Annual Reports

 
Quarterly Reports

  • 10-Q (Oct 29, 2009)
  • 10-Q (Jul 30, 2009)
  • 10-Q (Apr 30, 2009)
  • 10-Q (Oct 30, 2008)
  • 10-Q (Jul 31, 2008)
  • 10-Q (May 1, 2008)

 
8-K

 
Other

First Advantage 10-Q 2009

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_10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2009
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)

 
 
12395 First American Way
Poway, California 92064
 (Address of principal executive offices, including zip code)

(727) 214-3411
(Registrant's telephone number, including area code)


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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).  Yes [ ] No [ ]
 
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer     [ ]         Accelerated filer       [X]        Non-accelerated filer    [ ]
 
Smaller reporting company [ ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12-b).    Yes [ ] No [X]

There were 12,098,680 shares of outstanding Class A Common Stock of the registrant as of October 26, 2009.
There were 47,726,521 shares of outstanding Class B Common Stock of the registrant as of October 26, 2009.
 
 
Part I:  FINANCIAL INFORMATION
 
                 3
                     
       4
 
 
               
       5
                     
     6
                     
       7
 
 
                 
       8
                     
           10
                     
    26
                     
        42
 
                 
                42

Part II:  OTHER INFORMATION
 
      42
             
Item 1A.  Risk Factors
       42
             
 43
             
     43
             
 43
             
      43
             
Item 6.  Exhibits
         43
           
 Signatures          44


 
 

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements
First Advantage Corporation
Consolidated Financial Statements (Unaudited)
For the Three and Nine Months Ended
September 30, 2009 and 2008



3

First Advantage Corporation

Consolidated Balance Sheets (Unaudited)




(in thousands)
 
September 30,
   
December 31,
 
 
2009
   
2008
 
    Current assets:
           
       Cash and cash equivalents
  $ 57,784     $ 52,361  
       Accounts receivable (less allowance for doubtful accounts
               
        of $11,520 and $8,345, respectively)
    115,870       121,531  
       Prepaid expenses and other current assets
    8,929       9,032  
       Income tax receivable
    11,968       -  
       Due from affiliates
    3,180       -  
       Deferred income tax asset
    18,929       16,695  
          Total current assets
    216,660       199,619  
       Property and equipment, net
    76,638       81,807  
       Goodwill
    753,547       731,369  
       Customer lists, net
    45,820       53,813  
       Other intangible assets, net
    14,375       17,245  
       Database development costs, net
    12,406       11,837  
       Marketable equity securities
    48,293       30,365  
       Other assets
    5,994       3,684  
          Total assets
  $ 1,173,733     $ 1,129,739  
Liabilities and Equity
               
    Current liabilities:
               
       Accounts payable
  $ 35,382     $ 38,404  
       Accrued compensation
    27,605       32,423  
       Accrued liabilities
    14,462       11,379  
       Deferred income
    5,704       7,381  
       Income tax payable
    -       2,609  
       Due to affiliates
    -       714  
       Current portion of long-term debt and capital leases
    20,446       9,891  
          Total current liabilities
    103,599       102,801  
       Long-term debt and capital leases, net of current portion
    1,028       22,938  
       Deferred income tax liability
    76,826       61,652  
       Other liabilities
    4,897       5,300  
          Total liabilities
    186,350       192,691  
    Equity:
               
       First Advantage Corporation's 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; 12,095 and 11,772 shares issued and outstanding
               
             as of September 30, 2009 and December 31, 2008, respectively
    12       12  
          Class B common stock, $.001 par value; 75,000 shares
               
             authorized; 47,727 shares issued and outstanding
               
             as of September 30, 2009 and December 31, 2008, respectively
    48       48  
          Additional paid-in capital
    502,411       502,600  
          Retained earnings
    425,637       390,602  
          Accumulated other comprehensive income (loss)
    14,414       (412 )
       Total First Advantage Corporation's stockholders' equity
    942,522       892,850  
          Noncontrolling interests
    44,861       44,198  
       Total equity
    987,383       937,048  
       Total liabilities and equity
  $ 1,173,733     $ 1,129,739  



