 )

Cumulative effect of accounting change on beneficial conversion feature on preferred stock

     (3,754,000 )     —         —    
    


 


 


Net loss attributable to common stockholders

   $ (34,443,000 )   $ (24,915,000 )   $ (24,076,000 )
    


 


 


Basic and diluted net loss per share:

                        

Net loss per share attributable to common stockholders before cumulative effect of accounting change

   $ (1.72 )   $ (1.38 )   $ (0.41 )

Cumulative effect of accounting change on beneficial conversion feature on preferred stock

     (0.21 )     —         —    
    


 


 


Net loss per share attributable to common stockholders

   $ (1.93 )   $ (1.38 )   $ (0.41 )

Weighted-average shares outstanding used in per share calculation

     17,836,000       18,054,000       58,711,000  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-30


US SEARCH.COM INC.

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

 

    

Series A-1

Preferred Stock


   Common Stock

  

Additional
Paid-In

Capital


   

Unearned
Deferred

Compensation


   

Accumulated

Deficit


   

Total
Stockholders’
Equity

(Deficit)


 
     Shares

    Amount

   Shares

   Amount

        

Balance, December 31, 1999

   —       $ —      17,421,644    $ 17,000    $ 53,790,000     $ (1,099,000 )   $ (33,219,000 )   $ 19,489,000  

Amortization of unearned compensation

   —         —      —        —        —         418,000       —         418,000  

Issuance of warrants to third parties

   —         —      —        —        2,179,000       —         —         2,179,000  

Accretion of discount on preferred stock

   —         —      —        —        (156,000 )     —         —         (156,000 )

Accrued preferred dividends

   —         —      —        —        (142,000 )     —         —         (142,000 )

Forfeiture of stock options

   —         —      —        —        (1,622,000 )     681,000       —         (941,000 )

Amendment of terms of stock options to former employee

   —         —      —        —        220,000       —         —         220,000  

Allocation of relative fair value to warrants issued with Series A preferred stock

   —         —      —        —        3,552,000       —         —         3,552,000  

Exercise of stock options

   —         —      516,600      1,000      1,601,000       —         —         1,602,000  

Net loss

   —         —      —        —        —         —         (29,362,000 )     (29,362,000 )
    

 

  
  

  


 


 


 


Balance, December 31, 2000

   —         —      17,938,244      18,000      59,422,000       —         (62,581,000 )     (3,141,000 )

Modification of employee stock options

   —         —      —        —        68,000       —         —         68,000  

Issuance of warrants in conjunction with bank financing

   —         —      —        —        1,189,000       —         —         1,189,000  

Issuance of warrants to vendors

   —         —      —        —        216,000       —         —         216,000  

Allocation of relative fair value to warrants issued with notes payable

   —