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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 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 11,239,222 shares of outstanding Class A Common Stock of the registrant as of April 30, 2007.

There were 47,726,521 shares of outstanding Class B Common Stock of the registrant as of April 30, 2007.

 



Table of Contents

INDEX

 

Part I. FINANCIAL INFORMATION   
  Item 1.   Financial Statements    1
    Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006 (unaudited)    2
    Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2007 and March 31, 2006 (unaudited)   

3

    Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2007 (unaudited)   

4

    Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and March 31, 2006 (unaudited)   

5

    Notes to Consolidated Financial Statements (unaudited)    7
  Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    18
  Item 3.   Quantitative and Qualitative Disclosures About Market Risk    27
  Item 4.   Controls and Procedures    27
Part II. OTHER INFORMATION   
  Item 1.   Legal Proceedings    28
  Item 1A.   Risk Factors    28
  Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds    28
  Item 3.   Defaults Upon Senior Securities    28
  Item 4.   Submission of Matters to a Vote of Security Holders    28
  Item 5.   Other Information    28
  Item 6.   Exhibits   


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

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Table of Contents

First Advantage Corporation

Consolidated Balance Sheets (Unaudited)

 

(in thousands)

 

  

March 31,

2007

  

December 31,

2006

Assets

     

Current assets:

     

Cash and cash equivalents

   $ 36,305    $ 31,941

Accounts receivable (less allowance for doubtful accounts of $7,057 and $6,487 in 2007 and 2006, respectively)

     142,819      138,563

Prepaid expenses and other current assets

     9,742      10,182

Income tax receivable

     5,555      6,155

Deferred income tax asset

     12,737      12,051
             

Total current assets

     207,158      198,892

Property and equipment, net

     72,956      68,931

Goodwill

     681,753      650,124

Customer lists, net

     72,524      74,419

Other intangible assets, net

     26,872      28,324

Database development costs, net

     10,917      10,640

Investment in equity investee

     55,781      55,001

Other assets

     4,175      3,592
             

Total assets

   $ 1,132,136    $ 1,089,923
             

Liabilities and Stockholders’ Equity

     

Current liabilities:

     

Accounts payable

   $ 46,579    $ 46,281

Accrued compensation

     34,571      35,299

Accrued liabilities

     18,990      21,286

Deferred income

     8,514      8,462

Due to affiliates

     3,925      4,776

Current portion of long-term debt and capital leases

     18,807      20,794
             

Total current liabilities

     131,386      136,898

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

     192,977      179,531

Deferred income tax liability

     52,650      44,802

Other liabilities

     5,438      5,338
             

Total liabilities

     382,451      366,569
             

Minority interest

     50,547      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; 10,846 and 10,452 shares issued and outstanding as of March 31, 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 March 31, 2007 and December 31, 2006

     48      48

Additional paid-in capital

     469,144      455,657

Retained earnings

     228,881      218,566

Accumulated other comprehensive income

     1,054      660
             

Total stockholders’ equity

     699,138      674,941
             

Total liabilities and stockholders’ equity

   $ 1,132,136    $ 1,089,923
             

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

 

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Table of Contents

First Advantage Corporation

Consolidated Statements of Income and Comprehensive Income (Unaudited)

 

(in thousands, except per share amounts)

 

  

For the Three Months Ended

March 31,

 
     2007     2006  

Service revenue

   $ 201,887     $ 181,219  

Reimbursed government fee revenue

     14,201       13,129  
                

Total revenue

     216,088       194,348  
                

Cost of service revenue

     61,188       56,589  

Government fees paid

     14,201       13,129  
                

Total cost of service

     75,389       69,718  
                

Gross margin

     140,699       124,630  
                

Salaries and benefits

     73,970       58,634  

Facilities and telecommunications

     8,025       7,051  

Other operating expenses

     26,249       22,551  

Depreciation and amortization

     10,445       9,210  
                

Total operating expenses

     118,689       97,446  
                

Income from operations

     22,010       27,184  
                

Other (expense) income:

    

Interest expense

     (3,226 )     (3,241 )

Interest income

     341       140  
                

Total other (expense), net

     (2,885 )     (3,101 )

Equity in earnings of investee

     780       109  
                

Income before income taxes and minority interest

     19,905       24,192  

Provision for income taxes

     8,102       10,500  
                

Income before minority interest

     11,803       13,692  

Minority interest

     560       947  
                

Net income

     11,243       12,745  

Other comprehensive income (loss), net of tax:

    

Foreign currency translation adjustments

     394       (19 )
                

Comprehensive income

   $ 11,637     $ 12,726  
                

Per share amounts:

    

Basic

   $ 0.19     $ 0.23  
                

Diluted

   $ 0.19     $ 0.22  
                

Weighted-average common shares outstanding:

    