The accompanying notes are an integral part of these consolidated financial statements.
4

First Advantage Corporation

Consolidated Statements of Income (Unaudited)



(in thousands, except per share amounts)
 
For the Three Months Ended
   
For the Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Service revenue
  $ 155,980     $ 174,664     $ 510,688     $ 545,341  
Reimbursed government fee revenue
    13,586       13,633       39,905       40,780  
Total revenue
    169,566       188,297       550,593       586,121  
Cost of service revenue
    51,429       53,520       191,030       160,723  
Government fees paid
    13,586       13,633       39,905       40,780  
Total cost of service
    65,015       67,153       230,935       201,503  
Gross margin
    104,551       121,144       319,658       384,618  
Salaries and benefits
    49,920       59,113       151,217       188,489  
Facilities and telecommunications
    6,741       7,789       20,265       24,073  
Other operating expenses
    18,453       19,899       56,397       65,642  
Depreciation and amortization
    10,993       10,898       32,574       31,520  
Impairment loss
    -       1,720       -       2,017  
Total operating expenses
    86,107       99,419       260,453       311,741  
Income from operations
    18,444       21,725       59,205       72,877  
Other (expense) income:
                               
Interest expense
    (234 )     (640 )     (903 )     (2,140 )
Interest income
    103       155       387       746  
Total other (expense), net
    (131 )     (485 )     (516 )     (1,394 )
Income from continuing operations before income taxes
    18,313       21,240       58,689       71,483  
Provision for income taxes
    6,898       8,932       23,856       29,582  
Income from continuing operations
    11,415       12,308       34,833       41,901  
Loss from discontinued operations, net of tax
    -       -       -       (4,241 )
Net income
    11,415       12,308       34,833       37,660  
Less:  Net loss attributable to noncontrolling interest
    (35 )     (323 )     (202 )     (648 )
Net income attributable to First Advantage Corporation ("FADV")
  $ 11,450     $ 12,631     $ 35,035     $ 38,308  
Basic income per share:
                               
Income from continuing operations attributable to FADV shareholders
  $ 0.19     $ 0.21     $ 0.59     $ 0.72  
Loss from discontinued operations attributable to FADV shareholders, net of tax
    -       -       -       (0.07 )
    Net income attributable to FADV shareholders
  $ 0.19     $ 0.21     $ 0.59     $ 0.65  
Diluted income per share:
                               
Income from continuing operations attributable to FADV shareholders
  $ 0.19     $ 0.21     $ 0.59     $ 0.72  
Loss from discontinued operations attributable to FADV shareholders, net of tax
    -       -       -       (0.08 )
    Net income attributable to FADV shareholders
  $ 0.19     $ 0.21     $ 0.59     $ 0.64  
Weighted-average common shares outstanding:
                               
Basic
    59,803       59,478       59,722       59,358  
Diluted
    60,086       59,529       59,867       59,446  
Amounts attributable to FADV shareholders:
                               
Income from continuing operations
  $ 11,450     $ 12,631     $ 35,035     $ 42,549  
Loss from discontinued operations, net of tax
    -       -       -       (4,241 )
     Net income
  $ 11,450     $ 12,631     $ 35,035     $ 38,308  



The accompanying notes are an integral part of these consolidated financial statements.
5

First Advantage Corporation

Consolidated Statements of Comprehensive Income (Unaudited)




   
Three Months Ended
   
Nine Months Ended
 
(in thousands)
 
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net income
  $ 11,415     $ 12,308     $ 34,833     $ 37,660  
Other comprehensive income (loss) , net of tax:
                               
