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First Advantage 10-Q 2007
Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2007

OR

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission file number: 001-31666

FIRST ADVANTAGE CORPORATION

(Exact name of registrant as specified in its charter)

 

Incorporated in Delaware   61-1437565
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification Number)

100 Carillon Parkway

St. Petersburg, Florida 33716

(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) Yes x  No ¨ 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 a large accelerated filer, accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer ¨                                             Accelerated filer x                                             Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b 2). Yes ¨  No x

There were 11,353,053 shares of outstanding Class A Common Stock of the registrant as of October 26, 2007.

There were 47,726,521 shares of outstanding Class B Common Stock of the registrant as of October 26, 2007.

 



Table of Contents

INDEX

 

Part I. FINANCIAL INFORMATION   

Item 1.

   Financial Statements    1
  

Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006 (unaudited)

   2
   Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2007 and September 30, 2006 (unaudited)    3
  

Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2007 (unaudited)

   4
  

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and September 30, 2006 (unaudited)

   5
  

Notes to Consolidated Financial Statements (unaudited)

   7

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    18

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    33

Item 4.

   Controls and Procedures    34

Part II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings    34

Item 1A.

   Risk Factors    34

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    34

Item 3.

   Defaults Upon Senior Securities    34

Item 4.

   Submission of Matters to a Vote of Security Holders    34

Item 5.

   Other Information    34

Item 6.

   Exhibits    34


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements –

First Advantage Corporation

Consolidated Financial Statements

For the Three and Nine Months Ended

September 30, 2007 and 2006


Table of Contents

First Advantage Corporation

Consolidated Balance Sheets (Unaudited)

 

(in thousands)    September 30,
2007
   December 31,
2006

Assets

     

Current assets:

     

Cash and cash equivalents

   $ 33,674    $ 31,941

Accounts receivable (less allowance for doubtful accounts of $7,291 and $6,487 in 2007 and 2006, respectively)

     150,617      138,563

Prepaid expenses and other current assets

     10,011      10,182

Income tax receivable

     4,769      6,155

Deferred income tax asset

     15,574      12,051
             

Total current assets

     214,645      198,892

Property and equipment, net

     80,915      68,931

Goodwill

     692,836      650,124

Customer lists, net

     67,040      74,419

Other intangible assets, net

     24,346      28,324

Database development costs, net

     11,013      10,640

Investment in equity investee

     57,316      55,001

Other assets

     3,872      3,592
             

Total assets

   $ 1,151,983    $ 1,089,923
             

Liabilities and Stockholders’ Equity

     

Current liabilities:

     

Accounts payable

   $ 43,977    $ 46,281

Accrued compensation

     42,285      35,299

Accrued liabilities

     14,778      21,286

Deferred income

     7,557      8,462

Due to affiliates

     2,277      4,776

Current portion of long-term debt and capital leases

     18,996      20,794
             

Total current liabilities

     129,870      136,898

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

     151,820      179,531

Deferred income tax liability

     59,090      44,802

Other liabilities

     5,503      5,338
             

Total liabilities

     346,283      366,569
             

Minority interest

     49,325      48,413

Stockholders’ equity:

     

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

     —        —  

Class A common stock, $.001 par value; 125,000 shares authorized; 11,349 and 10,452 shares issued and outstanding as of September 30, 2007 and December 31, 2006, respectively

     11      10

Class B common stock, $.001 par value; 75,000 shares authorized; 47,727 shares issued and outstanding as of September 30, 2007 and December 31, 2006

     48      48

Additional paid-in capital

     486,117      455,657

Retained earnings

     266,181      218,566

Accumulated other comprehensive income

     4,018      660
             

Total stockholders’ equity

     756,375      674,941
             

Total liabilities and stockholders’ equity

   $ 1,151,983    $ 1,089,923
             

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

 

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Table of Contents

First Advantage Corporation

Consolidated Statements of Income and Comprehensive Income (Unaudited)

 

(in thousands, except per share amounts)    For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2007     2006     2007     2006  

Service revenue

   $ 205,306     $ 198,605     $ 614,546     $ 571,564  

Reimbursed government fee revenue

     14,107       13,431       41,926       39,943  
                                

Total revenue

     219,413       212,036       656,472       611,507  
                                

Cost of service revenue

     56,603       62,020       178,621       177,762  

Government fees paid

     14,107       13,431       41,926       39,943  
                                

Total cost of service

     70,710       75,451       220,547       217,705  
                                

Gross margin

     148,703       136,585       435,925       393,802  
                                

Salaries and benefits

     67,865       60,414       207,685       177,794  

Facilities and telecommuncations

     8,670       7,625       24,812       22,205  

Other operating expenses

     26,754       24,799       80,544       70,850  

Depreciation and amortization

     10,862       9,641       32,044       28,369  
                                

Total operating expenses

     114,151       102,479       345,085       299,218  
                                

Income from operations

     34,552       34,106       90,840       94,584  
                                

Other (expense) income:

        

Interest expense

     (2,946 )     (3,571 )     (9,269 )     (10,062 )

Interest income

     323       252       975       554  
                                

Total other (expense), net

     (2,623 )     (3,319 )     (8,294 )     (9,508 )

Equity in earnings of investee

     865       747       2,315       1,407  
                                

Income before income taxes and minority interest

     32,794       31,534       84,861       86,483  

Provision for income taxes

     13,610       12,151       35,058       36,038  
                                

Income before minority interest

     19,184       19,383       49,803       50,445  

Minority interest

     231       759       1,260       2,439  
                                

Net income

     18,953       18,624       48,543       48,006  

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustments

     1,643       (323 )     3,358       (258 )
                                

Comprehensive income

   $ 20,596     $ 18,301     $ 51,901     $ 47,748  
                                

Per share amounts:

        

Basic

   $ 0.32     $ 0.32     $ 0.83     $ 0.84  
                                

Diluted

   $ 0.32     $ 0.32     $ 0.82     $ 0.83  
                                

Weighted-average common shares outstanding:

        

Basic

     59,064       58,096       58,799       57,282  

Diluted

     59,222       58,155       59,121       58,035  

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

 

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Table of Contents

First Advantage Corporation

Consolidated Statement of Changes in Stockholders’ Equity

For the Nine Months Ended September 30, 2007 (Unaudited)

 

(in thousands)

 

   Common
Stock Shares
   Common
Stock Amount
   Additional
Paid-in Capital
   Retained
Earnings
   

Accumulated

Other
Comprehensive

Income

   Total  

Balance at December 31, 2006

   58,179    $ 58    $ 455,657    $ 218,566     $ 660    $ 674,941  

Cumulative effect of the adoption of FIN 48

   —        —        —        (928 )     —        (928 )

Net income

   —        —        —        48,543       —        48,543  

Class A Shares issued in connection with prior year acquisitions

   444      —        10,912      —         —        10,912  

Class A Shares issued in connection with share based compensation

   453      1      10,926      —         —        10,927  

Tax benefit related to stock options

   —        —        222      —         —        222  

Share based compensation

   —        —        8,400      —         —        8,400  

Other comprehensive income

   —        —        —        —         3,358      3,358  
                                          

Balance at September 30, 2007

   59,076    $ 59    $ 486,117    $ 266,181     $ 4,018    $ 756,375  
                                          

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

 

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Table of Contents

First Advantage Corporation

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2007 and 2006 (Unaudited)

 

(in thousands)    For the Nine Months Ended
September 30,
 
     2007     2006  

Cash flows from operating activities:

    

Net income

   $ 48,543     $ 48,006  

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

    

Depreciation and amortization

     32,044       28,369  

Bad debt expense

     5,592       2,744  

Share based compensation

     10,942       8,484  

Minority interest in net income

     1,260       2,439  

Equity in earnings of investee

     (2,315 )     (1,407 )

Deferred income tax

     6,124       (2,770 )

Change in operating assets and liabilities, net of acquisitions:

    

Accounts receivable

     (15,831 )     (28,007 )

Prepaid expenses and other current assets

     62       (2,102 )

Other assets

     (220 )     (5,121 )

Accounts payable

     (2,546 )     (3,635 )

Accrued liabilities

     (6,256 )     (6,007 )

Deferred income

     (1,336 )     (1,536 )

Due to affiliates

     (2,522 )     6,676  

Net change in income tax accounts

     2,991       9,876  

Accrued compensation and other liabilities

     13,268       7,890  
                

Net cash provided by operating activities

     89,800       63,899  
                

Cash flows from investing activities:

    

Database development costs

     (2,699 )     (2,757 )

Purchases of property and equipment

     (28,839 )     (19,516 )

Cash paid for acquisitions

     (27,988 )     (30,956 )

