UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2007
OR
For the transition period from to
Commission file number: 001-31666
FIRST ADVANTAGE CORPORATION
(Exact name of registrant as specified in its charter)
100 Carillon Parkway
St. Petersburg, Florida 33716
(Address of principal executive offices, including zip code)
(727) 214-3411
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) Yes x No ¨ and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b 2). Yes ¨ No x
There were 11,338,530 shares of outstanding Class A Common Stock of the registrant as of July 26, 2007.
There were 47,726,521 shares of outstanding Class B Common Stock of the registrant as of July 26, 2007.
INDEX
Item 1.
Item 2.
Item 3.
Item 4.
Part II. OTHER INFORMATION
Item 1A.
Item 5.
Item 6.
PART I. FINANCIAL INFORMATION
First Advantage Corporation
Consolidated Financial Statements
For the Three and Six Months Ended
June 30, 2007 and 2006
Consolidated Balance Sheets (Unaudited)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable (less allowance for doubtful accounts of $7,296 and $6,487 in 2007 and 2006, respectively)
Prepaid expenses and other current assets
Income tax receivable
Deferred income tax asset
Total current assets
Property and equipment, net
Goodwill
Customer lists, net
Other intangible assets, net
Database development costs, net
Investment in equity investee
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
Accrued compensation
Accrued liabilities
Deferred income
Due to affiliates
Current portion of long-term debt and capital leases
Total current liabilities
Long-term debt and capital leases, net of current portion
Deferred income tax liability
Other liabilities
Total liabilities
Minority interest
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.001 par value; 1,000 shares authorized, no shares issued or outstanding
Class A common stock, $.001 par value; 125,000 shares authorized; 11,290 and 10,452 shares issued and outstanding as of June 30, 2007 and December 31, 2006, respectively
Class B common stock, $.001 par value; 75,000 shares authorized; 47,727 shares issued and outstanding as of June 30, 2007 and December 31, 2006
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying note are an integral part of these consolidated financial statements.
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Consolidated Statements of Income and Comprehensive Income (Unaudited)
Service revenue
Reimbursed government fee revenue
Total revenue
Cost of service revenue
Government fees paid
Total cost of service
Gross margin
Salaries and benefits
Facilities and telecommuncations
Other operating expenses
Depreciation and amortization
Total operating expenses
Income from operations
Other (expense) income:
Interest expense
Interest income
Total other (expense), net
Equity in earnings of investee
Income before income taxes and minority interest
Provision for income taxes
Income before minority interest
Net income
Other comprehensive income, net of tax:
Foreign currency translation adjustments
Comprehensive income
Per share amounts:
Basic
Diluted
Weighted-average common shares outstanding:
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Consolidated Statement of Changes in Stockholders’ Equity
For the Six Months Ended June 30, 2007 (Unaudited)
(in thousands)
Balance at December 31, 2006
Cumulative effect of the adoption of FIN 48
Class A Shares issued in connection with prior year acquisitions
Class A Shares issued in connection with share based compensation
Tax benefit related to stock options
Share based compensation
Other comprehensive income
Balance at June 30, 2007
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Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2007 and 2006 (Unaudited)
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense
Minority interest in net income
Deferred income tax
Change in operating assets and liabilities, net of acquisitions:
Accounts receivable
Net change in income tax accounts
Accrued compensation and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Database development costs
Purchases of property and equipment
Cash paid for acquisitions
Cash balance of companies acquired
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from long-term debt
Repayment of long-term debt
Cash contributions from First American to Leadclick LLC
Proceeds from class A shares issued in connection with stock option plan and employee stock purchase plan
Distribution to minority interest shareholders
Net cash (used in) provided by financing activities
Effect of exchange rates on cash
Decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
The accompanying notes are an integral part of these consolidated financial statements.
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Supplemental disclosures of cash flow information:
Cash paid for interest
Cash paid for income taxes
Non-cash investing and financing activities:
Class A shares issued in connection with prior year acquisitions
Notes issued in connection with acquisitions
Class A shares issued for share based compensation
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Notes to Consolidated Financial Statements
June 30, 2007 and 2006 (Unaudited)
First Advantage Corporation (the “Company” or “First Advantage”) is a global risk mitigation and business solutions provider and operates in six primary business segments: Lender Services, Data Services, Dealer Services, Employer Services, Multifamily Services, and Investigative and Litigation Support Services.
The First American Corporation and affiliates (“First American”) own approximately 81% of the shares of capital stock of the Company as of June 30, 2007. The Class B common stock owned by First American is entitled to ten votes per share on all matters presented to the stockholders for vote.
On March 1, 2007, John Long submitted his resignation as the Chief Executive Officer and as a director of the Company, effective as of March 30, 2007. In connection with his resignation from the Company, Mr. Long and First Advantage entered into a Transition Agreement dated as of March 2, 2007. The Transition Agreement provides that Mr. Long will receive cash severance of $4.4 million to be paid in two equal installments between April 2007 and March 2008. In addition, Mr. Long will receive an acceleration of his unvested options and two restricted stock awards, effective March 30, 2007. An additional restricted stock award made to Mr. Long will vest during the term of restrictive covenants set forth in the Transition Agreement. Restricted stock units, previously granted to Mr. Long, will continue to vest according to the terms of First Advantage’s 2003 Incentive Compensation Plan. Based on the recommendation of the Compensation Committee, the Transition Agreement was approved by First Advantage’s board of directors on March 1, 2007. In connection with the Transition Agreement, First Advantage recorded compensation expense of $8.0 million in the first quarter of 2007 (included in salaries and benefits in the accompanying six months ended June 30, 2007 Consolidated Statements of Income and Comprehensive Income), reflecting the value of the cash severance payment of $4.4 million and the value of the previously unvested restricted stock, restricted stock units and stock options. The $8.0 million of compensation expense reduced net income for the six months ending June 30, 2007 by $4.7 million or 8 cents per diluted share.
