FIRST ADVANTAGE CORP - Quarter Report: 2004 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2004

OR

For the transition period from              to             

Commission file number: 000-50285

FIRST ADVANTAGE CORPORATION

(Exact name of registrant as specified in its charter)

One Progress Plaza, Suite 2400

St. Petersburg, Florida 33701

(Address of principal executive offices, including zip code)

(727) 214-3411

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

There were 7,214,837 shares of outstanding Class A Common Stock of the registrant as of November 4, 2004.

There were 16,027,086 shares of outstanding Class B Common Stock of the registrant as of November 4, 2004.

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INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements -

First Advantage Corporation

Consolidated Balance Sheets (Unaudited)

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

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First Advantage Corporation

Consolidated Statements of Income (Unaudited)

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

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First Advantage Corporation

Consolidated Statement of Changes in Stockholders’ Equity

For the Nine Months Ended September 30, 2004 (Unaudited)

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

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First Advantage Corporation

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2004 and 2003 (Unaudited)

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

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First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2004 and 2003 (Unaudited)

In June 2003, First Advantage Corporation (the “Company”), a 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 70% of the shares of capital stock of the Company as of September 30, 2004. 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 operates in three primary business segments: Enterprise Screening, Risk Mitigation and Consumer Direct. The Enterprise Screening segment includes employment background screening, occupational health services, resident screening services and tax incentives. 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.

Basis of Presentation

The consolidated financial information included in this report has been prepared in accordance with the instructions to Form 10-Q and does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments are of a normal recurring nature and are considered necessary for a fair statement of the results for the interim period. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission.

First Advantage completed two acquisitions during the third quarter of 2004. The Company’s operating results for the three and nine months ended September 30, 2004 include results for the acquired entities from their respective dates of acquisition. The Company’s operating results for the three and nine months ended September 30, 2003 include results for the FAST division from January 1, 2003 and the results for US SEARCH.com from June 1, 2003.

Operating results for the three and nine months ended September 30, 2004 and 2003 are not necessarily indicative of the results that may be expected for the entire fiscal year.

Reclassifications

Certain amounts in our prior period condensed consolidated financial statements have been reclassified from salaries and benefits, and other operating expenses to cost of sales in order to conform with the current period’s presentation.

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First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2004 and 2003 (Unaudited)

Comprehensive Income

Comprehensive income is as follows:

Impairment of Intangible and Long-Lived Assets

First Advantage carries intangible and long-lived ssets at cost less accumulated amortization. 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.

Stock Based Compensation Plan

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. 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.

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First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2004 and 2003 (Unaudited)

During the first quarter of 2004, the Company acquired Quantitative Risk Solutions LLC, Proudfoot Reports Incorporated, MVR’s, Inc., Background Information Systems, Inc., Infocheck Ltd. and Landlord Protect, Inc. During the second quarter of 2004, the Company acquired U.D. Registry, Inc., CoreFacts, LLC, Realeum, Inc. and created a new subsidiary, CIC Enterprises, LLC, which acquired substantially all of the assets of CIC Enterprises, Inc., STEPS, Inc., and Horton, Inc. During the third quarter 2004, the Company acquired BackTrack Reports, Inc. and National Background Data, LLC. These 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 Statement of Financial Accounting Standards (“SFAS”) No. 141. The allocations may be revised in 2004. 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 the Company. 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 connection with the acquisition of CIC Enterprises, LLC, up to $14 million of additional purchase price was contingent upon the renewal by the United States government of the Work Opportunity Tax Credit (WOTC) program or a similar program. The Working Families Tax Relief Act of 2004 became law on October 4, 2004. The Act extended the WOTC program through 2005. The additional consideration that is comprised of $11 million of subordinated debt and $3 million of stock was released from escrow on November 2, 2004.

Convertible promissory notes totaling $8,722,000 had been issued in connection with the acquisitions of CoreFacts, LLC, Realeum, Inc. and CIC Enterprises, LLC. In September 2004, the debt was converted into 563,257 shares of Class A common stock.