Cash balance of companies acquired

     120       3,254  
                

Net cash used in investing activities

     (59,406 )     (49,975 )
                

Cash flows from financing activities:

    

Proceeds from long-term debt

     50,076       42,865  

Repayment of long-term debt

     (83,245 )     (53,961 )

Cash contributions from First American to Leadclick LLC

     3,785       —    

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

     3,479       1,916  

Distribution to minority interest shareholders

     (3,013 )     (2,042 )

Tax benefit related to stock options

     222       46  
                

Net cash used in financing activities

     (28,696 )     (11,176 )
                

Effect of exchange rates on cash

     35       (12 )

Increase in cash and cash equivalents

     1,733       2,736  

Cash and cash equivalents at beginning of period

     31,941       28,380  
                

Cash and cash equivalents at end of period

   $ 33,674     $ 31,116  
                

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

 

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Table of Contents

First Advantage Corporation

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2007 and 2006 (Unaudited)

 

     For the Nine Months Ended
September 30,
     2007    2006

Supplemental disclosures of cash flow information:

     

Cash paid for interest

   $ 9,520    $ 9,872
             

Cash paid for income taxes

   $ 26,208    $ 30,415
             

Non-cash investing and financing activities:

     

Class A shares issued in connection with prior year acquisitions

   $ 10,912    $ 12,603
             

Notes issued in connection with acquisitions

   $ 3,432    $ 8,758
             

Class A shares issued for share based compensation

   $ 5,518    $ 1,642
             

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

 

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Table of Contents

First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2007 and 2006 (Unaudited)

 

1. Organization and Nature of Business

First Advantage Corporation (the “Company” or “First Advantage”) is a global risk mitigation and business solutions provider and operates in six primary business segments: Lender Services, Data Services, Dealer Services, Employer Services, Multifamily Services, and Investigative and Litigation Support Services.

The First American Corporation and affiliates (“First American”) own approximately 81% of the shares of capital stock of the Company as of September 30, 2007. 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.

On March 1, 2007, John Long submitted his resignation as the Chief Executive Officer and as a director of the Company, effective as of March 30, 2007. In connection with his resignation from the Company, Mr. Long and First Advantage entered into a Transition Agreement dated as of March 2, 2007. The Transition Agreement provides that Mr. Long will receive cash severance of $4.4 million to be paid in two equal installments between April 2007 and March 2008. In addition, Mr. Long will receive an acceleration of his unvested options and two restricted stock awards, effective March 30, 2007. An additional restricted stock award made to Mr. Long will vest during the term of restrictive covenants set forth in the Transition Agreement. Restricted stock units, previously granted to Mr. Long, will continue to vest according to the terms of First Advantage’s 2003 Incentive Compensation Plan. Based on the recommendation of the Compensation Committee, the Transition Agreement was approved by First Advantage’s board of directors on March 1, 2007. In connection with the Transition Agreement, First Advantage recorded compensation expense of $8.0 million in the first quarter of 2007 (included in salaries and benefits in the accompanying nine months ended September 30, 2007 Consolidated Statements of Income and Comprehensive Income), reflecting the value of the cash severance payment of $4.4 million and the value of the previously unvested restricted stock, restricted stock units and stock options. The $8.0 million of compensation expense reduced net income for the nine months ending September 30, 2007 by $4.7 million or 8 cents per diluted share.

 

2. Summary of Significant Accounting Policies

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. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally

 

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Table of Contents

First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2007 and 2006 (Unaudited)

 

accepted accounting principles. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission.

First Advantage completed one acquisition in the first quarter of 2007. The Company’s operating results for the three and nine months ended September 30, 2007 include results for the acquired entity from the date of acquisition.

Operating results for the three and nine months ended September 30, 2007 and 2006 are not necessarily indicative of the results that may be expected for the entire fiscal year.

As of September 30, 2007, the Company’s significant accounting polices and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, have not changed from December 31, 2006.

Certain amounts for the three and nine months ended September 30, 2006 have been reclassified to conform with the 2007 presentation.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value within generally accepted accounting principles, and expands disclosure requirements regarding fair value measurements. The provisions for SFAS 157 are effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the effects of adoption on its consolidated financial statements and the impact, if any, is not known at this time.

In February 2007, the FASB issued FAS 159 “The Fair Value Option for Financial Assets and Liabilities.” FAS 159 allows companies to report selected financial assets and liabilities at fair value at their discretion. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. FAS 159 is effective at the beginning of a company’s first fiscal year after November 15, 2007. The Company is currently evaluating the effects of adoption on its consolidated financial statements and the impact, if any, is not known at this time.

 

3. Acquisitions

During the first quarter of 2007, the Company completed one acquisition for $4.5 million in cash and notes. In addition, the Company paid consideration of $36.4 million related to earnout provisions from prior year acquisitions and an additional purchase of a portion of the minority interest in LeadClick Media Inc.

 

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Table of Contents

First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2007 and 2006 (Unaudited)

 

The aggregate purchase price of the acquisition and the earnouts completed during 2007 is as follows:

 

(in thousands)     

Cash

   $ 27,988

Notes payable

     3,432

Stock (378 Class A shares)

     9,466
      

Purchase price

   $ 40,886
      

The cash paid includes $3.8 million contributed by First American to LeadClick Holding Company, LLC (70% owned by First Advantage and 30% owned by First American), a consolidated subsidiary of First Advantage, to fund their portion of an overall $12.6 million capital contribution in LeadClick Media, Inc.

The preliminary allocation of the aggregate purchase price of this acquisition and the earnouts are as follows:

 

(in thousands)     

Goodwill

   $ 37,932

Identifiable intangible assets

     1,046

Net assets acquired

     1,908
      
   $ 40,886
      

The changes in the carrying amount of goodwill, by operating segment, are as follows for the nine months ended September 30, 2007:

 

(in thousands)    Balance at
December 31, 2006
   Acquisitions
and Earnouts
   Adjustments to net
assets acquired
   Balance at
September 30, 2007

Lender Services

   $ 46,800    $ —      $ —      $ 46,800

Data Services

     218,248      11,495      2,068      231,811

Dealer Services

     55,995      —        —        55,995

Employer Services

     224,012      18,280      2,701      244,993

Multifamily Services

     48,100      1,000      —        49,100

Investigative and Litigation Support Services

     56,969      7,157      11      64,137
                           

Consolidated

   $ 650,124    $ 37,932    $ 4,780    $ 692,836
                           

The adjustments to net assets acquired represent post acquisition adjustments for those companies not acquired in the period.

 

4. Goodwill and Intangible Assets

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” the Company will complete the goodwill

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2007 and 2006 (Unaudited)

 

impairment test for all reporting units in the fourth quarter of 2007 (using the September 30 valuation date). There have been no impairments of goodwill during the nine months ended September 30, 2007.

Goodwill, customer lists and other intangible assets as of September 30, 2007 and December 31, 2006 are as follows:

 

(in thousands)

 

   September 30, 2007     December 31, 2006  

Goodwill

   $ 692,836     $ 650,124  
                

Customer lists

   $ 97,908     $ 96,917  

Less accumulated amortization

     (30,868 )     (22,498 )
                

Customer lists, net

   $ 67,040     $ 74,419  
                

Other intangible assets:

    

Noncompete agreements

   $ 14,735     $ 15,084  

Trade names

     21,620       21,607  
                
     36,355       36,691  

Less accumulated amortization

     (12,009 )     (8,367 )
                

Other intangible assets, net

   $ 24,346     $ 28,324  
                

Amortization of customer lists and other intangible assets totaled approximately $12.5 million and $11.9 million for the nine months ended September 30, 2007 and 2006, respectively. Estimated amortization expense relating to intangible asset balances as of September 30, 2007, is expected to be as follows over the next five years:

 

(in thousands)     

2007

   $ 4,124

2008

     16,012

2009

     15,089

2010

     14,139

2011

     11,207

Thereafter

     30,815
      
   $ 91,386
      

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2007 and 2006 (Unaudited)

 

The changes in the carrying amount of identifiable intangible assets are as follows for the nine months ended September 30, 2007:

 

(in thousands)    Other
Intangible
Assets
    Customer
Lists
 

Balance, at December 31, 2006

   $ 28,324     $ 74,419  

Acquisitions

     174       872  

Adjustments

     40       87  

Amortization

     (4,192 )     (8,338 )
                

Balance, at September 30, 2007

   $ 24,346     $ 67,040  
                

 

5. Debt

Long-term debt and capital leases consist of the following at September 30, 2007:

 

(in thousands, except percentages)     

Acquisition notes:

  

Weighted average interest rate of 6.52% with maturities through 2010

   $ 35,705

Bank notes:

  

$225 million Secured Credit Facility, interest at 30-day LIBOR plus 1.25% (6.54% at September 30, 2007), matures September 2010

     135,000

Capital leases and other debt:

  

Various interest rates with maturities through 2009

     111
      

Total long-term debt and capital leases

     170,816

Less current portion of long-term debt and capital leases

     18,996
      

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

   $ 151,820
      

At September 30, 2007, the Company was in compliance with the financial covenants of its loan agreement.