Basis of Presentation
The consolidated financial information included in this report has been prepared in accordance with the instructions to Form 10-Q and does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments are of a normal recurring nature and are considered necessary for a fair statement of the results for the interim period. The year end balance data was derived from audited financial statements, but does not include all disclosures required by generally
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accepted accounting principles. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission.
First Advantage completed one acquisition in the first quarter of 2007. The Company’s operating results for the three and six months ended June 30, 2007 include results for the acquired entity from the date of acquisition.
Operating results for the three and six months ended June 30, 2007 and 2006 are not necessarily indicative of the results that may be expected for the entire fiscal year.
As of June 30, 2007, the Company’s significant accounting polices and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, have not changed from December 31, 2006.
Certain amounts for the three and six months ended June 30, 2006 have been reclassified to conform with the 2007 presentation.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value within generally accepted accounting principles, and expands disclosure requirements regarding fair value measurements. The provisions for SFAS 157 are effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
In February 2007, the FASB issued FAS 159 “The Fair Value Option for Financial Assets and Liabilities.” FAS 159 allows companies to report selected financial assets and liabilities at fair value at their discretion. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. FAS 159 is effective at the beginning of a company’s first fiscal year after November 15, 2007.
During the first quarter of 2007, the Company completed one acquisition for $4.5 million in cash and notes. In addition, the Company paid consideration of $35.6 related to earnout provisions from prior year acquisitions and an additional purchase of a portion of the minority interest in LeadClick Media Inc.
The aggregate purchase price of the acquisition and the earnouts completed during 2007 is as follows:
Cash
Notes payable
Stock (378 Class A shares)
Purchase price
The cash paid includes $3.8 million contributed by First American to LeadClick Holding Company, LLC (70% owned by First Advantage and 30% owned by First American), a consolidated subsidiary of First Advantage, to fund their portion of an overall $12.6 capital contribution in LeadClick Media, Inc.
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The preliminary allocation of the aggregate purchase price of this acquisition and the earnouts are as follows:
Identifiable intangible assets
Net assets acquired
The changes in the carrying amount of goodwill, by operating segment, are as follows for the six months ended June 30, 2007:
Lender Services
Data Services
Dealer Services
Employer Services
Multifamily Services
Investigative and Litigation Support Services
Consolidated
The adjustments to net assets acquired represent post acquisition adjustments for those companies not acquired in the period.
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” the Company will complete the goodwill impairment test for all reporting units in the fourth quarter of 2007 (using the September 30 valuation date). There have been no impairments of goodwill during the six months ended June 30, 2007.
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Goodwill, customer lists and other intangible assets as of June 30, 2007 and December 31, 2006 are as follows:
Customer lists
Less accumulated amortization
Other intangible assets:
Noncompete agreements
Trade names
Amortization of customer lists and other intangible assets totaled approximately $8.4 million and $7.8 million for the six months ended June 30, 2007 and 2006, respectively. Estimated amortization expense relating to intangible asset balances as of June 30, 2007, is expected to be as follows over the next five years:
2007
2008
2009
2010
2011
Thereafter
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The changes in the carrying amount of identifiable intangible assets are as follows for the six months ended June 30, 2007:
Balance, at December 31, 2006
Acquisitions
Adjustments
Amortization
Balance, at June 30, 2007
Long-term debt and capital leases consist of the following at June 30, 2007:
Acquisition notes:
Weighted average interest rate of 6.72% with maturities through 2010
Bank notes:
$225 million Secured Credit Facility, interest at 30-day LIBOR plus 1.25% (6.57% and 5.99% at June 30, 2007 and 2006, respectively), matures September 2010
Capital leases and other debt:
Various interest rates with maturities through 2009
Total long-term debt and capital leases
Less current portion of long-term debt and capital leases
At June 30, 2007, the Company was in compliance with the financial covenants of its loan agreement.
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A reconciliation of earnings per share and weighted-average shares outstanding is as follows:
Net Income - numerator for basic and fully diluted earnings per share
Denominator:
Weighted-average shares for basic earnings per share
Effect of restricted stock
Effect of contingent shares related to DealerTrack
Effect of dilutive securities - employee stock options and warrants
Denominator for diluted earnings per share
Earnings per share:
For the three months ended June 30, 2007 and 2006, options totaling 2,105,586 and 1,581,662, respectively, were excluded from the weighted average diluted shares outstanding, as they were antidilutive. For the six months ended June 30, 2007 and 2006, options totaling 1,901,776 and 1,329,719, respectively, were excluded from the weighted average diluted shares outstanding, as they were antidilutive.
At June 30, 2007, there are 5,762,425 stock options to purchase shares of the Company’s common stock, 356,660 restricted stock awards, and 71,483 restricted stock units were granted under the First Advantage Corporation 2003 Incentive Compensation Plan. Share-based grants generally vest over three years at a rate of 33.4% for the first year and 33.3% for each of the two following years. The option grants expire ten years after the grant date. As of January 1, 2006, the Company accounts for these share-based grants in accordance with SFAS No.123R, which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. Share-based compensation for the three months ending June 30, 2007 and 2006 was $2.8 million and $3.1 million, respectively. Share-based compensation for the six months ending June 30, 2007 and 2006 was $8.9 million and $6.0 million, respectively.
Warrants and Options to Purchase Class A Common Stock
The Company had outstanding warrants to purchase up to 47,994 shares of its common stock at exercise prices ranging from $0.25 to $22.50 per share as of June 30, 2007. The weighted average remaining contractual life in years for the warrants outstanding is 3.01 and the weighted average exercise price is $14.01.
