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First Advantage 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
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 June 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 11,338,530 shares of outstanding Class A Common Stock of the registrant as of July 26, 2007.

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

 



Table of Contents

INDEX

 

Part I. FINANCIAL INFORMATION   

Item 1.

   Financial Statements    1
   Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006 (unaudited)    2
   Consolidated Statements of Income and Comprehensive Income for the Three and Six Months Ended June 30, 2007 and June 30, 2006 (unaudited)    3
   Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2007 (unaudited)    4
   Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and June 30, 2006 (unaudited)    5
   Notes to Consolidated Financial Statements (unaudited)    6

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    17

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    31

Item 4.

   Controls and Procedures    31

Part II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings    32

Item 1A.

   Risk Factors    32

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    32

Item 3.

   Defaults Upon Senior Securities    32

Item 4.

   Submission of Matters to a Vote of Security Holders    32

Item 5.

   Other Information    33

Item 6.

   Exhibits    33


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements –

First Advantage Corporation

Consolidated Financial Statements

For the Three and Six Months Ended

June 30, 2007 and 2006


Table of Contents

First Advantage Corporation

Consolidated Balance Sheets (Unaudited)

 

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

Assets

     

Current assets:

     

Cash and cash equivalents

   $ 29,824    $ 31,941

Accounts receivable (less allowance for doubtful accounts of $7,296 and $6,487 in 2007 and 2006, respectively)

     146,788      138,563

Prepaid expenses and other current assets

     11,137      10,182

Income tax receivable

     2,292      6,155

Deferred income tax asset

     13,651      12,051
             

Total current assets

     203,692      198,892

Property and equipment, net

     78,341      68,931

Goodwill

     689,680      650,124

Customer lists, net

     69,784      74,419

Other intangible assets, net

     25,661      28,324

Database development costs, net

     10,948      10,640

Investment in equity investee

     56,451      55,001

Other assets

     4,075      3,592
             

Total assets

   $ 1,138,632    $ 1,089,923
             

Liabilities and Stockholders’ Equity

     

Current liabilities:

     

Accounts payable

   $ 42,455    $ 46,281

Accrued compensation

     32,771      35,299

Accrued liabilities

     14,428      21,286

Deferred income

     7,518      8,462

Due to affiliates

     5,112      4,776

Current portion of long-term debt and capital leases

     17,398      20,794
             

Total current liabilities

     119,682      136,898

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

     177,495      179,531

Deferred income tax liability

     53,478      44,802

Other liabilities

     5,455      5,338
             

Total liabilities

     356,110      366,569
             

Minority interest

     49,987      48,413

Commitments and contingencies

     

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; 11,290 and 10,452 shares issued and outstanding as of June 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 June 30, 2007 and December 31, 2006

     48      48

Additional paid-in capital

     482,873      455,657

Retained earnings

     247,228      218,566

Accumulated other comprehensive income

     2,375      660
             

Total stockholders’ equity

     732,535      674,941
             

Total liabilities and stockholders’ equity

   $ 1,138,632    $ 1,089,923
             

The accompanying note 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
June 30,
    For the Six Months Ended
June 30,
 
     2007     2006     2007     2006  

Service revenue

   $ 207,353     $ 191,740     $ 409,240     $ 372,959  

Reimbursed government fee revenue

     13,618       13,383       27,819       26,512  
                                

Total revenue

     220,971       205,123       437,059       399,471  
                                

Cost of service revenue

     60,830       59,153       122,018       115,742  

Government fees paid

     13,618       13,383       27,819       26,512  
                                

Total cost of service

     74,448       72,536       149,837       142,254  
                                

Gross margin

     146,523       132,587       287,222       257,217  
                                

Salaries and benefits

     65,850       58,746       139,820       117,380  

Facilities and telecommuncations

     8,117       7,529       16,142       14,580  

Other operating expenses

     27,541       23,500       53,790       46,051  

Depreciation and amortization

     10,737       9,518       21,182       18,728  
                                

Total operating expenses

     112,245       99,293       230,934       196,739  
                                

Income from operations

     34,278       33,294       56,288       60,478  
                                

Other (expense) income:

        

Interest expense

     (3,097 )     (3,250 )     (6,323 )     (6,491 )

Interest income

     311       162       652       302  
                                

Total other (expense), net

     (2,786 )     (3,088 )     (5,671 )     (6,189 )

Equity in earnings of investee

     670       551       1,450       660  
                                

Income before income taxes and minority interest

     32,162       30,757       52,067       54,949  

Provision for income taxes

     13,346       13,387       21,448       23,887  
                                

Income before minority interest

     18,816       17,370       30,619       31,062  

Minority interest

     469       733       1,029       1,680  
                                

Net income

     18,347       16,637       29,590       29,382  

Other comprehensive income, net of tax:

        

Foreign currency translation adjustments

     1,321       84       1,715       65  
                                

Comprehensive income

   $ 19,668     $ 16,721     $ 31,305     $ 29,447  
                                

Per share amounts:

        

Basic

   $ 0.31     $ 0.29     $ 0.50     $ 0.52  
                                

Diluted

   $ 0.31     $ 0.29     $ 0.50     $ 0.51  
                                

Weighted-average common shares outstanding:

        

Basic

     58,954       57,730       58,665       56,868  

Diluted

     59,445       57,929       59,130       58,019  

The accompanying note 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 Six Months Ended June 30, 2007 (Unaudited)

 

(in thousands)

 

   Common
Stock Shares
   Common
Stock Amount
   Additional
Paid-in Capital
   Accumulated
Other
Comprehensive
Income
   Retained
Earnings
    Total  

Balance at December 31, 2006

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

Cumulative effect of the adoption of FIN 48

   —        —        —        —        (928 )     (928 )

Net income

   —        —        —        —        29,590       29,590  

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

   394      1      9,706      —        —         9,707  

Tax benefit related to stock options

   —        —        231      —        —         231  

Share based compensation

   —        —        6,367      —        —         6,367  

Other comprehensive income

   —        —        —        1,715      —         1,715  
                                          

Balance at June 30, 2007

   59,017    $ 59    $ 482,873    $ 2,375    $ 247,228     $ 732,535  
                                          

The accompanying note 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 Six Months Ended June 30, 2007 and 2006 (Unaudited)

 

(in thousands)    For the Six Months Ended
June 30,
 
     2007     2006  

Cash flows from operating activities:

    

Net income

   $ 29,590     $ 29,382  

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

    

