UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
8-K
AMENDMENT
NO. 1 TO
CURRENT
REPORT PURSUANT
TO
SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Date of
Report (Date of earliest event reported)
October
8, 2009
FIRST
ADVANTAGE CORPORATION
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
(State
or Other Jurisdiction of Incorporation)
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Delaware
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001-31666
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61-1437565
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(State
or Other
Jurisdiction
of incorporation)
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(Commission
File
Number)
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(IRS
Employer
Identification
Number)
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12395
First American Way
Poway,
CA 92064
(Address
of principal executive offices)
(727)
214-3411
(Registrant’s
telephone number)
Not
Applicable.
(Former
name or former address, if changed since last report)
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General
Instruction A.2 below):
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x
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Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
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o
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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o
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
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o
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
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1
Item
8.01. Other Events.
This
Current Report on Form 8-K updates First Advantage Corporation’s (the “Company”)
Annual Report on Form 10-K for the year ended December 31, 2008 (the "2008
Annual Report on Form 10-K") to reflect the following:
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·
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The
retrospective change in business segments which were effective during the
first quarter of 2009 (as discussed in Notes 1,
3 and 16).
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·
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The
retrospective adoption of Statement of Financial Accounting Standard SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements,
an amendment of ARB No. 51,” effective January 1, 2009 (discussed in Notes
2, 14 and 17).
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·
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The
reclassification of certain amounts presented for prior periods to conform
to the 2009 presentation.
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Additional
detail follows with respect to the business segment realignments.
Effective
in the first quarter of 2009, the Company operates in five primary business
segments: Credit Services, Data Services, Employer Services, Multifamily
Services, and Investigative and Litigation Support Services. 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
following table shows the realigned reportable segments:
Previous
reportable segments
Lender
Services
Data
Services
Dealer
Services
Employer
Services
Multifamily
Services
Investigation
and Litigation Support Services
New
reportable segments
Credit
Services
Data
Services
Employer
Services
Multifamily
Services
Investigation
and Litigation Support Services
Item
9.01of this Current Report on Form 8-K updates the information contained in the
Company’s 2008 Annual Report on Form 10-K to reflect the realigned segment
structure and other impacts described above in Item 8.01. Updates
provided in this Form 8-K are contained in Part I, Item 1, “Business”, Part II,
Item 6, “Selected Financial Data”, Part II, Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”, and in Part II, Item
8, “Financial Statements and Supplementary Data”. Updates provided in
exhibits of Item 9.01 are incorporated by reference into Item 8.01.
The
financial statements and other information included in this Current Report on
Form 8-K will supersede the financial statements and other information in the
Company’s 2008 Annual Report on Form 10-K and will be incorporated by reference
in future registration statements or post-effective amendments to existing
registration statements. This Current Report does not update for
other changes since the filing of the Company’s 2008 Annual Report on Form 10-K
(e.g., new accounting pronouncements adopted after December 31, 2008 and new
developments in commitments and contingencies). For significant
developments since the filing of the Company’s 2008 Annual Report on Form 10-K,
refer to subsequent 2009 Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K.
Notice to
stockholders:
On October 8, 2009, The First American Corporation (“First
American”) issued a press release announcing its intention to commence 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. The
Offer has not yet commenced and this communication shall not constitute an offer
to sell or the solicitation of an offer to sell or the solicitation of an offer
to buy any securities nor
shall there be any sale of securities in any jurisdiction in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such jurisdiction. No offering of securities
shall be made except by means of an appropriate prospectus. When the Offer is commenced, First
American will file an Offer to Exchange and related materials with the
Securities and Exchange Commission (“SEC”), and the Company will file with the
SEC a Solicitation/Recommendation Statement on Schedule 14D-9. Stockholders are
urged to read the Offer to Exchange and related materials and the
Solicitation/Recommendation Statement and any amendments thereto filed from time
to time, because they will contain important information. Stockholders will be
able to obtain a free copy of the Offer to Exchange and related materials and
the Solicitation/Recommendation Statement at the SEC’s website at www.sec.gov when they become available. In
addition, the Solicitation/Recommendation Statement, if and when filed, as well
as the Company’s other public SEC filings, can be obtained at www.fadv.com. You may also read and copy any
reports, statements and other information filed by First American or the Company
with the SEC at the SEC public reference room at 100 F Street N.E., Washington,
D.C. 20549. Please call the SEC at (800) 732-0330 or visit the SEC’s website for
further information on its public reference room.
2
Item
9.01. Financial Statements and Exhibits.
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(c)
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Exhibits
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23 Consent
of Independent Registered Certified Public Accounting Firm
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99.1
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Updates
to First Advantage Corporation’s 2008 Annual Report on Form
10-K:
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Part I,
Item 1, Business
Part II,
Item 6, Selected Financial Data
Part II,
Item 7, Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Part II,
Item 8, Financial Statements and Supplementary Data
3
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 hereunto
duly authorized.
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FIRST
ADVANTAGE CORPORATION
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Dated:
October 8, 2009
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By:
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/s/ John Lamson | |
| Name: John Lamson | |||
| Title: Executive Vice President and | |||
| Chief Financial Officer | |||
4
Exhibit
23
CONSENT OF INDEPENDENT
REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
We hereby
consent to the incorporation by reference in the Registration Statement on Form
S-3 (Nos. 333-121402, 333-117624, 333-117571, 333-117552), Form S-4 (Nos.
333-130238, 333-106680, 333-102565) and Form S-8 (Nos. 333-128349, 333-11749,
333-105852 and 333-105847 of First Advantage Corporation of our report dated
February 26, 2009, except with respect to our opinion on the consolidated
financial statements insofar as it relates to the change in the manner in
which the Company accounts for noncontrolling interests in consolidated
subsidiaries and the segment realignments discussed in Notes 2, 14, 17 and 1, 3,
16, respectively, as to which the date is October 8, 2009, relating to the
financial statements, financial statement schedule and the effectiveness of
internal control over financial reporting of First Advantage Corporation, which
appears in this Form 8-K.
/s/ PricewaterhouseCoopers
LLP
Tampa,
Florida
October
8, 2009
Exhibit
99
FIRST
ADVANTAGE CORPORATION ANNUAL REPORT ON FORM 10-K
(UPDATED BY THIS CURRENT REPORT ON
FORM 8-K)
For
the Year Ended December 31, 2008
PART
I
Item
1. Business.
Note: The
information contained in this item has been updated only to reflect First
Advantage Corporation’s business segment realignments, which are discussed
further in Notes 1, 3 and 16 in the Consolidated Financial
Statements. This item has not been updated for other changes since
December 31, 2008. For significant developments since the filing of
the Company’s 2008 Annual Report on Form 10-K, refer to subsequent 2009
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
First
Advantage Corporation (“First Advantage,” the “Company” or “We”) is an
international provider of risk mitigation and business solutions. Our
Company was formed in the June 5, 2003 merger with The First American
Corporation’s (“First American”) screening technology division and US SEARCH.com
Inc. (“US Search”). On June 6, 2003, First Advantage’s Class A common
stock commenced trading on The Nasdaq Stock Market LLC (“Nasdaq”) under the
symbol “FADV.”
Prior to
June 5, 2003, our activities were limited to participation in the business
combination transaction contemplated by the Agreement and Plan of Merger dated
December 13, 2002 (“Merger Agreement”) by and among First American,
US Search, First Advantage and Stockholm Seven Merger Corp.
On June
5, 2003, HireCheck, Inc., Employee Health Programs, Inc., SafeRent, Inc.,
Substance Abuse Management, Inc., American Driving Records, Inc. and First
American Registry, Inc., each formerly a wholly-owned subsidiary of First
American and collectively comprising the First American Screening Technology
(“FAST”) division, and US Search, a public company whose common shares were,
until June 5, 2003, traded on Nasdaq under the symbol “SRCH,” became
wholly-owned operating subsidiaries of First Advantage.
Pursuant
to the Merger Agreement, on June 5, 2003, First American received First
Advantage Class B common stock representing approximately 80% of the economic
interest and 98% of the voting interest of First Advantage. The former
shareholders of US Search exchanged their outstanding shares of US Search common
stock for First Advantage Class A common stock representing, in the aggregate,
approximately 20% of the economic interest and 2% of the voting interest in
First Advantage.
On
September 14, 2005, the Company acquired First American’s Credit
Information Group (“CIG”) Business under the terms of the master transfer
agreement. First Advantage purchased the CIG Business and related
businesses with 29,073,170 shares of its Class B common stock. The
acquisition of the CIG Business by First Advantage was a transaction between
businesses under common control of First American. As such, First Advantage
recorded the assets and liabilities of the CIG Business at historical cost.
Historical financial statements of First Advantage have been restated to include
results of operations of the CIG Business at historical costs. As of December
31, 2008, First American owned approximately 74% of the economic interest and
approximately 91% of the voting interest of First Advantage. Subject to certain
restrictions, First American may at any time convert its shares of our Class B
common stock into shares of Class A common stock on a one to one conversion
ratio.
1
Our
operations are organized into five 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.
A summary
of our service revenue, income (loss) from operations, and assets for our
segments is found in Note 16 to the Consolidated Financial Statements in Item 8,
which is included herein by reference.
Credit
Services
The
Credit Services segment provides specialized credit reports to mortgage lenders
and automotive dealers and lenders throughout the United States. The Company
believes that it is the largest provider of credit reports to the United States
mortgage lending industry, based on the number of credit reports issued. In
preparing its merged credit reports for mortgage lenders, the Company obtains
credit reports from at least two of the three United States primary credit
bureaus, merges and summarizes the credit reports, and delivers its report in a
standard format to their customers. The segment provides comprehensive solutions
that help organizations meet their lending, leasing and other consumer credit
automation needs. By delivering innovative systems, services and data
solutions, the Company helps companies reduce risk, decrease costs and improve
service. Our Credit Services segment accounted for
approximately 35% of our service revenue in 2008.
The
Credit Services segment also provides specialized credit reports direct to
consumers. These reports may be derived from credit reports obtained from one or
more of the three United States credit bureaus and may be specially formatted
for ease of use by the creditor or to facilitate interpretation by a consumer.
Demand for our Credit Services products usually decreases in November and
December due to the holidays and related decrease in home and vehicle buying
activity. The current economic downturn has caused decreased service
revenue in the Credit Services segment related to the mortgage industry and
reduced automobile and truck sales. Management expects continued
weakness in the real estate, mortgage, and automotive markets to continue
impacting this segment. Given this outlook, management is focusing on expense
reductions, operating efficiencies, and increasing market share throughout the
Company.
Data
Services
First
Advantage’s Data Services segment offers motor vehicle records, transportation
industry credit reporting, criminal records reselling, specialty finance credit
reporting, consumer credit reporting services and lead
generation. Our Data Services segment accounted for approximately 15%
of our service revenue in 2008.
Our motor
vehicle record services provide customers with automated access to motor vehicle
records from all 50 states and the District of Columbia. Independent
insurance agents operating in the United States represent the core of the
customer base for this product, which they use for underwriting purposes.
Employers also utilize the product to manage risk associated with employees that
require the use of a vehicle in the performance of their duties. For most
customers, we receive and fulfill orders through our proprietary
Comprise/ZapApp® software, which allows the customer to integrate the process of
obtaining motor vehicles reports with other processes utilized by the
customer.
As part
of the offerings of this segment, we also provide trucking companies with access
to a database of payment practice records on more than 60,000 transportation
brokers and shippers in North America, which is comprised of client-contributed
accounts receivables and public records data. Subscribing clients utilize the
Company's services to evaluate the nonpayment (or slow payment) risk of shippers
and brokers before agreeing to transport cargo on credit. Additionally, we offer
transportation consulting services that are designed to address and resolve
asset management and compliance problems for owners and operators of truck
fleets.
2
Demand
for our motor vehicle records products usually decreases in November and
December as a result of reductions in the insurance and employment
markets.
Our
specialty finance credit reporting business, Teletrack, provides credit reports
derived from its proprietary database. The Company believes Teletrack is the
largest provider of credit reports focusing on specialty borrowers in the United
States, based on the number of reports issued. Its primary customers
include pay-day loan, rent-to-own retailers and similar types of creditors.
Demand for our specialty finance credit products usually increases in November
and December due to the holidays and increased consumer
spending. In turn, the business generally experiences a
decrease in demand in the first quarter due to tax return refunds, thereby
decreasing the need for payday loans.
Our lead
generation business is a provider of performance-based, internet marketing
solutions connecting our clients directly to customers buying through the
web. Its primary service offerings are sales lead generation, list
management and affiliate network marketing. Customers include a wide
variety of companies ranging from medium-sized businesses to Fortune 500
companies, including many service providers in the specialty and personal
finance markets.
The
current economic downturn has caused decreased service revenue in the Data
Services segment related to lead generation, transportation and specialty
finance businesses. Management expects continued weakness in the real
estate and mortgage markets to continue impacting the Company’s lead generation,
transportation and specialty credit businesses in the Data Services
segment. Given this outlook, management is focusing on expense
reductions, operating efficiencies, and increasing market share throughout the
Company.
Employer
Services
First
Advantage’s Employer Services segment helps thousands of companies in the United
States and abroad manage risk with our employment screening,
occupational health, tax incentive services and hiring solutions. Our
Employer Services segment accounted for approximately 29% of our service revenue
in 2008.
Our
employment screening services generate reports about a prospective employee’s
criminal record, motor vehicle violations, credit standing and involvement in
civil litigation. We also make inquiries of provided references and former
employers, verify educational credentials and licenses, verify social security
numbers and check industry specific records. A customer can order any of these
and other related services individually, as a package with our other employment
screening products or with other products we offer. Depending on a
customer’s preference, orders may be placed and fulfilled directly from the
Company, through a secure Internet connection, software, facsimile or through
third party vendors.