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Stock option activity under the Company’s stock plan since December 31, 2006 is summarized as follows:
Weighted
Average
Exercise Price
Options outstanding at December 31, 2006
Options granted
Options exercised
Options canceled
Options outstanding at June 30, 2007
Options exercisable, end of the quarter
The following table summarizes information about stock options outstanding at June 30, 2007:
(in thousands, except for exercise prices, years and weighted average amounts)
Options Outstanding
Options Exercisable
Range of Exercise Prices
Shares
Weighted AvgRemaining ContractualLife in Years
$ 7.00 - $ 12.50
$12.51 - $ 25.00
$25.01 - $ 50.00
$50.01 - $242.25
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal examinations by tax authorities for years before 2003, and state and local, and non-U.S. income tax examinations by tax authorities for years before 2002. The Internal Revenue Service commenced an examination of Leadclick Media, Inc.’s separate 2005 federal income tax return. The Company does not anticipate material adjustments as a result of this examination.
The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized approximately a $0.2 million increase in the liability for uncertain tax benefits as well as approximately $0.7 million increase in the liability for related penalties and interest, which was accounted for as a reduction to the January 1, 2007 retained earnings.
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As of June 30, 2007, the Company has a $0.9 million total liability recorded for unrecognized tax benefits as well as a $0.7 million total liability for income tax related penalties and interest. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $0.9 million. The majority of the unrecognized tax benefits and associated interest and penalties relates to foreign operations. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company does not currently anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease by the end of 2007.
The Company operates in six primary business segments: Lender Services, Data Services, Dealer Services, Employer Services, Multifamily Services, and Investigative and Litigation Support Services.
The Lender Services segment offers lenders credit reporting solutions for mortgage and home equity needs.
The Data Services segment includes business lines that provide transportation credit reporting, motor vehicle record reporting, fleet management, supply chain theft and damage mitigation consulting, consumer location, criminal records reselling, specialty finance credit reporting, consumer credit reporting services, and lead generation services. Revenue for the Data Services segment includes $1.3 million and $1.2 million of inter-segment sales for the three months ended June 30, 2007 and 2006, respectively. Revenue for the Data Services segment includes $2.5 million and $2.4 million of inter-segment sales for the six months ended June 30, 2007 and 2006, respectively.
The Dealer Services business segment serves the automotive dealer marketplace by delivering consolidated consumer credit reports, credit automation software and vehicle lead generation services.
The Employer Services segment includes employment background screening, occupational health services, tax incentive services and hiring solutions. Products and services relating to employment background screening include criminal records searches, employment and education verification, social security number verification and credit reporting. Occupational health services include drug-free workplace programs, physical examinations and employee assistance programs. Hiring solutions include applicant tracking software and recruiting services. Tax incentive services include services related to the administration of employment-based and location-based tax credit and incentive programs, sales and use tax programs and fleet asset management programs. The professional employer organization provides companies with comprehensive outsourced management of payroll and human resource management. Revenue for the Employer Services segment includes $0.2
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million and $0.2 million of inter-segment sales for each of the three month periods ended June 30, 2007 and 2006, respectively. Revenue for the Employer Services segment includes $0.6 million and $0.5 million of inter-segment sales for each of the six month periods ended June 30, 2007 and 2006, respectively.
The Multifamily Services segment includes resident screening and software services. Resident screening services include criminal background and eviction searches, credit reporting, employment verification and lease performance and payment histories. Revenue for the Multifamily Services segment includes $0.1 million of inter-segment sales for each of the three month periods ended June 30, 2007 and 2006. Revenue for the Multifamily Services segment includes $0.3 million and $0.2 million of inter-segment sales for each of the six month periods ended June 30, 2007 and 2006, respectively.
The Investigative and Litigation Support Services segment includes all investigative services. Products and services offered by the Investigative and Litigation Support Services segment includes surveillance services, field interviews, computer forensics, electronic discovery, due diligence reports and other high level investigations.
The elimination of intra-segment revenue and cost of service revenue is included in Corporate. These transactions are recorded at cost.
International operations included in the Employer Services segment include service revenue of $9.8 million and $4.4 million for the three months ended June 30, 2007 and 2006, respectively, and $18.4 million and $7.8 million for the six months ended June 30, 2007 and 2006, respectively. International operations included in Investigative and Litigation Support Services segment include service revenue of $6.0 million and $6.1 million for the three and six months ended June 30, 2007, respectively.
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The following table sets forth segment information for the three months ended June 30, 2007 and 2006.
Service
Revenue
Depreciation
and Amortization
Income (Loss)
From Operations
Three Months Ended June 30, 2007
Corporate and Eliminations
Three Months Ended June 30, 2006
Six Months Ended June 30, 2007
Six Months Ended June 30, 2006
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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”) provides global risk mitigation, screening services and credit reporting to enterprise and consumer customers. The Company operates in six primary business segments: Lender Services, Data Services, Dealer Services, Employer Services, Multifamily Services, and Investigative & Litigation Support Services. First Advantage is headquartered in St. Petersburg, Florida, and has approximately 4,800 employees in offices throughout the United States and abroad. For the six months ended June 30, 2007, First Advantage has acquired one company, which is included in the Employer Services segment.
Operating results for the three and six months ended June 30, 2007 included total service revenue of $207.4 million and $409.2 million, respectively. This represents an increase of 8.1% and 9.7% over the same periods in 2006. The organic growth rate was 4.0% and 4.7% for the three and six months ended June 30, 2007, respectively. Operating income for the three and six months ended June 30, 2007 was $34.3 million and $56.3 million, respectively. Operating income increased $.9 million for the three months ended June 30, 2007 and decreased $4.2 million for the six months ended June 30, 2007 in comparison to the same periods in 2006. In connection with the former CEO’s Transition Agreement, First Advantage recorded compensation expense of $8.0 million in the first quarter of 2007 (included in salaries and benefits in the accompanying six months ended June 30, 2007 Consolidated Statements of Income and Comprehensive Income), reflecting the value of the cash severance payment of $4.4 million and the value of the previously unvested restricted stock, restricted stock units and stock options. The $8.0 million of compensation expense reduced net income for the six months ending June 30, 2007 by $4.7 million or 8 cents per diluted share.