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2007 and 2006 (Unaudited)

 

6. Earnings Per Share

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

 

(in thousands, except per share amounts)    Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2007    2006    2007    2006

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

   $ 18,953    $ 18,624    $ 48,543    $ 48,006

Denominator:

           

Weighted-average shares for basic earnings per share

     59,064      58,096      58,799      57,282

Effect of restricted stock

     59      16      74      35

Effect of contingent shares related to DealerTrack

     —        —        —        490

Effect of dilutive securities - employee stock options and warrants

     99      43      248      228
                           

Denominator for diluted earnings per share

     59,222      58,155      59,121      58,035
                           

Earnings per share:

           

Basic

   $ 0.32    $ 0.32    $ 0.83    $ 0.84

Diluted

   $ 0.32    $ 0.32    $ 0.82    $ 0.83

For the three months ended September 30, 2007 and 2006, options totaling 3,207,035 and 2,521,213, respectively, were excluded from the weighted average diluted shares outstanding, as they were antidilutive. For the nine months ended September 30, 2007 and 2006, options totaling 2,092,430 and 1,520,983, respectively, were excluded from the weighted average diluted shares outstanding, as they were antidilutive.

 

7. Share-Based Compensation

At September 30, 2007, there are 7.0 million shares of the Company’s common stock available for issuance. Approximately 357,000 restricted stock awards, and approximately 71,000 restricted stock units were granted under the First Advantage Corporation 2003 Incentive Compensation Plan. Share-based grants generally vest over three years at a rate of 33.4% for the first year and 33.3% for each of the two following years. The option grants expire ten years after the grant date. As of January 1, 2006, the Company accounts for these share-based grants in accordance with SFAS No. 123R, which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. Share-based compensation for the three months ending September 30, 2007 and 2006 was $2.0 million and $2.5 million, respectively. Share-based compensation for the nine months ending September 30, 2007 and 2006 was $10.9 million and $8.5 million, respectively.

Warrants and Options to Purchase Class A Common Stock

The Company had outstanding warrants to purchase up to 47,994 shares of its common stock at exercise prices ranging from $0.25 to $22.50 per share as of September 30, 2007. The weighted average remaining contractual life in years for the warrants outstanding is 2.76 and the weighted average exercise price is $14.01.

 

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Table of Contents

First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2007 and 2006 (Unaudited)

 

Stock option activity under the Company’s stock plan since December 31, 2006 is summarized as follows:

 

(in thousands)    Number of
Shares
    Weighted
Average
Exercise Price

Options outstanding at December 31, 2006

   4,201     $ 21.89

Options granted

   806     $ 25.69

Options exercised

   (155 )   $ 16.55

Options canceled

   (167 )   $ 23.98
            

Options outstanding at September 30, 2007

   4,685       $22.63
            

Options exercisable, end of the quarter

   3,044     $ 21.51
            

The following table summarizes information about stock options outstanding at September 30, 2007:

(in thousands, except for exercise prices, years and weighted average amounts)

 

   

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

  12   3.9   $10.31   12   $10.31

$12.51 - $ 25.00

  3,405   5.8   $20.82   2,592   $20.28

$25.01 - $ 50.00

  1,257   8.5   $27.07   429   $27.52

$50.01 - $242.25

  11   2.8   $87.74   11   $87.74
             
  4,685       3,044  
             

 

8. Income Taxes

The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal examinations by tax authorities for years before 2003, and state and local, and non-U.S. income tax examinations by tax authorities for years before 2002. The Internal Revenue Service has commenced an examination of Leadclick Media, Inc.’s separate 2005 federal income tax return. The Company does not anticipate material adjustments as a result of this examination.

The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized approximately a $0.2 million

 

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Table of Contents

First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2007 and 2006 (Unaudited)

 

increase in the liability for uncertain tax benefits as well as approximately $0.7 million increase in the liability for related penalties and interest, which was accounted for as a reduction to the January 1, 2007 retained earnings.

As of September 30, 2007, the Company has a $0.4 million total liability recorded for unrecognized tax benefits as well as a $1.0 million total liability for income tax related penalties and interest. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $0.4 million. The majority of the unrecognized tax benefits and associated interest and penalties relates to international operations. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company does not currently anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease by the end of 2007.

 

9. Segment Information

The Company operates in six primary business segments: Lender Services, Data Services, Dealer Services, Employer Services, Multifamily Services, and Investigative and Litigation Support Services.

The Lender Services segment offers lenders credit reporting solutions for mortgage and home equity needs.

The Data Services segment includes business lines that provide transportation credit reporting, motor vehicle record reporting, fleet management, supply chain theft and damage mitigation consulting, consumer location, criminal records reselling, specialty finance credit reporting, consumer credit reporting services, and lead generation services. Revenue for the Data Services segment includes $1.2 million and $1.1 million of inter-segment sales for the three months ended September 30, 2007 and 2006, respectively, and $3.7 million and $3.5 million of inter-segment sales for the nine months ended September 30, 2007 and 2006, respectively.

The Dealer Services business segment serves the automotive dealer marketplace by delivering consolidated consumer credit reports, credit automation software and vehicle lead generation services.

The Employer Services segment includes employment background screening, occupational health services, tax incentive services and hiring solutions. 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. Hiring solutions include applicant tracking software, recruiting services and outsourced management of payroll and human resource functions. Tax incentive

 

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Table of Contents

First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2007 and 2006 (Unaudited)

 

services include services related to the administration of employment-based and location-based tax credit and incentive programs, sales and use tax programs and fleet asset management programs. Revenue for the Employer Services segment includes $0.1 million and $0.2 million of inter-segment sales for each of the three month periods ended September 30, 2007 and 2006, respectively and includes $0.7 million and $0.8 million of inter-segment sales for each of the nine month periods ended September 30, 2007 and 2006, respectively.

The Multifamily Services segment includes resident screening and software services. Resident screening services include criminal background and eviction searches, credit reporting, employment verification and lease performance and payment histories. Revenue for the Multifamily Services segment includes $0.1 million of inter-segment sales for each of the three month periods ended September 30, 2007 and 2006, and $0.4 million and $0.3 million of inter-segment sales for each of the nine month periods ended September 30, 2007 and 2006, respectively.

The Investigative and Litigation Support Services segment includes all investigative services. Products and services offered by the Investigative and Litigation Support Services segment includes surveillance services, field interviews, computer forensics, electronic discovery, due diligence reports and other high level investigations. Revenue for the Investigative and Litigation Support Services segment includes $0.1 million of inter-segment sales for each of the three month period ended September 2006, and $0.3 million of inter-segment sales for the nine month period ended September 30, 2006.

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

International operations included in the Employer Services segment include service revenue of $12.5 million and $5.9 million for the three months ended September 30, 2007 and 2006, respectively, and $30.9 million and $13.7 million for the nine months ended September 30, 2007 and 2006, respectively. International operations included in the Investigative and Litigation Support Services segment include service revenue of $14.4 million and $20.5 million for the three and nine months ended September 30, 2007.

 

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Table of Contents

First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2007 and 2006 (Unaudited)

 

The following table sets forth segment information for the three and nine months ended September 30, 2007 and 2006.