Our
occupational health products generally involve the design and management of drug
free workplace programs, including provision for the collection and testing of
specimens and interpretation of the results. We also provide physical
examination services to employers. Reports of our findings are
generally delivered through a secure Internet connection or through other direct
means. We also develop and manage employee assistance programs, which
provide our customers’ employees with access to confidential counseling services
and other resources to assist with personal issues that may affect workplace
productivity. These programs cover a wide range of personal and workplace
issues, including alcohol and drug abuse, marital problems, family matters,
bereavement management, depression, stress, retirement and downsizing. First
Advantage’s employee assistance programs also provide employers with a number of
corporate-focused services, including management counseling, critical incident
stress management programs, organizational change consulting and intensive
specialty training on issues such as violence in the workplace.
3
Our tax
incentive services specialize in identifying primarily employment-related tax
incentive programs available under both federal and state legislation, and
processing the paperwork required to capture such tax incentives and
credits.
Our
hiring solutions group provides skill assessment, recruiting, and hiring systems
to manage job applicants. We provide an applicant tracking system to
customers to track job applicants from the initial stages of job requisition
development through the hiring and on-board process. We can also
provide the complete outsourcing of the recruitment process.
Our
professional employer organization provides comprehensive outsourced management
of payroll and human resource management for its clients.
Our
employment screening, occupational health services and hiring solutions
generally experience seasonality near year-end, which is attributed to decreases
in hiring. Our tax incentive services group’s ability to obtain
certain tax credits, such as the Work Opportunity Tax Credit (“WOTC”) program or
a similar program, is dependent upon the passage of federal legislation that
generally must be renewed every one or two years. The WOTC program
was renewed for two years in fourth quarter 2006 for employees hired after
December 31, 2005 and before January 1, 2008. The WOTC program was
renewed again in the second quarter of 2007 through August 31,
2011.
The
effect of the issues in the real estate and related credit markets and other
macroeconomic matters has resulted in higher unemployment rates negatively
impacting the volumes in the Employer Services segment. Given this
outlook, management is focusing on expense reductions, operating efficiencies,
and increasing market share throughout the Company.
Multifamily
Services
First
Advantage’s Multifamily Services segment helps thousands of companies in the
United States manage risk with resident screening services. Our Multifamily
Services segment accounted for approximately 10% of our service revenue in
2008.
Our
resident screening offerings generate reports containing information about a
prospective renter’s eviction record, lease and payment performance history,
credit standing, references and criminal records to residential property
managers and owners operating in the United States. Depending
on a customer’s needs, our reports may contain one or any combination of these
pieces of information. In serving our customers, we may draw on our
database of landlord-tenant records, which is the largest of its kind in the
United States, and our database of criminal conviction information, which is one
of the largest for use in resident screening in the United
States. We also offer a scoring product, which assesses risk of
default by a prospective renter based on a statistical scoring model developed
exclusively for the multifamily housing industry. Customers generally order and
receive the segment’s resident screening products through a secure Internet
connection or through proprietary software.
Our
resident screening products experience seasonality declines during the winter
months from November to March.
Investigative
and Litigation Support Services
The
Investigative and Litigation Support Services segment provides corporate
litigation and investigative services. Products and services provided
by the segment include: computer forensics, electronic discovery, due
diligence reports and other high level investigations. Our Investigative and
Litigation Support Services segment accounted for approximately 11% of our
service revenue in 2008.
Within
this segment we provide services that assist our customers in business, legal
and financial matters, including investigations and litigation arising from
trade secret theft, software infringement, financial fraud, employee
4
malfeasance
and unfair competition. The segment employs computer forensic and electronic
discovery experts and consultants in its bi-coastal state-of-the-art
laboratories. We also offer due diligence services for a variety of
purposes and have a specialized database of hedge fund
managers. Increased emphasis on corporate integrity and compliance,
following the wave of corporate scandals and the resulting litigation, has
driven growth in the segment’s business.
Prior to
the June 5, 2003 mergers, HireCheck, Employee Health Programs, SafeRent,
Substance Abuse Management, American Driving Records and First American
Registry, now wholly-owned subsidiaries of First Advantage, were wholly-owned
subsidiaries of First American and made up the FAST division.
In the
late 1990s, First American initiated a diversification strategy which called
for, among other things, the combination of one of its core competencies—data
management and analysis—with businesses that are counter-cyclical to its
long-standing real estate related products and services. First American also
sought businesses that were complementary to its rapidly growing credit
reporting business, First American CREDCO. First American management initially
focused on the background screening industry—an information-intensive business
with a heavy demand for credit reports and a relatively tangential tie to the
real estate market.
In
September 1998, First American began its entry into the employee screening
industry by acquiring HireCheck. HireCheck, headquartered in St. Petersburg,
Florida, and now referred to as First Advantage Background Services Corporation,
is today the principal subsidiary through which our Employer Services segment
provides employment screening services. In the same month, First American also
entered the resident screening industry by acquiring First American Registry,
now known as First Advantage SafeRent, headquartered in Rockville, Maryland.
First Advantage SafeRent, which we believe to be the largest resident screening
company in the United States, is today the principal subsidiary through which
our Multifamily Services segment provides resident screening
products.
Continuing
its efforts to provide a comprehensive set of risk management tools to its
customers, in August 2001 First American entered the occupational health
services business by acquiring Milwaukee, Wisconsin-based Substance Abuse
Management.
Five
months later, in January 2002, First American further added to the menu of
services offered by the FAST division by acquiring American Driving Records, a
Rancho Cordova, California-based provider of motor vehicle reports. One of the
largest competitors in its industry, American Driving Records brought to the
FAST division not only a formidable player in a key area of the risk management
industry, but also enhanced the division’s access to the motor vehicle records
of almost every state in the United States. With American Driving Records, First
American purchased ZapApp India Private Limited, a Bangalore, India-based
private limited company that provides technology services to American Driving
Records and now to all of First Advantage.
In an
effort to improve the profitability of the companies then comprising the FAST
division, in the second quarter of 2001 First American reorganized the
division’s management structure by dedicating a single management group to the
oversight of all operations. By emphasizing the group as a whole, First American
believed this reorganization effort would position the FAST division to pursue
cross-selling opportunities, take advantage of mutual supplier relationships and
leverage technological developments and resources across the entire division. It
also hoped to focus management on efforts to improve the division’s operating
margins by increasing the volume of transactions performed using the division’s
existing systems, whether through internal sales growth or by acquiring
businesses with complementary product offerings. In January 2002, First American
formally created the FAST division and began reporting the division as a segment
in its financial statements.
Strategic
Acquisitions Following the 2001 Reorganization
5
First
American supplemented the division’s employee background screening operations by
acquiring Factual Business Information, Inc., headquartered in Miami, Florida,
in August 2001 and Pretiem Corporation, headquartered in Princeton Junction, New
Jersey, in December of 2001. These acquisitions provided the division with an
expanded customer base for employee screening services in three important
employment markets: the Miami metropolitan area, New Jersey and New York
State.
In the
last quarter of 2002, the FAST division completed acquisitions of Employee
Health Programs in October and SafeRent in November.
A
competitor of Substance Abuse Management, the Bethesda, Maryland-based Employee
Health Programs brought critical volume to the FAST division’s occupational
health business. Through the acquisition of Employee Health Programs, the FAST
division also expanded the scope of its existing services to include employee
assistance programs, which are designed to help troubled employees resolve
personal issues that can affect workplace productivity. Employee
Health Programs and Substance Abuse Management, now known as First Advantage
Occupational Health Services Corporation, are today the principal subsidiaries
through which the Employer Services segment provides occupational health
services.
SafeRent,
headquartered in Denver, Colorado, brought additional key customers to the FAST
division’s resident screening business and increased the division’s penetration
in key markets, in particular markets in the western United States.
June
5, 2003 Mergers
In the
June 5, 2003 mergers, the companies comprising the FAST division and US Search
combined under one umbrella. US Search brought to First Advantage not
only many important employment screening customers through its Professional
Resource Screening, Inc. subsidiary, but also an opportunity to pursue a new
market – consumers – with specially tailored versions of our existing
products. Ultimately, Professional Resource Screening was combined
with the other companies in our Employer Services segment.
September
14, 2005 Acquisition
On
September 14, 2005, the Company acquired First American’s CIG Business under the
terms of the master transfer agreement. Under the terms of the
agreement, First American and its First American Real Estate Solutions (“FARES”)
joint venture contributed their mortgage, automotive, consumer and specialty
finance credit businesses to First Advantage in exchange for 29,073,170 shares
of First Advantage Class B common stock. The acquisition of the CIG Business by
First Advantage was a transaction between businesses under common control of
First American. As such, First Advantage recorded the assets and liabilities of
the CIG Business at historical cost. Historical financial statements of First
Advantage have been restated to include results of operations of the CIG
Business at historical costs.
Strategic
Acquisitions
Since
becoming a public company in June 2003, we have actively pursued our acquisition
strategy. In August 2003, we acquired two employment background
screening companies, Liberatore Services, Inc. and Total Information Source,
Inc., and an occupational health services company, Continental Compliance
Systems. In September 2003 we further expanded our occupational
health services with the acquisition of Employee Information Services,
Inc. In that same month, we acquired Omega Insurance Services, Inc.,
which brought a new investigative services product to First
Advantage. In November 2003 we made three acquisitions: occupational
health services company Greystone Health Sciences Corporation; MedTech
Diagnostics, Inc., a provider of both occupational health services and
employment screening services; and Agency Records, Inc., a provider of motor
vehicle records. In December 2003, we acquired Credential Check &
Personnel Services, Inc., an employment screening company.
6
During
the first quarter of 2004, the Company acquired Quantitative Risk Solutions LLC,
Proudfoot Reports Incorporated, MVR’s, Inc., Background Information Systems,
Inc., Infocheck Ltd. and Landlord Protect, Inc. During the second
quarter of 2004, the Company acquired U.D. Registry, Inc., CoreFacts, LLC,
Realeum, Inc., and CIC Enterprises, Inc. During the third quarter
2004, the Company acquired BackTrack Reports, Inc. and National Background Data,
LLC. During the fourth quarter 2004, the Company acquired Business
Tax Credit Corporation d/b/a The Alameda Company and Compunet Credit Services,
Inc.
The
Company acquired fifteen companies in 2005. In the second quarter of
2005, the Company acquired Bar None, Inc, a provider of credit-based lead
generation, processing and tracking services, which is included in our Credit
Services segment. In the fourth quarter of 2005, the Company acquired
majority interest in LeadClick Media Inc, an online lead generation and
marketing company. This company is included in our Data Services
segment. In 2005, we acquired two businesses from
Experian. They were Experian RES and Credit Data Services, both were
added to our Credit Services segment. Throughout the
year, we added six companies to our Employer Services segment, including ITax
Group, Inc., Quest Research Group, LTD, Recruiternet, Inc., Road Manager
Financial Services, Inc., TruStar Solutions, Inc., and majority interest in
PrideRock Holding Company, Inc. Recruiternet, Inc. and TruStar
Solutions, Inc. together became our hiring solutions group. Three
companies were added to our Investigative and Litigation Support Services
segment in 2005. They were Data Recovery Services, Inc., Phoenix
Research Corporation, and True Data Partners. We also acquired The
Info Center and Jenark Business Systems, Inc. which both are included in our
Multifamily Services segment.
The
Company acquired eleven companies in 2006. Nine of those
acquisitions, SkillCheck Inc., National Data Verification Services, Brooke
Consulting, HR Logix LLC, Inquest, Inc., Accufacts Pre-Employment Screening,
Inc., DecisionHR USA, Inc., Refsure Worldwide Pty LTD, and Single Source
Services, Inc. are included in our Employer Services Segment. Two of
these, Evident Data, Inc. and DataSec UK Ltd are included in our Investigative
and Litigation Support Services segment.
The
Company acquired two companies in 2007. In February 2007, the Company
acquired RE Austin, Ltd. an international employment screening company which is
included in the Employer Services segment. In December 2007, we
acquired CredStar which is included in our Credit Services segment.
The
Company acquired one company in 2008. In February 2008, the Company
acquired Verify, Ltd. an international employment screening company which is
included in the Employer Services segment.
Customers
First
Advantage, through its subsidiaries, serves a wide variety of clients throughout
the United States and abroad. The tens of thousands of customers
served by First Advantage include nearly a quarter of those businesses
comprising the Fortune 1000, leading mortgage lenders, automobile dealerships,
real estate investment trusts and property management companies, many of the top
providers of transportation services, insurance agents, the leading national law
firms, and non-profit organizations. Dominant categories of customers vary
depending on the type of service or product. For example, our credit
reporting services are typically purchased by industry-leading mortgage and
refinance lenders. Automobile dealerships nationwide buy our credit
reports as well as our automotive lead generation services. Law firms
nationwide utilize the computer forensics and e-discovery services we offer.
Trucking companies are major consumers of our occupational health and
transportation industry credit services. Multifamily housing property management
companies and landlords of all sizes are represented in the resident screening
business’ customer base. Larger employers represent the predominant share of the
employee background screening and tax incentive services
clients. Individual consumers dominate the customer base for our
consumer direct businesses. We derive approximately $87.1 million of
revenue from operations outside the United States and their related
customers.
We have
in excess of 80,000 customers. No single customer is responsible for
7 percent or more of our service revenue.
7
Suppliers
Data
represents a key ingredient in most of our products. In obtaining such data, we
draw upon a wide variety of sources, including governmental agencies, credit
reporting agencies, competitors, customers, third parties which compile public
record information and on-line search services. Many of our suppliers provide
this data in electronic format. We do not anticipate the termination of any
significant relationship with any of our data suppliers. We obtain some of
our data from consumer credit reporting agencies. Any of these
suppliers could stop supplying this data or could substantially increase their
prices. Withholding this data could have a material adverse effect on our
business, financial condition or results of operations.