Critical Accounting Policies and Estimates
Critical accounting policies are those policies used in the preparation of the company’s financial statements that require management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenue, expenses and related disclosure of contingencies. A summary of these policies can be found in Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for year ended December 31, 2006.
In September 2006, the FASB issued SFAS 157 “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value within generally accepted accounting principles (GAAP), and expands disclosure requirements regarding fair value measurements. The provisions for SFAS 157 are effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
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The following is a summary of the operating results by the Company’s business segments for the three and six months ended June 30, 2007 and 2006.
Facilities and telecommunications
Income (loss) from operations
Operating margin percentage
Lender Services Segment
Three Months Ended June 30, 2007 Compared to Three Months Ended June 30, 2006
Service revenue was $42.8 million for the three months ended June 30, 2007, a decrease of $2.8 million compared to service revenue of $45.6 million for the three months ended June 30, 2006. A decrease in transactions, consistent with the decline in the mortgage lending industry, resulted in an overall decrease in service revenue despite revenue growth from new products and services.
Cost of service revenue was $14.2 million for the three months ended June 30, 2007, a decrease of $.8 million compared to cost of service revenue of $15.0 million in the same period of 2006. The impact of the decrease in transactions resulted in an overall decrease in the cost of service revenue offset in part by an increase in credit data costs.
Salaries and benefits were flat when comparing the three months ended June 30, 2007 and June 30, 2006. Salaries and benefits were 29.1% of service revenue in the second quarter of 2007 compared to 27.2% during the same period in 2006.
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Facilities and telecommunication expenses were flat compared to the same period in 2006. Facilities and telecommunication expenses were 4.4% of service revenue in the second quarter of 2007 compared to 3.8% in the second quarter of 2006.
Other operating expenses increased by $.5 million. Other operating expenses were 2.1% of service revenue in the second quarter of 2007 compared to .8% for the same period of 2006. The change in 2007 is primarily due to an increase in bad debt expense and increased costs related to foreign operations, partially offset by an increase in the amounts allocated to other segments for shared services and product development initiatives.
Depreciation and amortization expense was flat compared to the same period in 2006. Depreciation and amortization was 3.9% of service revenue during the second quarter of 2007 compared to 3.7% in the same period in 2006.
Income from operations was $11.7 million for the three months ended June 2007 compared to $14.4 million in the same period of 2006. The operating margin percentage decreased from 31.5% to 27.3% primarily due to impact of the decrease in service revenue, cost of increased foreign operations and bad debt expense.
Data Services Segment
Total service revenue was $38.7 million for the three months ended June 30, 2007, an increase of $3.4 million compared to service revenue of $35.3 million in the same period of 2006. This segment has experienced 9.7% organic growth primarily due to the expansion of the existing customer base in the membership and direct to consumer businesses.
Cost of service revenue was $10.2 million for the three months ended June 30, 2007, a decrease of $.4 million compared to cost of service revenue of $10.6 million in the same period of 2006. The decrease is primarily due to a change in the revenue mix of the businesses in the second quarter of 2007 compared to the same period in 2006.
Salaries and benefits increased $.4 million compared to the second quarter of 2006. Salaries and benefits were approximately 16.4% of service revenue in the second quarter of 2007 and 2006. The increase is primarily due to increased staffing levels needed to support the growth of the businesses.
Facilities and telecommunication expenses for the second quarter of 2007 were comparable to the same period in 2006. Facilities and telecommunication expenses were approximately 2.4% of service revenue in the second quarter of 2007 and 2006.
Other operating expenses increased by $1.6 million. Other operating expenses were 18.8% of service revenue in the second quarter of 2007 and 16.2% in the second quarter of 2006. The increase is largely attributable to increased advertising costs, bad debt expense and shared services allocations.
Depreciation and amortization expense was flat to the comparable period of 2006.
The operating margin percentage increased from 26.3% to 28.4% in comparing the second quarter of 2006 to the second quarter of 2007. The increase in the operating margin is primarily due to a change in the revenue mix of the businesses in the second quarter of 2007 compared to the same period in 2006.
Income from operations was $11.0 million for the second quarter of 2007, an increase of $1.7 million compared to $9.3 million in the second quarter of 2006.
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Dealer Services Segment
Service revenue was $29.9 million for the three months ended June 30, 2007, a decrease of $1.3 million compared to service revenue of $31.2 million for the three months ended June 30, 2006. An increase in transactions accounted for an 8.5% increase in credit report related revenue; however, a larger decrease in revenue in the vehicle lead generation business resulted in an overall decrease in service revenue.
Cost of service revenue was $16.1 million for the three months ended June 30, 2007, a decrease of $.1 million compared to cost of service revenue of $16.2 million in the same period of 2006. The decrease in cost of service revenue was driven by lower cost of service revenue on the lower margin vehicle lead generation business which was offset by an increase in credit reporting transactions.
Salaries and benefits decreased by $.2 million. Salaries and benefits were 13.3% of service revenue in the second quarter of 2007 and 2006. Salaries and benefits expense decreased due to operational efficiencies, which included relocation and consolidation of certain functions of the vehicle lead generation business.
Facilities and telecommunication expenses were flat when comparing the second quarter of 2007 to the second quarter of 2006. Facilities and telecommunication expenses were 1.2% of service revenue in the second quarter of 2007 compared to 1.3% in the second quarter of 2006.
Other operating expenses increased by $.4 million. Other operating expenses were 17.2% of service revenue in the second quarter of 2007 compared to 15.2% for the same period in 2006. The increase in 2007 is due to an increase in the amounts allocated for shared services, product development initiatives and an increase in bad debt expense at the vehicle lead generation business.
Depreciation and amortization were flat when comparing the second quarter of 2007 to the second quarter of 2006. Depreciation and amortization were 2.4% of service revenue during the second quarter of 2007 compared to 2.2% in the same period in 2006.
Income from operations was $3.6 million for the three months ended June 30, 2007 compared to $5.0 million in the same period in 2006. The operating margin percentage decreased from 16.0% to 12.0% primarily due to the impact of the increased allocations for shared services and the decrease in the revenue of the vehicle lead generation subsidiary.
Employer Services Segment
Total service revenue was $57.8 million for the three months ended June 30, 2007, an increase of $11.0 million compared to service revenue of $46.8 million in the same period of 2006. The increase was driven by the addition of $7.6 million of revenue from acquisitions and $3.7 million of revenue from existing business, primarily in the tax service and background screening businesses.
Salaries and benefits increased by $4.5 million. Salaries and benefits were 36.9% of service revenue in the second quarter of 2007 compared to 36.0% in the same period of 2006. The number of employees has increased due to growth in foreign operations and the growth of the existing businesses in the segment in comparison to the same period in 2006.
Facilities and telecommunication expenses increased by $.3 million. Facilities and telecommunication expenses were 4.2% of service revenue in the second quarter of 2007 and 4.6% in the second quarter of 2006.
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Other operating expenses increased by $1.6 million. Other operating expenses were 14.5% of service revenue in the second quarter of 2007 and 2006. The increase in other operating expenses is due to costs incurred in integrating and consolidating operations, product and geographic expansion and cross selling initiatives.
Depreciation and amortization increased by $.8 million primarily due to the addition of intangible assets related to the acquisitions and the rollout of new software projects.
The operating margin percentage decreased from 12.1% to 11.8% primarily due to the change in the mix of the revenue products in comparing the same quarter of 2007 to 2006.
Income from operations was $6.8 million for the three months ended June 30, 2007, an increase of $1.1 million compared to income from operations of $5.7 million in the same period of 2006. Income from operations increased primarily due to the growth in the tax service and background screening businesses.
Multifamily Services Segment
Total service revenue was $19.7 million for the three months ended June 30, 2007, an increase of $.9 million compared to service revenue of $18.8 million in the same period of 2006. The 4.9% organic growth is driven by expanded market share and an increase in products and services.
Salaries and benefits costs were flat compared to the same period in 2006. Salaries and benefits were 34.2% of service revenue for the second quarter of 2007 compared to 36.1% of service revenue in the same period of 2006.
Facilities and telecommunication expenses are comparable to the same period of 2006. Facilities and telecommunication expenses were 5.0% of service revenue in the second quarter of 2007 and 4.8% in the second quarter of 2006.
Other operating expenses decreased $.2 million compared to the same period in 2006. Other operating expenses were 15.4% of service revenue in the second quarter of 2007 compared to 17.4% in the same period of 2006.
Depreciation and amortization is comparable to the same period of 2006. Depreciation and amortization was 6.0% of service revenue in the second quarter of 2007 compared to 5.9% in the same period of 2006.
The operating margin increased from 26.0% to 29.8% due to increased revenue growth with a larger variety of products delivered to the customers while containing infrastructure costs.
Income from operations was $5.9 million in the second quarter of 2007 compared to income from operations of $4.9 million in the same period of 2006.
Investigative and Litigation Support Services Segment
Total service revenue was $18.9 million for the three months ended June 30, 2007, an increase of $3.8 million compared to service revenue of $15.1 million in the same period of 2006. The organic growth of $3.4 million is predominately driven by the Litigation Support Services businesses.
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Salaries and benefits increased by $2.0 million. Salaries and benefits were 41.5% of service revenue in the second quarter of 2007 compared to 39.1% in the same period of 2006. The increase is mainly due to the increase of employees needed to support the revenue growth in the Litigation Support Services businesses.
Facilities and telecommunication expenses increased by $.2 million compared to the same period in 2006. Facilities and telecommunication expenses were 3.0% of service revenue in the second quarter of 2007 and 2.8% in the second quarter of 2006.
Other operating expenses increased by $.7 million. Other operating expenses were 14.0% of service revenue in the second quarter of 2007 and 13.3% for the same period of 2006. The increase is related to geographic expansion and new business development efforts in this segment.
Depreciation and amortization increased by $.1 million. The increase is mainly due to the roll out of purchased and developed software.
The operating margin percentage increased from 20.5% to 23.4%. The increase is due to an increase in revenues in the Litigation Support Services businesses with higher margin services.
Income from operations was $4.4 million for the second quarter of 2007 compared to $3.1 million for the same period of 2006. The increase is due to the continued growth in the Litigation Support Services businesses.
Corporate
Corporate costs and expenses primarily represent compensation and benefits for senior management, administrative staff, technology personnel and their related expenses in addition to an administrative fee paid to First American. The corporate expenses were $9.1 million in the second quarter of 2007 compared to expenses of $9.0 million in the same period of 2006. Corporate expenses were 4.4% of consolidated service revenues in 2007 compared to 4.7% in 2006.
Consolidated Results
Consolidated service revenue for the three months ended June 30, 2007 was $207.4 million, an increase of $15.7 million compared to service revenue of $191.7 million in the same period in 2006. Acquisitions accounted for $8.0 million of the increase while $7.6 million was organic growth.
Salaries and benefits increased $7.1 million in comparing the second quarter of 2007 to the second quarter of 2006. Salaries and benefits expense were 31.8% of service revenue for the three months ended June 30, 2007 and 30.6% for the same period in 2006. The increase is primarily related to additional employees added for company growth.