Basic

     58,371       55,997  

Diluted

     58,888       57,833  

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

 

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First Advantage Corporation

Consolidated Statement of Changes in Stockholders’ Equity

For the Three Months Ended March 31, 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

                 11,243       11,243  

Class A Shares issued in connection with prior year acquisitions

   66         1,645           1,645  

Class A Shares issued in connection with share based compensation

   328      1      7,468           7,469  

Tax benefit related to stock options

           184           184  

Share based compensation

           4,190           4,190  

Other comprehensive income

              394        394  
                                          

Balance at March 31, 2007

   58,573    $ 59    $ 469,144    $ 1,054    $ 228,881     $ 699,138  
                                          

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

 

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First Advantage Corporation

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2007 and 2006 (Unaudited)

 

(in thousands)

 

  

For the Three Months Ended

March 31,

 
     2007     2006  

Cash flows from operating activities:

    

Net income

   $ 11,243     $ 12,745  

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

    

Depreciation and amortization

     10,445       9,210  

Bad debt expense

     1,898       776  

Share based compensation

     6,057       2,850  

Minority interests in net income

     560       947  

Equity in earnings of investee

     (780 )     (109 )

Deferred income tax

     6,019       1,191  

Change in operating assets and liabilities, net of acquisitions:

    

Accounts receivable

     (5,089 )     (11,100 )

Prepaid expenses and other current assets

     441       (558 )

Other assets

     (570 )     487  

Accounts payable

     253       (962 )

Accrued liabilities

     (7,341 )     (3,253 )

Deferred income

     (376 )     (558 )

Due from affiliates

     (874 )     (480 )

Net change in income tax accounts

     219       6,490  

Accrued compensation and other liabilities

     2,972       3,719  
                

Net cash provided by operating activities

     25,077       21,395  
                

Cash flows from investing activities:

    

Database development costs

     (1,027 )     (1,081 )

Purchases of property and equipment

     (9,274 )     (4,962 )

Cash paid for acquisitions

     (23,268 )     (7,871 )

Cash balance of companies acquired

     120       381  
                

Net cash used in investing activities

     (33,449 )     (13,533 )
                

Cash flows from financing activities:

    

Proceeds from long-term debt

     32,279       5,633  

Repayment of long-term debt

     (24,193 )     (17,743 )

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

     1,950       669  

Distributions to minority interest shareholders

     (1,091 )     —    
                

Net cash provided by (used in) financing activities

     12,730       (11,441 )
                

Effect of exchange rates on cash

     6       (2 )

Increase (decrease) in cash and cash equivalents

     4,364       (3,581 )

Cash and cash equivalents at beginning of period

     31,941       28,380  
                

Cash and cash equivalents at end of period

   $ 36,305     $ 24,799  
                

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

 

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First Advantage Corporation

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2007 and 2006 (Unaudited)

 

    

For the Three Months Ended

March 31,

     2007    2006

Supplemental disclosures of cash flow information:

     

Cash paid for interest

   $ 3,237    $ 2,635
             

Cash paid for income taxes

   $ 1,842    $ 2,859
             

Non-cash investing and financing activities:

     

Class A shares issued in connection with prior year acquisitions

   $ 1,645    $ 1,233
             

Notes issued in connection with acquisitions

   $ 3,373    $ 1,000
             

Class A shares issued for share based compensation

   $ 4,885    $ 381
             

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

March 31, 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 March 31, 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 separate restricted stock

 

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Table of Contents

First Advantage Corporation

Notes to Consolidated Financial Statements

March 31, 2007 and 2006 (Unaudited)

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 quarter ending March 31, 2007 (included in salaries and benefits in the accompanying 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 quarter ending March 31, 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 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 during the first quarter of 2007. The Company’s operating results for the three months ended March 31, 2007 include results for the acquired entity from the date of acquisition.

Operating results for the three months ended March 31, 2007 and 2006 are not necessarily indicative of the results that may be expected for the entire fiscal year.

As of March 31, 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.

Recent Accounting Pronouncements

In September 2006, the 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 (GAAP), and expands disclosure requirements regarding fair value measurements. The provisions for SFAS 157 are effective for fiscal years ending after November 15, 2007, and interim periods within those fiscal years.

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

March 31, 2007 and 2006 (Unaudited)

 

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 $28.1 million related to earnout provisions from prior year acquisitions and an additional purchase of a portion of minority interests in LeadClick Media Inc.