Foreign currency translation adjustments
    1,495       (4,515 )     4,298       (2,435 )
  Unrealized gain (loss) on investment, net of tax
    2,795       4,174       10,528       (25,483 )
Total other comprehensive income (loss) , net of tax
    4,290       (341 )     14,826       (27,918 )
Comprehensive income
    15,705       11,967       49,659       9,742  
 Less:  Comprehensive loss attributable to the noncontrolling interest
    (35 )     (323 )     (202 )     (648 )
Comprehensive income attributable to FADV
  $ 15,740     $ 12,290     $ 49,861     $ 10,390  







The accompanying notes are an integral part of these consolidated financial statements.
6

First Advantage Corporation

 
Consolidated Statement of Changes in Equity
For the Nine Months Ended September 30, 2009 (Unaudited)





                           
Accumulated
             
(in thousands)
 
Common
   
Common
   
Additional
         
Other
             
   
Stock
   
Stock
   
Paid-in
   
Retained
   
Comprehensive
   
Noncontrolling
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
(Loss) Income
   
Interests
   
Total
 
Balance at December 31, 2008
    59,499     $ 60     $ 502,600     $ 390,602     $ (412 )   $ 44,198     $ 937,048  
Net income
    -       -       -       35,035       -       (202 )     34,833  
Purchase of subsidiary shares from
                                                       
noncontrolling interest
    -       -       (6,779 )     -       -       865       (5,914 )
Class A Shares issued in connection
                                                       
with share based compensation
    323       -       830       -       -       -       830  
Share based compensation
    -       -       5,760       -       -       -       5,760  
Foreign currency translation
    -       -       -       -       4,298       -       4,298  
Unrealized gain on investment, net of tax
    -       -       -       -       10,528       -       10,528  
Balance at September 30, 2009
    59,822     $ 60     $ 502,411     $ 425,637     $ 14,414     $ 44,861     $ 987,383  

The accompanying notes are an integral part of these consolidated financial statements.
7

First Advantage Corporation

Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2009 and 2008 (Unaudited)



(in thousands)
 
For the Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
Cash flows from operating activities:
           
Net income
  $ 34,833     $ 37,660  
Loss from discontinued operations
    -       (4,241 )
Income from continuing operations
  $ 34,833     $ 41,901  
Adjustments to reconcile income from continuing operations to net
               
cash provided by (used in) operating activities:
               
Depreciation and amortization
    32,574       31,520  
Impairment loss
    -       2,017  
Bad debt expense
    7,013       5,867  
Share based compensation
    5,760       7,344  
Deferred income tax
    3,132       4,288  
Change in operating assets and liabilities, net of acquisitions:
               
Accounts receivable
    (2,220 )     13,206  
Prepaid expenses and other current assets
    9       541  
Other assets
    (2,597 )     (790 )
Accounts payable
    (2,908 )     (5,433 )
Accrued liabilities
    4,069       (1,478 )
Deferred income
    (1,630 )     (938 )
Due from affiliates
    (3,894 )     (5,825 )
Income tax accounts
    (12,072 )     (52,452 )
Accrued compensation and other liabilities
    (5,050 )     (6,739 )
Net cash provided by operating activities - continuing operations
    57,019       33,029  
Net cash provided by operating activities - discontinued operations
    -       754  
Cash flows from investing activities:
               
Database development costs
    (2,955 )     (3,203 )
Purchases of property and equipment
    (14,517 )     (24,337 )
Cash paid for acquisitions
    (19,465 )     (51,191 )
Proceeds from sale of assets
    900       -  
Cash balance of companies acquired
    -       331  
Net cash used in investing activities - continuing operations
    (36,037 )     (78,400 )
Net cash provided by investing activities - discontinued operations
    -       1,721  
Cash flows from financing activities:
               