Facilities and telecommunication expense increased by $.6 million compared to the same period in 2006. Facilities and telecommunication expenses were 3.9% of service revenue in the second quarter of 2007 and 2006.
Other operating expenses increased by $4.0 million compared to the same period in 2006. Other operating expenses were 13.3% of service revenue for the three months ended June 30, 2007 and 12.3% compared to the same period for 2006. The increase is primarily related to marketing expense, bad debt expense, temporary labor, and professional fees.
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Depreciation and amortization increased by $1.2 million due to an increase in amortization of intangible assets as a result of acquisitions, fixed asset additions and the roll out of internally developed software.
The consolidated operating margin was 16.5% for the three months ended June 30, 2007, compared to 17.4% for the same period in 2006. The decrease in the operating margin is related to the mix of business in comparing the second quarter of 2007 to the second quarter of 2006, driven primarily by the decrease in the Lender Services segment which is affected by the decline in the mortgage lending industry.
Income from operations was $34.3 million for the three months ended June 30, 2007 compared to $33.3 million for the same period in 2006. The increase of $1.0 million is comprised of an increase in operating income of $1.7 million in Data Services, $1.1 million in Employer Services, $1.0 million at Multifamily Services and $1.3 million in Investigative and Litigation Support Services offset by decreases in operating income of $2.7 million in Lender Services and $1.4 million in Dealer Services.
Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
Service revenue was $88.5 million for the six months ended June 30, 2007, a decrease of $2.5 million compared to service revenue of $91.0 million in the same period of 2006. A decrease in transactions in the second quarter of 2007, consistent with the decline in the mortgage lending industry, resulted in an overall decrease in service revenue despite an increase in revenue from new products and services.
Cost of service revenue was $29.8 million for the six months ended June 30, 2007, a decrease of $.3 million compared to cost of service revenue of $30.1 million in the same period of 2006. Cost of service revenue was 33.7% of service revenue in 2007 compared to 33.1% in the same period of 2006. A decrease in transaction volumes was offset by an increase in credit data costs.
Salaries and benefits expenses increased $.3 million compared to the same period in 2006. Salaries and benefits were 28.7% of service revenue for the six months ended June 30, 2007 compared to 27.6% in the same period of 2006. The increase is primarily due to customary annual increases.
Facilities and telecommunication expenses increased $.2 million compared to the same period in 2006. Facilities and telecommunication expenses were 4.3% of service revenue in the first half of 2007 and 3.9% in the same period of 2006.
Other operating expenses increased by $.9 million. Other operating expenses were 2.0% of service revenue in the first half of 2007 and .9% in the same period of 2006. The increase is primarily due to an increase in bad debt expense and costs related to increased foreign operations, which is partially offset by an increase in the amounts allocated for shared services and product development initiatives.
Depreciation and amortization decreased by $.1 million compared to the same period in 2006. Depreciation and amortization were 3.8% of service revenue as of June 2007 and 2006.
Income from operations was $24.3 million for the six months ended June 2007 compared to $27.9 million in the same period in 2006. The operating margin percentage decreased from 30.6% to 27.5% primarily due to the impact of the decrease in service revenue and increases in salary and benefit costs, cost of foreign operations and bad debt expense.
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Service revenue was $78.7 million for the six months ended June 30, 2007, an increase of $7.5 million compared to service revenue of $71.2 million in the same period of 2006. Organic growth was 10.6% for the segment. The organic growth is primarily driven by expansion of the existing customer base in the membership and direct to consumer businesses.
Cost of service revenue was $21.3 million for the six months ended June 30, 2007 and 2006. Cost of service decreased from 29.9% on a year-to-date basis in 2006 to 27.1% for the comparable period in 2007. The decrease in cost of service revenue as a percentage of sales revenue is due to the increased sales in the membership and direct to consumer business offset by the decline in revenue at the lead generation business that occurred in the second quarter of 2007.
Salaries and benefits increased by $1.0 million. Salaries and benefits were 16.2% of service revenue in the first half of 2007 compared to 16.4% in the same period of 2006.
Facilities and telecommunication expenses increased by $.3 million compared to the same period in 2006. Facilities and telecommunication expenses were 2.2% of service revenue for the six months ended June 30, 2007 and 2.0% in the same period of 2006.
Other operating expenses increased by $2.6 million. Other operating expenses were 18.3% of service revenue in the first half of 2007 and 16.6% in the same period of 2006. The increase in operating expenses is due to an increase in marketing expenses, shared services and professional fees.
Depreciation and amortization decreased by $.2 million due to some of the intangible assets becoming fully amortized since the 2006 comparable period.
Income from operations was $22.7 million for the first half of 2007 compared to $18.9 million in the first half of 2006. The operating margin percentage increased from 26.6% to 28.9%. The increase in the operating margin is primarily due to the sales mix and related margins. The membership and direct to consumer businesses have increased revenue with higher margins and the lead generation business has decreased revenue resulting in lower operating margins.
Service revenue was $59.6 million for the six months ended June 30, 2007, a decrease of $1.2 million compared to service revenue of $60.8 million in the same period of 2006. An increase in transactions accounted for an 8.2% increase in credit report related revenue; however, a larger decrease in revenue in the vehicle lead generation business resulted in an overall decrease in service revenue.
Cost of service revenue was $31.7 million for the six months ended June 30, 2007, a decrease of $.2 million compared to cost of service revenue of $31.9 million in the same period of 2006. An increase in cost of service revenue based on an increase in credit report related transactions was offset by a decrease in cost of service revenue in the lower margin vehicle lead generation business.
Salaries and benefits decreased by $.3 million. Salaries and benefits were 13.7% of service revenue in the first half of 2007 compared to 14.0% in the same period of 2006. Salaries and benefits expense decreased due to operational efficiencies, which included relocation and consolidation of certain functions of the vehicle lead generation business.