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

 

(in thousands)

 

    

Cash

   $ 23,268

Notes payable

     3,373

Deferred payments

     5,947
      

Purchase price

   $ 32,588
      

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

 

(in thousands)

 

    

Goodwill

   $ 31,156

Identifiable intangible assets

     880

Net assets acquired

     552
      
   $ 32,588
      

The changes in the carrying amount of goodwill, by operating segment, are as follows for the three months ended March 31, 2007:

 

(in thousands)

 

   Balance at
December 31, 2006
   Acquisitions
and Earnouts
  

Adjustments to net

assets acquired

   

Balance at

March 31, 2007

Lender Services

   $ 46,800      —        —       $ 46,800

Data Services

     218,248      12,814      (1,120 )     229,942

Dealer Services

     55,995      —        —         55,995

Employer Services

     224,012      17,342      1,593       242,947

Multifamily Services

     48,100      1,000      —         49,100

Investigative and Litigation Support Services

     56,969      —        —         56,969
                            

Consolidated

   $ 650,124    $ 31,156    $ 473     $ 681,753
                            

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

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

March 31, 2007 and 2006 (Unaudited)

Unaudited pro forma results of operations assuming all the acquisitions were consummated on January 1, 2006 are as follows:

 

(in thousands, except per share amounts)

 

  

For the Three Months Ended

March 31,

     2007    2006

Total revenue

   $ 216,371    $ 204,834
             

Net income

   $ 11,192    $ 13,479
             

Earnings per share:

     

Basic

   $ 0.19    $ 0.23

Diluted

   $ 0.19    $ 0.23

Weighted-average common shares outstanding:

     

Basic

     58,377      58,060

Diluted

     58,894      58,411

 

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. 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 three months ended March 31, 2007.

Goodwill and other intangible assets for the periods as of March 31, 2007 and December 31, 2006 are as follows:

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

March 31, 2007 and 2006 (Unaudited)

 

(in thousands)

 

   March 31, 2007     December 31, 2006  

Goodwill

   $ 681,753     $ 650,124  
                

Customer lists

   $ 97,794     $ 96,917  

Less accumulated amortization

     (25,270 )     (22,498 )
                

Customer lists, net

   $ 72,524     $ 74,419  
                

Other intangible assets:

    

Noncompete agreements

   $ 14,529     $ 15,084  

Trade names

     21,610       21,607  
                
     36,139       36,691  

Less accumulated amortization

     (9,267 )     (8,367 )
                

Other intangible assets, net

   $ 26,872     $ 28,324  
                

Amortization of customer lists and other intangible assets totaled approximately $4.2 million and $3.9 million for the three months ended March 31, 2007 and 2006, respectively. Estimated amortization expense relating to intangible asset balances as of March 31, 2007, is expected to be as follows over the next five years:

 

(in thousands)

 

    

2007

   $ 12,344

2008

   $ 15,911

2009

     15,043

2010

     14,119

2011

     11,192

Thereafter

     30,787
      
   $ 99,396
      

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

March 31, 2007 and 2006 (Unaudited)

The changes in the carrying amount of identifiable intangible assets are as follows for the three months ended March 31, 2007:

 

(in thousands)

 

   Other
Intangible
Assets
    Customer
Lists
 

Balance, at December 31, 2006

   $ 28,324     $ 74,419  

Acquisitions

           880  

Adjustments

     4        

Amortization

     (1,456 )     (2,775 )
                

Balance, at March 31, 2007

   $ 26,872     $ 72,524  
                

 

5. Debt

Long-term debt consists of the following at March 31, 2007:

 

(in thousands, except percentages)

 

    

Acquisition notes:

  

Weighted average interest rate of 6.56% with maturities through 2010

   $ 47,481

Bank notes:

  

$225 million Secured Credit Facility, interest at 30-day LIBOR plus 1.25% (6.57% and 5.99% at March 31, 2007 and 2006, respectively), matures September 2010

     164,000

Capital leases and other debt:

  

Various interest rates with maturities through 2009

     303
      

Total long-term debt and capital leases

     211,784

Less current portion of long-term debt and capital leases

     18,807
      

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

   $ 192,977
      

At March 31, 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

March 31, 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
March 31,
     2007    2006

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

   $ 11,243    $ 12,745

Denominator:

     

Weighted-average shares for basic earnings per share

     58,371      55,997

Effect of restricted stock

     181      19

Effect of contingent shares related to DealerTrack

     —        1,485

Effect of dilutive securities - employee stock options and warrants

     336      332
             

Denominator for diluted earnings per share

     58,888      57,833
             

Earnings per share:

     

Basic

   $ 0.19    $ 0.23

Diluted

   $ 0.19    $ 0.22

For the three months ended March 31, 2007 and 2006, options and warrants totaling 1,709,617 and 815,251, respectively, were excluded from the weighted average diluted shares outstanding, as they were antidilutive.

 

7. Share-Based Compensation

At March 31, 2007, there are 5,751,425 stock options to purchase shares of the Company’s common stock, 356,660 restricted stock awards, and 45,941 restricted stock units 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 first quarter of 2007 and 2006 was approximately $6.1 and $2.9 million, respectively.

Warrants and Options to Purchase Class A Common Stock

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

March 31, 2007 and 2006 (Unaudited)

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 March 31, 2007. The weighted average remaining contractual life in years for the warrants outstanding is 3.26 and the weighted average exercise price is $14.01.

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

   721     $ 26.56

Options exercised

   (97 )   $ 15.98

Options canceled

   (64 )   $ 22.75
            

Options outstanding at March 31, 2007

   4,761     $ 22.66
            

Options exercisable, end of the quarter

   2,761     $ 21.14
            

The following table summarizes information about stock options outstanding at March 31, 2007:

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

March 31, 2007 and 2006 (Unaudited)

 

   

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   4.4   $10.34   13   $10.34
$12.51 - $ 25.00   3,434   6.1   $20.82   2,505   $20.26
$25.01 - $ 50.00   1,303   9.1   $27.06   232   $27.94
$50.01 - $242.25   11   3.3   $89.20   11   $89.20
             
  4,761       2,761  
             

 

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, or non-U.S. income tax examinations by tax authorities for years before 2002.

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB statement No. 109” (“FIN 48”), on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized an approximately $.2 million increase in the liability for unrecognized tax benefits as well as approximately $.7 million increase in the liability for related penalties and interest. The increase in unrecognized tax benefits and related interest and penalties was accounted for as a reduction to the January 1, 2007 balance of retained earnings.

As of January 1, 2007, the Company has a $.8 million total liability recorded for unrecognized tax benefits as well as a $.7 million of 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 $.8 million. The majority of the unrecognized tax benefits and associated interest and penalties relates to foreign operations. The Company does not currently anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease by the end of 2007.

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

March 31, 2007 and 2006 (Unaudited)

 

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, subprime credit reporting, consumer credit reporting services, and lead generation services. Revenue for the Data Services segment includes $1.2 million and $1.1 million of inter-segment sales for the three months ended March 31, 2007 and 2006, respectively.

The Dealer Services business segment serves the automotive dealer marketplace by delivering consolidated consumer credit reports, credit automation software and 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 $.4 million and $.3 million of inter-segment sales for the three month periods ended March 31, 2007 and 2006.

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.

 

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First Advantage Corporation

Notes to Consolidated Financial Statements

March 31, 2007 and 2006 (Unaudited)

Revenue for the Multifamily Services segment includes $.1 million of inter-segment sales for each of the three month periods ended March 31, 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 are included in the Employer Services segment and include revenue of $8.7 million and $3.4 million for the three months ended March 31, 2007 and 2006, respectively.

The following table sets forth segment information for the three months ended March 31, 2007 and 2006.

 

(in thousands)

 

   Service
Revenue
   

Depreciation

and Amortization

  

Income (Loss)

From Operations

    Assets

Three Months Ended March 31, 2007

         

Lender Services

   $ 45,637     $ 1,648    $ 12,656     $ 79,877

Data Services

     40,042       2,850      11,721       330,300

Dealer Services

     29,767       726      3,512       117,326

Employer Services

     54,698       2,468      5,111       363,110

Multifamily Services

     17,605       1,170      4,314       83,792

Investigative and Litigation Support Services

     15,298       926      2,186       87,630

Corporate and Eliminations

     (1,160 )     657      (17,490 )     70,101
                             

Consolidated

   $ 201,887     $ 10,445    $ 22,010     $ 1,132,136
                             

Three Months Ended March 31, 2006

         

Lender Services

   $ 45,302     $ 1,758    $ 13,481     $ 80,214

Data Services

     35,881       3,010      9,635       317,678

Dealer Services

     29,629       688      3,928       114,652

Employer Services

     39,662       1,612      2,338       275,432

Multifamily Services

     16,693       1,137      3,204       76,197

Investigative and Litigation Support Services

     15,046       751      3,069       83,646

Corporate and Eliminations

     (994 )     254      (8,471 )     51,124
                             

Consolidated

   $ 181,219     $ 9,210    $ 27,184     $ 998,943
                             

 

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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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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Overview

First Advantage Corporation (Nasdaq: FADV) (“First Advantage” or the “Company”) is a 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 three months ended March 31, 2007, First Advantage has acquired one company, which is included in the Employer Services segment.

Operating results for the three months ended March 31, 2007 included total service revenue of $201.9 million, representing an increase of 11.4% over the same period in 2006, with 5.3% of that growth being organic growth. Operating income for the three months ended March 31, 2007 was $22.0 million. Operating income decreased $5.2 million for the three months ended March 31, 2007 in comparison to the same period in 2006. In connection with the former CEO’s Transition Agreement, First Advantage recorded compensation expense of $8.0 million in the quarter ending March 31, 2007 (included in salaries and benefits in the accompanying 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 quarter ending March 31, 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, revenues, 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 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 (GAAP), and expands disclosure requirements regarding fair value measurements. The provisions for SFAS 157 are effective for fiscal years ending after November 15, 2007, and interim periods within those fiscal years.

The following is a summary of the operating results by the Company’s business segments for the three months ended March 31, 2007 and March 31, 2006.

 

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(in thousands, except percentages)                                                 

Three Months Ended March 31, 2007

  

Lender

Services

   

Data

Services

   

Dealer

Services

   

Employer

Services

   

Multifamily

Services

   

Invest/Litigation

Support Services

    Corporate     Total  

Service revenue

   $ 45,637     $ 40,042     $ 29,767     $ 54,698     $ 17,605     $ 15,298     $ (1,160 )   $ 201,887  

Reimbursed government fee revenue

     —         12,188       —         2,913       —         —         (900 )     14,201  
                                                                

Total revenue

     45,637       52,230       29,767       57,611       17,605       15,298       (2,060 )     216,088  

Cost of service revenue

     15,603       11,071       15,554       15,813       1,554       2,477       (884 )     61,188  

Government fees paid

     —         12,188       —         2,913       —         —         (900 )     14,201  
                                                                

Total cost of service

     15,603       23,259       15,554       18,726       1,554       2,477       (1,784 )     75,389  

Gross margin

     30,034       28,971       14,213       38,885       16,051       12,821       (276 )     140,699  

Salaries and benefits

     12,931       6,394       4,209       21,076       6,913       6,887       15,560       73,970  

Facilities and telecommunications

     1,946       832       434       2,343       935       535       1,000       8,025  

Other operating expenses

     853       7,174       5,332       7,887       2,719       2,287       (3 )     26,249  

Depreciation and amortization

     1,648       2,850       726       2,468       1,170       926       657       10,445  
                                                                

Income (loss) from operations

   $ 12,656     $ 11,721     $ 3,512     $ 5,111     $ 4,314     $ 2,186     $ (17,490 )   $ 22,010  
                                                                

Operating margin percentage

     27.7 %     29.3 %     11.8 %     9.3 %     24.5 %     14.3 %     N/A       10.9 %

Three Months Ended March 31, 2006

  

Lender

Services

   

Data

Services

   

Dealer

Services

   

Employer

Services

   

Multifamily

Services

   

Invest/Litigation

Support Services

    Corporate     Total  

Service revenue

   $ 45,302     $ 35,881     $ 29,629     $ 39,662     $ 16,693     $ 15,046     $ (994 )   $ 181,219  

Reimbursed government fee revenue

     —         11,156       —         2,680       —         —         (707 )     13,129  
                                                                

Total revenue

     45,302       47,037       29,629       42,342       16,693       15,046       (1,701 )     194,348  

Cost of service revenue

     15,051       10,674       15,726       11,399       1,567       3,075       (903 )     56,589  

Government fees paid

     —         11,156       —         2,680       —         —         (707 )     13,129  
                                                                

Total cost of service

     15,051       21,830       15,726       14,079       1,567       3,075       (1,610 )     69,718  

Gross margin

     30,251       25,207       13,903       28,263       15,126       11,971       (91 )     124,630  

Salaries and benefits

     12,696       5,766       4,374       15,991       6,874       5,886       7,047       58,634  

Facilities and telecommunications

     1,853       713       379       1,838       897       423       948       7,051  

Other operating expenses

     463       6,083       4,534       6,484       3,014       1,842       131       22,551  

Depreciation and amortization

     1,758       3,010       688       1,612       1,137       751       254       9,210  
                                                                

Income (loss) from operations

   $ 13,481     $ 9,635     $ 3,928     $ 2,338     $ 3,204     $ 3,069     $ (8,471 )   $ 27,184  
                                                                

Operating margin percentage

     29.8 %     26.9 %     13.3 %     5.9 %     19.2 %     20.4 %     N/A       15.0 %

Lender Services Segment

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

Service revenue was $45.6 million for the three months ended March 31, 2007, an increase of $.3 million compared to service revenue of $45.3 million for the three months ended March 31, 2006. Revenue from new products and services accounted for the increase.

Cost of service revenue was $15.6 million for the three months ended March 31, 2007, an increase of $.5 million compared to cost of service revenue of $15.1 million in the same period of 2006. An increase in credit data costs accounted for the increase in the cost of service revenue.

Salaries and benefits increased by $.2 million. Salaries and benefits were 28.3% of service revenue in the first quarter of 2007 compared to 28.0% during the same period in 2006. Salaries and benefits expense increased due to an increase in benefit costs.

Facilities and telecommunication expenses were flat compared to the same period in 2006. Facilities and telecommunication expense were 4.3% of service revenue in the first quarter of 2007 compared to 4.1% in the first quarter of 2006.

 

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Other operating expenses increased by $.4 million. Other operating expenses were 1.9% of service revenue in the first quarter of 2007 compared to 1.0% for the same period of 2006. The change in 2007 is primarily due to an increase in bad debt expense and costs related to increased offshoring activities, partially offset by an increase in the amounts allocated to other segments for shared services and product development initiatives.

Depreciation and amortization decreased by $.1 million. Depreciation and amortization was 3.6% of service revenue during the first quarter of 2007 compared to 3.9% in the same period in 2006. The decrease is primarily due to certain fixed assets and intangibles becoming fully depreciated.

Income from operations was $12.7 million for the three months ended March 2007 compared to $13.5 million in the same period of 2006. The operating margin percentage decreased from 29.8% to 27.7% primarily due to higher cost of service revenue, benefit costs, overseas operations, and bad debt expense.

Data Services Segment

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

Total service revenue was $40.0 million for the three months ended March 31, 2007, an increase of $4.1 million compared to service revenue of $35.9 million in the same period of 2006. This segment has experienced 11.6% of organic growth primarily due to the expansion of the existing customer base and the sale of new products and services.

Cost of service revenue was $11.1 million for the three months ended March 31, 2007, an increase of $.4 million compared to cost of service revenue of $10.7 million in the same period of 2006.

Salaries and benefits increased by $.6 million. Salaries and benefits were approximately 16.0% of service revenue in the first quarter of 2007 and 2006. The increase is primarily due to increased staffing levels and related salaries and benefit costs needed to support the growth of the businesses.

Facilities and telecommunication expenses for the first quarter of 2007 were comparable to the same period in 2006. Facilities and telecommunication expenses were approximately 2.0% of service revenue in the first quarter of 2007 and 2006.

Other operating expenses increased by $1.1 million. Other operating expenses were 17.9% of service revenue in the first quarter of 2007 and 17.0% in the first quarter of 2006. The increase is largely attributable to bad debt expense and increased allocations for accounting and IT costs that are correlated to increased revenues.

Depreciation and amortization decreased by $.2 million. The decrease is due to certain assets becoming fully depreciated and certain intangibles becoming fully amortized.

The operating margin percentage increased from 26.9% to 29.3% in comparing the first quarter of 2006 to the first quarter of 2007. The increase in the operating margin is primarily due to a change in the revenue mix of the businesses in the first quarter of 2007 compared to the same period in 2006.

Income from operations was $11.7 million for the first quarter of 2007, an increase of $2.1 million compared to $9.6 million in the first quarter of 2006. The increase is primarily due to economies of scale based on the increase in revenues and due to the impact of new ancillary products and services introduced during the quarter.

 

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Dealer Services Segment

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

Service revenue was $29.8 million for the three months ended March 31, 2007, an increase of $.2 million compared to service revenue of $29.6 million for the three months ended March 31, 2006. An increase in transactions accounted for a 7.9% increase in credit report related revenue, and a decrease in revenue in the vehicle lead generation business offset most of this increase in service revenue.

Cost of service revenue was $15.6 million for the three months ended March 31, 2007, a decrease of $.1 million compared to cost of service revenue of $15.7 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 larger decrease in cost of service revenue on the lower margin vehicle lead generation business.

Salaries and benefits decreased by $.2 million. Salaries and benefits were 14.1% of service revenue in the first quarter of 2007 compared to 14.8% during the same period in 2006. Salaries and benefits expense decreased due to operational efficiencies which included relocation and consolidation of certain functions.

Facilities and telecommunication expenses were flat when comparing the first quarter of 2007 to the first quarter of 2006. Facilities and telecommunication expenses were 1.5% of service revenue in the first quarter of 2007 compared to 1.3% in the first quarter of 2006.

Other operating expenses increased by $.8 million. Other operating expenses were 17.9% of service revenue in the first quarter of 2007 compared to 15.3% for the same period in 2006. The increase in 2007 is due to an increase in the amounts allocated from Lender Services for shared services and an increase in bad debt expense at the vehicle lead generation business.

Depreciation and amortization were flat when comparing the first quarter of 2007 to the first quarter of 2006. Depreciation and amortization were 2.4% of service revenue during the first quarter of 2007 compared to 2.3% in the same period in 2006.

Income from operations was $3.5 million for the three months ended March 2007 compared to $3.9 million in the same period in 2006. The operating margin percentage decreased from 13.3% to 11.8% primarily due to the impact of the increased allocations from Lender Services and the decrease in the revenues of the vehicle lead generation subsidiary.

Employer Services Segment

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

Total service revenue was $54.7 million for the three months ended March 31, 2007, an increase of $15.0 million compared to service revenue of $39.7 million in the same period of 2006. The increase was primarily driven by the addition of $10.7 million of revenue from acquisitions and $4.3 million of revenue from organic growth.