In
connection with our occupational health services, we depend upon services
provided by specimen collection agencies and laboratories. There is significant
competition among suppliers of these services and, consequently, we do not
believe the termination of our relationship with any of these suppliers would
have a material adverse effect on its financial condition or operating
results.
Governmental
Regulation
Although
generally our products or services do not require governmental approvals, our
businesses are subject to various federal and state regulations that may impact
our products and services. For example, the Federal Fair Credit Reporting Act,
Fair and Accurate Credit Transactions Act, the Drivers Privacy Protection
Act, the CAN-SPAM Act, federal and state laws
relating to drug testing, federal and state tax credit laws, state private
investigator laws, federal and state laws regulating to residential-leasing and
landlord services, federal and state laws regulating the hiring process, and
various state laws regulating services that include disclosure of
personal information.
Many
state and local laws require certain of our subsidiaries and employees engaged
in providing our investigative services products to be licensed as private
investigators. Some state and local governments require the same with
respect to our employee screening companies.
Historically,
we have been able to comply with existing laws and regulations without incurring
substantial costs or restrictions on our business.
Competition
A number
of companies compete with our service offerings. First Advantage’s most
significant credit reporting services competitors are the three major credit
repositories and Kroll Factual Data (“Kroll”). First Advantage’s most
significant national competitors in employment background verifications include
ChoicePoint, Kroll, U.S. Investigative Services and ADP, although hundreds of
local and regional competitors also exist. In occupational health services, we
believe that we have only one significant nationwide competitor, ChoicePoint;
however, there are a number of local and regional companies in the industry, as
well. The addition of both applicant tracking systems (“ATS”) and
recruiting services brought new competitors into our mix. The ATS
competitive field includes no dominant players, but rather, many small
competitors focused on serving specific industries. Similarly,
competition in recruiting is also very diverse and includes ATS companies,
advertising agencies, job board companies, and in house recruiting
departments. First Advantage’s most significant national competitors
in our tax incentive services include ADP, Talx and the Big 4 accounting firms,
and other small regional companies operating in that market. The
resident screening industry is fragmented, with only approximately eight other
companies providing significant competition to First Advantage’s business on a
national level. In motor vehicle record services, there are
approximately ten major competitors to First Advantage, the most predominant of
which is ChoicePoint. Our transportation credit services business
competes with three significant vendors. First Advantage’s due
diligence services compete with a handful of small boutiques, Kroll and two or
three regional firms across the country. Our computer forensics
services mainly compete against the large litigation consulting practices, the
Big 4 accounting firms, and Kroll. Our e-discovery business line
also
8
competes
with Kroll, Electronic Evidence Discovery, and a handful of other top tier
providers. There is also some competition from small regional
companies and sole practitioners for both of these services. In
virtually all of these markets, First Advantage competes foremost on the basis
of customer service and secondarily on product and price
differentiation.
Intellectual
Property
First
Advantage owns a number of items of intellectual property, including trademarks,
tradenames, copyrights, patents, domain names and unregistered trade
secrets. First Advantage is not dependent upon any single item of
intellectual property.
First
Advantage believes that as the world becomes increasingly risky for individuals
and organizations, demand for our products and services will grow. Our primary
goal is to be well positioned to capture not only a substantial portion of the
existing market, but also a substantial share of the expected growth. We intend
to accomplish this goal in the following manner:
Pursue Strategic
Acquisitions. We intend to continue pursuing
acquisitions of companies that would enable us to enter new markets as well as
increase our share of those markets in which we are already operating. We will
pursue companies with assets that will enhance our ability to fulfill orders,
including companies with proprietary databases containing information for use in
our products or technology that would make order placement or product delivery
more efficient. We also expect to pursue acquisition opportunities which would
enable us to enter into related product fields. In 2008 and 2007, we expanded
our international employment screening business with the acquisition of Verify,
Ltd. and R E Austin, Ltd, respectively. In 2007, we also
increased our market share in our Credit Services segment with the acquisition
of CredStar. Our 2006 acquisitions of TruStar Solutions, Inc.,
Recruiternet, Inc., SkillCheck, Inc., and HR Logix, LLC. all applicant service
companies, and our acquisition of Decision HR USA, Inc., a professional employer
organization, are examples of our efforts to enter into related product
fields. Our 2005 acquisitions of Phoenix Research Corporation and
True Data Partners, allowed us to expand the breadth of our high-end
investigative services, such as e-discovery and computer forensics, in our
Investigative and Litigation Support Services segment.
International
Expansion. In second quarter 2005, we acquired Quest Research
Ltd., the premier provider of employment screening services in India and East
Asia. In fourth quarter 2005, the Company opened an employment screening office
in Manila, Philippines to help serve the increasing overseas demand for
screening by multinational corporations. In first quarter 2006, we
acquired Brooke Consulting, a regional employment screening provider focused on
Japan and Korea. In third quarter 2006, we acquired Refsure Worldwide
Pty Ltd., a background screening company located in Sydney, Australia that
provides services throughout Asia-Pacific. In 2007, we expanded our
international employment screening business with the acquisition of R E Austin,
Ltd. located in England. In 2008, we expanded our international employment
screening business with the acquisition of Verify, Ltd. located in Asia Pacific.
These strategic additions bolster the international employment screening
operations of First Advantage, situating the Company to more effectively service
multinational corporations' demands for these services. We intend to
continue to pursue opportunities to offer our services outside the United
States. Given the risks that face businesses around the world, we
believe that international markets provide a substantial opportunity for
growth. We expect that by expanding our offerings to other countries
we will also enhance our ability to compete in the United States for the
business of global companies.
Product
Expansion. First Advantage continues to seek strategic methods
of meeting unique customer and market segment needs by providing solutions
through product expansion and the ability to bundle various product
offerings. Our Credit Services segment has identified the need for
alternative credit products in the non-traditional and emerging home loan
markets. Additionally, our emergence into the lead generation
industry will provide a conduit to bundle service offerings with our Credit
Services segment enabling First Advantage to bring new products and business
solutions to meet our market segment needs.
9
Employees
We employ
over 4,000 people. Of this number, approximately 1,700 are employed
abroad.
Available
Information
We maintain a website, www.fadv.com,
which includes financial and other information for investors. Our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the
investor relations page of our website as soon as reasonably practicable after
we electronically file such material with, or furnish it to, the Securities and
Exchange Commission (“SEC”). Our website and the information
contained therein or connected thereto are not intended to be incorporated into
this annual report on Form 10-K, or any other filing with the Securities and
Exchange Commission unless we expressly incorporate such materials.
The public can read and copy any
materials the Company files with the SEC at the SEC’s Public Reference Room at
450 Fifth Street, N.W., Washington D.C. 20549. The public can obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an Internet site, www.sec.gov that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.
PART
II
Item
6. Selected Financial Data.
Note: Certain
amounts presented for the prior periods have been reclassified to conform to the
current year presentation. As discussed later in Note 2, effective
January 1, 2009, the Company adopted SFAS No. 160, “Noncontrolling Interest in
Consolidated Financial Statements, an amendment of ARB No. 51.” This
accounting pronouncement, relating to noncontrolling interest required
retrospective application. The impact of this standard is reflected
in the Selected Financial Data table below.
The
Company’s operating results for the five years ended December 31, 2008 include
results for the acquired entities (excluding the CIG Business) from their
respective dates of acquisition. The acquisition of the CIG Business
by First Advantage was a transaction between businesses under the common control
of First American. In an acquisition of businesses under common
control, the acquiring company records acquired assets and liabilities at
historical costs. The historical income statements of First Advantage
for the five years ended December 31, 2008 include the operations of the CIG
Business at historical cost assuming the acquisition was completed on January 1,
2004.
Certain
amounts for the year ended December 31, 2007, 2006, 2005, and 2004 have been
reclassified to conform to the 2008 presentation.
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. These businesses are presented in discontinued
operations for the year ended December 31, 2008. The results of these
businesses’ operations in the prior periods have been reclassified to conform to
the 2008 classification.
Recent
market conditions and economic events have had an overall negative impact on the
Company’s operations and related financial results. As a result of acquisitions,
the Company has goodwill of approximately $731.4 million at December 31, 2008.
In accordance with SFAS No. 142 “Goodwill and other Intangible Assets” and
consistent with prior years, the Company’s policy is to perform an annual
impairment test for each reporting unit in
10
the
fourth quarter or sooner if circumstances indicate a possible impairment. The
valuation of goodwill requires assumptions and estimates of many critical
factors including revenue growth, cash flows, market multiples and discount
rates. Forecasts of future operations are based, in part, on operating results
and management’s expectations as to future market conditions. Many of
the factors used in assessing fair value are outside the control of management
including future economic and market conditions. If the fair value of a
reporting unit exceeds its carrying value, then its goodwill is not considered
impaired. In the event that the carrying value of a reporting unit exceeds its
fair value, then further testing must be performed to determine if the carrying
value of goodwill exceeds the fair value of goodwill. The
Company’s annual evaluation in 2008 resulted in an impairment loss of $19.7
million ($19.5 million net of tax) in the Data Services segment based primarily
upon diminished earnings and cash flow expectations for the lead generation
reporting unit and lower residual valuation multiples existing in the present
market conditions. The lead generation reporting unit is 70% owned by First
Advantage and 30% owned by First American; therefore, the Company recorded a
reduction of noncontrolling interest expense of $5.7 million related to the
impairment loss. See Note 5 – Goodwill and Intangible
Assets for additional information regarding the impairment
loss. Due to significant volatility in the current markets,
the Company’s operations may be negatively impacted in the future to the extent
that exposure to impairment losses may be increased.
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 receive cash
severance of $4.4 million; $2.2 million was paid in March 2007 and the remaining
payment of $2.2 million was paid in March 2008. In
addition, Mr. Long received 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, 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 year ended December 31, 2007 by $4.7 million or $0.08 per diluted
share.
In
October 2007, the Company completed the sale of its US Search business for
approximately $26.5 million resulting in a gain before income taxes of
approximately $20.4 million. The results of this business’ operations
are reflected in the Company’s Consolidated Statements of Income and
Comprehensive (Loss) Income as discontinued operations. The results
of this business’ operations in prior years have been reclassified to conform to
the 2007 classification.
In
October 2007, the Company sold approximately 2,875,000 shares of DealerTrack
Holdings, Inc. (“DealerTrack”) common stock. The sale resulted in a
pretax investment gain of approximately $97.4 million or $58.4 million after tax
and $0.99 per diluted share. The Company discontinued using the
equity method of accounting for its remaining investment in DealerTrack. After
the sale, First Advantage continues to own approximately 2,553,000 shares of
DealerTrack common stock, which is approximately 6% of the outstanding
shares.
In fourth
quarter 2006, DealerTrack completed a follow-on offering of its
stock. The Company recognized a pretax investment gain of
approximately $7.0 million. In the fourth quarter of 2005, the
Company recorded a pretax gain of $9.5 million as a result of DealerTrack’s sale
of 6.7 million shares of its common stock in an initial public
offering. The sale of the stock was at a price per share in excess of
its carrying value.
The
results of operations for the year ended December 31, 2005 include $3.2 million
of nondeductible merger costs that First Advantage incurred in connection with
its acquisition of the CIG Business from First American; $2.0 million of costs
incurred in connection with the relocation of the Company’s
corporate headquarters and other office consolidations; and $0.6 million of
costs related to the launch of the corporate branding initiative that was
announced in June 2005.
11
This
information is only a summary and should be read in conjunction with Item 7
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the audited financial statements and accompanying notes included
in Item 8 “Financial Statements and Supplementary Data”.