Facilities and telecommunication expenses are flat compared to the same period in 2006. Facilities and telecommunication expenses were 1.3% of service revenue in the first half of 2007 and 2006.
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Other operating expenses increased by $1.2 million. Other operating expenses were 17.6% of service revenue in the first half of 2007 and 15.3% in the same period of 2006. The increase is due to an increase in amounts allocated for shared services, product development initiatives and bad debt expense.
Depreciation and amortization were flat compared to the same period in 2006.
Income from operations was $7.1 million for the six months ended June 2007 compared to $8.9 million for the same period in 2006. The operating margin decreased from 14.6% to 11.9% primarily due to the impact of the increase in allocations for shared services and the reduced volumes in the vehicle lead generation business.
Service revenue was $112.5 million for the six months ended June 30, 2007, an increase of $26.0 million compared to service revenue of $86.5 million in the same period of 2006. The increase was primarily driven by the addition of $18.0 million of revenue from acquisitions and $8.3 million of organic growth.
Salaries and benefits increased by $9.6 million. Salaries and benefits were 37.7% of service revenue in the first half of 2007 compared to 38.0% in the same period of 2006. The increase is primarily related to the foreign acquisitions in 2006 and growth in the segment.
Facilities and telecommunication expenses increased by $.8 million. Facilities and telecommunication expenses were 4.2% of service revenue in the first half of 2007 and 4.6% compared to the same period in 2006. The increase in expense is primarily due to the acquisitions that occurred in 2006 and expanded facilities for organic growth.
Other operating expenses increased by $3.0 million. Other operating expenses were 14.4% of service revenue in the first half of 2007 and 15.3% for the same period of 2006. The increase is mainly due to the additional cost of professional fees, shared services and marketing expense related to the 2006 acquisitions.
Depreciation and amortization increased by $1.7 million primarily due to the addition of intangible assets related to the acquisitions and the rollout of software development initiatives.
Income from operations increased $3.9 million compared to the same period in 2006. The operating margin increased from 9.2% to 10.6%. The increase is due to revenue and earnings growth in most of the product lines slightly offset by a decline in the occupational health service business.
Service revenue was $37.3 million for the six months ended June 30, 2007, an increase of $1.8 million compared to service revenue of $35.5 million in the same period of 2006. Organic growth was 5.2% for the segment.
Salaries and benefits were flat compared to the same period in 2006. Salaries and benefits were 36.6% of service revenue for the first half of 2007 compared to 38.5% of service revenue in the same period of 2006. The decrease of salaries and benefits as a percentage of revenue is due to increased revenue growth while salary and benefit expense increased due to customary annual increases offset by strategic reductions in employees.
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Facilities and telecommunication expenses increased by $.1 million compared to the same period of 2006. Facilities and telecommunication expenses were 5.1% of service revenue for the six months ended June 30, 2007 and 2006.
Other operating expenses decreased by $.5 million and were 15.4% of service revenue in the first half of 2007 compared to 17.7% in the same period of 2006. The decrease is due to reduced costs of leased equipment, software and marketing expense.
Depreciation and amortization increased $.1 million compared to the same period of 2006. Depreciation and amortization was 6.3% of service revenue in the first half of 2007 and 2006.
Income from operations was $10.2 million in the first half of 2007 compared to income from operations of $8.1 million in the same period of 2006. The operating margin increased from 22.8% to 27.3%. The increase in operating income and margins is primarily due to increased revenue while containing and reducing operating costs.
Investigative and Litigation Services Segment
Service revenue was $34.2 million for the six months ended June 30, 2007, an increase of $4.1 million compared to service revenue of $30.1 million in the same period of 2006. The increase is predominantly driven by $3.3 million of organic growth and $.8 million of acquisition growth.
Salaries and benefits increased by $3.0 million. Salaries and benefits were 43.1% of service revenue in the first half of 2007 compared to 39.1% in the same period of 2006. The increases are mainly due to the acquisitions and increased incentive compensation and commissions as a result of revenue growth.
Facilities and telecommunication expenses increased by $.3 million. Facilities and telecommunication expenses were 3.2% of service revenue for the six months ended June 30, 2007 and 2.8% in the same period of 2006.
Other operating expenses increased by $1.1 million. Other operating expenses were 14.4% of service revenue in the first half of 2007 and 12.8% for the same period of 2006. The increase is predominantly driven by the 2006 acquisitions and is related to travel and shared services.
Depreciation and amortization increased by $.3 million. The increase is due to the increase in investment in capital assets for growth and the rollout of software initiatives.
Income from operations was $6.6 million for the six months ended June 30, 2007 compared to $6.2 million in 2006. The operating margin decreased from 20.4% to 19.3%.
Corporate costs and expenses represent primarily compensation and benefits for senior management, administrative staff, technology personnel and their related expenses in addition to an administrative fee paid to First American. The corporate expenses were $26.6 million for the six months ended June 30, 2007 compared to expenses of $17.4 million in the same period of 2006. Approximately $8.0 million of the increased expense is due to costs related to the former CEO’s transition agreement in the first quarter of 2007.
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Consolidated service revenue for the six months ended June 30, 2007 was $409.2 million, an increase of $36.2 million compared to service revenue of $373.0 million in the same period in 2006. Acquisitions accounted for $18.8 million of the increase and $17.4 million was related to organic growth.
Salaries and benefits increased by $22.4 million for the six months ended June 30, 2007 compared to the same period in 2006. Salaries and benefits expense was 34.2% of service revenue for the six months ended June 30, 2007 and 31.5% for the same period in 2006. The increase is primarily due to the $8.0 million recorded in the first quarter of 2007 related to the former CEO’s transition agreement.