Salaries and benefits increased by $5.1 million. Salaries and benefits were 38.5% of service revenue in the first quarter of 2007 compared to 40.3% in the same period of 2006. The number of employees has increased due to acquisitions and the growth of this segment in comparison to the same period in 2006.

Facilities and telecommunication expenses increased by $.5 million. Facilities and telecommunication expenses were 4.3% of service revenue in the first quarter of 2007 and 4.6% in the first quarter of 2006.

 

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Other operating expenses increased by $1.4 million. Other operating expenses were 14.4% of service revenue in the first quarter of 2007 and 16.3% for the same period of 2006. The increase in other operating expenses is due to costs incurred in integrating and consolidating operations, product and geographic expansion and cross selling initiatives.

Depreciation and amortization increased by $.9 million primarily due to the addition of intangible assets related to the acquisitions and the rollout of new software projects.

The operating margin percentage increased from 5.9% to 9.3% primarily due to a greater increase in revenue quarter over quarter versus the increase in expense.

Income from operations was $5.1 million for the three months ended March 31, 2007, an increase of $2.8 million compared to income from operations of $2.3 million in the same period of 2006. Income from operations increased due to a greater increase in service revenue compared to the increase in costs for the same period.

Multifamily Services Segment

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

Total service revenue was $17.6 million for the three months ended March 31, 2007, an increase of $.9 million compared to service revenue of $16.7 million in the same period of 2006. The 5.5% organic growth is driven by expanded market share and an increase in products and services.

Salaries and benefits cost were flat compared to the same period in 2006. Salaries and benefits were 39.3% of service revenue for the first quarter of 2007 compared to 41.2% 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 5.3% of service revenue in the first quarter of 2007 and 5.4% in the first quarter of 2006.

Other operating expenses were flat compared to the same period in 2006. Other operating expenses were 15.4% of service revenue in the first quarter of 2007 compared to 18.1% in the same period of 2006. The decrease in expense as a percentage of revenue was due to containing costs while experiencing revenue growth.

Depreciation and amortization is comparable to the same period of 2006. Depreciation and amortization was 6.6% of service revenue in the first quarter of 2007 compared to 6.8% in the same period of 2006.

The operating margin percentage increased from 19.2% to 24.5% due to increased revenues from the renter’s insurance program and expense reductions due to integrations and consolidations.

Income from operations was $4.3 million in the first quarter of 2007 compared to income from operations of $3.2 million in the same period of 2006.

Investigative and Litigation Services Segment

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

Total service revenue was $15.3 million for the three months ended March 31, 2007, an increase of $.3 million compared to service revenue of $15.0 million in the same period of 2006. The increase is predominantly driven by the two acquisitions in the fourth quarter of 2006.

 

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Salaries and benefits increased by $1.0 million. Salaries and benefits were 45.0% of service revenue in the first quarter of 2007 compared to 39.1% in the same period of 2006. The increases are mainly due to the acquisitions and an increase of employees in the Litigation support division.

Facilities and telecommunication expenses were flat compared to the same period in 2006. Facilities and telecommunication expenses were 3.5% of service revenue in the first quarter of 2007 and 2.8% in the first quarter of 2006.

Other operating expenses increased by $.4 million. Other operating expenses were 14.9% of service revenue in the first quarter of 2007 and 12.2% for the same period of 2006. The increase is related to the geographic expansion and new business development efforts in this segment.

Depreciation and amortization increased by $.2 million. The increase is due to the increase in acquisition related intangibles.

The operating margin percentage decreased from 20.4% to 14.3%. The decrease in margin is primarily due to increased number of employees in litigation support businesses, travel and infrastructure costs related to geographic expansion.

Income from operations was $2.2 million for the first quarter of 2007 compared to $3.1 million for the same period of 2006.

Corporate

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 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. Additional costs were incurred for the increased level of professional fees for audit related services, Sarbanes Oxley compliance, and increased staffing in the technology, accounting, human resources and legal departments to support corporate growth. The corporate expenses were $17.5 million in the first quarter of 2007 compared to expenses of $8.5 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.

Consolidated Results

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006

Consolidated service revenue for the three months ended March 31, 2007 was $201.9 million, an increase of $20.7 million compared to service revenue of $181.2 million in the same period in 2006. Acquisitions accounted for $11.1 million of the increase.

Salaries and benefits were 36.6% of service revenue for the three months ended March 31, 2007 and 32.4% for the same period in 2006. The increase is related to additional employees added for company growth and the former CEO’s transition agreement. In addition, approximately $6.1 million in expense was recorded for share based compensation in first quarter 2007 compared to $2.9 million for the first quarter of 2006, of which $3.4 million is related to the former CEO’s transition agreement.

Facilities and telecommunication increased by $1.0 million compared to the same period in 2006. Facilities and telecommunication expenses were 4.0% of service revenue in the first quarter of 2007 and 3.9% in the first quarter of 2006.

Other operating expenses increased by $3.7 million compared to the same period in 2006. Other operating expenses were 13.0% of service revenue for the three months ended March 31, 2007 and 12.4%

 

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compared to the same period for 2006. The increase is primarily related to marketing expense, bad debt expense, temporary labor, and professional fees.

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 10.9% for the three months ended March 31, 2007, compared to 15.0% for the same period in 2006. The operating margin quarter over quarter was relatively flat after excluding the negative impact related to the former CEO’s transition agreement.

Income from operations was $22.0 million for the three months ended March 31, 2007 compared to $27.2 million for the same period in 2006. The decrease of $5.2 million is comprised of an increase in operating income of $2.1 million in Data Services, $2.8 million in Employer Services and $1.1 million at Multifamily Services offset by decreases in operating income of $.8 million in Lender Services, $.4 million in Dealer Services, $.9 million in Investigative and Litigation Support Services and an increase of corporate expenses of $9.0 million.

Liquidity and Capital Resources

The Company’s primary source of liquidity is cash flow from operations and amounts available under credit lines the Company has established with a bank. As of March 31, 2007, cash and cash equivalents were $36.3 million.

Net cash provided by operating activities was $25.1 million compared to cash provided by operating activities of $21.4 million for the three months ended March 31, 2007 and 2006, respectively.

Cash provided by operating activities increased by $3.7 million from the first quarter of 2006 to the first quarter of 2007 while net income was $11.2 million in the first quarter of 2007 and $12.7 million for the same period in 2006. The increase in cash provided by operating activities was primarily due to the increase in shared based compensation, tax liabilities, depreciation, amortization and bad debt expense, offset by payments made for accrued liabilities and an increase in accounts receivable.

Cash used in investing activities was $33.4 million and $13.5 million, for the three months ended March 31, 2007 and 2006, respectively. In the first quarter of 2007, cash in the amount of $23.3 million was used for acquisitions compared to $7.9 million in 2006. Purchases of property and equipment were $10.3 million in the first quarter of 2007 compared to $6.0 million in the same period of 2006.

Cash provided by financing activities was $12.7 million for the three months ended March 31, 2007, compared to cash used in financing activities of $11.4 million for the three months ended March 31, 2006. In the first quarter of 2007, proceeds from existing credit facilities were $32.3 million compared to $5.6 million in 2006. Repayment of debt was $24.2 million in the first quarter of 2007 and $17.7 million in the same period of 2006.

In 2005, the Company executed a revolving credit agreement, with a bank syndication (the “Credit Agreement”). Borrowings available under the Credit Agreement total up to $225 million. 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 March 31, 2007, the Company had available lines of credit of $61 million and the Company was in compliance with the financial covenants of its loan agreements.

First Advantage filed a new 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 926,063 shares were issued for acquisitions as of March 31, 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 March 31, 2007.

 

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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.

The following is a schedule of long-term contractual commitments, as of March 31, 2007, over the periods in which they are expected to be paid.

 

In thousands    2007    2008    2009    2010    2011    Thereafter    Total

Advertising commitments

   $ 456    $ —      $ —      $ —      $ —      $ —      $ 456

Minimum contract purchase commitments

     2,629      2,633      511      195      —        —        5,968

Operating leases

     15,643      16,272      13,120      9,545      7,236      20,922      82,738

Debt and capital leases

     15,603      17,975      7,952      170,254      —        —        211,784

Interest payments related to debt (1)

     10,278      12,741      11,824      8,504      —        —        43,347
                                                

Total

   $ 44,609    $ 49,621    $ 33,407    $ 188,498    $ 7,236    $ 20,922    $ 344,293
                                                

 

(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.

The Company’s fixed rate debt consists primarily of uncollateralized term notes. In addition, the Company has $186.7 million of variable rate debt outstanding. A 100 basis point increase in interest rates, due to increased rates nationwide, would result in $1.9 million additional annual interest payments.

 

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.

There was no change in the Company’s internal control over financial reporting during the quarter ended March 31, 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

None

 

Item 5. Other Information

None

 

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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: May 3, 2007     By:  

  /s/ ANAND NALLATHAMBI

        Anand Nallathambi
        Chief Executive Officer
Date: May 3, 2007     By:  

  /s/ JOHN LAMSON

        John Lamson
        Chief Financial Officer


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EXHIBIT INDEX

 

Exhibit No.   

Description

2.1    Amended By-laws of First Advantage Corporation
10.1    Transition Agreement, dated March 2, 2007 by and between John Long and First Advantage Corporation
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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