|
(in
thousands, except per share amounts)
|
For
the year ended December 31,
|
|||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Income
Statement Data:
|
||||||||||||||||||||
|
Service
revenue
|
$ | 727,276 | $ | 770,165 | $ | 725,309 | $ | 556,757 | $ | 429,530 | ||||||||||
|
Reimbursed
government fee revenue
|
52,687 | 54,106 | 52,166 | 47,226 | 44,599 | |||||||||||||||
|
Total
revenue
|
779,963 | 824,271 | 777,475 | 603,983 | 474,129 | |||||||||||||||
|
Cost
of service revenue
|
229,980 | 219,279 | 228,626 | 172,071 | 134,261 | |||||||||||||||
|
Government
fees paid
|
52,687 | 54,106 | 52,166 | 47,226 | 44,599 | |||||||||||||||
|
Total
cost of service
|
282,667 | 273,385 | 280,792 | 219,297 | 178,860 | |||||||||||||||
|
Gross
margin
|
497,296 | 550,886 | 496,683 | 384,686 | 295,269 | |||||||||||||||
|
Operating
expenses
|
403,726 | 429,553 | 376,056 | 286,870 | 223,364 | |||||||||||||||
|
Impairment
loss
|
21,750 | 204 | - | - | - | |||||||||||||||
|
Income
from operations
|
71,820 | 121,129 | 120,627 | 97,816 | 71,905 | |||||||||||||||
|
Total
interest (expense), net
|
(1,651 | ) | (8,618 | ) | (12,434 | ) | (6,449 | ) | (2,009 | ) | ||||||||||
|
Equity
in earnings of investee
|
- | 2,939 | 2,299 | 1,385 | 1,782 | |||||||||||||||
|
Gain
on sale of investment
|
- | 97,380 | 6,993 | 9,471 | - | |||||||||||||||
|
Income
from continuing operations before income taxes
|
70,169 | 212,830 | 117,485 | 102,223 | 71,678 | |||||||||||||||
|
Provision
for income taxes
|
37,079 | 85,531 | 47,870 | 43,453 | 29,567 | |||||||||||||||
|
Income
from continuing operations
|
33,090 | 127,299 | 69,615 | 58,770 | 42,111 | |||||||||||||||
|
(Loss)
income and gain from discontinued operations, net of tax
|
(4,241 | ) | 11,985 | (140 | ) | 99 | 222 | |||||||||||||
|
Net
income
|
28,849 | 139,284 | 69,475 | 58,869 | 42,333 | |||||||||||||||
|
Less
Net (Loss) income attributable to noncontrolling interest
|
(6,008 | ) | 1,177 | 3,314 | 443 | - | ||||||||||||||
|
Net
Income attributable to First Advantage Corporation
("FADV")
|
$ | 34,857 | $ | 138,107 | $ | 66,161 | $ | 58,426 | $ | 42,333 | ||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Total
assets
|
$ | 1,129,739 | $ | 1,227,524 | $ | 1,089,923 | $ | 980,083 | $ | 572,536 | ||||||||||
|
Long-term
debt
|
$ | 22,938 | $ | 14,404 | $ | 179,531 | $ | 182,127 | $ | 86,480 | ||||||||||
|
Equity
|
$ | 937,048 | $ | 932,011 | $ | 723,354 | $ | 630,560 | $ | 418,187 | ||||||||||
|
Per
Share Information:
|
||||||||||||||||||||
|
Basic
|
||||||||||||||||||||
|
Income
from continuing operations attributable to FADV
shareholders
|
$ | 0.66 | $ | 2.14 | $ | 1.15 | $ | 1.10 | $ | 0.85 | ||||||||||
|
(Loss)
income from discontinued operations attributable to FADV shareholders, net
of tax
|
(0.07 | ) | 0.21 | - | - | - | ||||||||||||||
|
Net
Income attributable to FADV shareholders
|
$ | 0.59 | $ | 2.35 | $ | 1.15 | $ | 1.10 | $ | 0.85 | ||||||||||
|
Diluted
|
||||||||||||||||||||
|
Income
from continuing operations attributable to FADV
shareholders
|
$ | 0.66 | $ | 2.13 | $ | 1.14 | $ | 1.09 | $ | 0.84 | ||||||||||
|
(Loss)
income from discontinued operations attributable to FADV shareholders, net
of tax
|
(0.07 | ) | 0.21 | - | - | 0.01 | ||||||||||||||
|
Net
Income attributable to FADV shareholders
|
$ | 0.59 | $ | 2.34 | $ | 1.14 | $ | 1.09 | $ | 0.85 | ||||||||||
|
Weighted
average shares outstanding
|
||||||||||||||||||||
|
Basic
|
59,392 | 58,871 | 57,502 | 52,884 | 49,711 | |||||||||||||||
|
Diluted
|
59,499 | 59,121 | 58,079 | 53,593 | 50,036 | |||||||||||||||
|
Amounts
attributable to FADV shareholders:
|
||||||||||||||||||||
|
Income
from continuing operations, net of tax
|
$ | 39,098 | $ | 126,122 | $ | 66,301 | $ | 58,327 | $ | 42,111 | ||||||||||
|
Loss
from discontinued operations, net of tax
|
(4,241 | ) | 11,985 | (140 | ) | 99 | 222 | |||||||||||||
|
Net
income
|
$ | 34,857 | $ | 138,107 | $ | 66,161 | $ | 58,426 | $ | 42,333 | ||||||||||
|
Total
shares outstanding at December 31,
|
59,499 | 59,095 | 58,179 | 55,765 | 50,084 | |||||||||||||||
12
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
Note: The
information contained in the Item has been updated to reflect the
following:
|
|
·
|
The retrospective change in
business segments which were effective during the first quarter of 2009
(as discussed in Notes 1,
3 and 16).
|
|
|
·
|
The retrospective adoption of
Statement of Financial Accounting Standard SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No.
51,” effective January 1, 2009 (discussed in Notes 2, 14 and
17).
|
|
|
·
|
The reclassification of
certain amounts presented for prior periods to conform to the 2009
presentation.
|
This
Item has not been updated for other changes since December 31,
2008.. For significant developments since the filling of the
Company’s 2008 Annual Report on Form 10-K, refer to subsequent 2009 Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K.
13
First
Advantage Corporation
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
For
The Two Years Ended December 31, 2008 and 2007
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 five
primary business segments; Credit Services, Data Services, Employer Services,
Multifamily Services, and Investigative and Litigation Support
Services. First Advantage is headquartered in Poway, California, and
has more than 4,000 employees in offices throughout North America and
abroad.
The
current economic downturn has caused decreased service revenue in the Credit
Services segment related to the mortgage industry and the Data Services segment
related to lead generation and specialty finance businesses. These
decreases were offset by international expansion in our Employer Services and
Investigative and Litigation Support Services segments. Management expects
continued weakness in the real estate and mortgage markets to continue impacting
the Company’s Credit Services segment and the lead generation, transportation
and specialty credit businesses in the Data Services segment. In
addition, the effect of the issues in the real estate and related credit markets
together with the other macroeconomic matters has resulted in higher
unemployment rates negatively impacting the volumes in the Employer Services
segment and the Credit Services segments. Given this outlook,
management is focusing on expense reductions, operating efficiencies, and
increasing market share throughout the Company.
Recent
market conditions and economic events have had an overall negative impact on the
Company’s operations and related financial results. As a result of acquisitions,
the Company has goodwill of approximately $731.4 million at December 31, 2008.
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142
“Goodwill and other Intangible Assets” and consistent with prior years, the
Company’s policy is to perform an annual impairment test for each reporting unit
in the fourth quarter or sooner if circumstances indicate a possible impairment.
The valuation of goodwill requires assumptions and estimates of many critical
factors including revenue growth, cash flows, market multiples and discount
rates. Forecasts of future operations are based, in part, on operating results
and management’s expectations as to future market conditions. Many of
the factors used in assessing fair value are outside the control of management
including future economic and market conditions. If the fair value of a
reporting unit exceeds its carrying value, then its goodwill is not considered
impaired. In the event that the carrying value of a reporting unit exceeds its
fair value, then further testing must be performed to determine if the carrying
value of goodwill exceeds the fair value of goodwill. The
Company’s annual evaluation in 2008 resulted in an impairment loss of $19.7
million ($19.5 million net of tax) in the Data Services segment based primarily
upon diminished earnings and cash flow expectations for the lead generation
reporting unit and lower residual valuation multiples existing in the present
market conditions. The lead generation reporting unit is 70% owned by First
Advantage and 30% owned by First American; therefore, the Company recorded a
reduction of noncontrolling interest expense of $5.7 million related to the
impairment loss. Due to significant volatility in the current
markets, the Company’s operations may be negatively impacted in the future to
the extent that exposure to impairment losses may be increased.
The
Credit Services segment provides specialized credit reporting services,
strategic marketing solutions, anti-fraud/identity verification tools,
automotive lead generation services, and broker certification services for auto
and mortgage and home equity lenders. Specialized credit reporting
services includes delivering consolidated consumer credit reports to the
mortgage and home equity industries, and automotive, recreational vehicle,
marine and manufactured housing marketplace. These reports are derived from
credit reports obtained from one or more of the three United States primary
credit bureaus, and may be merged or specially formatted for ease of use by
lenders, dealers and other financial institutions. Designed to drive
consumers into an auto dealership to buy a vehicle, the segment’s automotive
lead generation services provide advertising and other marketing, telemarketing,
fulfillment and customer management solutions.
14
The Data
Services segment includes business lines that provide transportation credit
reporting, motor vehicle record reporting, criminal records reselling, specialty
finance credit reporting, and lead generation. Products and services
offered by the Data Services segment include driver history reports, vehicle
registration, and credit reports on cargo shippers and brokers.
The
Employer Services segment includes employment background screening, hiring
management systems, occupational health services, and tax incentive
services. The Employer Services segment serves approximately 20,000
customers, including approximately a quarter of the Fortune 1000
companies. Products and services relating to employment background
screening include criminal records searches, employment verification, education
verification, social security number verification and credit reporting. Hiring
management systems provide recruiting strategies, applicant tracking, and talent
management software. Occupational health services include drug-free
workplace programs, physical examinations and employee assistance programs. Tax
incentive services include services related to the administration of
employment-based and location-based tax credit and incentive programs and fleet
asset management programs. The professional employer organization
provides companies with comprehensive outsourced management of payroll and human
resource management.
The
Multifamily Services segment includes resident screening
services. Resident screening services include criminal and eviction
records searches, credit reporting, employment verification, lease performance
and payment histories. Other products and services offered by this segment
include renters’ insurance, property performance analytics and property
management software. The Multifamily Services segment serves approximately
13,000 customers. The Company believes it has the largest proprietary
database of landlord-tenant records that include eviction court records, rental
histories, prior inquiries and other valuable information reported directly by
landlords.
The
Investigative and Litigation Support Services segment offers computer forensics,
electronic discovery, due diligence reports and other high level
investigations. These services are provided to enterprise customers
nationwide, including law firms, financial institutions, multi-national
corporations and government agencies.
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. These businesses are presented in discontinued
operations at March 31, 2008. The results of these businesses’
operations in the prior periods have been reclassified to conform to the 2008
classification.
In
October 2007, the Company completed the sale of US Search.com (“US
Search”). US Search was included in the Company’s Data Services
segment. With the growth of First Advantage, a consumer-driven people
locator service no longer fits into the Company’s core business
strategy. This business is presented in discontinued operations at
December 31, 2007. The results of the business’ operations in the
prior periods have been reclassified to conform to the 2007
classification.
First
Advantage intends to continue its efforts to consolidate the operations brought
together in mergers and acquisitions. First Advantage also intends to
continue pursuing acquisitions of businesses that will enable the Company to
enter new markets as well as increase existing market share. First
Advantage also expects to pursue acquisition opportunities which will enable the
Company to enter into related product fields.
First
Advantage generates revenue in the form of fees from reports created from
searches performed, credit reports delivered to its customers, project and
consulting fees, membership fees collected on its credit monitoring membership
products, sale of software licenses, maintenance, custom programming, and
related services provided. First Advantage generally enters into agreements with
customers that provide for a fixed fee per report or for services
provided. For purposes of analyzing operating results, operating
margin and operating costs are compared to service revenues, excluding
reimbursed government fee revenue. Elimination of inter-segment
revenue is included in the Corporate segment.
Cost of
sales includes fees paid to vendors or agencies for data procurement, specimen
collection, laboratory testing, and investigators’ compensation, benefits and
travel expenses.
15
First
Advantage’s operating expenses consist primarily of compensation and benefits
costs for employees, commissions, occupancy and related costs, other selling,
general and administrative expenses associated with operating its business,
depreciation of property and equipment and amortization of intangible
assets.
Operating
Results
The
following is a summary of the operating results by the Company’s business
segments for the three years ended December 31, 2008.