The aggregate purchase price of acquisitions completed during 2004 is as follows:

The preliminary allocation of the aggregate purchase price of these acquisitions is as follows:

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First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2004 and 2003 (Unaudited)

Unaudited pro forma results of operations assuming all acquisitions were consummated on January 1, 2003 are as follows:

The changes in the carrying amount of goodwill, by operating segment, are as follows for the nine months ended September 30, 2004:

The changes in the carrying amount of intangible assets are as follows for the nine months ended September 30, 2004:

Amortization expense totaled $2,349,000 and $831,000 for the nine months ended September 30, 2004 and 2003, respectively.

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First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2004 and 2003 (Unaudited)

Long-term debt consists of the following at September 30, 2004:

On March 18, 2004, the Company entered into a three year $25 million unsecured revolving line of credit with a bank (the “Line of Credit”). The Line of Credit is guaranteed by First American. The Line of Credit bears interest at a rate equal to the 30-day LIBOR Rate plus an applicable margin ranging from 1.29% per annum to 2.29% per annum. Accrued interest is payable monthly.

On April 27, 2004, the Company entered into a Promissory Note with First American. The loan evidenced by the Promissory Note is a $20 million unsecured revolving loan, with interest payable monthly. The principal balance of the Promissory Note is due on July 31, 2006. The Promissory Note is subordinated to the bank Loan Agreement and Line of Credit and bears interest at the rate payable under the $20 million bank Loan Agreement plus 0.5% per annum. At September 30, 2004, the Company was in compliance with the financial covenants of its Loan Agreement.

On September 7, 2004 the Company amended its Loan Agreement (“Amended Loan Agreement”). As part of the amendment, the Company’s available borrowings thereunder were increased from $15 million to $20 million with a two year maturity date of July 31, 2006. The Amended Loan Agreement is secured by a security interest in the Company’s accounts receivable, as well as the accounts receivable of certain subsidiaries.

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First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2004 and 2003 (Unaudited)

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

For the three months ended September 30, 2004 and 2003 options and warrants totaling 2,163,305 and 1,729,732, respectively, were excluded from the weighted average diluted shares outstanding as they were antidilutive. For the nine months ended September 30, 2004 and 2003 options and warrants totaling 1,853,676 and 1,221,052, respectively, were excluded, as they were antidilutive.

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, resident screening services and tax incentives. 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. Tax incentives specialize in the identification and processing of tax and incentive credits, sales and use-tax services, transportation tax services and tax consulting services. Revenue for the Enterprise Screening segment includes $8,000 and $32,000 of sales to the Consumer Direct segment for the three and nine months ended September 30, 2004, respectively.

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First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2004 and 2003 (Unaudited)

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 $226,000 and $427,000 of sales to the Enterprise Screening segment for the three months ended September 30, 2004 and 2003, respectively, and $1,283,000 and $1,062,000 of sales for the nine months ended September 30, 2004 and 2003, 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 $4,000 and $93,000 of sales to the Enterprise Screening segment for the three months ended September 30, 2004 and 2003, respectively, and $86,000 and $124,000 of sales for the nine months ended September 30, 2004 and 2003, respectively.

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

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First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2004 and 2003 (Unaudited)

The following table sets forth segment information for the three and nine months ended September 30, 2004 and 2003.

On October 11, 2004, the Company acquired substantially all of the assets of the Business Tax Credit Corporation d/b/a The Alameda Company, under the terms of an asset purchase agreement. In consideration for the purchase of the assets, the Company paid the sellers an aggregate purchase price of $7.6 million comprised of $2.5 million in cash and $5.1 million of subordinated notes.

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First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2004 and 2003 (Unaudited)

On November 3, 2004, the Company acquired CompuNet Credit Services, Inc, under the terms of the purchase agreement. In consideration for the purchase of the assets, the Company paid the sellers an aggregate purchase price of $18 million comprised of $5 million in cash, $9 million in subordinated notes, and $4 million of the Company’s Class A common stock.

Unaudited pro forma results of operations assuming all acquisitions to date were consummated on January 1, 2003 are as follows: