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Business Context and Reporting Period

Company: First Advantage Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2003
Business Overview: First Advantage is a newly formed holding company created via a June 5, 2003 merger between The First American Corporation's Screening Technologies (FAST) division and US SEARCH.com, Inc. The company operates in two primary segments: Business Screening and Information (background checks, tenant screening, motor vehicle reports) and Consumer Services (consumer location and reference services). First American Corporation owns approximately 80% of the company's capital stock.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Service revenues increased 51.5% ($12.7 million) for the three months and 45.6% ($21.6 million) for the six months ended June 30, 2003, compared to the prior year. This growth is primarily attributed to strategic acquisitions, including US SEARCH.com and subsidiaries acquired in late 2002.
• Expense Increases: Operating expenses rose significantly due to acquisitions. Salaries and benefits increased 57% (three months) and 54.3% (six months). Depreciation and amortization doubled to $3.6 million for the six-month period due to new intangible assets.
• Balance Sheet Expansion: Total assets grew from $164.0 million (Dec 31, 2002) to $253.4 million (June 30, 2003). Goodwill increased by $53.8 million following the US SEARCH.com acquisition.
• Cash Flow: Net cash provided by operating activities decreased to $3.1 million for the six months ended June 30, 2003, compared to $6.1 million in the prior year period, largely due to increases in accounts receivable and accounts payable timing.

Guidance, Outlook, and Risks

• Acquisition Strategy: Management continues to evaluate acquisitions to capitalize on industry consolidation, intending to fund them through available liquidity and cash flow.
• Subsequent Financing: On July 31, 2003, the company secured a $15 million bank loan agreement and a $10 million unsecured revolving promissory note from First American Corporation. The bank loan includes covenants requiring a "Funded Debt to EBITDA" ratio not exceeding 2.5 to 1.0 and a "Debt Service Coverage Ratio" of at least 1.5 to 1.
• Related Party Dependence: The company relies on First American Corporation for administrative, financial, and managerial support services under a formal agreement. While First American has provided cash contributions to fund operations, there is no assurance of future contributions.
• Risks: Key risks include the successful integration of the US SEARCH.com merger, volatility in capital markets, changes in government regulations regarding background checks, and the ability to maintain data supplier relationships.

Investor Verification Checklist

• Acquisition Integration: Verify the progress of integrating US SEARCH.com and the realization of anticipated synergies, as goodwill of $53.8 million was recorded pending final allocation.
• Debt Covenants: Monitor compliance with the new July 2003 loan covenants (Funded Debt/EBITDA and Debt Service Coverage ratios) to avoid default.
• Related Party Transactions: Review the terms of the services agreement and the $10 million revolving note with First American Corporation to assess ongoing financial dependence.
• Stock-Based Compensation: Note that the company uses APB 25 (intrinsic value method) rather than SFAS 123 (fair value method); pro forma net income would be lower if fair value accounting were applied.
• Goodwill Impairment: Assess the risk of future impairment charges on the significant goodwill balance if projected cash flows from the new segments are not met.