16
|
(in
thousands)
|
Credit
|
Data
|
Employer
|
Multifamily
|
Invest/Litigation
|
Corporate
|
||||||||||||||||||||||
|
2008
|
Services
|
Services
|
Services
|
Services
|
Support
Services
|
and
Eliminations
|
Total
|
|||||||||||||||||||||
|
Service
revenue
|
$ | 254,278 | $ | 109,788 | $ | 211,101 | $ | 73,337 | $ | 81,723 | $ | (2,951 | ) | $ | 727,276 | |||||||||||||
|
Reimbursed
government fee revenue
|
- | 46,198 | 10,365 | - | - | (3,876 | ) | 52,687 | ||||||||||||||||||||
|
Total
revenue
|
254,278 | 155,986 | 221,466 | 73,337 | 81,723 | (6,827 | ) | 779,963 | ||||||||||||||||||||
|
Cost
of service revenue
|
115,668 | 51,537 | 57,340 | 6,680 | 1,868 | (3,113 | ) | 229,980 | ||||||||||||||||||||
|
Government
fees paid
|
- | 46,198 | 10,365 | - | - | (3,876 | ) | 52,687 | ||||||||||||||||||||
|
Total
cost of service
|
115,668 | 97,735 | 67,705 | 6,680 | 1,868 | (6,989 | ) | 282,667 | ||||||||||||||||||||
|
Gross
margin
|
138,610 | 58,251 | 153,761 | 66,657 | 79,855 | 162 | 497,296 | |||||||||||||||||||||
|
Salaries
and benefits
|
57,589 | 20,332 | 74,772 | 25,567 | 32,258 | 31,434 | 241,952 | |||||||||||||||||||||
|
Facilities
and telecommunications
|
9,210 | 2,586 | 9,868 | 3,478 | 2,888 | 4,445 | 32,475 | |||||||||||||||||||||
|
Other
operating expenses
|
22,754 | 7,019 | 39,072 | 10,719 | 10,478 | (3,336 | ) | 86,706 | ||||||||||||||||||||
|
Depreciation
and amortization
|
6,237 | 10,131 | 13,045 | 5,747 | 3,180 | 4,253 | 42,593 | |||||||||||||||||||||
|
Impairment
loss
|
1,721 | 19,733 | 296 | - | - | - | 21,750 | |||||||||||||||||||||
|
Income
(loss) from operations
|
$ | 41,099 | $ | (1,550 | ) | $ | 16,708 | $ | 21,146 | $ | 31,051 | $ | (36,634 | ) | $ | 71,820 | ||||||||||||
|
Operating
margin percentage
|
16.2 | % | -1.4 | % | 7.9 | % | 28.8 | % | 38.0 | % | N/A | 9.9 | % | |||||||||||||||
17
|
Credit
|
Data
|
Employer
|
Multifamily
|
Invest/Litigation
|
Corporate
|
|||||||||||||||||||||||
|
2007
|
Services
|
Services
|
Services
|
Services
|
Support
Services
|
and
Eliminations
|
Total
|
|||||||||||||||||||||
|
Service
revenue
|
$ | 292,286 | $ | 87,904 | $ | 233,824 | $ | 72,276 | $ | 86,720 | $ | (2,845 | ) | $ | 770,165 | |||||||||||||
|
Reimbursed
government fee revenue
|
- | 45,312 | 12,778 | - | - | (3,984 | ) | 54,106 | ||||||||||||||||||||
|
Total
revenue
|
292,286 | 133,216 | 246,602 | 72,276 | 86,720 | (6,829 | ) | 824,271 | ||||||||||||||||||||
|
Cost
of service revenue
|
125,478 | 22,665 | 65,027 | 6,805 | 2,168 | (2,864 | ) | 219,279 | ||||||||||||||||||||
|
Government
fees paid
|
- | 45,312 | 12,778 | - | - | (3,984 | ) | 54,106 | ||||||||||||||||||||
|
Total
cost of service
|
125,478 | 67,977 | 77,805 | 6,805 | 2,168 | (6,848 | ) | 273,385 | ||||||||||||||||||||
|
Gross
margin
|
166,808 | 65,239 | 168,797 | 65,471 | 84,552 | 19 | 550,886 | |||||||||||||||||||||
|
Salaries
and benefits
|
61,103 | 18,885 | 85,917 | 26,705 | 33,574 | 37,704 | 263,888 | |||||||||||||||||||||
|
Facilities
and telecommunications
|
8,659 | 2,696 | 9,947 | 3,769 | 2,379 | 4,260 | 31,710 | |||||||||||||||||||||
|
Other
operating expenses
|
32,864 | 7,753 | 33,182 | 11,496 | 8,577 | 363 | 94,235 | |||||||||||||||||||||
|
Depreciation
and amortization
|
8,155 | 9,985 | 10,421 | 4,880 | 2,954 | 3,325 | 39,720 | |||||||||||||||||||||
|
Impairment
loss
|
- | - | 204 | - | - | - | 204 | |||||||||||||||||||||
|
Income
(loss) from operations
|
$ | 56,027 | $ | 25,920 | $ | 29,126 | $ | 18,621 | $ | 37,068 | $ | (45,633 | ) | $ | 121,129 | |||||||||||||
|
Operating
margin percentage
|
19.2 | % | 29.5 | % | 12.5 | % | 25.8 | % | 42.7 | % | N/A | 15.7 | % | |||||||||||||||
18
|
Credit
|
Data
|
Employer
|
Multifamily
|
Invest/Litigation
|
Corporate
|
|||||||||||||||||||||||
|
2006
|
Services
|
Services
|
Services
|
Services
|
Support
Services
|
and
Eliminations
|
Total
|
|||||||||||||||||||||
|
Service
revenue
|
$ | 318,860 | $ | 100,651 | $ | 195,737 | $ | 68,811 | $ | 45,007 | $ | (3,757 | ) | $ | 725,309 | |||||||||||||
|
Reimbursed
government fee revenue
|
- | 44,420 | 10,843 | - | - | (3,097 | ) | 52,166 | ||||||||||||||||||||
|
Total
revenue
|
318,860 | 145,071 | 206,580 | 68,811 | 45,007 | (6,854 | ) | 777,475 | ||||||||||||||||||||
|
Cost
of service revenue
|
134,750 | 29,355 | 59,094 | 6,661 | 2,255 | (3,489 | ) | 228,626 | ||||||||||||||||||||
|
Government
fees paid
|
- | 44,420 | 10,843 | - | - | (3,097 | ) | 52,166 | ||||||||||||||||||||
|
Total
cost of service
|
134,750 | 73,775 | 69,937 | 6,661 | 2,255 | (6,586 | ) | 280,792 | ||||||||||||||||||||
|
Gross
margin
|
184,110 | 71,296 | 136,643 | 62,150 | 42,752 | (268 | ) | 496,683 | ||||||||||||||||||||
|
Salaries
and benefits
|
61,265 | 18,125 | 71,028 | 26,221 | 20,215 | 28,283 | 225,137 | |||||||||||||||||||||
|
Facilities
and telecommunications
|
8,548 | 2,261 | 8,297 | 3,706 | 1,680 | 4,332 | 28,824 | |||||||||||||||||||||
|
Other
operating expenses
|
29,229 | 6,827 | 28,979 | 12,573 | 5,994 | 2,909 | 86,511 | |||||||||||||||||||||
|
Depreciation
and amortization
|
8,568 | 9,754 | 8,507 | 4,522 | 2,607 | 1,626 | 35,584 | |||||||||||||||||||||
|
Impairment
loss
|
- | - | - | - | - | - | - | |||||||||||||||||||||
|
Income
(loss) from operations
|
$ | 76,500 | $ | 34,329 | $ | 19,832 | $ | 15,128 | $ | 12,256 | $ | (37,418 | ) | $ | 120,627 | |||||||||||||
|
Operating
margin percentage
|
24.0 | % | 34.1 | % | 10.1 | % | 22.0 | % | 27.2 | % | N/A | 16.6 | % | |||||||||||||||
19
Credit
Services Segment
Service
revenue was $254.3 million for the year ended December 31, 2008, a decrease of
$38.0 million compared to service revenue of $292.3 million in
2007. A decrease in transactions related to the decline in the
mortgage and auto industries and challenging credit markets resulted in an
overall decrease in service revenue. Service revenue from existing businesses
decreased by $51.6 million, while the acquisition of a mortgage credit reporting
business during the fourth quarter of 2007 increased service revenue by $13.6
million.
Gross
margin was $138.6 million in 2008, a decrease of $28.2 million compared to gross
margin of $166.8 million in 2007. Gross margin from existing businesses
decreased by $35.1 million, while the acquisition of a mortgage credit reporting
business during the fourth quarter of 2007 increased gross margin by $6.9
million. The gross margin percentage was 54.5% for year ended December 31, 2008
as compared to 57.1% for 2007. The decrease is due to an increase in
credit data costs and the current year’s product mix.
Salaries
and benefits decreased by $3.5 million. Salaries and benefits were
22.6% of service revenue in 2008 compared to 20.9% in 2007. The expense decrease
is due to the segment reducing employees in line with the decrease in service
revenue. This is offset by an acquisition during the fourth quarter
of 2007 which increased salaries and benefits expense by $2.4 million, severance
expense of $1.8 million that was recorded in 2008, and salaries and benefit
expense for technology personnel, previously outsourced, to gain cost
efficiencies.
Facilities
and telecommunication expenses increased by $0.6 million. Facilities
and telecommunication expenses were 3.6% of service revenue in 2008 compared to
3.0% in 2007. The expense increase was primarily due to accelerated
lease expense related to office consolidations, offset by a decrease in
telecommunication expenses.
Other
operating expenses decreased by $10.1 million. Other operating expenses were
8.9% of service revenue in 2008 compared to 11.2% for 2007. The decrease in
other operating expense was primarily due to a reduction of temporary labor
costs, international operations, technology related shared services fees, and
bad debt expense. This is offset by the acquisition of a mortgage
credit reporting business during the fourth quarter of 2007 which increased
other operating expenses by $1.7 million during 2008.
Depreciation
and amortization decreased by $1.9 million. Depreciation and
amortization was 2.5% of service revenue in 2008 compared to 2.8% in
2007. The decrease is primarily due to certain software projects and
intangibles becoming fully depreciated, offset by additional expense for
accelerated depreciation on assets related to office
consolidations.
Impairment
loss was $1.7 million for the year ended December 31, 2008, due to the $1.3
million write-off of identifiable intangible assets.
Income
from operations was $41.1 million in 2008 compared to $56.0 million in
2007. Income from operations from existing businesses decreased by
$16.8 million, offset by the acquisition of a mortgage credit reporting business
during the fourth quarter of 2007 which increased income from operations by $1.9
million. The operating margin percentage decreased from 19.2% to 16.2% primarily
due to the overall decrease in service revenue, increased expenses related to
office consolidations and the write-off of identifiable intangible
assets.
2007
Compared to 2006
Total
service revenue was $292.3 million in 2007, a decrease of $26.6 million compared
to service revenue of $318.9 million in 2006. A decrease in
transactions related to the decline in the mortgage and auto industries resulted
in an overall decrease in service revenue despite an increase of in revenue from
new products and services.
20
Gross
margin was $166.8 million in 2007, a decrease of $17.3 million compared to gross
margin of $184.1 million in 2006. The impact of the decrease in
transactions and an increase in credit data costs resulted in an overall
decrease in gross margin. Gross margin percentage was 57.1% of
revenue in 2007 as compared to 57.7% in 2006.
Salaries
and benefits decreased by $0.2 million. Salaries and benefits were
20.9% of service revenue in 2007 compared to 19.2% during the same period in
2006. Salaries and benefits expense decreased due to an increase in
capitalized personnel costs related to software development initiatives,
operational efficiencies and a decrease in incentive based compensation,
partially offset by an increase in benefit costs and severance related
expense.
Facilities
and telecommunication expense was flat in 2007 compared to 2006. Facilities and
telecommunication expense were 3.0% of service revenue in 2007 compared to 2.7%
in 2006.
Other
operating expenses increased by $3.6 million. Other operating expenses were
11.2% of service revenue in 2007 compared to 9.2% in 2006. The change in 2007 is
primarily due to an increase in bad debt expense and costs related to
international operations. This is partially offset by a decrease in
temporary labor cost related to a decrease in operations offset by an increase
for IT projects and system migrations, and an increase in the amounts allocated
for IT costs, shared services, and product development initiatives.
Depreciation
and amortization decreased by $0.4 million. Depreciation and amortization was
2.8% of service revenue in 2007 compared to 2.7% in 2006.
Income
from operations was $56.0 million in 2007 compared to $76.5 million in 2006. The
operating margin percentage decreased from 24.0% to 19.2% primarily due to the
impact of the decrease in service revenue caused by the decline in the mortgage
and auto industries, costs of international operations and bad debt
expense.
Data
Services Segment
2008
Compared to 2007
Service
revenue was $109.8 million in 2008, an increase of $21.9 million compared to
service revenue of $87.9 million in 2007. The increase in service
revenue is primarily due to an increase in revenue in our lead generation
business, offset by reduced volumes in the specialty credit and transportation
businesses as a result of the economic slowdown in the housing market and auto
industry.
Salaries
and benefits increased by $1.4 million. Salaries and benefits were
approximately 18.5% of service revenue in 2008 compared to 21.5% of service
revenue in the same period of 2007. The expense increase is primarily
due to an increase in salaries and benefits for the lead generation business to
support future growth.
Facilities
and telecommunication expenses for 2008 were comparable to 2007. Facilities and
telecommunication expenses were approximately 2.4% and 3.1% of service revenue
for 2008 and 2007, respectively.
Other
operating expenses decreased by $0.7 million. Other operating expenses were 6.4%
of service revenue in 2008 and 8.8% in 2007. The decrease is primarily due to
the decrease of leased equipment and bad debt expense.
Depreciation
and amortization expense for 2008 was comparable to
2007. Depreciation and amortization was 9.2% of service revenue in
2008 compared to 11.4% in the same period in 2007.
Impairment
loss was $19.7 million and was 18.0% of service revenue in 2008. The
loss was due to the impairment loss for goodwill recorded for the lead
generation reporting unit in 2008.
Loss from
operations was $1.6 million in 2008, a decrease of $27.5 million compared to
$25.9 million in 2007. The operating margin percentage
decreased from 29.5% to (1.4)% in 2008 to 2007. The decrease is
primarily
21
the $19.7
million impairment loss primarily for goodwill recorded for the lead generation
reporting unit in 2008. Excluding the impairment loss, the operating
income was $18.2 million or 16.6%.
2007
Compared to 2006
Total
service revenue was $87.9 million in 2007, a decrease of $12.8 million compared
to 2006 service revenue of $100.7 million. The decrease is primarily
due to the decline in the lead generation business as a result of the weakness
in the credit markets in the second half of 2007.
Salaries
and benefits increased $0.8 million. Salaries and benefits were 21.5%
of service revenue in 2007 compared to 18.0% in 2006. The expense
increase is primarily due to an increase in salaries and benefits for the lead
generation business to support future growth
Facilities
and telecommunications increased $0.4 million. The current year
expense as a percentage of service revenue was 3.1%, compared to 2.2% in
2006. The increase is primarily due to the increase in rent and
telecommunications costs as a result of relocating offices.
Other
operating expenses increased $0.9 million. As a percentage of service
revenue, other operating expenses were 8.8% and 6.8% for years ended 2007 and
2006, respectively. The increase is due to increased allocations of
accounting and finance expenses, and increased bad debt expense.
Depreciation
and amortization increased $0.2 million. Depreciation and amortization was 11.4%
of service revenue in 2007 compared to 9.7% in 2006. The expense increase is due
to asset additions.
Operating
income decreased $8.4 million. The operating margin was 29.5% for
2007 compared to 34.1% for 2006. The decrease is primarily due to a
decline in revenue and increased operating expenses at the lead generation
business.
Employer
Services
2008
Compared to 2007
Service
revenue was $211.1 million in 2008, a decrease of $22.7 million compared to
service revenue of $233.8 million in 2007. The decrease was a result
of a reduction in revenue of $28.4 million from existing businesses offset by
the addition of $5.7 million of revenue from acquisitions. The
decrease in service revenue from existing businesses is directly related to the
slowdown in hiring in the United States and abroad. This is offset by
the 2007 and 2008 acquisitions.
Salaries
and benefits decreased by $11.1 million. Salaries and benefits were
35.4% of service revenue in 2008 compared to 36.7% in 2007. The
decrease is a direct effect of office closings in 2007 and 2008 and the shift of
personnel to shared services, offset by $0.6 million in severance costs for
office consolidations and an increase related to the 2007 and 2008
acquisitions.
Facilities
and telecommunication expenses was flat comparing 2008 to
2007. Facilities and telecommunication expenses were 4.7% of service
revenue in 2008 and 4.3% in 2007.
Other
operating expenses increased by $5.9 million. Other operating expenses were
18.5% of service revenue in 2008 and 14.2% for 2007. The increase in
other operating expenses is primarily due to the increase in allocation for
shared services, increase in bad debt, and foreign currency losses.
Depreciation
and amortization increased by $2.6 million primarily due to the addition of
intangible assets related to the acquisitions and the rollout of new software
projects.
22
Impairment
loss was flat in 2008 compared to 2007. The impairment loss was
related to asset write downs for the office consolidations.
Income
from operations was $16.7 million for 2008, a decrease of $12.4 million compared
to income from operations of $29.1 million in 2007. The operating
margin percentage decreased from 12.5% to 7.9%. The decrease in the
operating margin is primarily due to a change in the revenue mix of the
businesses in 2008 compared to 2007, and overall reduced revenue
levels.
2007
Compared to 2006
Service
revenue was $233.8 million, an increase of $38.1 million compared to prior
year. The increase is primarily related to the nine 2006 acquisitions
in the segment. Specifically, the acquired hiring management
solutions division added $4.9 million and the background screening division
acquisitions added $13.8 million in service revenue to the
segment. In addition, the segment showed increased volumes from the
passing of the Work Opportunity Tax Credit (“WOTC”) program in late
2006. These increases were offset by a decrease in revenue at the
occupational health division of $2.6 million.
Salaries
and benefits increased $14.9 million. Salaries and benefits were
36.7% of service revenue in 2007 compared to 36.3% in 2006. The
expense increase is primarily due to acquisitions, international expansion, and
severance expense of approximately $0.9 million recorded for office
closures.
Facilities
and telecommunication expense increased $1.7 million. The current
year expense as a percentage of service revenue was 4.3%, which is comparable to
2006. The segment recorded approximately $0.3 million in future lease
expense related to office consolidations. The remaining increase in expense is
primarily due to the acquisitions and international expansion, partially offset
by office consolidations.
Other
operating expenses increased $4.2 million. As a percentage of service
revenue, other operating expenses were 14.2% and 14.8% for years ended 2007 and
2006, respectively. The increase in operating expenses is primarily
due to the acquisitions, international expansion, and approximately $0.5 million
in expenses related to office closures.
Depreciation
and amortization increased $2.1 million. Depreciation and
amortization expense was 4.5% of service revenue for the year ended 2007
compared to 4.3% for the same period of 2006. The increase is
primarily due to the amortization of the acquired intangible
assets.
Operating
income increased $9.3 million. The operating margin was 12.5% for
2007 compared to 10.1% for 2006. The increase is primarily due to
revenue and earnings growth in most product lines offset by a decline in the
occupational health business and $1.7 million in expense related to
consolidating offices.
Multifamily
Services
2008
Compared to 2007
Service
revenue was $73.3 million for 2008, an increase of $1.0 million compared to
service revenue of $72.3 million in the same period of 2007. The 1.5%
growth from existing businesses is driven by the renter’s insurance program,
expanded market share, and an increase in products and services.
Salaries
and benefits expenses decreased $1.1 million. Salaries and benefits
were 34.9% of service revenue for 2008 compared to 36.9% of service revenue in
the same period of 2007. The decrease is related to a decrease in
employees offset by $0.4 million in severance costs.
Facilities
and telecommunication expenses decreased $0.3 million. Facilities and
telecommunication expenses were 4.7% and 5.2% of service revenue in 2008 and
2007, respectively.
23
Other
operating expenses decreased $0.8 million. Other operating
expenses were 14.6% of service revenue in 2008 compared to 15.9% in 2007. The
decrease is due to management’s focus on cost containment.
Depreciation
and amortization increased $0.9 million. Depreciation and amortization was
7.8% of service revenue in 2008 compared to 6.8% in the same period of
2007. The increase is related to asset additions and the rollout of
new software projects.
Income
from operations was $21.1 million for 2008 compared to income from operations of
$18.6 million in the same period of 2007. The operating margin percentage
increased from 25.8% to 28.8% due to increased revenue from the renter’s
insurance program and cost containment.
2007
Compared to 2006
Total
service revenue was $72.3 million in 2007, an increase of $3.5 million compared
to 2006. The increase is primarily due the segment’s growth from
existing businesses of approximately 5%. The increase is related to
increases in criminal searches and commissions on renters’
insurance.
Salaries
and benefits increased $0.5 million. Salaries and benefits were 36.9%
of service revenue in 2007 compared to 38.1% in 2006. The increase is
primarily related to customary annual salary increases offset by strategic
reductions in employees.
Facilities
and telecommunication expense was flat in comparing 2007 to
2006. Facilities and telecommunication expense was 5.2% and 5.4% of
service revenue in 2007 and 2006, respectively.
Other
operating expenses decreased $1.1 million. As a percentage of service
revenue, other operating expenses were 15.9% and 18.3% in 2007 and 2006,
respectively. The decrease is related to reduced costs of leased
equipment, software and marketing expense.
Depreciation
and amortization increased by $0.4 million. Depreciation and
amortization was 6.8% and 6.6% of service revenue for the years ended December
31, 2007 and 2006, respectively. The increase is related to an
increase in developed software projects.
Operating
income increased by $3.5 million. Operating margin is 25.8% in 2007
compared to 22.0% in 2006. The increase in operating income and
margin is primarily due to the containment of costs coupled with the revenue
growth.
Investigative
and Litigation Support Services
2008
Compared to 2007
Service
revenue was $81.7 million for 2008, a decrease of $5.0 million compared to
service revenue of $86.7 million in 2007.
Salaries
and benefits decreased by $1.3 million. Salaries and benefits were
39.5% of service revenue in 2008 compared to 38.7% in 2007. The
expense decrease is mainly due a decrease in compensation related to revenue and
profitability.
Facilities
and telecommunication expenses increased $0.5 million. Facilities and
telecommunication expenses were 3.5% of service revenue in 2008 and 2.7% in the
same period of 2007. The increase is related to geographic expansion
and new business development efforts in this segment.
24
Other
operating expenses increased by $1.9 million. Other operating expenses were
12.8% of service revenue in 2008 and 9.9% for the same period of
2007. The increase is related to geographic expansion and new
business development efforts in this segment.
Depreciation
and amortization was flat comparing 2008 to 2007. Depreciation and
amortization was 3.9% of service revenue in 2008 compared to 3.4% in
2007.
The
operating margin percentage was 38.0% and 42.7% for 2008 and 2007,
respectively. Income from operations was $31.1 million for 2008
compared to $37.1 million for the same period of 2007. The decrease
in margin is primarily due to the revenue decrease on the higher margin
electronic discovery business.
2007
Compared to 2006
Total
service revenue was $86.7 million in 2007, an increase of $41.7 million compared
to 2006 service revenue of $45.0 million. The increase is primarily
due to the continued growth in the segment’s electronic discovery business of
the Litigation Support Services division.
Salaries
and benefits increased by $13.4 million. Salaries and benefits were 38.7% of
service revenue in 2007 compared to 44.9% in 2006. The increase in
expense is due to increases in incentive compensation and commissions as a
result of the revenue growth.
Facilities
and telecommunications increased $0.7 million. Facilities and
telecommunications were 2.7% of service revenue in 2007 compared 3.7% in the
prior year. The increase is primarily due to the growth in the
Litigation Support Services division.
Other
operating expenses increased by $2.6 million and were 9.9% of service revenue in
2007 compared to 13.3% in 2006. The increase is primarily due to
increased international travel and the growth in the Litigation Support Services
division.
Depreciation
and amortization increased by $0.3 million. The increase is the
result of the increase in capital equipment related to growth.
Income
from operations was $37.1 million in 2007 compared to $12.3 million in 2006. The
increase is primarily due to increased revenues at the higher margin electronic
discovery business.
Corporate
2008
Compared to 2007
Corporate
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 $36.6 million in 2008 compared to expenses of $45.6
million in 2007. The decrease is primarily related to the $8.0
million of severance costs recorded for the former CEO in 2007.
2007
Compared to 2006
Corporate
costs and expenses primarily represent compensation and benefits for senior
management, administrative staff, technology personnel and their related
expenses in addition to an administrative fee paid to First
American. Additional costs were incurred for the increased level of
professional fees for data security and increased staffing in the technology,
accounting, human resources, and legal departments to support corporate
growth. The corporate expenses were $45.6 million in 2007, an
increase of $8.2 million compared to 2006. The 2007 expenses were
impacted by the $8.0 million of severance costs related to the termination of
the former CEO’s employment.
25
Consolidated
Results
2008
Compared to 2007
Consolidated
service revenue for the year ended December 31, 2008 was $727.3 million, a
decrease of $42.9 million compared to service revenue of $770.2 million in the
same period in 2007. Service revenue at existing businesses decreased $62.2
million, offset by an increase of $19.3 million due to
acquisitions. The decrease in service revenue is directly related to
the downturn in domestic and international hiring, the decline in the mortgage
industry, weakness in the credit markets, and overall economic
slowdown.
Salaries
and benefits decreased $21.9 million. Salaries and benefits were
33.3% of service revenue for 2008 and 34.3% for 2007. The decrease is primarily
due to strategic reductions in employees, office consolidations and the
departure of our former CEO in 2007. In connection with the former
CEO’s Transition Agreement, the Company recorded compensation expense of $8.0
million in 2007, 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. This is offset by the increase
related to customary annual salary increases, acquisitions and additional
employees added to support international expansion.
Facilities and
telecommunication increased by $0.8 million compared to 2007. Facilities and
telecommunication expenses were 4.5% of service revenue in 2008 and 4.1% in
2007.
Other
operating expenses decreased by $7.5 million compared to the same period in
2007. Other operating expenses were 11.9% and 12.2% of service
revenue in 2008 and 2007, respectively. The decrease is due to
a decrease in temporary labor, leased equipment, marketing, and office expenses
related to the overall initiative to reduce costs. This is offset by
an increase in shared services allocations and acquisitions.
Depreciation
and amortization increased by $2.9 million. Depreciation and
amortization expense was 5.9% and 5.2% of service revenue in 2008 and 2007,
respectively. The expense increase is primarily due to fixed asset
additions and the roll out of internally developed software.
Impairment
loss increased $21.5 million compared to 2007 primarily due to an impairment
loss of $19.7 recorded in the Data Services segment. Approximately $0.9 million
was recorded related to asset write downs and $1.6 million related to
identifiable intangible assets write downs and office
consolidations.
The
consolidated operating margin was 9.9% for the 2008, compared to 15.7% for
2007. Excluding restructuring costs of $9.7 million and $19.7 million
impairment loss for goodwill recorded million in 2008, the consolidated
operating margin was 13.9%. The decrease in operating margin as a
percentage of service revenue is due to the decrease in service revenue
partially offset by an overall decrease in operating expenses.
Income
from operations was $71.8 million for 2008 compared to $121.1 million for the
same period in 2007. Results of operations for the year ended December 31, 2008
include restructuring costs of $9.7 million and a $19.7 million impairment loss
for goodwill. Results of operations for the year ended December 31,
2007 include restructuring costs of $1.7 million and $8.0 in severance costs
related to the departure of our former CEO in March 2007. The
decrease of $49.3 million is comprised of decreases in operating income of $14.9
million in Credit Services, $27.5 million in Data Services, $12.4 million in
Employer Services, and $6.0 million in Investigative and Litigation Support
Services, offset by increases in operating income of $2.5 million at Multifamily
Services and a decrease of Corporate expenses of $9.0 million.
2007
Compared to 2006
Consolidated
service revenue for the year ended December 31, 2007 was $770.2 million, an
increase of $44.9 million compared to service revenue of $725.3 million in 2006.
Acquisitions accounted for $25.8 million of the increase and revenue from
existing businesses increased 2.7% for the year ended December 31,
2007.
26
Salaries
and benefits were 34.3% of service revenue for 2007 and 31.0% for 2006. The
increase is related to additional employees added through acquisitions and
company expansion. In addition, the 2007 expenses were impacted by
the $8.0 million of severance costs related to the termination of the former
CEO’s employment and approximately $12.8 million in expense was recorded for
share-based compensation in 2007 compared to $10.1 million in 2006.
Facilities and
telecommunication expense increased by $2.9 million compared to the same period
in 2006. Facilities and telecommunication expense was 4.1% of service revenue
for 2007 and 4.0% in the same period of 2006. The increase is
primarily related to acquisitions, relocation expenses and international
expansion.
Other
operating expenses increased by $7.7 million compared to 2006. Other
operating expenses were 12.2% of service revenue for year ended December 31,
2007 and 11.9% compared to the same period for 2006. The
increase is due to acquisitions, and increased marketing, software,
international travel, legal and professional expenses.
Depreciation
and amortization increased by $4.3 million due to an overall increase in
amortization of intangible assets as a result of acquisitions, rollout of
software initiatives and capital asset investment.
Income
from operations was $121.1 million for the 2007 compared to $120.6 million for
2006. The increase of $0.5 million is comprised of an increase in operating
income of $9.3 million at the Employer Services segment, $24.8 million at the
Investigative and Litigation Support Services segment and $3.5 million at the
Multifamily Services segment, offset by a decrease in operating income of $20.5
million at the Credit Services segment, $8.4 million at the Data Services
segment, and an increase of Corporate expenses of $8.2 million.