 

(in thousands)    Service
Revenue
    Depreciation
and Amortization
   Income (Loss)
From Operations
    Assets

Three Months Ended September 30, 2007

         

Lender Services

   $ 35,110     $ 1,699    $ 6,660     $ 73,388

Data Services

     35,138       2,911      9,230       323,986

Dealer Services

     28,720       668      4,150       114,935

Employer Services

     59,013       2,478      6,550       372,900

Multifamily Services

     19,699       1,193      6,076       84,858

Investigative and Litigation Support Services

     28,051       832      11,056       108,396

Corporate and Eliminations

     (425 )     1,081      (9,170 )     73,520
                             

Consolidated

   $ 205,306     $ 10,862    $ 34,552     $ 1,151,983
                             

Three Months Ended September 30, 2006

         

Lender Services

   $ 44,072     $ 1,649    $ 14,603     $ 77,507

Data Services

     37,153       2,836      10,283       321,713

Dealer Services

     31,993       714      4,913       120,294

Employer Services

     53,399       2,110      5,960       333,234

Multifamily Services

     18,616       1,136      4,933       79,451

Investigative and Litigation Support Services

     14,336       791      2,666       85,711

Corporate and Eliminations

     (964 )     405      (9,252 )     53,782
                             

Consolidated

   $ 198,605     $ 9,641    $ 34,106     $ 1,071,692
                             

Nine Months Ended September 30, 2007

         

Lender Services

   $ 123,580     $ 5,033    $ 31,002     $ 73,388

Data Services

     113,874       8,690      31,946       323,986

Dealer Services

     88,364       2,100      11,238       114,935

Employer Services

     171,534       7,617      18,460       372,900

Multifamily Services

     56,980       3,550      16,256       84,858

Investigative and Litigation Support Services

     62,289       2,629      17,672       108,396

Corporate and Eliminations

     (2,075 )     2,425      (35,734 )     73,520
                             

Consolidated

   $ 614,546     $ 32,044    $ 90,840     $ 1,151,983
                             

Nine Months Ended September 30, 2006

         

Lender Services

   $ 135,023     $ 5,112    $ 42,469     $ 77,507

Data Services

     108,312       8,838      29,185       321,713

Dealer Services

     92,790       2,101      13,814       120,294

Employer Services

     139,901       5,554      13,961       333,234

Multifamily Services

     54,068       3,373      13,023       79,451

Investigative and Litigation Support Services

     44,451       2,307      8,822       85,711

Corporate and Eliminations

     (2,981 )     1,084      (26,690 )     53,782
                             

Consolidated

   $ 571,564     $ 28,369    $ 94,584     $ 1,071,692
                             

 

10. Subsequent Events

In October 2007, the Company completed the sale of its US Search business for $26.5 million in cash resulting in a gain before income taxes of approximately $21.1 million. The transaction will be recorded in the fourth quarter 2007.

 

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Table of Contents

First Advantage Corporation

Notes to Consolidated Financial Statements

September 30, 2007 and 2006 (Unaudited)

 

In October 2007, the Company sold 2,875,000 shares of DealerTrack Holdings, Inc. (“DealerTrack”) common stock. The sale will result in a gain, before income taxes, of approximately $97.7 million or $0.96 per diluted share. The Company will discontinue using the equity method of accounting for its remaining investment in DealerTrack, which will be accounted for on the cost method. After the sale, First Advantage will continue to own approximately 2,553,000 million shares of DealerTrack common stock, which is approximately 6% of the outstanding shares. The transaction will be recorded in the fourth quarter 2007.

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Note of Caution Regarding Forward Looking Statements

Certain statements in this quarterly report on Form 10-Q relate to future results of the Company and are considered “forward-looking statements”. These statements, which may be expressed in a variety of ways, including the use of future or present tense language, relate to among other things, sufficiency and availability of cash flows and other sources of liquidity, current levels of operations, anticipated growth, future market positions, synergies from integration, ability to execute its growth strategy, levels of capital expenditures and ability to satisfy current debt. These forward-looking statements, and others forward-looking statements contained in other public disclosures of the Company are based on assumptions that involve risks and uncertainties, and that are subject to change based on various important factors (some of which are beyond the Company’s control). 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 the Company’s Class A common stock; the Company’s ability to successfully raise capital; the Company’s ability to identify and complete acquisitions and to successfully integrate businesses it acquires; changes in applicable government regulations; the degree and nature of the Company’s competition; increases in the Company’s expenses; continued consolidation among the Company’s competitors and customers; unanticipated technological changes and requirements; the Company’s ability to identify suppliers of quality and cost-effective data; and other factors described in this quarterly report on Form 10-Q. Actual results may differ materially from those expressed or implied as a result of these risks and uncertainties. The forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

 

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Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Overview

First Advantage Corporation (NASDAQ: FADV) (“First Advantage” or the “Company”) provides global risk mitigation, screening services and credit reporting to enterprise and consumer customers. The Company operates in six primary business segments: Lender Services, Data Services, Dealer Services, Employer Services, Multifamily Services, and Investigative & Litigation Support Services. First Advantage is headquartered in St. Petersburg, Florida, and has approximately 4,800 employees in offices throughout the United States and abroad. For the nine months ended September 30, 2007, First Advantage has acquired one company, which is included in the Employer Services segment.

Operating results for the three and nine months ended September 30, 2007 included total service revenue of $205.3 million and $614.5 million, respectively. This represents an increase of 3.4% and 7.5% over the same periods in 2006. The organic growth rate was 1.7% and 3.6% for the three and nine months ended September 30, 2007, respectively. Operating income for the three and nine months ended September 30, 2007 was $34.6 million and $90.8 million, respectively. Operating income increased $.4 million for the three months ended September 30, 2007 and decreased $3.7 million for the nine months ended September 30, 2007 in comparison to the same periods in 2006. In connection with the former CEO’s Transition Agreement, First Advantage recorded compensation expense of $8.0 million in the first quarter of 2007 (included in salaries and benefits in the accompanying nine months ended September 30, 2007 Consolidated Statements of Income and Comprehensive Income), reflecting the value of the cash severance payment of $4.4 million and the value of the previously unvested restricted stock, restricted stock units and stock options. The $8.0 million of compensation expense reduced net income for the nine months ending September 30, 2007 by $4.7 million or 8 cents per diluted share.

Critical Accounting Policies and Estimates

Critical accounting policies are those policies used in the preparation of the company’s financial statements that require management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenue, expenses and related disclosure of contingencies. A summary of these policies can be found in Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for year ended December 31, 2006.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS 157 “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value within generally accepted accounting principles (GAAP), and expands disclosure requirements regarding fair value measurements. The provisions for SFAS 157 are effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the effects of adoption on its consolidated financial statements and the impact, if any, is not known at this time.

In February 2007, the FASB issued FAS 159 “The Fair Value Option for Financial Assets and Liabilities.” FAS 159 allows companies to report selected financial assets and liabilities at fair value at their discretion. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. FAS 159 is effective at the beginning of a company’s first fiscal year after November 15, 2007. The Company is currently evaluating the effects of adoption on its consolidated financial statements and the impact, if any, is not known at this time.

The following is a summary of the operating results by the Company’s business segments for the three and nine months ended September 30, 2007 and 2006.

 

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Table of Contents
(in thousands, except percentages)                                                 

Three Months Ended September 30, 2007

   Lender
Services
    Data
Services
    Dealer
Services
    Employer
Services
    Multifamily
Services
    Invest/Litigation
Support Services
    Corporate and
Eliminations
    Total  

Service revenue

   $ 35,110     $ 35,138     $ 28,720     $ 59,013     $ 19,699     $ 28,051     $ (425 )   $ 205,306  

Reimbursed government fee revenue

     —         11,218       —         3,769       —         —         (880 )     14,107  
                                                                

Total revenue

     35,110       46,356       28,720       62,782       19,699       28,051       (1,305 )     219,413  

Cost of service revenue

     11,979       9,120       15,115       16,419       1,906       2,792       (728 )     56,603  

Government fees paid

     —         11,218       —         3,769       —         —         (880 )     14,107  
                                                                

Total cost of service

     11,979       20,338       15,115       20,188       1,906       2,792       (1,608 )     70,710  

Gross margin

     23,131       26,018       13,605       42,594       17,793       25,259       303       148,703  

Salaries and benefits

     11,697       6,190       3,781       22,156       6,757       10,166       7,118       67,865  

Facilities and telecommunications

     1,926       958       264       2,858       914       688       1,062       8,670  

Other operating expenses

     1,149       6,729       4,742       8,552       2,853       2,517       212       26,754  

Depreciation and amortization

     1,699       2,911       668       2,478       1,193       832       1,081       10,862  
                                                                

Income (loss) from operations

   $ 6,660     $ 9,230     $ 4,150     $ 6,550     $ 6,076     $ 11,056     $ (9,170 )   $ 34,552  
                                                                

Operating margin percentage

     19.0 %     26.3 %     14.4 %     11.1 %     30.8 %     39.4 %     N/A       16.8 %

Three Months Ended September 30, 2006

   Lender
Services
    Data
Services
    Dealer
Services
    Employer
Services
    Multifamily
Services
    Invest/Litigation
Support Services
   

Corporate and

Eliminations

    Total  

Service revenue

   $ 44,072     $ 37,153     $ 31,993     $ 53,399     $ 18,616     $ 14,336     $ (964 )   $ 198,605  

Reimbursed government fee revenue

     —         11,360       —         2,818       —         —         (747 )     13,431  
                                                                

Total revenue

     44,072       48,513       31,993       56,217       18,616       14,336       (1,711 )     212,036  