Depreciation and amortization

     21,182       18,728  

Bad debt expense

     3,543       1,708  

Share based compensation

     8,903       5,962  

Minority interest in net income

     1,029       1,680  

Equity in earnings of investee

     (1,450 )     (660 )

Deferred income tax

     6,050       (804 )

Change in operating assets and liabilities, net of acquisitions:

    

Accounts receivable

     (10,209 )     (24,687 )

Prepaid expenses and other current assets

     (1,076 )     (2,284 )

Other assets

     (687 )     2,762  

Accounts payable

     (4,015 )     (4,050 )

Accrued liabilities

     (6,577 )     (4,733 )

Deferred income

     (1,375 )     (480 )

Due to affiliates

     313       7,122  

Net change in income tax accounts

     3,542       (1,816 )

Accrued compensation and other liabilities

     2,391       (164 )
                

Net cash provided by operating activities

     51,154       27,666  
                

Cash flows from investing activities:

    

Database development costs

     (1,835 )     (1,958 )

Purchases of property and equipment

     (20,118 )     (12,962 )

Cash paid for acquisitions

     (27,183 )     (25,713 )

Cash balance of companies acquired

     120       2,962  
                

Net cash used in investing activities

     (49,016 )     (37,671 )
                

Cash flows from financing activities:

    

Proceeds from long-term debt

     42,817       32,777  

Repayment of long-term debt

     (51,707 )     (31,458 )

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

     3,067       1,365  

Distribution to minority interest shareholders

     (2,120 )     (1,948 )
                

Net cash (used in) provided by financing activities

     (4,158 )     736  
                

Effect of exchange rates on cash

     (97 )     7  

Decrease in cash and cash equivalents

     (2,117 )     (9,262 )

Cash and cash equivalents at beginning of period

     31,941       28,380  
                

Cash and cash equivalents at end of period

   $ 29,824     $ 19,118  
                

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 Six Months Ended June 30, 2007 and 2006 (Unaudited)

 

     For the Six Months Ended
June 30,
     2007    2006

Supplemental disclosures of cash flow information:

     

Cash paid for interest

   $ 6,512    $ 5,198
             

Cash paid for income taxes

   $ 12,363    $ 23,187
             

Non-cash investing and financing activities:

     

Class A shares issued in connection with prior year acquisitions

   $ 10,912    $ 12,103
             

Notes issued in connection with acquisitions

   $ 3,432    $ 5,600
             

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

June 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 June 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 six months ended June 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 six months ending June 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 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

June 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 six months ended June 30, 2007 include results for the acquired entity from the date of acquisition.

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

As of June 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 six months ended June 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.

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.

 

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 $35.6 related to earnout provisions from prior year acquisitions and an additional purchase of a portion of the minority interest in LeadClick Media Inc.

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

 

(in thousands)     

Cash

   $ 27,183

Notes payable

     3,432

Stock (378 Class A shares)

     9,466
      

Purchase price

   $ 40,081
      

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 capital contribution in LeadClick Media, Inc.

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

June 30, 2007 and 2006 (Unaudited)

 

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

 

(in thousands)     

Goodwill

   $ 36,895

Identifiable intangible assets

     1,046

Net assets acquired

     2,140
      
   $ 40,081
      

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

 

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

Lender Services

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

Data Services

     218,248      11,495      199      229,942

Dealer Services

     55,995      —        —        55,995

Employer Services

     224,012      17,243      2,457      243,712

Multifamily Services

     48,100      1,000      —        49,100

Investigative and Litigation Support Services

     56,969      7,157      5      64,131
                           

Consolidated

   $ 650,124    $ 36,895    $ 2,661    $ 689,680
                           

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 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 six months ended June 30, 2007.

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

June 30, 2007 and 2006 (Unaudited)

 

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

 

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

Goodwill

   $ 689,680     $ 650,124  
                

Customer lists

   $ 97,854     $ 96,917  

Less accumulated amortization

     (28,070 )     (22,498 )
                

Customer lists, net

   $ 69,784     $ 74,419  
                

Other intangible assets:

    

Noncompete agreements

   $ 14,720     $ 15,084  

Trade names

     21,615       21,607  
                
     36,335       36,691  

Less accumulated amortization

     (10,674 )     (8,367 )
                

Other intangible assets, net

   $ 25,661     $ 28,324  
                

Amortization of customer lists and other intangible assets totaled approximately $8.4 million and $7.8 million for the six months ended June 30, 2007 and 2006, respectively. Estimated amortization expense relating to intangible asset balances as of June 30, 2007, is expected to be as follows over the next five years:

 

(in thousands)     

2007

   $ 8,241

2008

     16,000

2009

     15,080

2010

     14,128

2011

     11,201

Thereafter

     30,795
      
   $ 95,445
      

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

June 30, 2007 and 2006 (Unaudited)

 

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

 

(in thousands)

 

   Other
Intangible
Assets
    Customer
Lists
 

Balance, at December 31, 2006

   $ 28,324     $ 74,419  

Acquisitions

     174       872  

Adjustments

     27       47  

Amortization

     (2,864 )     (5,554 )
                

Balance, at June 30, 2007

   $ 25,661     $ 69,784  
                

 

5. Debt

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

 

(in thousands, except percentages)     

Acquisition notes:

  

Weighted average interest rate of 6.72% with maturities through 2010

   $ 40,064

Bank notes:

  

$225 million Secured Credit Facility, interest at 30-day LIBOR plus 1.25% (6.57% and 5.99% at June 30, 2007 and 2006, respectively), matures September 2010

     154,000

Capital leases and other debt:

  

Various interest rates with maturities through 2009

     829
      

Total long-term debt and capital leases

     194,893

Less current portion of long-term debt and capital leases

     17,398
      

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

   $ 177,495
      

At June 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

June 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
June 30,
   Six Months Ended
June 30,
     2007    2006    2007    2006

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

   $ 18,347    $ 16,637    $ 29,590    $ 29,382

Denominator:

           

Weighted-average shares for basic earnings per share

     58,954      57,730      58,665      56,868

Effect of restricted stock

     124      23      123      26

Effect of contingent shares related to DealerTrack

     —        —        —        739

Effect of dilutive securities - employee stock options and warrants

     367      176      342      386
                           

Denominator for diluted earnings per share

     59,445      57,929      59,130      58,019
                           

Earnings per share:

           

Basic

   $ 0.31    $ 0.29    $ 0.50    $ 0.52

Diluted

   $ 0.31    $ 0.29    $ 0.50    $ 0.51

For the three months ended June 30, 2007 and 2006, options totaling 2,105,586 and 1,581,662, respectively, were excluded from the weighted average diluted shares outstanding, as they were antidilutive. For the six months ended June 30, 2007 and 2006, options totaling 1,901,776 and 1,329,719, respectively, were excluded from the weighted average diluted shares outstanding, as they were antidilutive.

 

7. Share-Based Compensation

At June 30, 2007, there are 5,762,425 stock options to purchase shares of the Company’s common stock, 356,660 restricted stock awards, and 71,483 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 June 30, 2007 and 2006 was $2.8 million and $3.1 million, respectively. Share-based compensation for the six months ending June 30, 2007 and 2006 was $8.9 million and $6.0 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 June 30, 2007. The weighted average remaining contractual life in years for the warrants outstanding is 3.01 and the weighted average exercise price is $14.01.

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

June 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

   727     $ 26.49

Options exercised

   (149 )   $ 16.52

Options canceled

   (100 )   $ 23.37
            

Options outstanding at June 30, 2007

   4,679     $ 22.71
            

Options exercisable, end of the quarter

   2,854     $ 21.15
            

The following table summarizes information about stock options outstanding at June 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

  13   4.1   $10.34   13   $10.34

$12.51 - $ 25.00

  3,368   6.0   $20.87   2,590   $20.28

$25.01 - $ 50.00

  1,287   8.8   $27.07   240   $27.86

$50.01 - $242.25

  11   3.0   $89.20   11   $89.20
             
  4,679       2,854  
             

 

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 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 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.

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

June 30, 2007 and 2006 (Unaudited)

 

As of June 30, 2007, the Company has a $0.9 million total liability recorded for unrecognized tax benefits as well as a $0.7 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 $0.9 million. The majority of the unrecognized tax benefits and associated interest and penalties relates to foreign 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 $1.3 million and $1.2 million of inter-segment sales for the three months ended June 30, 2007 and 2006, respectively. Revenue for the Data Services segment includes $2.5 million and $2.4 million of inter-segment sales for the six months ended June 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 and recruiting services. Tax incentive 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. The professional employer organization provides companies with comprehensive outsourced management of payroll and human resource management. Revenue for the Employer Services segment includes $0.2

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

June 30, 2007 and 2006 (Unaudited)

 

million and $0.2 million of inter-segment sales for each of the three month periods ended June 30, 2007 and 2006, respectively. Revenue for the Employer Services segment includes $0.6 million and $0.5 million of inter-segment sales for each of the six month periods ended June 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 June 30, 2007 and 2006. Revenue for the Multifamily Services segment includes $0.3 million and $0.2 million of inter-segment sales for each of the six month periods ended June 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.

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 $9.8 million and $4.4 million for the three months ended June 30, 2007 and 2006, respectively, and $18.4 million and $7.8 million for the six months ended June 30, 2007 and 2006, respectively. International operations included in Investigative and Litigation Support Services segment include service revenue of $6.0 million and $6.1 million for the three and six months ended June 30, 2007, respectively.

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

June 30, 2007 and 2006 (Unaudited)

 

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

 

(in thousands)   

Service

Revenue

   

Depreciation

and Amortization

  

Income (Loss)

From Operations

    Assets

Three Months Ended June 30, 2007

         

Lender Services

   $ 42,833     $ 1,686    $ 11,686     $ 82,424

Data Services

     38,694       2,929      10,995       325,585

Dealer Services

     29,877       706      3,576       115,945

Employer Services

     57,823       2,671      6,799       366,150

Multifamily Services

     19,676       1,187      5,866       84,618

Investigative and Litigation Support Services

     18,940       871      4,430       99,533

Corporate and Eliminations

     (490 )     687      (9,074 )     64,377
                             

Consolidated

   $ 207,353     $ 10,737    $ 34,278     $ 1,138,632
                             

Three Months Ended June 30, 2006

         

Lender Services

   $ 45,649     $ 1,705    $ 14,385     $ 81,815

Data Services

     35,278       2,992      9,267       310,769

Dealer Services

     31,168       699      4,973       120,199

Employer Services

     46,840       1,832      5,663       330,749

Multifamily Services

     18,759       1,100      4,886       78,907

Investigative and Litigation Support Services

     15,069       765      3,087       85,166

Corporate and Eliminations

     (1,023 )     425      (8,967 )     35,938
                             

Consolidated

   $ 191,740     $ 9,518    $ 33,294     $ 1,043,543
                             

Six Months Ended June 30, 2007

         

Lender Services

   $ 88,470     $ 3,334    $ 24,342     $ 82,424

Data Services

     78,736       5,779      22,716       325,585

Dealer Services

     59,644       1,432      7,088       115,945

Employer Services

     112,521       5,139      11,910       366,150

Multifamily Services

     37,281       2,357      10,180       84,618

Investigative and Litigation Support Services

     34,238       1,797      6,616       99,533

Corporate and Eliminations

     (1,650 )     1,344      (26,564 )     64,377
                             

Consolidated

   $ 409,240     $ 21,182    $ 56,288     $ 1,138,632
                             

Six Months Ended June 30, 2006

         

Lender Services

   $ 90,951     $ 3,463    $ 27,866     $ 81,815

Data Services

     71,159       6,002      18,902       310,769

Dealer Services

     60,797       1,387      8,901       120,199

Employer Services

     86,502       3,444      8,001       330,749

Multifamily Services

     35,452       2,237      8,090       78,907

Investigative and Litigation Support Services

     30,115       1,516      6,156       85,166

Corporate and Eliminations

     (2,017 )     679      (17,438 )     35,938
                             

Consolidated

   $ 372,959     $ 18,728    $ 60,478     $ 1,043,543
                             

 

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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 six months ended June 30, 2007, First Advantage has acquired one company, which is included in the Employer Services segment.

Operating results for the three and six months ended June 30, 2007 included total service revenue of $207.4 million and $409.2 million, respectively. This represents an increase of 8.1% and 9.7% over the same periods in 2006. The organic growth rate was 4.0% and 4.7% for the three and six months ended June 30, 2007, respectively. Operating income for the three and six months ended June 30, 2007 was $34.3 million and $56.3 million, respectively. Operating income increased $.9 million for the three months ended June 30, 2007 and decreased $4.2 million for the six months ended June 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 six months ended June 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 six months ending June 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.

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.

 

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Table of Contents

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

 

(in thousands, except percentages)                                                

Three Months Ended June 30, 2007

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

Service revenue

  $ 42,833     $ 38,694     $ 29,877     $ 57,823     $ 19,676     $ 18,940     $ (490 )   $ 207,353  

Reimbursed government fee revenue

    —         11,097       —         3,792       —         —         (1,271 )     13,618  
                                                               

Total revenue

    42,833       49,791       29,877       61,615       19,676       18,940       (1,761 )     220,971  

Cost of service revenue

    14,244       10,247       16,110       16,218       1,890       2,548       (427 )     60,830  

Government fees paid

    —         11,097       —         3,792       —         —         (1,271 )     13,618  
                                                               

Total cost of service

    14,244       21,344       16,110       20,010       1,890       2,548       (1,698 )     74,448  

Gross margin

    28,589       28,447       13,767       41,605       17,786       16,392       (63 )     146,523  

Salaries and benefits

    12,459       6,344       3,984       21,352       6,721       7,858       7,132       65,850  

Facilities and telecommunications

    1,870       920       356       2,412       982       577       1,000       8,117  

Other operating expenses

    888       7,259       5,145       8,371       3,030       2,656       192       27,541  

Depreciation and amortization

    1,686       2,929       706       2,671       1,187       871       687       10,737  
                                                               

Income (loss) from operations

  $ 11,686     $ 10,995     $ 3,576     $ 6,799     $ 5,866     $ 4,430     $ (9,074 )   $ 34,278  
                                                               

Operating margin percentage

    27.3 %     28.4 %     12.0 %     11.8 %     29.8 %     23.4 %     N/A       16.5 %

Three Months Ended June 30, 2006

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

Service revenue

  $ 45,649     $ 35,278     $ 31,168     $ 46,840     $ 18,759     $ 15,069     $ (1,023 )   $ 191,740  

Reimbursed government fee revenue

    —         11,094       —         3,102       —         —         (813 )     13,383  
                                                               

Total revenue

    45,649       46,372       31,168       49,942       18,759       15,069       (1,836 )     205,123  

Cost of service revenue

    15,049       10,633       16,214       13,534       1,813       2,901       (991 )     59,153  

Government fees paid

    —         11,094       —         3,102       —         —         (813 )     13,383  
                                                               

Total cost of service

    15,049       21,727       16,214       16,636       1,813       2,901       (1,804 )     72,536  

Gross margin

    30,600       24,645       14,954       33,306       16,946       12,168       (32 )     132,587  

Salaries and benefits

    12,438       5,937       4,140       16,880       6,780       5,894       6,677       58,746  

Facilities and telecommunications

    1,728       742       401       2,149       907       423       1,179       7,529  

Other operating expenses

    344       5,707       4,741       6,782       3,273       1,999       654       23,500  

Depreciation and amortization

    1,705       2,992       699       1,832       1,100       765       425       9,518  
                                                               

Income (loss) from operations

  $ 14,385     $ 9,267     $ 4,973     $ 5,663     $ 4,886     $ 3,087     $ (8,967 )   $ 33,294  
                                                               

Operating margin percentage

    31.5 %     26.3 %     16.0 %     12.1 %     26.0 %     20.5 %     N/A       17.4 %

Six Months Ended June 30, 2007

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

Service revenue

  $ 88,470     $ 78,736     $ 59,644     $ 112,521     $ 37,281     $ 34,238     $ (1,650 )   $ 409,240  

Reimbursed government fee revenue

    —         23,285       —         6,705       —         —         (2,171 )     27,819  
                                                               

Total revenue

    88,470       102,021       59,644       119,226       37,281       34,238       (3,821 )     437,059  

Cost of service revenue

    29,847       21,318       31,664       32,031       3,444       5,025       (1,311 )     122,018  

Government fees paid

    —         23,285         6,705       —         —         (2,171 )     27,819  
                                                               

Total cost of service

    29,847       44,603       31,664       38,736       3,444       5,025       (3,482 )     149,837  

Gross margin

    58,623       57,418       27,980       80,490       33,837       29,213       (339 )     287,222  

Salaries and benefits

    25,390       12,738       8,193       42,428       13,634       14,745       22,692       139,820  

Facilities and telecommunications

    3,816       1,752       790       4,755       1,917       1,112       2,000       16,142  

Other operating expenses

    1,741       14,433       10,477       16,258       5,749       4,943       189       53,790  

Depreciation and amortization

    3,334       5,779       1,432       5,139       2,357       1,797       1,344       21,182  
                                                               

Income (loss) from operations

  $ 24,342     $ 22,716     $ 7,088     $ 11,910     $ 10,180     $ 6,616     $ (26,564 )   $ 56,288  
                                                               

Operating margin percentage

    27.5 %     28.9 %     11.9 %     10.6 %     27.3 %     19.3 %     N/A       13.8 %

 

Six Months Ended June 30, 2006

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

Service revenue

  $ 90,951     $ 71,159     $ 60,797     $ 86,502     $ 35,452     $ 30,115     $ (2,017 )   $ 372,959  

Reimbursed government fee revenue

    —         22,250       —         5,782       —         —         (1,520 )     26,512  
                                                               

Total revenue

    90,951       93,409       60,797       92,284       35,452       30,115       (3,537 )     399,471  

Cost of service revenue

    30,100       21,307       31,940       24,933       3,380       5,976       (1,894 )     115,742  

Government fees paid

    —         22,250       —         5,782       —         —         (1,520 )     26,512  
                                                               

Total cost of service

    30,100       43,557       31,940       30,715       3,380       5,976       (3,414 )     142,254  

Gross margin

    60,851       49,852       28,857       61,569       32,072       24,139       (123 )     257,217  

Salaries and benefits

    25,134       11,703       8,514       32,871       13,654       11,780       13,724       117,380  

Facilities and telecommunications

    3,581       1,455       780       3,987       1,804       846       2,127       14,580  

Other operating expenses

    807       11,790       9,275       13,266       6,287       3,841       785       46,051  

Depreciation and amortization

    3,463       6,002       1,387       3,444       2,237       1,516       679       18,728  
                                                               

Income (loss) from operations

  $ 27,866     $ 18,902     $ 8,901     $ 8,001     $ 8,090     $ 6,156     $ (17,438 )   $ 60,478  
                                                               

Operating margin percentage

    30.6 %     26.6 %     14.6 %     9.2 %     22.8 %     20.4 %     N/A       16.2 %

Lender Services Segment

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

Service revenue was $42.8 million for the three months ended June 30, 2007, a decrease of $2.8 million compared to service revenue of $45.6 million for the three months ended June 30, 2006. A decrease in transactions, consistent with the decline in the mortgage lending industry, resulted in an overall decrease in service revenue despite revenue growth from new products and services.

Cost of service revenue was $14.2 million for the three months ended June 30, 2007, a decrease of $.8 million compared to cost of service revenue of $15.0 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 offset in part by an increase in credit data costs.

Salaries and benefits were flat when comparing the three months ended June 30, 2007 and June 30, 2006. Salaries and benefits were 29.1% of service revenue in the second quarter of 2007 compared to 27.2% during the same period in 2006.

 

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Facilities and telecommunication expenses were flat compared to the same period in 2006. Facilities and telecommunication expenses were 4.4% of service revenue in the second quarter of 2007 compared to 3.8% in the second quarter of 2006.

Other operating expenses increased by $.5 million. Other operating expenses were 2.1% of service revenue in the second quarter of 2007 compared to .8% for the same period of 2006. The change in 2007 is primarily due to an increase in bad debt expense and increased costs related to foreign operations, partially offset by an increase in the amounts allocated to other segments for shared services and product development initiatives.

Depreciation and amortization expense was flat compared to the same period in 2006. Depreciation and amortization was 3.9% of service revenue during the second quarter of 2007 compared to 3.7% in the same period in 2006.

Income from operations was $11.7 million for the three months ended June 2007 compared to $14.4 million in the same period of 2006. The operating margin percentage decreased from 31.5% to 27.3% primarily due to impact of the decrease in service revenue, cost of increased foreign operations and bad debt expense.

Data Services Segment

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

Total service revenue was $38.7 million for the three months ended June 30, 2007, an increase of $3.4 million compared to service revenue of $35.3 million in the same period of 2006. This segment has experienced 9.7% organic growth primarily due to the expansion of the existing customer base in the membership and direct to consumer businesses.

Cost of service revenue was $10.2 million for the three months ended June 30, 2007, a decrease of $.4 million compared to cost of service revenue of $10.6 million in the same period of 2006. The decrease is primarily due to a change in the revenue mix of the businesses in the second quarter of 2007 compared to the same period in 2006.

Salaries and benefits increased $.4 million compared to the second quarter of 2006. Salaries and benefits were approximately 16.4% of service revenue in the second quarter of 2007 and 2006. The increase is primarily due to increased staffing levels needed to support the growth of the businesses.

Facilities and telecommunication expenses for the second quarter of 2007 were comparable to the same period in 2006. Facilities and telecommunication expenses were approximately 2.4% of service revenue in the second quarter of 2007 and 2006.

Other operating expenses increased by $1.6 million. Other operating expenses were 18.8% of service revenue in the second quarter of 2007 and 16.2% in the second 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 increased from 26.3% to 28.4% in comparing the second quarter of 2006 to the second quarter of 2007. The increase in the operating margin is primarily due to a change in the revenue mix of the businesses in the second quarter of 2007 compared to the same period in 2006.

Income from operations was $11.0 million for the second quarter of 2007, an increase of $1.7 million compared to $9.3 million in the second quarter of 2006.

 

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Dealer Services Segment

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

Service revenue was $29.9 million for the three months ended June 30, 2007, a decrease of $1.3 million compared to service revenue of $31.2 million for the three months ended June 30, 2006. An increase in transactions accounted for an 8.5% increase in credit report related revenue; however, a larger decrease in revenue in the vehicle lead generation business resulted in an overall decrease in service revenue.

Cost of service revenue was $16.1 million for the three months ended June 30, 2007, a decrease of $.1 million compared to cost of service revenue of $16.2 million in the same period of 2006. The decrease in cost of service revenue was driven by lower cost of service revenue on the lower margin vehicle lead generation business which was offset by an increase in credit reporting transactions.

Salaries and benefits decreased by $.2 million. Salaries and benefits were 13.3% of service revenue in the second quarter of 2007 and 2006. Salaries and benefits expense decreased due to operational efficiencies, which included relocation and consolidation of certain functions of the vehicle lead generation business.

Facilities and telecommunication expenses were flat when comparing the second quarter of 2007 to the second quarter of 2006. Facilities and telecommunication expenses were 1.2% of service revenue in the second quarter of 2007 compared to 1.3% in the second quarter of 2006.

Other operating expenses increased by $.4 million. Other operating expenses were 17.2% of service revenue in the second quarter of 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 vehicle lead generation business.

Depreciation and amortization were flat when comparing the second quarter of 2007 to the second quarter of 2006. Depreciation and amortization were 2.4% of service revenue during the second quarter of 2007 compared to 2.2% in the same period in 2006.

Income from operations was $3.6 million for the three months ended June 30, 2007 compared to $5.0 million in the same period in 2006. The operating margin percentage decreased from 16.0% to 12.0% primarily due to the impact of the increased allocations for shared services and the decrease in the revenue of the vehicle lead generation subsidiary.

Employer Services Segment

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

Total service revenue was $57.8 million for the three months ended June 30, 2007, an increase of $11.0 million compared to service revenue of $46.8 million in the same period of 2006. The increase was driven by the addition of $7.6 million of revenue from acquisitions and $3.7 million of revenue from existing business, primarily in the tax service and background screening businesses.

Salaries and benefits increased by $4.5 million. Salaries and benefits were 36.9% of service revenue in the second quarter of 2007 compared to 36.0% in the same period of 2006. The number of employees has increased due to growth in foreign operations and the growth of the existing businesses in the segment in comparison to the same period in 2006.

Facilities and telecommunication expenses increased by $.3 million. Facilities and telecommunication expenses were 4.2% of service revenue in the second quarter of 2007 and 4.6% in the second quarter of 2006.

 

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Other operating expenses increased by $1.6 million. Other operating expenses were 14.5% of service revenue in the second quarter of 2007 and 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 $.8 million primarily due to the addition of intangible assets related to the acquisitions and the rollout of new software projects.

The operating margin percentage decreased from 12.1% to 11.8% primarily due to the change in the mix of the revenue products in comparing the same quarter of 2007 to 2006.

Income from operations was $6.8 million for the three months ended June 30, 2007, an increase of $1.1 million compared to income from operations of $5.7 million in the same period of 2006. Income from operations increased primarily due to the growth in the tax service and background screening businesses.

Multifamily Services Segment

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

Total service revenue was $19.7 million for the three months ended June 30, 2007, an increase of $.9 million compared to service revenue of $18.8 million in the same period of 2006. The 4.9% organic growth is driven by expanded market share and an increase in products and services.

Salaries and benefits costs were flat compared to the same period in 2006. Salaries and benefits were 34.2% of service revenue for the second quarter of 2007 compared to 36.1% 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 5.0% of service revenue in the second quarter of 2007 and 4.8% in the second quarter of 2006.

Other operating expenses decreased $.2 million compared to the same period in 2006. Other operating expenses were 15.4% of service revenue in the second quarter of 2007 compared to 17.4% in the same period of 2006.

Depreciation and amortization is comparable to the same period of 2006. Depreciation and amortization was 6.0% of service revenue in the second quarter of 2007 compared to 5.9% in the same period of 2006.

The operating margin increased from 26.0% to 29.8% due to increased revenue growth with a larger variety of products delivered to the customers while containing infrastructure costs.

Income from operations was $5.9 million in the second quarter of 2007 compared to income from operations of $4.9 million in the same period of 2006.

Investigative and Litigation Support Services Segment

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

Total service revenue was $18.9 million for the three months ended June 30, 2007, an increase of $3.8 million compared to service revenue of $15.1 million in the same period of 2006. The organic growth of $3.4 million is predominately driven by the Litigation Support Services businesses.

 

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Salaries and benefits increased by $2.0 million. Salaries and benefits were 41.5% of service revenue in the second quarter of 2007 compared to 39.1% in the same period of 2006. The increase is mainly due to the increase of employees needed to support the revenue growth in the Litigation Support Services businesses.

Facilities and telecommunication expenses increased by $.2 million compared to the same period in 2006. Facilities and telecommunication expenses were 3.0% of service revenue in the second quarter of 2007 and 2.8% in the second quarter of 2006.

Other operating expenses increased by $.7 million. Other operating expenses were 14.0% of service revenue in the second quarter of 2007 and 13.3% for the same period of 2006. The increase is related to geographic expansion and new business development efforts in this segment.

Depreciation and amortization increased by $.1 million. The increase is mainly due to the roll out of purchased and developed software.

The operating margin percentage increased from 20.5% to 23.4%. The increase is due to an increase in revenues in the Litigation Support Services businesses with higher margin services.

Income from operations was $4.4 million for the second quarter of 2007 compared to $3.1 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 June 30, 2007 Compared to Three Months Ended June 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 $9.1 million in the second quarter of 2007 compared to expenses of $9.0 million in the same period of 2006. Corporate expenses were 4.4% of consolidated service revenues in 2007 compared to 4.7% in 2006.

Consolidated Results

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

Consolidated service revenue for the three months ended June 30, 2007 was $207.4 million, an increase of $15.7 million compared to service revenue of $191.7 million in the same period in 2006. Acquisitions accounted for $8.0 million of the increase while $7.6 million was organic growth.

Salaries and benefits increased $7.1 million in comparing the second quarter of 2007 to the second quarter of 2006. Salaries and benefits expense were 31.8% of service revenue for the three months ended June 30, 2007 and 30.6% for the same period in 2006. The increase is primarily related to additional employees added for company growth.

Facilities and telecommunication expense increased by $.6 million compared to the same period in 2006. Facilities and telecommunication expenses were 3.9% of service revenue in the second quarter of 2007 and 2006.

Other operating expenses increased by $4.0 million compared to the same period in 2006. Other operating expenses were 13.3% of service revenue for the three months ended June 30, 2007 and 12.3% compared to the same period for 2006. The increase is primarily related to marketing expense, bad debt expense, temporary labor, and professional fees.

 

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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 16.5% for the three months ended June 30, 2007, compared to 17.4% for the same period in 2006. The decrease in the operating margin is related to the mix of business in comparing the second quarter of 2007 to the second quarter of 2006, driven primarily by the decrease in the Lender Services segment which is affected by the decline in the mortgage lending industry.

Income from operations was $34.3 million for the three months ended June 30, 2007 compared to $33.3 million for the same period in 2006. The increase of $1.0 million is comprised of an increase in operating income of $1.7 million in Data Services, $1.1 million in Employer Services, $1.0 million at Multifamily Services and $1.3 million in Investigative and Litigation Support Services offset by decreases in operating income of $2.7 million in Lender Services and $1.4 million in Dealer Services.

Lender Services Segment

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

Service revenue was $88.5 million for the six months ended June 30, 2007, a decrease of $2.5 million compared to service revenue of $91.0 million in the same period of 2006. A decrease in transactions in the second quarter of 2007, consistent with the decline in the mortgage lending industry, resulted in an overall decrease in service revenue despite an increase in revenue from new products and services.

Cost of service revenue was $29.8 million for the six months ended June 30, 2007, a decrease of $.3 million compared to cost of service revenue of $30.1 million in the same period of 2006. Cost of service revenue was 33.7% of service revenue in 2007 compared to 33.1% in the same period of 2006. A decrease in transaction volumes was offset by an increase in credit data costs.

Salaries and benefits expenses increased $.3 million compared to the same period in 2006. Salaries and benefits were 28.7% of service revenue for the six months ended June 30, 2007 compared to 27.6% in the same period of 2006. The increase is primarily due to customary annual increases.

Facilities and telecommunication expenses increased $.2 million compared to the same period in 2006. Facilities and telecommunication expenses were 4.3% of service revenue in the first half of 2007 and 3.9% in the same period of 2006.

Other operating expenses increased by $.9 million. Other operating expenses were 2.0% of service revenue in the first half of 2007 and .9% in the same period of 2006. The increase is primarily due to an increase in bad debt expense and costs related to increased foreign operations, which is partially offset by an increase in the amounts allocated for shared services and product development initiatives.

Depreciation and amortization decreased by $.1 million compared to the same period in 2006. Depreciation and amortization were 3.8% of service revenue as of June 2007 and 2006.

Income from operations was $24.3 million for the six months ended June 2007 compared to $27.9 million in the same period in 2006. The operating margin percentage decreased from 30.6% to 27.5% primarily due to the impact of the decrease in service revenue and increases in salary and benefit costs, cost of foreign operations and bad debt expense.

 

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Data Services Segment

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

Service revenue was $78.7 million for the six months ended June 30, 2007, an increase of $7.5 million compared to service revenue of $71.2 million in the same period of 2006. Organic growth was 10.6% for the segment. The organic growth is primarily driven by expansion of the existing customer base in the membership and direct to consumer businesses.

Cost of service revenue was $21.3 million for the six months ended June 30, 2007 and 2006. Cost of service decreased from 29.9% on a year-to-date basis in 2006 to 27.1% for the comparable period in 2007. The decrease in cost of service revenue as a percentage of sales revenue is due to the 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 quarter of 2007.

Salaries and benefits increased by $1.0 million. Salaries and benefits were 16.2% of service revenue in the first half of 2007 compared to 16.4% in the same period of 2006.

Facilities and telecommunication expenses increased by $.3 million compared to the same period in 2006. Facilities and telecommunication expenses were 2.2% of service revenue for the six months ended June 30, 2007 and 2.0% in the same period of 2006.

Other operating expenses increased by $2.6 million. Other operating expenses were 18.3% of service revenue in the first half of 2007 and 16.6% in the same period of 2006. The increase in operating expenses is due to an increase in marketing expenses, shared services and professional fees.

Depreciation and amortization decreased by $.2 million due to some of the intangible assets becoming fully amortized since the 2006 comparable period.

Income from operations was $22.7 million for the first half of 2007 compared to $18.9 million in the first half of 2006. The operating margin percentage increased from 26.6% to 28.9%. 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 resulting in lower operating margins.

Dealer Services Segment

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

Service revenue was $59.6 million for the six months ended June 30, 2007, a decrease of $1.2 million compared to service revenue of $60.8 million in the same period of 2006. An increase in transactions accounted for an 8.2% increase in credit report related revenue; however, a larger decrease in revenue in the vehicle lead generation business resulted in an overall decrease in service revenue.

Cost of service revenue was $31.7 million for the six months ended June 30, 2007, a decrease of $.2 million compared to cost of service revenue of $31.9 million in the same period of 2006. An increase in cost of service revenue based on an increase in credit report related transactions was offset by a decrease in cost of service revenue in the lower margin vehicle lead generation business.

Salaries and benefits decreased by $.3 million. Salaries and benefits were 13.7% of service revenue in the first half of 2007 compared to 14.0% in the same period of 2006. Salaries and benefits expense decreased due to operational efficiencies, which included relocation and consolidation of certain functions of the vehicle lead generation business.

Facilities and telecommunication expenses are flat compared to the same period in 2006. Facilities and telecommunication expenses were 1.3% of service revenue in the first half of 2007 and 2006.

 

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Other operating expenses increased by $1.2 million. Other operating expenses were 17.6% of service revenue in the first half of 2007 and 15.3% in the same period of 2006. The increase is due to an increase in amounts allocated for shared services, product development initiatives and bad debt expense.

Depreciation and amortization were flat compared to the same period in 2006.

Income from operations was $7.1 million for the six months ended June 2007 compared to $8.9 million for the same period in 2006. The operating margin decreased from 14.6% to 11.9% primarily due to the impact of the increase in allocations for shared services and the reduced volumes in the vehicle lead generation business.

Employer Services Segment

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

Service revenue was $112.5 million for the six months ended June 30, 2007, an increase of $26.0 million compared to service revenue of $86.5 million in the same period of 2006. The increase was primarily driven by the addition of $18.0 million of revenue from acquisitions and $8.3 million of organic growth.

Salaries and benefits increased by $9.6 million. Salaries and benefits were 37.7% of service revenue in the first half of 2007 compared to 38.0% in the same period of 2006. The increase is primarily related to the foreign acquisitions in 2006 and growth in the segment.

Facilities and telecommunication expenses increased by $.8 million. Facilities and telecommunication expenses were 4.2% of service revenue in the first half of 2007 and 4.6% compared to the same period in 2006. The increase in expense is primarily due to the acquisitions that occurred in 2006 and expanded facilities for organic growth.

Other operating expenses increased by $3.0 million. Other operating expenses were 14.4% of service revenue in the first half of 2007 and 15.3% 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 2006 acquisitions.

Depreciation and amortization increased by $1.7 million primarily due to the addition of intangible assets related to the acquisitions and the rollout of software development initiatives.

Income from operations increased $3.9 million compared to the same period in 2006. The operating margin increased from 9.2% to 10.6%. The increase is due to revenue and earnings growth in most of the product lines slightly offset by a decline in the occupational health service business.

Multifamily Services Segment

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

Service revenue was $37.3 million for the six months ended June 30, 2007, an increase of $1.8 million compared to service revenue of $35.5 million in the same period of 2006. Organic growth was 5.2% for the segment.

Salaries and benefits were flat compared to the same period in 2006. Salaries and benefits were 36.6% of service revenue for the first half of 2007 compared to 38.5% of service revenue in the same period of 2006. The decrease of salaries and benefits as a percentage of revenue is due to increased revenue growth while salary and benefit expense increased due to customary annual increases offset by strategic reductions in employees.

 

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Facilities and telecommunication expenses increased by $.1 million compared to the same period of 2006. Facilities and telecommunication expenses were 5.1% of service revenue for the six months ended June 30, 2007 and 2006.

Other operating expenses decreased by $.5 million and were 15.4% of service revenue in the first half of 2007 compared to 17.7% in the same period of 2006. The decrease is due to reduced costs of leased equipment, software and marketing expense.

Depreciation and amortization increased $.1 million compared to the same period of 2006. Depreciation and amortization was 6.3% of service revenue in the first half of 2007 and 2006.

Income from operations was $10.2 million in the first half of 2007 compared to income from operations of $8.1 million in the same period of 2006. The operating margin increased from 22.8% to 27.3%. The increase in operating income and margins is primarily due to increased revenue while containing and reducing operating costs.

Investigative and Litigation Services Segment

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

Service revenue was $34.2 million for the six months ended June 30, 2007, an increase of $4.1 million compared to service revenue of $30.1 million in the same period of 2006. The increase is predominantly driven by $3.3 million of organic growth and $.8 million of acquisition growth.

Salaries and benefits increased by $3.0 million. Salaries and benefits were 43.1% of service revenue in the first half of 2007 compared to 39.1% in the same period of 2006. The increases are mainly due to the acquisitions and increased incentive compensation and commissions as a result of revenue growth.

Facilities and telecommunication expenses increased by $.3 million. Facilities and telecommunication expenses were 3.2% of service revenue for the six months ended June 30, 2007 and 2.8% in the same period of 2006.