The
consolidated operating margin was 15.7% for the year ended December 31, 2007,
compared to 16.6% for the same period in 2006. The decrease in margin
is primarily due to the decline in revenue and margins in the Credit Services
and Data Services segments, offset by the increased revenue and margins in the
Investigative and Litigation Services segment.
Critical
Accounting Estimates
First
Advantage believes the following are the more critical accounting estimates that
impact its financial statements. In connection with the preparation of our
financial statements, management is required to make assumptions and estimates
about future events, and apply judgments that affect the reported amounts of
assets, liabilities, revenue, expenses and the related
disclosures. Management’s assumptions, estimates and judgments are
based on historical experience, current trends and other factors that management
believes to be relevant at the time the consolidated financial statements are
prepared. Although First Advantage believes that its estimates and assumptions
are reasonable, future events and their effects cannot be determined with
certainty, actual results could differ from our assumptions and estimates, and
such differences could be material.
The
Company’s significant accounting policies are discussed in the Company’s Annual
Report on Form 10-K.
Basis
of Presentation and Consolidation
First
Advantage’s discussion and analysis of financial condition and results of
operations is based upon its audited consolidated financial statements, which
have been prepared in accordance with generally accepted accounting principles
(“GAAP”). The Company’s operating results for the years ended
December 31, 2008, 2007 and 2006 include results for the acquired entities from
the date of acquisition.
The
elimination of intra-segment revenue and cost of service revenue is included in
Corporate. These transactions are recorded at cost.
Revenue
Recognition
27
Revenue
from the sale of reports and leads is recognized at the time of delivery, as the
Company has no significant ongoing obligation after delivery. Revenue
from investigative and litigation support services is recognized as services are
performed. In accordance with GAAP, the Company includes reimbursed
government fees in revenue and in cost of service.
Revenue
via the eAdvertising network of the Data Services segment is recognized when
transactions are completed as evidenced by qualifying actions by end users of
the publishers and /or advertiser on the proprietary eAdvertising
network. Revenue as a result of list management services is
recognized when transactions are completed as evidenced by qualifying actions of
end users. In most instances, the qualifying action that completes
the earnings process is the submission of an on-line form that generates a sales
lead via the internet.
Membership
fees, billed monthly to member’s accounts, are recognized in the month the fee
is earned. A portion of the membership revenue received is paid in the form of a
commission to clients and is reflected in cost of service revenue. Revenue
earned from providing services to third party issuers of membership based
consumer products is recognized at the time the service is provided, generally
on a monthly basis.
Software
maintenance revenues are recognized ratably over the term of the maintenance
period. Custom programming and professional consulting service revenue is
recognized using the percentage-of-completion method pursuant to Accounting
Research Bulletin (ARB) No. 45 “Long-Term Construction-Type Contracts.” To the
extent that interim amounts billed to clients exceed revenue earned, deferred
income is recorded. Other revenue is recognized upon completion of the
contractual obligation, which is typically evidenced by delivery of the product
or performance of the service.
Allowance
for Uncollectible Receivables
The allowance for all probable uncollectible receivables is
based on a combination of historical data, cash payment trends, specific
customer issues, write-off trends, general economic conditions and other
factors. These factors are continuously monitored by management to arrive at an
estimate for the amount of accounts receivable that may ultimately be
uncollectible. In circumstances where First Advantage is aware of a specific
customer’s inability to meet its financial obligations, First Advantage records
a specific allowance for bad debts against amounts due to reduce the net
recognized receivable to the amount it reasonably believes will be collected.
This analysis requires making significant estimates, and changes in facts and
circumstances could result in material changes in the allowance for
uncollectible receivables.
First
Advantage capitalizes costs associated with developing software for internal
use, which costs primarily include salaries of developers. Direct costs incurred
in the development of software are capitalized once the preliminary project
stage is completed, management has committed to funding the project and
completion and use of the software for its intended purpose are probable. First
Advantage ceases capitalization of development costs once the software has been
substantially completed at the date of conversion and is ready for its intended
use. The estimation of useful lives requires a significant amount of judgment
related to matters, specifically, future changes in technology. The
Company believes there have not been any events or circumstances that warrant
revised estimates of useful lives.
Database
Development Costs
Database
development costs represent expenditures associated with First Advantage’s
databases of information for customer usage. The costs are capitalized from the
time technological feasibility is established until the information is ready for
use. The estimation of useful lives requires a significant amount of
judgment related to matters such as future changes in technology, legal issues
related to allowable uses of data and other matters. The Company
believes there have not been any events or circumstances that warrant revised
estimates of useful lives.
Impairment
of Intangible and Long-Lived Assets
28
First
Advantage carries intangible and long-lived assets at cost less accumulated
amortization (where applicable). Accounting standards require that
assets be written down if they become impaired. Intangible and
long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset is not
recoverable. At such time that an impairment in value of an
intangible or long-lived asset is identified, the impairment will be measured as
the amount by which the carrying amount of a long-lived asset exceeds its fair
value. Fair value is determined by employing an expected present
value technique, which utilizes multiple cash flow scenarios that reflect the
range of possible outcomes and an appropriate discount
rate. The use of comparative market multiples (the market
approach) compares the reporting unit to other comparable companies based on
valuation multiples to arrive at a fair value. In accordance with SFAS
No. 142, “Goodwill and Other Intangible Assets,” the Company completed a
goodwill impairment test, for the years ending December 31, 2008 and 2007, for
all reporting units. The Company’s policy is to perform an annual
impairment test for each reporting unit in the fourth quarter or sooner if
circumstances indicate a possible impairment.
The
Company’s annual evaluation in 2008 resulted in an impairment loss of $19.7
million ($19.5 million net of tax) in the Data Services segment based primarily
upon diminished earnings and cash flow expectations for the lead generation
reporting unit and lower residual valuation multiples existing in the present
market conditions. There was no impairment loss in 2007. The lead
generation reporting unit is 70% owned by First Advantage and 30% owned by First
American; therefore, the Company recorded a reduction of noncontrolling interest
expense of $5.7 million related to the impairment loss. Due to
significant volatility in the current markets, the Company’s operations may be
negatively impacted in the future to the extent that exposure to impairment
losses may be increased.
These
types of analyses contain uncertainties because they require management to make
assumptions and to apply judgments to estimate industry economic factors and the
profitability of future business strategies. However, if actual
results are not consistent with the Company’s estimates and assumptions, we may
be exposed to an additional impairment loss that could be material.
Purchase
Accounting
First
Advantage completed one acquisition in 2008, two acquisitions in 2007 and eleven
acquisitions in 2006. The purchase method of accounting requires
companies to assign values to assets and liabilities acquired based upon their
fair values. In most instances, there is not a readily defined or listed market
price for individual assets and liabilities acquired in connection with a
business, including intangible assets. The determination of fair value for
assets and liabilities in many instances requires a high degree of estimation.
The valuation of intangibles assets, in particular, is very subjective. First
Advantage generally uses internal cash flow models. The use of different
valuation techniques and assumptions can change the amounts and useful lives
assigned to the assets and liabilities acquired, including goodwill and other
intangible assets and related amortization expense. The Company does not
anticipate that revisions to the amounts allocated to acquired assets and
liabilities, if any, will be significant to the Company’s financial
statements.
Share-Based
Compensation
Effective
January 1, 2006, the Company adopted SFAS No. 123R (revised 2004), “Share-Based
Payment,” which is a revision of SFAS No. 123 “Accounting for Stock-Based
Compensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25
“Accounting for Stock Issued to Employees” and its related implementation
guidance. The Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions. SFAS No. 123R requires a public entity to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with limited
exceptions). The cost is recognized over the period during which an
employee is required to provide services in exchange for the
award. The Company adopted SFAS No. 123R using the modified
prospective method. Under this method, results of prior periods are
not restated. Share-based compensation expense was $9.1 million ($6.0
million after tax or $0.10 per basic and diluted share), $12.8 million ($8.3
million after tax or $0.15 per basic and diluted share) and $10.1 million ($7.4
million after tax or $0.13 per basic and diluted share) for the years ended
December 31, 2008, 2007 and 2006, respectively.
29
Option-pricing
models and generally accepted valuation techniques require management to make
assumptions and to apply judgment to determine the fair value of our
awards. These assumptions and judgments include estimating the future
volatility of the Company’s stock price, expected dividend yield, future
employee turnover rates and future employee stock options exercise
behaviors. Management does not believe there is a reasonable
likelihood there will be a material change in the future estimates or
assumptions we use to determine share-based compensation
expense. However, if actual results are not consistent with our
estimates or assumptions, share-based compensation expense reported in our
financial statements may not be representative of the actual economic cost of
the share-base compensation.
Income
Taxes
We
estimate our income tax provision in each of the jurisdictions in which we
operate, a process that includes estimating exposures related to examinations by
taxing authorities. We must also make judgments regarding the ability
to realize the deferred tax assets. The carrying value of our net deferred tax
assets is based on our belief that it is more likely than not that we will
generate sufficient future taxable income in certain jurisdictions to realize
these deferred tax assets. A valuation allowance has been established
for deferred tax assets that we do not believe meet the “more likely than not”
criteria established by SFAS No. 109, “Accounting for Income
Taxes.” Our judgments regarding future taxable income may change due
to changes in market conditions changes in tax laws or other
factors. If our assumptions and consequently our estimates change in
the future, the valuation allowances we have established may be increased or
decreased, resulting in a respective increase or decrease in income tax
expense.
Liquidity
and Capital Resources
Overview
The
Company’s principal sources of capital include, but are not limited to, existing
cash balances, operating cash flows and borrowing under its Secured Credit
Facility. The Company’s short-term and long-term liquidity depends
primarily upon its level of net income, working capital management (accounts
receivable, accounts payable and accrued expenses), capital expenditures and
bank borrowings. The Company believes that, based on current
forecasts and anticipated market conditions, sufficient operating cash flow will
be generated to meet all operating needs, to make planned capital expenditures,
scheduled debt payments, and tax obligations for the next twelve
months. Any material variance of operating results could require us
to seek other funding alternatives including raising additional capital, which
may be difficult in the current economic conditions.
In 2008,
2007 and 2006, First Advantage sought 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.
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. Management expects continued weakness in
the real estate and mortgage markets to continue impacting the Company’s Credit
Services segment and the lead generation, transportation and specialty credit
businesses in the Data Services segment. In addition, the effect of
the issues in the real estate and related credit markets and other macroeconomic
matters has resulted in higher unemployment rates negatively impacting the
volumes in the Employer Services and Credit Services segments. Given
this outlook, management is focusing on expense reductions, operating
efficiencies, and increasing market share throughout the Company.
Statement
of Cash Flows
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
syndication. As of December 31, 2008, cash and cash equivalents were $52.4
million.
Cash
provided by operating activities of continuing operations was $65.5 million;
$139.4 million; and $90.3 million for the years ended December 31, 2008, 2007,
and 2006, respectively.
30
Cash
provided from operating activities of continuing operations decreased by $73.8
million from 2007 to 2008. The decrease was derived from 2008 income
from continuing operations of $33.1 million compared to $127.3 million in 2007.
Share-based compensation decreased by $3.7 million, and 2007 included the $97.4
million gain on the sale of DealerTrack Holdings, Inc. (“DealerTrack”)
shares, offset by the $21.8 million impairment loss for goodwill and
identifiable intangible assets, an increase in depreciation and amortization of
$2.9 million and an increase in bad debt expense of $0.4 million, The primary
changes in operating assets and liabilities were due to a decrease in income tax
liabilities related to the investment gains, accrued compensation and amounts
due to affiliates, offset by an increase in accounts receivable collections and
an increase accrued liabilities.
Cash
provided from operating activities of continuing operations increased by $49.0
million from 2006 to 2007. The increase was derived from 2007 income
from continuing operations of $127.3 million compared to $69.6 million in 2006.
Depreciation and amortization increased by $4.3 million, bad debt expense
increased by $2.9 million and share-based compensation increased by $2.6
million, offset by a $97.4 million gain on the sale of DealerTrack shares. The
primary changes in operating assets and liabilities were due to an increase in
income tax liabilities related to the investment gains, an increase in accrued
compensation and an increase in accounts receivable collections offset by
payments to affiliates and payments made for accrued liabilities.
Cash used
in investing activities of continuing operations was $86.3 million for the year
ended December 31, 2008 and cash provided from investing activities was $68.1
million for same period in 2007. Cash used in investing
activities of continuing operations was $61.3 million for the year ended
December 31, 2006. In 2008, cash in the amount of $51.4 million was
used for acquisitions compared to $21.3 million in 2007 and $34.6 million in
2006. Purchases of property and equipment were $30.9 million in 2008 compared to
$35.2 million in 2007 and $26.8 million in 2006. Database development costs were
$4.3 million in 2008 compared to $3.6 million in 2007 and $3.6 million in
2006. Proceeds from the 2007 sale of DealerTrack shares were $128.1
million. The proceeds were used to pay down the Company’s
debt.
Cash used
in financing activities of continuing operations was $5.0 million in 2008
compared to cash used in financing activities of $180.5 million and $25.6
million for the years ended December 31, 2007 and 2006,
respectively. Proceeds from bank financing were $101.1 million, $50.2
million and $71.5 million for the years ended 2008, 2007 and 2006, respectively.
Cash used to acquire noncontrolling interest in a consolidated subsidiary was
$8.0 million and $12.6 million for the years ended December 31, 2008 and 2007,
respectively. First American contributed $2.4 million and $3.9
million in 2008 and 2007, respectively to LeadClick Holdings LLC (70% owned by
First Advantage and 30% owned by First American), a consolidated subsidiary of
First Advantage, which acquired LeadClick Media, Inc. Repayment of
debt was $103.9 million in 2008, $222.0 million in 2007, and $97.0 million in
2006.