Cost of service revenue

     13,913       11,049       17,147       16,421       1,803       2,624       (937 )     62,020  

Government fees paid

     —         11,360       —         2,818       —         —         (747 )     13,431  
                                                                

Total cost of service

     13,913       22,409       17,147       19,239       1,803       2,624       (1,684 )     75,451  

Gross margin

     30,159       26,104       14,846       36,978       16,813       11,712       (27 )     136,585  

Salaries and benefits

     12,381       5,764       3,945       18,771       6,514       5,996       7,043       60,414  

Facilities and telecommunications

     1,855       737       415       2,103       1,007       404       1,104       7,625  

Other operating expenses

     (329 )     6,484       4,859       8,034       3,223       1,855       673       24,799  

Depreciation and amortization

     1,649       2,836       714       2,110       1,136       791       405       9,641  
                                                                

Income (loss) from operations

   $ 14,603     $ 10,283     $ 4,913     $ 5,960     $ 4,933     $ 2,666     $ (9,252 )   $ 34,106  
                                                                

Operating margin percentage

     33.1 %     27.7 %     15.4 %     11.2 %     26.5 %     18.6 %     N/A       17.2 %

 

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Table of Contents

Nine Months Ended September 30,
2007

   Lender
Services
    Data
Services
    Dealer
Services
    Employer
Services
    Multifamily
Services
    Invest/Litigation
Support Services
   

Corporate and

Eliminations

    Total  

Service revenue

   $ 123,580     $ 113,874     $ 88,364     $ 171,534     $ 56,980     $ 62,289     $ (2,075 )   $ 614,546  

Reimbursed government fee revenue

     —         34,503       —         10,474       —         —         (3,051 )     41,926  
                                                                

Total revenue

     123,580       148,377       88,364       182,008       56,980       62,289       (5,126 )     656,472  

Cost of service revenue

     41,826       30,438       46,779       48,450       5,350       7,817       (2,039 )     178,621  

Government fees paid

     —         34,503       —         10,474       —         —         (3,051 )     41,926  
                                                                

Total cost of service

     41,826       64,941       46,779       58,924       5,350       7,817       (5,090 )     220,547  

Gross margin

     81,754       83,436       41,585       123,084       51,630       54,472       (36 )     435,925  

Salaries and benefits

     37,087       18,928       11,974       64,584       20,391       24,911       29,810       207,685  

Facilities and telecommunications

     5,742       2,710       1,054       7,613       2,831       1,800       3,062       24,812  

Other operating expenses

     2,890       21,162       15,219       24,810       8,602       7,460       401       80,544  

Depreciation and amortization

     5,033       8,690       2,100       7,617       3,550       2,629       2,425       32,044  
                                                                

Income (loss) from operations

   $ 31,002     $ 31,946     $ 11,238     $ 18,460     $ 16,256     $ 17,672     $ (35,734 )   $ 90,840  
                                                                

Operating margin percentage

     25.1 %     28.1 %     12.7 %     10.8 %     28.5 %     28.4 %     N/A       14.8 %

Nine Months Ended September 30,
2006

   Lender
Services
    Data
Services
    Dealer
Services
    Employer
Services
    Multifamily
Services
    Invest/Litigation
Support Services
   

Corporate and

Eliminations

    Total  

Service revenue

   $ 135,023     $ 108,312     $ 92,790     $ 139,901     $ 54,068     $ 44,451     $ (2,981 )   $ 571,564  

Reimbursed government fee revenue

     —         33,610       —         8,600       —         —         (2,267 )     39,943  
                                                                

Total revenue

     135,023       141,922       92,790       148,501       54,068       44,451       (5,248 )     611,507  

Cost of service revenue

     44,013       32,356       49,087       41,354       5,183       8,600       (2,831 )     177,762  

Government fees paid

     —         33,610       —         8,600       —         —         (2,267 )     39,943  
                                                                

Total cost of service

     44,013       65,966       49,087       49,954       5,183       8,600       (5,098 )     217,705  

Gross margin

     91,010       75,956       43,703       98,547       48,885       35,851       (150 )     393,802  

Salaries and benefits

     37,515       17,467       12,459       51,642       20,168       17,776       20,767       177,794  

Facilities and telecommunications

     5,436       2,192       1,195       6,090       2,811       1,250       3,231       22,205  

Other operating expenses

     478       18,274       14,134       21,300       9,510       5,696       1,458       70,850  

Depreciation and amortization

     5,112       8,838       2,101       5,554       3,373       2,307       1,084       28,369  
                                                                

Income (loss) from operations

   $ 42,469     $ 29,185     $ 13,814     $ 13,961     $ 13,023     $ 8,822     $ (26,690 )   $ 94,584  
                                                                

Operating margin percentage

     31.5 %     26.9 %     14.9 %     10.0 %     24.1 %     19.8 %     N/A       16.5 %

Lender Services Segment

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

Service revenue was $35.1 million for the three months ended September 30, 2007, a decrease of $9.0 million compared to service revenue of $44.1 million for the three months ended September 30, 2006. A decrease in transactions related to the decline in the mortgage lending industry was partially offset by an increase in revenue from new products and services.

Cost of service revenue was $12.0 million for the three months ended September 30, 2007, a decrease of $1.9 million compared to cost of service revenue of $13.9 million in the same period of 2006. The impact of the decrease in transactions resulted in an overall decrease in the cost of service revenue despite an increase in credit data costs.

Salaries and benefits decreased by $.7 million. Salaries and benefits were 33.3% of service revenue in the third quarter of 2007 compared to 28.1% during the same period in 2006. The decreased expense is due to staff reductions.

Facilities and telecommunication expenses were 5.5% of service revenue in the third quarter of 2007 compared to 4.2% in the third quarter of 2006.

 

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Other operating expenses increased by $1.5 million. Other operating expenses were 3.3% of service revenue in the third quarter of 2007. The change in 2007 is primarily due to an increase in bad debt expense and costs related to off-shoring activities, and a decrease in the amounts allocated to other segments for shared services.

Depreciation and amortization expense was flat to the comparable period of 2006.

Income from operations was $6.7 million for the three months ended September 2007 compared to $14.6 million in the same period of 2006. The operating margin percentage decreased from 33.1% to 19.0% primarily due to the impact of the decrease in service revenue, a decrease in allocations to other segments, an increase in bad debt expense, an increase in credit data costs and costs of off-shoring activities, as partially offset by a reduction in salaries and benefits.

Data Services Segment

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

Total service revenue was $35.1 million for the three months ended September 30, 2007, a decrease of $2.1 million compared to service revenue of $37.2 million in the same period of 2006. The lead generation business has experienced decreased transactions due to the decline in the mortgage and sub-prime lending industry. This is offset by an increase in revenue at the consumer location and credit businesses.

Cost of service revenue was $9.1 million for the three months ended September 30, 2007, a decrease of $1.9 million compared to cost of service revenue of $11.0 million in the same period of 2006. The decrease is primarily due to a change in the revenue mix of the businesses in the third quarter of 2007 compared to the same period in 2006.

Salaries and benefits increased $.4 million compared to the third quarter of 2006. Salaries and benefits were approximately 17.6% and 15.5% of service revenue in the third quarter of 2007 and 2006, respectively. The increase is primarily due to increased staffing levels needed to support the consumer businesses.

Facilities and telecommunication expenses increased $.2 million compared to the third quarter of 2006. Facilities and telecommunication expenses were approximately 2.7% and 2.0% of service revenue in the third quarter of 2007 and 2006, respectively. The increase is primarily due to the increase in rent and telecommunication costs as a result of two businesses moving offices.

Other operating expenses increased by $.2 million. Other operating expenses were 19.2% of service revenue in the third quarter of 2007 and 17.5% in the third quarter of 2006. The increase is largely attributable to increased advertising costs, bad debt expense and shared services allocations.

Depreciation and amortization expense was flat to the comparable period of 2006.

The operating margin percentage decreased from 27.7% to 26.3% in comparing the third quarter of 2006 to the third quarter of 2007. Income from operations was $9.2 million for the third quarter of 2007, a decrease of $1.1 million compared to $10.3 million in the third quarter of 2006. The decrease in the operating income is primarily due to a decrease in the lead generation business offset by an increase in the consumer location and credit businesses.

 

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Dealer Services Segment

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

Service revenue was $28.7 million for the three months ended September 30, 2007, a decrease of $3.3 million compared to service revenue of $32.0 million for the three months ended September 30, 2006. An increase in credit report related revenue accounted for a 4.0% increase, however, a larger decrease in revenue in the automotive lead generation business resulted in an overall decrease in service revenue.