Proceeds from long-term debt
    50,860       100,260  
Repayment of long-term debt
    (62,260 )     (85,455 )
Cash contributions from First American to LeadClick Holdings, LLC
    -       2,402  
Proceeds from class A shares issued in connection with stock option
               
plan and employee stock purchase plan
    830       4,566  
Cash paid for acquisition of noncontrolling interests
    (5,914 )     (8,008 )
Distribution to noncontrolling interests
    -       (1,127 )
Tax expense related to stock options
    -       (204 )
Net cash (used in) provided by financing activities
    (16,484 )     12,434  
Effect of exchange rates on cash
    925       (648 )
Increase (decrease) in cash and cash equivalents
    5,423       (31,110 )
Cash and cash equivalents at beginning of period
    52,361       76,060  
Change in cash and cash equivalents of discontinued operations
    -       540  
Cash and cash equivalents at end of period
  $ 57,784     $ 45,490  


The accompanying notes are an integral part of these consolidated financial statements.
8

First Advantage Corporation

Consolidated Statements of Cash Flows, continued
For the Nine Months Ended September 30, 2009 and 2008 (Unaudited)




   
For the Nine Months Ended
 
(in thousands)
 
September 30,
 
   
2009
   
2008
 
Supplemental disclosures of cash flow information:
           
Cash paid for interest
  $ 684     $ 2,106  
Cash received for income tax refunds
  $ 1,081     $ 1,248  
Cash paid for income taxes
  $ 33,996     $ 75,661  
Non-cash investing and financing activities:
               
Notes issued in connection with acquisitions
  $ -     $ 3,026  
Class A shares issued for compensation
  $ 4,997     $ 2,788  
Unrealized gain (loss) on investment, net of tax
  $ 10,528     $ (25,483 )

The accompanying notes are an integral part of these consolidated financial statements.
9

First Advantage Corporation

Notes to Consolidated Financial Statements


1. Organization and Nature of Business
 
First Advantage Corporation (the “Company” or “First Advantage” or “FADV”) is a global risk mitigation and business solutions provider and operates in five primary business segments: Credit Services, Data Services, Employer Services, Multifamily Services, and Investigative and Litigation Support Services.  In the first quarter of 2009, the Company consolidated the previous Lender Services and Dealer Services segments and moved the consumer credit business from the Data Services segment to create the Credit Services segment. The prior periods have been recast to reflect the changed segments.
 
The First American Corporation and its affiliates (“First American”) currently own or control, directly or indirectly, all of the Company's Class B shares of common stock, which represents approximately 80% of equity interests of the Company and approximately 98% of the voting power of the Company as of September 30, 2009.  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 October 8, 2009, First American issued a press release announcing the commencement of an exchange offer (the “Offer”) to acquire all of the outstanding shares of the Company’s Class A common stock (“Class A Shares”) not owned or controlled by First American at an exchange ratio of 0.58 of a First American common share per Class A Share (See Note 11 – Subsequent Event).  On October 9, 2009, First American filed a Registration Statement on Form S-4 with the Securities and Exchange Commission (the “SEC”), which contains the Offer to Exchange and related materials.  On that same day, the Company filed with the SEC a Solicitation/Recommendation on Schedule 14D-9 pursuant to which the Special Committee of the Board of Directors of the Company recommended on behalf of the Board of Directors of the Company, that the stockholders of the Company accept the Offer and tender their shares pursuant to the Offer.  The Offer is described in further detail in Note 11 – Subsequent Event.    
 
In the event that the Offer is accepted and consummated in the fourth quarter, operating results for the fourth quarter will be negatively impacted due to related costs.  As further described in Note 11 – Subsequent Event, upon meeting certain conditions, First American has announced that it intends to merge the Company with a wholly-owned subsidiary of First American.  This merger will constitute a  “Change in Control” under the FADV 2003 Incentive Compensation Plan (“the Plan”).  Upon a Change in Control, the unvested awards of stock options, restricted stock units and restricted stock issued under the Plan will vest and the unamortized costs of those awards will be expensed.  At September 30, 2009, the unamortized compensation expense was approximately $8.5 million and approximately $0.9 million related to the unvested restricted stock and unvested options, respectively.  In addition, Morgan Stanley is acting as the Company’s financial advisor related to the Offer.  Pursuant to the terms of Morgan Stanley’s engagement, in the event that the Offer is accepted, the Company has agreed to pay Morgan Stanley a transaction fee which is currently estimated to be approximately $3.0 million.


 
10

First Advantage Corporation

Notes to Consolidated Financial Statements


For the three and nine months ended September 30, 2009, the Company incurred approximately $1.6 million in legal expenses related to the Offer and related litigation and expects additional professional fees in the fourth quarter related to the Offer and related litigation.
 
As part of the Company’s streamlining initiative, in the second quarter of 2008, First Advantage sold First Advantage Investigative Services (“FAIS”), which was included in our Investigative and Litigation Support Services segment, and Credit Management Solutions, Inc. (“CMSI”), which was included in our Credit Services segment.  The results of these businesses’ operations in the prior period are presented in discontinued operations in the Company’s Consolidated Statements of Income.


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 (“GAAP”) for complete financial statements.  In the opinion of management, all adjustments are of a normal, recurring nature and are considered necessary for a fair statement of the results for the interim period.  The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally 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, 2008 and as amended on the Current Form 8-K filed on October 8, 2009 with the Securities and Exchange Commission.
 
Certain amounts for the three and nine months ended September 30, 2008 and at December 31, 2008 have been reclassified to conform with the 2009 presentation.
 
Operating results for the three and nine months ended September 30, 2009 and 2008 are not necessarily indicative of the results that may be expected for the entire fiscal year.
 
Subsequent events have been evaluated through October 29, 2009, the date these financial statements were issued.
 
As of September 30, 2009, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, have not changed from December 31, 2008, except for the adoption of the Financial Accounting Standards Board's (“FASB”) GAAP updates related to business combinations, noncontrolling interest in consolidated financial statements, subsequent events,

 
11

First Advantage Corporation

Notes to Consolidated Financial Statements


interim disclosures about fair value of financial instruments, and FASB Accounting Standards Codification.
 
Purchase Accounting
 
In December 2007, the FASB updated GAAP related to business combinations.  This update retains the fundamental requirements in previous statements that the acquisition method of accounting (which is called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. In general, the update 1) broadens the guidance, extending its applicability to all events where one entity obtains control over one or more other businesses, 2) broadens the use of fair value measurements used to recognize the assets acquired and liabilities assumed, 3) changes the accounting for acquisition related fees and restructuring costs incurred in connection with an acquisition, and 4) increases required disclosures. The Company will apply the provisions of this update prospectively to business combinations for which the acquisition date is on or after January 1, 2009.  
 
Noncontrolling Interest
 
In December 2007, the FASB updated GAAP related to noncontrolling interests in consolidated financial statements.  This update requires that a noncontrolling interest in a subsidiary be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest be identified in the consolidated financial statements. It also requires consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. The Company has applied the provisions of this update effective beginning on January 1, 2009 and the adoption did not have a material effect on its consolidated financial statements.
 
Fair Value of Financial Instruments
 
In April 2009, the FASB updated GAAP related to interim disclosures about fair value of financial instruments. This amends previous statements, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This also requires those disclosures in summarized financial information at interim reporting periods. This is effective for interim reporting periods ending after June 15, 2009. The update does not require disclosures for earlier periods presented for comparative purposes at initial


 
12

First Advantage Corporation

Notes to Consolidated Financial Statements


adoption. In periods after initial adoption, this update requires comparative disclosures only for periods ending after initial adoption. The Company adopted this new standard effective April 1, 2009.
 
The carrying amount of the Company’s financial instruments at September 30, 2009 and December 31, 2008, which includes cash and cash equivalents, marketable equity securities and accounts receivable, approximates fair value because of the short maturity of those instruments.  The Company’s marketable equity securities are classified as available for sale securities.  Unrealized holding gains and losses for available for sale securities are excluded from earnings and reported, net of taxes, as accumulated other comprehensive (loss) income.  The Company considers its variable rate debt to be representative of current market rates and, accordingly, estimates that the recorded amounts approximate fair market value.  Fair value estimates of its fixed rate debt were determined using discounted cash flow methods with a discount rate of 3.25%, which are the estimated rates that similar instruments could be negotiated at September 30, 2009 and December 31, 2008.
 
The estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, are summarized as follows:



   
September 30, 2009
   
December 31, 2008
 
(in thousands)
 
Carrying
   
Estimated
   
Carrying
   
Estimated
 
   
Amount
   
Fair Value
   
Amount
   
Fair Value
 
Cash and cash equivalents
  $ 57,784     $ 57,784     $ 52,361     $ 52,361  
Accounts receivable
    115,870       115,870       121,531       121,531  
Marketable equity securities
    48,293       48,293       30,365       30,365  
Long-term debt and capital leases
    (21,474 )     (21,508 )     (32,829 )     (32,699 )

Subsequent Events
 
In May 2009, the FASB updated GAAP related to subsequent events.  The update establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued.  It is effective for reporting periods ending after June 15, 2009. The Company adopted this update effective April 1, 2009.
 
Accounting Standards Codification
 
The FASB has adopted the FASB Accounting Standards Codification (the “Codification”) as the single authoritative source for GAAP, replacing the mix of accounting standards that have evolved over the last 50 plus years. The Codification is effective for financial statements that cover interim and annual periods ending after September 15, 2009. While not intended to change GAAP, the Codification significantly changes the way in which accounting literature is organized. It's now organized by accounting topic, which should enable users to more quickly identify the guidance that applies to a specific accounting issue.  The Company adopted this new standard effective September 15, 2009.
 
3. Acquisitions
 
During the nine months ended September 30, 2009, the Company paid consideration of approximately $19.5 million in cash related to earnout provisions from prior year acquisitions, approximately $5.1 million for the final purchase of a portion of noncontrolling interests in LeadClick Media, Inc, and $0.8 million for an additional portion of noncontrolling interest in PrideRock Holding Company.  The additional


 
13

First Advantage Corporation

Notes to Consolidated Financial Statements


consideration related to earnout provisions was recorded to goodwill and the purchase of noncontrolling interests was recorded to additional paid in capital when paid.
 
The changes in the carrying amount of goodwill, by operating segment, are as follows for the nine months ended September 30, 2009:


         
Acquisitions,
   
Adjustments
       
   
Balance at
   
(Disposals)
   
to net assets
   
Balance at
 
(in thousands)
 
December 31, 2008
   
and Earnouts
   
acquired
      September 30, 2009  
Credit Services
  $ 107,578     $ -     $ -     $ 107,578  
Data Services
    218,505       (611     -       217,894  
Employer Services
    272,461       2,266       3,308       278,035  
Multifamily Services
    49,174       -       -       49,174  
Investigative and Litigation Support Services
    83,651       17,199       16       100,866  
Consolidated
  $ 731,369     $ 18,854     $ 3,324     $ 753,547  

The adjustments to net assets acquired represent post acquisition adjustments for those companies acquired in the past periods.

4. Discontinued Operations
 
As discussed in Note 1, as part of the Company’s streamlining initiative, in the second quarter of 2008, the Company sold FAIS, which was included in our Investigative and Litigation Support Services segment, and CMSI, which was included in our Credit Services segment.  The results of these businesses’ operations in the prior period are presented in discontinued operations in the Company’s Consolidated Statements of Income.
 
The following amounts have been segregated from continuing operations and are reflected as discontinued operations for the nine months ended September 30, 2008.


 
14

First Advantage Corporation

Notes to Consolidated Financial Statements



 
   
Nine months ended
 
   
September 30,
 
(in thousands, except per share amounts)
 
2008
 
Total revenue
  $ 7,671  
Loss from discontinued operations before income taxes
  $ (7,155 )
Income tax benefit
    (2,914 )
    Loss from discontinued operations, net of tax
  $ (4,241 )
Loss per share:
       
Basic
  $ (0.07 )
Diluted
  $ (0.08 )
Weighted-average common shares outstanding:
       
Basic
    59,358  
Diluted
    59,446  

5. Goodwill and Intangible Assets
 
In accordance with GAAP, the Company will perform the goodwill impairment test for all reporting units in the fourth quarter of 2009.   There have been no impairments of goodwill during the nine months ended September 30, 2009.
 
Given the current economic environment and the uncertainties regarding the impact on the Company’s business, there can be no assurance that the Company’s estimates and assumptions regarding the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of the Company’s goodwill impairment testing during the year ended December 31, 2008 will prove to be accurate predictions of the future. If the Company’s assumptions regarding forecasted revenue or margin growth rates of certain reporting units are not achieved, the Company may be required to record additional goodwill impairment losses in connection with the Company’s next annual impairment testing in the fourth quarter of 2009 or in future periods. It is not possible at this time to determine if any such future impairment loss would result or, if it does, whether such charge would be material.
 
 


 
15

First Advantage Corporation

Notes to Consolidated Financial Statements


Goodwill and other identifiable intangible assets as of September 30, 2009 and December 31, 2008 are as follows:
 
(in thousands)
 
September 30, 2009
   
December 31, 2008
 
Goodwill
  $ 753,547     $ 731,369  
Customer lists
  $ 93,757     $ 95,446  
Less accumulated amortization
    (47,937 )     (41,633 )
Customer lists, net
  $ 45,820     $ 53,813  
Other identifiable intangible assets:
               
   Noncompete agreements
  $ 9,097     $ 11,783  
   Trade names
    20,468       21,631  
      29,565       33,414  
Less accumulated amortization
    (15,190 )     (16,169 )
Other identifiable intangible assets, net
  $ 14,375     $ 17,245  

Amortization of customer lists and other identifiable intangible assets totaled approximately $3.6 million and $5.3 million for the three months ended September 30, 2009 and 2008, respectively, and approximately $11.0 million and $13.8 million for the nine months ended September 30, 2009 and 2008, respectively.
 
An impairment loss of $1.3 million was recorded for the three and nine months ended September 30, 2008 in the Credit Services segment.  The charge is related to the write-off of the net book value of the automotive lead generation business’ identifiable intangible assets and customer list.  The impairment loss was incurred due to the challenging credit market and the negative impact to the automotive lead generation business.
 
Estimated amortization expense relating to intangible asset balances as of September 30, 2009, is expected to be as follows over the next five years:


(in thousands)
     
Remainder of 2009
  $ 3,609  
2010
    13,956  
2011
    11,323  
2012
    10,231  
2013
    8,831  
Thereafter
    12,245  
    $ 60,195  


 



 
 
16

First Advantage Corporation

Notes to Consolidated Financial Statements


The changes in the carrying amount of identifiable intangible assets are as follows for the nine months ended September 30, 2009:
 
   
Other
       
   
Identifiable
       
   
Intangible
   
Customer
 
(in thousands)
 
Assets
   
Lists
 
Balance, at December 31, 2008
  $ 17,245     $ 53,813  
Adjustments
    37       57  
Amortization
    (2,907 )     (8,050 )
Balance, at September 30, 2009
  $ 14,375     $ 45,820  



6. Debt
 
Long-term debt consists of the following at September 30, 2009:


(in thousands, except percentages)
     
 
     
Acquisition notes:  Weighted average interest rate of 3.64% with maturities
     
    through 2011
  $ 9,657  
Bank notes:  $225 million Secured Credit Facility, interest at 30-day LIBOR
       
    plus 1.13% (1.37% at September 30, 2009) matures September 2010
    10,000  
Capital leases and other debt:  Various interest rates with maturities through 2011
     1,817  
    Total long-term debt and capital leases
  $ 21,474  
    Less current portion of long-term debt and capital leases
    20,446  
    Long-term debt and capital leases, net of current portion
  $ 1,028  

At September 30, 2009, the Company was in compliance with the financial covenants of its loan agreement.  In the event that the First American Offer is accepted and consummated with a merger, this may be determined to be an “Event of Default,” under the terms of the Credit Agreement.