Facilities and telecommunication increased by $1.6 million compared to the same period in 2006. Facilities and telecommunication expenses were 3.9% of service revenue in the first half of 2007 and 2006. The increase in facilities and telecommunication expenses is primarily due to acquisitions and costs for expansion in connection with organic growth.
Other operating expenses increased by $7.7 million compared to the same period in 2006. Other operating expenses were 13.1% of service revenue for the six months ended June 30, 2007 and 12.3% compared to the same period for 2006. The increase is due to acquisitions, and increased marketing, legal and professional fees.
Depreciation and amortization increased by $2.5 million due to an overall increase in amortization of intangible assets as a result of acquisitions, rollout of software initiatives and capital asset investment for organic growth.
The consolidated operating margin was 13.8% for the six months ended June 30, 2007, compared to 16.2% for the same period in 2006. The decrease in margin is primarily due the change in revenue mix, primarily effected by the mortgage lending industry, and $8.0 million of costs related to the former CEO’s transition agreement in the first quarter of 2007.
Income from operations was $56.3 million for the six months ended June 30, 2007 compared to $60.5 million for the same period in 2006. The decrease of $4.2 million is comprised of an increase in operating income of $3.8 million in Data Services, $3.9 million in Employer Services, $2.1 million in Multifamily Services and $.4 million in Investigative and Litigation Support Services offset by decreases in operating income of $3.5 million at Lender Services, $1.8 million at Dealer Services and an increase of corporate expenses of $9.1 million.
Liquidity and Capital Resources
The Company’s primary source of liquidity is cash flow from operations and amounts available under credit lines the Company has established with a bank. As of June 30, 2007, cash and cash equivalents were $29.8 million.
Net cash provided by operating activities was $51.2 million compared to cash provided by operating activities of $27.7 million for the six months ended June 30, 2007 and 2006, respectively.
Cash provided by operating activities increased by $23.5 million from the first half of 2006 to the first half of 2007 while net income was $29.6 million in the six months ended June 30, 2007 and $29.4 million for the same period in 2006. The increase in cash provided by operating activities was primarily due to the
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increase in shared based compensation, deferred taxes, depreciation, amortization and bad debt expense, offset by payments made for accrued liabilities and collections on accounts receivable.
Cash used in investing activities was $49.0 million and $37.7 million for the six months ended June 30, 2007 and 2006, respectively. In the first half of 2007, net cash in the amount of $27.2 million was used for acquisitions compared to $25.7 million in 2006. Purchases of property and equipment were $20.1 million in the first half of 2007 compared to $13.0 million in the same period of 2006.
Cash used in financing activities was $4.2 million for the six months ended June 30, 2007, compared to cash provided from financing activities of $0.7 million for the six months ended June 30, 2006. In the first half of 2007, proceeds from existing credit facilities were $42.8 million compared to $32.8 million in 2006. Repayment of debt was $51.7 million in the first half of 2007 and $31.5 million in the same period of 2006.
In 2005, the Company executed a $225 million revolving credit agreement, with a bank syndication (the “Credit Agreement”). The Credit Agreement includes a $10 million sub-facility for the issuance of letters of credit and up to a $5 million swing loan facility. The credit facility maturity date is September 28, 2010. The Credit Agreement is collateralized by the stock of the Company’s subsidiaries.
At June 30, 2007, the Company had available lines of credit of $71 million and the Company was in compliance with the financial covenants of its loan agreements.
First Advantage filed a Registration Statement with the Securities and Exchange Commission for the issuance of up to 5,000,000 shares of our Class A common stock, par value $.001 per share, from time to time as full or partial consideration for the acquisition of businesses, assets or securities of other business entities. The Registration Statement was declared effective on January 9, 2006. A total of 1,304,005 shares were issued for acquisitions as of June 30, 2007.
First Advantage filed a Registration Statement with the Securities and Exchange Commission for the issuance of up to 2,000,000 shares of our Class A common stock, par value $.001 per share, from time to time for general corporate purposes. The Registration Statement was declared effective on January 3, 2005. No shares have been issued as of June 30, 2007.
First Advantage seeks to acquire other businesses as part of its growth strategy. The Company will continue to evaluate acquisitions in order to achieve economies of scale, expand market share and enter new markets. The extent of future acquisitions, however, is dependent upon the availability of capital and liquidity to fund such acquisitions.
While uncertainties within the Company’s industry exist, management is not aware of any trends or events likely to have a material adverse effect on liquidity or the accompanying financial statements. The Company believes that, based on current levels of operations and anticipated growth, the Company’s cash flow from operations, together with available sources of liquidity, will be sufficient to fund operations, anticipated capital expenditures, make required payments of principal and interest on debt, and satisfy other long-term contractual commitments. However, any material adverse change in our operating results from our business plan, or acceleration of existing debt obligations or in the amount of investment in acquisitions, technology or products could require the Company to seek other funding alternatives including raising additional capital.
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The following is a schedule of long-term contractual commitments, as of June 30, 2007, over the periods in which they are expected to be paid.
Advertising commitments
Minimum contract purchase commitments
Operating leases
Debt and capital leases
Interest payments related to debt (1)
Total
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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 Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, have concluded that, as of the end of the fiscal quarter covered by this report on Form 10-Q, the Company’s disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports filed or submitted under such Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer to permit timely decisions regarding disclosures.
There was no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
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.
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.
None
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Parker Kennedy
Anand Nallathambi
J. David Chatham
Barry Connelly
Frank McMahon
Donald Nickelson
Donald Robert
Jill Kanin-Lovers
D. Van Skilling
David Walker
See Exhibit Index.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
/s/ ANAND NALLATHAMBI
Chief Executive Officer
/s/ JOHN LAMSON
John Lamson
Chief Financial Officer
EXHIBIT INDEX
Description