Cost of service revenue was $15.1 million for the three months ended September 30, 2007 compared to $17.1 million for the three months ended September 30, 2006. The decrease in cost of service revenue was driven by reduced cost of service revenue on the lower margin automotive lead generation business which was offset by an increase in credit report related transaction costs.

Salaries and benefits decreased by $.2 million. Salaries and benefits were 13.2% of service revenue in the third quarter of 2007 compared to 12.3% during the same period in 2006. Salaries and benefits expense decreased due to operational efficiencies which included relocation and consolidation of certain functions of the automotive lead generation business during the fourth quarter of 2006 and first quarter of 2007.

Facilities and telecommunication expenses were 0.9% of service revenue in the third quarter of 2007 compared to 1.3% in the third quarter of 2006. Facilities and telecommunication expense decreased due to operational efficiencies which included relocation and consolidation of facilities for the automotive lead generation business.

Other operating expenses decreased by $.1 million. Other operating expenses were 16.5% of service revenue in the third quarter of 2007 compared to 15.2% for the same period in 2006. The decrease in 2007 is due to a decrease in bad debt expense and contract labor at the automotive lead generation business.

Depreciation and amortization was 2.3% of service revenue during the third quarter of 2007 compared to 2.2% in the same period in 2006.

Income from operations was $4.2 million for the three months ended September 2007 compared to $4.9 million in the same period in 2006. The operating margin percentage decreased from 15.4% to 14.4% primarily due to the impact of the decrease in revenue and profitability in the automotive lead generation business.

Employer Services Segment

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

Total service revenue was $59.0 million for the three months ended September 30, 2007, an increase of $5.6 million compared to service revenue of $53.4 million in the same period of 2006. The increase was driven by the addition of $2.8 million of revenue from acquisitions and $2.8 million of revenue from existing businesses, primarily in the tax service and background screening businesses.

Salaries and benefits increased by $3.4 million. Salaries and benefits were 37.5% of service revenue in the third quarter of 2007 compared to 35.2% in the same period of 2006. The number of employees has increased due to growth in international operations and the growth of the existing businesses in the segment in comparison to the same period in 2006. In addition, approximately $.9 million in severance expense was recorded related to the office consolidations.

Facilities and telecommunication expenses increased by $.8 million. Facilities and telecommunication expenses were 4.8% of service revenue in the third quarter of 2007 and 3.9% in the third quarter of 2006. The segment recorded approximately $.3 million in future lease expense related to office consolidations. The remaining increase is primarily due to the growth in international operations.

 

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Other operating expenses increased by $.5 million. Other operating expenses were 14.5% of service revenue in the third quarter of 2007 and 15.0% for the same period of 2006. The increase in other operating expenses is due to costs incurred in integrating and consolidating operations, product and geographic expansion and cross-selling initiatives.

Depreciation and amortization increased by $.4 million primarily due to the addition of intangible assets related to the acquisitions and the rollout of new software projects.

The operating margin percentage was flat compared to the same quarter of 2006.

Income from operations was $6.6 million for the three months ended September 30, 2007, an increase of $.6 million compared to income from operations of $6.0 million in the same period of 2006. Income from operations increased primarily due to the growth in the tax service and background screening businesses, offset by $1.7 million in expense related to consolidating operations.

Multifamily Services Segment

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

Total service revenue was $19.7 million for the three months ended September 30, 2007, an increase of $1.1 million compared to service revenue of $18.6 million in the same period of 2006. The 5.8% organic growth is driven by expanded market share and an increase in products and services.

Salaries and benefits costs increased $.2 million compared to the same period in 2006. Salaries and benefits were 34.3% of service revenue for the third quarter of 2007 compared to 35.0% of service revenue in the same period of 2006.

Facilities and telecommunication expenses are comparable to the same period of 2006. Facilities and telecommunication expenses were 4.6% of service revenue in the third quarter of 2007 and 5.4% in the third quarter of 2006. The decrease as a percentage of service revenue is due to service revenue increasing as facilities and telecommunication expense remained stable.

Other operating expenses decreased $.4 million compared to the same period in 2006. Other operating expenses were 14.5% of service revenue in the third quarter of 2007 compared to 17.3% in the same period of 2006.

Depreciation and amortization is comparable to the same period of 2006.

Income from operations was $6.1 million in the third quarter of 2007 compared to income from operations of $4.9 million in the same period of 2006. The operating margin increased from 26.5% to 30.8% due to increased revenue growth with a larger variety of products delivered to the customers while containing infrastructure costs.

Investigative and Litigation Services Support Segment

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

Total service revenue was $28.1 million for the three months ended September 30, 2007, an increase of $13.8 million compared to service revenue of $14.3 million in the same period of 2006. The organic growth of $13.3 million is predominately driven by continued growth in the Litigation Support Services’ international operations.

Salaries and benefits increased by $4.2 million. Salaries and benefits were 36.2% of service revenue in the third quarter of 2007 compared to 41.8% in the same period of 2006. The increase is mainly due to

 

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the increase of employees needed to support the revenue growth in the Litigation Support Services international operations as well as increased incentive compensation and commissions as a result of revenue growth.

Facilities and telecommunication expenses increased by $.3 million compared to the same period in 2006. Facilities and telecommunication expenses were 2.5% of service revenue in the third quarter of 2007 and 2.8% in the third quarter of 2006. The increase is primarily due to a new European office.

Other operating expenses increased by $.7 million. Other operating expenses were 9.0% of service revenue in the third quarter of 2007 and 12.9% for the same period of 2006. The increase is related to international expansion and new business development efforts in this segment.

Depreciation and amortization is comparable to the same period of 2006. Depreciation and amortization was 3.0% of service revenue in the third quarter of 2007 and 5.5% for the same period of 2006.

The operating margin percentage increased from 18.6% to 39.4%. The increase is due to an increase in revenue in the Litigation Support Services businesses which have higher margin services.

Income from operations was $11.1 million for the third quarter of 2007 compared to $2.7 million for the same period of 2006. The increase is due to the continued growth in the Litigation Support Services businesses.

Corporate

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

Corporate costs and expenses primarily represent compensation and benefits for senior management, administrative staff, technology personnel and their related expenses in addition to an administrative fee paid to First American. The corporate expenses were $9.2 million in the third quarter of 2007 compared to expenses of $9.3 million in the same period of 2006. Corporate expenses were 4.5% of consolidated service revenue in 2007 compared to 4.7% in 2006.

Consolidated Results

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

Consolidated service revenue for the three months ended September 30, 2007 was $205.3 million, an increase of $6.7 million compared to service revenue of $198.6 million in the same period in 2006. Acquisitions accounted for $3.3 million of the increase while $3.4 million was organic growth.

Salaries and benefits increased $7.5 million when comparing the third quarter of 2007 to the third quarter of 2006. Salaries and benefits expenses were 33.1% of service revenue for the three months ended September 30, 2007 and 30.4% for the same period in 2006. The increase is primarily related to additional employees added for company growth.

Facilities and telecommunication expense increased by $1.0 million compared to the same period in 2006. Facilities and telecommunication expenses were 4.2% and 3.8% of service revenue in the third quarter of 2007 and 2006, respectively. The increase is due to international growth and office moves or consolidations.

Other operating expenses increased by $2.0 million compared to the same period in 2006. Other operating expenses were 13.0% of service revenue for the three months ended September 30, 2007 and 12.5% compared to the same period for 2006. The increase is primarily related to increased marketing expense, bad debt expense and software expense.

 

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Depreciation and amortization increased by $1.2 million due to an increase in amortization of intangible assets as a result of acquisitions, fixed asset additions and the roll out of internally developed software.

The consolidated operating margin was 16.8% for the three months ended September 30, 2007, compared to 17.2% for the same period in 2006. The decrease in the operating margin is related to the mix of business in comparing the third quarter of 2007 to the third quarter of 2006, driven primarily by the decrease in the Lender Services segment which is affected by the decline in the mortgage lending industry. In addition, $1.7 million in expense was recorded related to consolidating operations in the Employer Services segment.

Income from operations was $34.6 million for the three months ended September 30, 2007 compared to $34.1 million for the same period in 2006. The increase of $.5 million is comprised of an increase in operating income of $.6 million in Employer Services, $1.2 million at Multifamily Services and $8.4 million in Investigative and Litigation Support Services offset by decreases in operating income of $7.9 million in Lender Services, $1.0 million in Data Services, and $.8 million in Dealer Services.

Lender Services Segment

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Service revenue was $123.6 million for the nine months ended September 30, 2007, a decrease of $11.4 million compared to service revenue of $135.0 million for the nine months ended September 30, 2006. A decrease in transactions related to the decline in the mortgage lending industry partially offset by an increase in revenue from new products and services.