7. Earnings Per Share
 
A reconciliation of earnings per share and weighted-average shares outstanding is as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
(in thousands, except per share amounts)
 
September 30,
   
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Income from continuing operations attributable to FADV shareholders
  $ 11,450     $ 12,631     $ 35,035     $ 42,549  
Loss from discontinued operations attributable to FADV shareholders, net of tax
    -       -       -       (4,241 )
    Net income attributable to FADV shareholders
  $ 11,450     $ 12,631     $ 35,035     $ 38,308  
Denominator:
                               
Weighted-average shares for basic earnings per share
    59,803       59,478       59,722       59,358  
Effect of restricted stock
    255       42       135       72  
Effect of dilutive securities - employee stock options and warrants
    28       9       10       16  
Denominator for diluted earnings per share
    60,086       59,529       59,867       59,446  
Earnings per share:
                               
 Basic
                               
Income from continuing operations attributable to FADV shareholders
  $ 0.19     $ 0.21     $ 0.59     $ 0.72  
Loss from discontinued operations attributable to FADV shareholders, net of tax
    -       -       -       (0.07 )
    Net income attributable to FADV shareholders
  $ 0.19     $ 0.21     $ 0.59     $ 0.65  
 Diluted
                               
Income from continuing operations attributable to FADV shareholders
  $ 0.19     $ 0.21     $ 0.59     $ 0.72  
Loss from discontinued operations attributable to FADV shareholders, net of tax
    -       -       -       (0.08 )
    Net income attributable to FADV shareholders
  $ 0.19     $ 0.21     $ 0.59     $ 0.64  

For the three months ended September 30, 2009 and 2008, options and warrants totaling 2,962,431 and 3,999,719, respectively, were excluded from the weighted average diluted shares outstanding, as they were antidilutive.  For the nine months ended September 30, 2009 and 2008, options and warrants totaling 3,162,930 and 3,895,234, respectively, were excluded from the weighted average diluted shares outstanding, as they were antidilutive.

8. Share-Based Compensation
 
In the first quarter of 2008, the Company changed from granting stock options as the primary means of share-based compensation to granting restricted stock units (“RSU”). The fair value of any RSU grant is based on the market value of the Company’s shares on the date of the grant and is recognized as compensation expense over the vesting period.  RSUs generally vest over three years at a rate of 33.3% for the first two years and 33.4% for last year.
 
Restricted stock activity since December 31, 2008 is summarized as follows:


         
Weighted
 
(in thousands, except weighted average fair value prices)
       
Average
 
   
Number of
   
Grant-Date
 
   
Shares
   
Fair Value
 
Nonvested restricted stock outstanding at December 31, 2008
    632     $ 21.93  
    Restricted stock granted
    423     $ 10.89  
    Restricted stock forfeited
    (30 )   $ 17.99  
    Restricted stock vested
    (253 )   $ 23.06  
Nonvested restricted stock outstanding at September 30, 2009
    772     $ 15.66  


 


 
18

First Advantage Corporation

Notes to Consolidated Financial Statements


The following table illustrates the share-based compensation expense recognized for the three and nine months ended September 30, 2009 and 2008.

 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in thousands)
 
2009
   
2008
   
2009
   
2008
 
Stock options
  $ 457     $ 1,165     $ 1,578     $ 3,875  
Restricted stock
    1,363       1,169       4,109       3,357  
Employee stock purchase plan
    20       26       73       112  
    $ 1,840     $ 2,360     $ 5,760     $ 7,344