Other operating expenses increased by $1.1 million. Other operating expenses were 14.4% of service revenue in the first half of 2007 and 12.8% for the same period of 2006. The increase is predominantly driven by the 2006 acquisitions and is related to 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 and the rollout of software initiatives.

Income from operations was $6.6 million for the six months ended June 30, 2007 compared to $6.2 million in 2006. The operating margin decreased from 20.4% to 19.3%.

Corporate

Six Months Ended June 30, 2007 Compared to Six Months Ended June 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 $26.6 million for the six months ended June 30, 2007 compared to expenses of $17.4 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.

 

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Consolidated Results

Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006

Consolidated service revenue for the six months ended June 30, 2007 was $409.2 million, an increase of $36.2 million compared to service revenue of $373.0 million in the same period in 2006. Acquisitions accounted for $18.8 million of the increase and $17.4 million was related to organic growth.

Salaries and benefits increased by $22.4 million for the six months ended June 30, 2007 compared to the same period in 2006. Salaries and benefits expense was 34.2% of service revenue for the six months ended June 30, 2007 and 31.5% for the same period in 2006. The increase is primarily due to the $8.0 million recorded in the first quarter of 2007 related to the former CEO’s transition agreement.

Facilities and telecommunication increased by $1.6 million compared to the same period in 2006. Facilities and telecommunication expenses were 3.9% of service revenue in the first half of 2007 and 2006. 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 $7.7 million compared to the same period in 2006. Other operating expenses were 13.1% of service revenue for the six months ended June 30, 2007 and 12.3% compared to the same period for 2006. The increase is due to acquisitions, and increased marketing, legal and professional fees.

Depreciation and amortization increased by $2.5 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 13.8% for the six months ended June 30, 2007, compared to 16.2% for the same period in 2006. The decrease in margin is primarily due the change in revenue mix, primarily effected by the mortgage lending industry, and $8.0 million of costs related to the former CEO’s transition agreement in the first quarter of 2007.

Income from operations was $56.3 million for the six months ended June 30, 2007 compared to $60.5 million for the same period in 2006. The decrease of $4.2 million is comprised of an increase in operating income of $3.8 million in Data Services, $3.9 million in Employer Services, $2.1 million in Multifamily Services and $.4 million in Investigative and Litigation Support Services offset by decreases in operating income of $3.5 million at Lender Services, $1.8 million at Dealer Services and an increase of corporate expenses of $9.1 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 June 30, 2007, cash and cash equivalents were $29.8 million.

Net cash provided by operating activities was $51.2 million compared to cash provided by operating activities of $27.7 million for the six months ended June 30, 2007 and 2006, respectively.

Cash provided by operating activities increased by $23.5 million from the first half of 2006 to the first half of 2007 while net income was $29.6 million in the six months ended June 30, 2007 and $29.4 million for the same period in 2006. The increase in cash provided by operating activities was primarily due to the

 

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increase in shared based compensation, deferred taxes, depreciation, amortization and bad debt expense, offset by payments made for accrued liabilities and collections on accounts receivable.

Cash used in investing activities was $49.0 million and $37.7 million for the six months ended June 30, 2007 and 2006, respectively. In the first half of 2007, net cash in the amount of $27.2 million was used for acquisitions compared to $25.7 million in 2006. Purchases of property and equipment were $20.1 million in the first half of 2007 compared to $13.0 million in the same period of 2006.

Cash used in financing activities was $4.2 million for the six months ended June 30, 2007, compared to cash provided from financing activities of $0.7 million for the six months ended June 30, 2006. In the first half of 2007, proceeds from existing credit facilities were $42.8 million compared to $32.8 million in 2006. Repayment of debt was $51.7 million in the first half of 2007 and $31.5 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 June 30, 2007, the Company had available lines of credit of $71 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 1,304,005 shares were issued for acquisitions as of June 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 June 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.

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.

 

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The following is a schedule of long-term contractual commitments, as of June 30, 2007, over the periods in which they are expected to be paid.

 

In thousands    2007    2008    2009    2010    2011    Thereafter    Total

Advertising commitments

   $ 777    $ 564    $ —      $ —      $ —      $ —      $ 1,341

Minimum contract purchase commitments

     1,764      2,034      517      195      —        —        4,510

Operating leases

     11,311      16,905      13,667      10,097      7,749      21,763      81,492

Debt and capital leases

     8,686      17,986      7,947      160,274      —        —        194,893

Interest payments related to debt (1)

     6,067      11,429      10,510      7,518      —        —        35,524
                                                

Total

   $ 28,605    $ 48,918    $ 32,641    $ 178,084    $ 7,749    $ 21,763    $ 317,760
                                                

(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.

 

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 June 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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.

Two subsidiaries are defendants in separate class action lawsuits that are pending in state court in California. The plaintiffs in both cases allege that our 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

 

  a) The annual meeting of the shareholders (the “Meeting”) of First Advantage Corporation (the “Company”) was held on April 26, 2007.

 

  b) The names of the persons who were nominated to serve as directors of the Company for the ensuing year are listed below, together with a tabulation of the results of the voting with respect to each nominee. Each of the persons named was recommended by the Board of Directors and Nominating Committee of the Company and all such nominees were elected.

 

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Name of Nominee    Votes For    Votes Withheld

Parker Kennedy

   487,236,854    323,623

Anand Nallathambi

   487,151,068    409,409

J. David Chatham

   487,134,860    425,617

Barry Connelly

   487,252,882    307,595

Frank McMahon

   487,254,456    306,021

Donald Nickelson

   487,051,516    508,961

Donald Robert

   485,009,332    2,551,145

Jill Kanin-Lovers

   487,243,850    316,627

D. Van Skilling

   487,144,301    416,176

David Walker

   487,145,401    415,076

 

  c) The second matter voted upon was an amendment to the Amended and Restated First Advantage Corporation 2003 Incentive Compensation Plan to enable the compensation committee to grant non-employee directors an annual award of non-qualified stock options, SARs, shares of restricted stock, restricted stock units, performance units and/or cash-based awards, in each case in an amount determined by the committee from time to time, rather than solely stock options. This matter was approved by 483,523,304 votes, constituting a majority of all of our outstanding Class A and Class B shares.

 

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: August 1, 2007     By:  

/s/ ANAND NALLATHAMBI

     

Anand Nallathambi

     

Chief Executive Officer

   
Date: August 1, 2007     By:  

/s/ JOHN LAMSON

     

John Lamson

     

Chief Financial Officer


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EXHIBIT INDEX

 

Exhibit No.   

Description

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
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