Cost of service revenue was $41.8 million for the nine months ended September 30, 2007 compared to $44.0 million for the same period the year before. A decrease in transaction volumes was largely offset by an increase in credit data costs.

Salaries and benefits decreased by $.4 million. Salaries and benefits were 30.0% of service revenue in the first nine months of 2007 compared to 27.8% during the same period in 2006. Salaries and benefits expense decreased due to an increase in capitalized personnel costs related to software development initiatives and a decrease in incentive based compensation, as partially offset by an increase in benefit costs.

Facilities and telecommunication expense increased by $.3 million compared to the same period in 2006. Facilities and telecommunication expenses were 4.6% of service revenue for the nine months of 2007 compared to 4.0% in the same period in 2006.

Other operating expenses increased by $2.4 million. Other operating expenses were 2.3% of service revenue in the first nine months of 2007 compared to 0.4% for the same period of 2006. The change in 2007 is primarily due to an increase in bad debt expense and costs related to off-shoring activities, as partially offset by an increase in the amounts allocated other segments for shared services and product development initiatives.

Depreciation and amortization decreased by $.1 million. Depreciation and amortization was 4.1% of service revenue during the nine months ended September 30, 2007 compared to 3.8% in the same period in 2006. The decrease is primarily due to certain fixed assets and intangibles becoming fully depreciated.

Income from operations was $31.0 million for the nine months ended September 2007 compared to $42.5 million in the same period of 2006. The operating margin percentage decreased from 31.5% to 25.1% primarily due to the impact of the decrease in service revenue, costs of off-shoring activities, increase in credit data costs, and bad debt expense.

 

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Data Services Segment

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Service revenue was $113.9 million for the nine months ended September 30, 2007, an increase of $5.6 million compared to service revenue of $108.3 million in the same period of 2006. Organic growth was 5.1% for the segment. The organic growth is primarily driven by expansion of the existing customer base in the membership and direct to consumer businesses. This is offset by a decrease in revenue at the lead generation business which is due to the decline in the mortgage and sub-prime lending industry.

Cost of service revenue decreased $1.9 million. Cost of service decreased from 29.7% on a year-to-date basis in 2006 to 26.0% for the comparable period in 2007. The decrease is due to increased sales in the membership and direct to consumer business offset by the decline in revenue at the lead generation business that occurred in the second and third quarters of 2007.

Salaries and benefits increased by $1.5 million. Salaries and benefits were 16.6% of service revenue for the nine months ended September 30, 2007 compared to 16.1% in the same period of 2006. The increase is due to increased staffing levels and related salaries and benefit costs needed to support the growth of the businesses.

Facilities and telecommunication expenses increased by $.5 million compared to the same period in 2006. Facilities and telecommunication expenses were 2.4% of service revenue for the nine months ended September 30, 2007 and 2.0% in the same period of 2006. The increase is primarily due to two businesses moving to larger offices.

Other operating expenses increased by $2.9 million. Other operating expenses were 18.6% of service revenue for the nine months ended September 30, 2007 and 16.9% in the same period of 2006. The increase in operating expenses is due to an increase in marketing expenses, bad debt expense, shared services and professional fees.

Depreciation and amortization decreased by $.1 million due to some of the intangible assets becoming fully amortized.

Income from operations was $31.9 million for the nine months ended September 30, 2007 compared to $29.2 million for the same period in 2006. The operating margin percentage increased from 26.9% to 28.1%. The increase in the operating margin is primarily due to the sales mix and related margins. The membership and direct to consumer businesses have increased revenue with higher margins and the lead generation business has decreased revenue with lower operating margins.

Dealer Services Segment

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Service revenue was $88.4 million for the nine months ended September 30, 2007, a decrease of $4.4 million compared to service revenue of $92.8 million for the nine months ended September 30, 2006. An increase in transactions accounted for a 6.8% increase in credit report related revenue; however, a larger decrease in revenue in the automotive lead generation business resulted in an overall decrease in service revenue.

Cost of service revenue was $46.8 million for the nine months ended September 30, 2007, a decrease of $2.3 million compared to cost of service revenue of $49.1 million in the same period of 2006. A decrease in cost of service revenue on the lower margin automotive lead generation business was offset by an increase in cost of service revenue based on an increase in credit report related transactions.

 

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Salaries and benefits decreased by $.5 million. Salaries and benefits were 13.6% of service revenue in the first nine months of 2007 compared to 13.4% during the same period in 2006. Salaries and benefits expense decreased due to operational efficiencies which included relocation and consolidation of certain functions of the automotive lead generation business during the fourth quarter of 2006 and first quarter of 2007.

Facilities and telecommunication expenses were comparable the same period of 2006.

Other operating expenses increased by $1.1 million. Other operating expenses were 17.2% of service revenue for the nine months ended September 2007 compared to 15.2% for the same period in 2006. The increase in 2007 is due to an increase in the amounts allocated for shared services, product development initiatives, and an increase in bad debt expense at the automotive lead generation business.

Depreciation and amortization were comparable the same period of 2006.

Income from operations was $11.2 million for the nine months ended September 2007 compared to $13.8 million in the same period in 2006. The operating margin percentage decreased from 14.9% to 12.7% primarily due to the impact of amounts allocated for shared services and reduced volumes in the automotive lead generation business.

Employer Services Segment

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Service revenue was $171.5 million for the nine months ended September 30, 2007, an increase of $31.6 million compared to service revenue of $139.9 million in the same period of 2006. The increase was primarily driven by the addition of $21.3 million of revenue from acquisitions and $10.3 million in revenue from existing business, primarily in the tax service and background screening businesses.

Salaries and benefits increased by $12.9 million. Salaries and benefits were 37.7% of service revenue for the nine months ended September 30, 2007 compared to 36.9% in the same period of 2006. The increase is primarily related to the international acquisitions in 2006, growth in the segment and severance expense recorded for office consolidations.

Facilities and telecommunication expenses increased by $1.5 million. Facilities and telecommunication expenses were 4.4% of service revenue for the nine months ended September 30, 2007 and 2006. The increase in expense is primarily due to the acquisitions that occurred in 2006, expanded facilities for organic growth and estimated future lease payments accrued for office closures.

Other operating expenses increased by $3.5 million. Other operating expenses were 14.5% of service revenue for the nine months ended September 30, 2007 and 15.2% for the same period of 2006. The increase is mainly due to the additional cost of professional fees, shared services and marketing expense related to the growth of the businesses, consolidating offices and cross selling.

Depreciation and amortization increased by $2.1 million primarily due to the addition of intangible assets related to the acquisitions and the rollout of software development initiatives.

Income from operations increased $4.5 million compared to the same period in 2006. The operating margin increased from 10.0% to 10.8%. The increase is due to revenue and earnings growth in most of the product lines offset by a decline in the occupational health service business and $1.7 million in expense related to consolidating operations.

 

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Multifamily Services Segment

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Service revenue was $57.0 million for the nine months ended September 30, 2007, an increase of $2.9 million compared to service revenue of $54.1 million in the same period of 2006. Organic growth was 5.4% for the segment and was driven by expanded market share and an increase in products and services.

Salaries and benefits increased $.2 million when compared to the same period in 2006. Salaries and benefits were 35.8% of service revenue for the nine months ended September 30, 2007 compared to 37.3% of service revenue in the same period of 2006. The increase in expense is due to customary annual increases offset by strategic reductions in employees.

Facilities and telecommunication expenses were comparable to the same period of 2006.

Other operating expenses decreased by $.9 million and were 15.1% of service revenue for the nine months ended September 30, 2007 compared to 17.6% in the same period of 2006. The decrease is due to reduced costs of leased equipment, software and marketing expense.

Depreciation and amortization increased $.2 million compared to the same period of 2006. Depreciation and amortization was 6.2% of service revenue for the nine months ended September 30, 2007 and 2006.

Income from operations was $16.3 million for the nine months ended September 30, 2007 compared to income from operations of $13.0 million in the same period of 2006. The operating margin increased from 24.1% to 28.5%. The increase in operating income and margins is primarily due to increased revenue while containing or reducing operating costs.

Investigative and Litigation Services Segment

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Service revenue was $62.3 million for the nine months ended September 30, 2007, an increase of $17.8 million compared to service revenue of $44.5 million in the same period of 2006. The increase is $16.5 million of organic growth and $1.4 million of acquisition growth. The organic growth is predominately driven by continued growth in the Litigation Support Services’ international operations.

Salaries and benefits increased by $7.1 million. Salaries and benefits were 40.0% of service revenue for the nine months ended September 30, 2007 and 2006. The increase in expense is primarily due to acquisitions and increased incentive compensation and commissions as a result of revenue growth.

Facilities and telecommunication expenses increased by $.6 million. Facilities and telecommunication expenses were 2.9% of service revenue for the nine months ended September 30, 2007 and 2.8% in the same period of 2006. The increase is primarily due to acquisitions and growth in the Litigation Support Services division.

Other operating expenses increased by $1.8 million. Other operating expenses were 12.0% of service revenue for the nine months ended September 30, 2007 and 12.8% for the same period of 2006. The increase is predominantly driven by the 2006 acquisitions and is related to international travel and shared services.

Depreciation and amortization increased by $.3 million. The increase is due to the increase in investment in capital assets for growth.

 

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Income from operations was $17.7 million for the nine months ended September 30, 2007 compared to $8.8 million in 2006. The operating margin increased from 19.8% to 28.4%. The increase is due to an increase in revenue in the Litigation Support Services businesses which provide higher margin services.

Corporate

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Corporate costs and expenses represent primarily compensation and benefits for senior management, administrative staff, technology personnel and their related expenses in addition to an administrative fee paid to First American. The corporate expenses were $35.7 million for the nine months ended September 30, 2007 compared to expenses of $26.7 million in the same period of 2006. Approximately $8.0 million of the increased expense is due to costs related to the former CEO’s transition agreement in the first quarter of 2007.

Consolidated Results

Nine Months Ended September 30, 2007 Compared to Nine Months Ended September 30, 2006

Consolidated service revenue for the nine months ended September 30, 2007 was $614.5 million, an increase of $42.9 million compared to service revenue of $571.6 million in the same period in 2006. Acquisitions accounted for $22.9 million of the increase and $20.1 million was related to organic growth.

Salaries and benefits increased by $29.9 million for the nine months ended September 30, 2007 compared to the same period in 2006. Salaries and benefits expense was 33.8% of service revenue for the nine months ended September 30, 2007 and 31.1% for the same period in 2006. The increase is primarily the $8.0 million recorded in first quarter 2007 related to the former CEO’s transition agreement in the first quarter of 2007. The remaining increase is related to increase in personnel to support the growth of the businesses.

Facilities and telecommunication increased by $2.6 million compared to the same period in 2006. Facilities and telecommunication expenses were 4.0% and 3.9% of service revenue for the nine months ended September 30, 2007 and 2006, respectively. The increase in facilities and telecommunication expenses is primarily due to acquisitions and costs for expansion in connection with organic growth.

Other operating expenses increased by $9.7 million compared to the same period in 2006. Other operating expenses were 13.1% of service revenue for the nine months ended September 30, 2007 and 12.4% compared to the same period for 2006. The increase is due to acquisitions, and increased marketing, software, international travel, legal and professional expenses.

Depreciation and amortization increased by $3.7 million due to an overall increase in amortization of intangible assets as a result of acquisitions, rollout of software initiatives and capital asset investment for organic growth.

The consolidated operating margin was 14.8% for the nine months ended September 30, 2007, compared to 16.5% for the same period in 2006. The decrease in margin is primarily due the change in revenue mix, primarily affected by the mortgage lending industry, $8.0 million of costs related to the former CEO’s transition agreement in the first quarter of 2007 and $1.7 million in expense related to consolidating operations.

Income from operations was $90.8 million for the nine months ended September 30, 2007 compared to $94.6 million for the same period in 2006. The decrease of $3.7 million is comprised of an increase in operating income of $2.7 million in Data Services, $4.5 million in Employer Services, $3.2 million in

 

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Multifamily Services and $8.9 million in Investigative and Litigation Support Services offset by decreases in operating income of $11.4 million at Lender Services, $2.6 million at Dealer Services and an increase of corporate expenses of $9.0 million.

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. As of September 30, 2007, cash and cash equivalents were $33.7 million.

Net cash provided by operating activities was $89.8 million compared to cash provided by operating activities of $63.9 million for the nine months ended September 30, 2007 and 2006, respectively.

Cash provided by operating activities increased by $25.9 million for the nine months ended September 30, 2007 compared to the same period of 2006 while net income was $48.5 million for the nine months ended September 30, 2007 and $48.0 million for the same period in 2006. The increase in cash provided by operating activities was primarily due to the increase in non-cash charges for share based compensation, deferred taxes, depreciation, amortization and bad debt expense, offset by payments made for accrued liabilities and an increase in accounts receivable.

Cash used in investing activities was $59.4 million and $50.0 million for the nine months ended September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007, net cash in the amount of $28.0 million was used for acquisitions compared to $31.0 million in 2006. Purchases of property and equipment were $28.8 million for the nine months ended September 30, 2007 compared to $19.5 million in the same period of 2006.

Cash used in financing activities was $28.7 million for the nine months ended September 30, 2007, compared to $11.2 million for the nine months ended September 30, 2006. For the nine months ended September 30, 2007, proceeds from existing credit facilities were $50.1 million compared to $42.9 million in 2006. Repayment of debt was $83.2 million for the nine months ended September 30, 2007 and $54.0 million in the same period of 2006.

In 2005, the Company executed a $225 million revolving credit agreement, with a bank syndication (the “Credit Agreement”). The Credit Agreement includes a $10 million sub-facility for the issuance of letters of credit and up to a $5 million swing loan facility. The credit facility maturity date is September 28, 2010. The Credit Agreement is collateralized by the stock of the Company’s subsidiaries.

At September 30, 2007, the Company had available lines of credit of $90 million and the Company was in compliance with the financial covenants of its loan agreements.

First Advantage filed a Registration Statement with the Securities and Exchange Commission for the issuance of up to 5,000,000 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 January 9, 2006. A total of 1,338,631 shares were issued for acquisitions as of September 30, 2007.

First Advantage filed a Registration Statement with the Securities and Exchange Commission for the issuance of up to 2,000,000 shares of our Class A common stock, par value $.001 per share, from time to time for general corporate purposes. The Registration Statement was declared effective on January 3, 2005. No shares have been issued as of September 30, 2007.

First Advantage seeks 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.

 

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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 September 30, 2007, over the periods in which they are expected to be paid.

 

In thousands    2007    2008    2009    2010    2011    Thereafter    Total

Advertising commitments

   $ 256    $ —      $ —      $ —      $ —      $ —      $ 256

Minimum contract purchase commitments

     864      2,200      670      348      —        —        4,082

Operating leases

     6,534      16,600      13,203      9,533      7,427      22,577      75,874

Debt and capital leases

     3,595      18,001      7,944      141,276      —        —        170,816

Interest payments related to debt (1)

     2,783      11,288      10,401      7,486      —        —        31,958
                                                

Total

   $ 14,032    $ 48,089    $ 32,218    $ 158,643    $ 7,427    $ 22,577    $ 282,986
                                                

(1) Estimated interest payments are calculated assuming current interest rates over minimum maturity periods specified in debt agreements.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the Company’s risk since filing its Form 10-K for the year ended December 31, 2006.

 

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Item 4. Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, have concluded that, as of the end of the fiscal quarter covered by this report on Form 10-Q, the Company’s disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports filed or submitted under such Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer to permit timely decisions regarding disclosures.

There was no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

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

The Company and two subsidiaries are defendants in three class action lawsuits that are pending in state court in California. The plaintiffs in each of the cases allege that the Company and its subsidiaries, directly and through their agents, violated the California Consumer Credit Reporting Agencies Act and Investigative Consumer Reporting Agency Act (“ICRA”) by failing to use reasonable procedures to ensure the maximum possible accuracy when issuing tenant reports and to comply with ICRA. The actions seek injunctive relief, an accounting, restitution, statutory damages, interest, punitive damages and attorneys’ fees and costs. The Company does not believe that the ultimate resolution of these actions will have a material adverse affect on its financial condition, results of operations or cash flows.

 

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the Company’s Form 10-K for Fiscal Year Ending December 31, 2006.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Submission of Matters to a Vote of Security Holders

None.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

See Exhibit Index.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FIRST ADVANTAGE CORPORATION

(Registrant)

 

Date: October 31, 2007     By:  

/s/ ANAND NALLATHAMBI

     

Anand Nallathambi

     

Chief Executive Officer

   
Date: October 31, 2007     By:  

/s/ JOHN LAMSON

     

John Lamson

     

Chief Financial Officer


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EXHIBIT INDEX

 

Exhibit No.   

Description

10.1    Training Grant Services Agreement among The First American Corporation and First Advantage Tax Consulting Services, Inc., dated as April 28, 2007.
31.1    Certification pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certifications pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certifications pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1    Dealer Track Holdings, Inc. Underwriting Agreement, dated as October 18, 2007.
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