Certain
acquisitions have success consideration payments or earn-out provisions included
in the purchase agreements. At December 31, 2008, the Company
estimates that approximately $23.6 million in additional consideration will be
paid in the next twelve months in connection with these
acquisitions. The payments will be in the form of cash and/or
stock. The actual amount of the consideration is
dependent upon the future operating results of the respective
acquisitions. The Company will record the fair value of the success
consideration issued as an additional cost of the respective acquired entities
at such time as the contingency is resolved and the additional consideration is
distributable. The additional cost will be recorded to
goodwill.
Debt
and Capital
At
December 31, 2008, the Company had available lines of credit of $205.5
million.
On
September 29, 2005, the Company executed a revolving credit agreement, with a
bank syndication (the “Credit Agreement”). Borrowings available under the Credit
Agreement total up to $225 million. The Credit Agreement includes a $10 million
sub-facility for the issuance of letters of credit and up to a $5 million
swing loan facility. The credit facility maturity date is September 28,
2010. The Credit Agreement is collateralized by the stock and
accounts
31
receivable
of the Company’s subsidiaries. The interest rate is based on one
of two options consisting of 1) the higher of Federal Funds Rate
plus ½% and Bank of America’s announced “Prime Rate” or 2) a "LIBOR based rate".
The "LIBOR based rate" is based on LIBOR plus a margin that can range from
1.125% to 1.75% (based on progressive levels of leverage). First Advantage
management must elect the LIBOR based option up to three days
prior to its utilization.
The
agreement contains usual and customary negative covenants for transactions of
this type including but not limited to those regarding liens, investments,
creation of indebtedness and fundamental changes, as well as financial covenants
of consolidated leverage ratio and minimum consolidated fixed charge coverage
ratio.
The
agreement contains usual and customary provisions regarding acceleration. In the
event of a default by the Company under the credit facility, the lenders will
have no further obligation to make loans or issue letters of credit and in some
cases may, at the option of a majority of the lenders, declare all amounts owed
by the Company immediately due and payable and require the Company to provide
collateral, and in some cases any amounts owed by the Company under the credit
facility will automatically become immediately due and payable. There was $15.0
million outstanding at December 31, 2008.
At
December 31, 2008 and 2007, the Company was in compliance with the financial
covenants of its loan agreements, except for the Consolidated to Fixed Charge
Coverage Ratio for the quarter ended December 31, 2008. The Company
was not in default under the credit agreement in that compliance with this
covenant was waived by the required members of the loan syndicate for the
quarter ended December 31, 2008.
First
Advantage filed an amended 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 $0.001 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. As of December 31, 2008, 1,338,631 shares
were issued.
Contractual
Obligations and Commercial Commitments
First
Advantage leases certain office facilities, automobiles and equipment under
operating leases, which, for the most part, are renewable. The majority of these
leases also provide that First Advantage will pay insurance and applicable
taxes.
The
following is a schedule of long-term contractual commitments as of December 31,
2008 over the periods in which they are expected to be paid.
|
(in
thousands)
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Minimum
contract purchase commitments
|
$ | 1,922 | $ | 861 | $ | 262 | $ | 16 | $ | 16 | $ | 72 | $ | 3,149 | ||||||||||||||
|
Operating
leases
|
14,164 | 10,695 | 8,265 | 6,608 | 6,751 | 14,465 | 60,948 | |||||||||||||||||||||
|
Debt
and capital leases
|
9,891 | 22,514 | 424 | - | - | - | 32,829 | |||||||||||||||||||||
|
Interest
payments related to debt (1)
|
861 | 341 | 4 | - | - | - | 1,206 | |||||||||||||||||||||
|
Total
(2)
|
$ | 26,838 | $ | 34,411 | $ | 8,955 | $ | 6,624 | $ | 6,767 | $ | 14,537 | $ | 98,132 | ||||||||||||||
|
(1)
Estimated interest payments are calculated assuming current interest rates
over minimum maturity periods specified in debt
agreements.
|
||||||||||||||||||||||||||||
|
(2)
Excludes FIN 48 tax liability of $4.2 million due to uncertainty of
payment period.
|
||||||||||||||||||||||||||||
32
Item
8. Financial Statements and Supplementary Data.
The
following consolidated financial statements of First Advantage Corporation and
its subsidiaries are included in Item 8.
| Report of Independent Registered Certified Public Accounting Firm |
34
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
35 |
|
|
|
|
Consolidated
Statements of Income and Comprehensive (Loss) Income for the Years Ended
December 31, 2008, 2007 and 2006
|
36 |
|
Consolidated
Statement of Changes in Equity for the Years Ended December 31, 2008, 2007
and 2006
|
37 |
|
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
|
38 |
|
Notes
to Consolidated Financial Statements for the Years Ended December 31,
2008, 2007 and 2006
|
40 |
33
Report
of Independent Registered Certified Public Accounting Firm
To the
Board of Directors and Stockholders of First Advantage Corporation:
In our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of First
Advantage Corporation and its subsidiaries at December 31, 2008 and 2007, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2008 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule (not presented herein) appearing under item
15(a)(2) of the Company's 2008 Annual Report on Form 10-K presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for these financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in Management’s Annual Report on Internal Control over Financial
Reporting (not presented herein) appearing under Item 9A of the Company's 2008
Annual Report on Form 10-K. Our responsibility is to express opinions
on these financial statements, on the financial statement schedule and on the
Company’s internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
As
discussed in Note 2 to the consolidated financial statements, the Company
changed the manner in which it accounts for noncontrolling interests in
consolidated subsidiaries effective January 1, 2009.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers LLP
Tampa,
Florida
February 26,
2009, except with respect to our opinion on the consolidated financial
statements insofar as it relates to the effects of the change in the manner in
which the Company accounts for noncontrolling interests in consolidated
subsidiaries and the segment realignments discussed in Notes 2, 14, 17 and 1, 3,
16, respectively, as to which the date is October 8,
2009.
34
First
Advantage Corporation
Consolidated
Balance Sheets
|
(in
thousands)
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
Assets
|
2008
|
2007
|
||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 52,361 | $ | 76,060 | ||||
|
Accounts
receivable (less allowance for doubtful accounts
|
||||||||
|
of
$8,345 and $7,003 in 2008 and 2007, respectively)
|
121,531 | 148,875 | ||||||
|
Prepaid
expenses and other current assets
|
9,032 | 10,782 | ||||||
|
Deferred
income tax asset
|
16,695 | 21,614 | ||||||
|
Assets
of discontinued operations (Note 4)
|
- | 12,052 | ||||||
|
Total
current assets
|
199,619 | 269,383 | ||||||
|
Property
and equipment, net
|
81,807 | 76,308 | ||||||
|
Goodwill
|
731,369 | 694,519 | ||||||
|
Customer
lists, net
|
53,813 | 63,483 | ||||||
|
Other
intangible assets, net
|
17,245 | 23,011 | ||||||
|
Database
development costs, net
|
11,837 | 11,105 | ||||||
|
Marketable
equity securities
|
30,365 | 85,476 | ||||||
|
Other
assets
|
3,684 | 4,239 | ||||||
|
Total
assets
|
$ | 1,129,739 | $ | 1,227,524 | ||||
|
Liabilities
and Stockholders' Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 38,404 | $ | 44,998 | ||||
|
Accrued
compensation
|
32,423 | 42,199 | ||||||
|
Accrued
liabilities
|
11,379 | 12,846 | ||||||
|
Deferred
income
|
7,381 | 7,948 | ||||||
|
Income
tax payable
|
2,609 | 51,721 | ||||||
|
Due
to affiliates
|
714 | 6,750 | ||||||
|
Current
portion of long-term debt and capital leases
|
9,891 | 18,282 | ||||||
|
Liabilities
of discontinued operations (Note 4)
|
- | 4,989 | ||||||
|
Total
current liabilities
|
102,801 | 189,733 | ||||||
|
Long-term
debt and capital leases, net of current portion
|
22,938 | 14,404 | ||||||
|
Deferred
income tax liability
|
61,652 | 86,376 | ||||||
|
Other
liabilities
|
5,300 | 5,000 | ||||||
|
Total
liabilities
|
192,691 | 295,513 | ||||||
|
Commitments
and contingencies (Note 13)
|
||||||||
|
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;
11,772 and 11,368 shares issued and outstanding
|
||||||||
|
as
of December 31, 2008 and 2007, respectively
|
12 | 11 | ||||||
|
Class
B common stock, $.001 par value; 75,000 shares
|
||||||||
|
authorized;
47,727 shares issued and outstanding
|
||||||||
|
as
of December 31, 2008 and 2007, respectively
|
48 | 48 | ||||||
|
Additional
paid-in capital
|
502,600 | 488,683 | ||||||
|
Retained
earnings
|
390,602 | 355,745 | ||||||
|
Accumulated
other comprehensive (loss) income
|
(412 | ) | 39,103 | |||||
|
Total
First Advantage Corporation's stockholders' equity
|
892,850 | 883,590 | ||||||
|
Noncontrolling
interests
|
44,198 | 48,421 | ||||||
|
Total
equity
|
937,048 | 932,011 | ||||||
|
Total
liabilities and equity
|
$ | 1,129,739 | $ | 1,227,524 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
35
First
Advantage Corporation
Consolidated
Statements of Income and Comprehensive (Loss) Income
For
the Years Ended December 31, 2008, 2007 and 2006
|
(in
thousands, except per share amounts)
|
2008
|
2007
|
2006
|
|||||||||
|
Service
revenue
|
$ | 727,276 | $ | 770,165 | $ | 725,309 | ||||||
|
Reimbursed
government fee revenue
|
52,687 | 54,106 | 52,166 | |||||||||
|
Total
revenue
|
779,963 | 824,271 | 777,475 | |||||||||
|
Cost
of service revenue
|
229,980 | 219,279 | 228,626 | |||||||||
|
Government
fees paid
|
52,687 | 54,106 | 52,166 | |||||||||
|
Total
cost of service
|
282,667 | 273,385 | 280,792 | |||||||||
|
Gross
margin
|
497,296 | 550,886 | 496,683 | |||||||||
|
Salaries
and benefits
|
241,952 | 263,888 | 225,137 | |||||||||
|
Facilities
and telecommunications
|
32,475 | 31,710 | 28,824 | |||||||||
|
Other
operating expenses
|
86,706 | 94,235 | 86,511 | |||||||||
|
Depreciation
and amortization
|
42,593 | 39,720 | 35,584 | |||||||||
|
Impairment
loss
|
21,750 | 204 | - | |||||||||
|
Total
operating expenses
|
425,476 | 429,757 | 376,056 | |||||||||
|
Income
from operations
|
71,820 | 121,129 | 120,627 | |||||||||
|
Interest
(expense) income:
|
||||||||||||
|
Interest
expense
|
(2,548 | ) | (10,637 | ) | (13,316 | ) | ||||||
|
Interest
income
|
897 | 2,019 | 882 | |||||||||
|
Total
interest (expense), net
|
(1,651 | ) | (8,618 | ) | (12,434 | ) | ||||||
|
Equity
in earnings of investee
|
- | 2,939 | 2,299 | |||||||||
|
Gain
on investment
|
- | 97,380 | 6,993 | |||||||||
|
Income
from continuing operations before income taxes
|
70,169 | 212,830 | 117,485 | |||||||||
|
Provision
for income taxes
|
37,079 | 85,531 | 47,870 | |||||||||
|
Income
from continuing operations
|
33,090 | 127,299 | 69,615 | |||||||||
|
Loss
from discontinued operations, net of tax
|
(973 | ) | (152 | ) | (140 | ) | ||||||
|
(Loss)
gain on sale of discontinued operations, net of tax
|
(3,268 | ) | 12,137 | - | ||||||||
|
Net
income
|
28,849 | 139,284 | 69,475 | |||||||||
|
Less: Net
(loss) income attributable to noncontrolling interest
|
(6,008 | ) | 1,177 | 3,314 | ||||||||
|
Net
income attributable to First Advantage Corporation
("FADV")
|
$ | 34,857 | $ | 138,107 | $ | 66,161 | ||||||
|
Other
comprehensive (loss) income, net of tax:
|
||||||||||||
|
Foreign
currency translation adjustments
|
(6,527 | ) | 3,531 | 299 | ||||||||
|
Unrealized
(loss) gain on investment
|
(32,988 | ) | 34,912 | - | ||||||||
|
Comprehensive
(loss) income
|
$ | (4,658 | ) | $ | 176,550 | $ | 66,460 | |||||
|
Basic
income per share:
|
||||||||||||
|
Income
from continuing operations attributable to FADV
shareholders
|
$ | 0.66 | $ | 2.14 | $ | 1.15 | ||||||
|
Loss
from discontinued operations attributable to FADV shareholders, net of
tax
|
(0.02 | ) | - | - | ||||||||
|
(Loss)
gain on sale of discontinued operations attributable to FADV shareholders,
net of tax
|
(0.05 | ) | 0.21 | - | ||||||||
|
Net
income attributable to FADV
|
$ | 0.59 | $ | 2.35 | $ | 1.15 | ||||||
|
Diluted
income per share:
|
||||||||||||
|
Income
from continuing operations attributable to FADV
shareholders
|
$ | 0.66 | $ | 2.13 | $ | 1.14 | ||||||
|
Loss
from discontinued operations attributable to FADV shareholders, net of
tax
|
(0.02 | ) | - | - | ||||||||
|
(Loss)
gain on sale of discontinued operations attributable to FADV shareholders,
net of tax
|
(0.05 | ) | 0.21 | - | ||||||||
|
Net
income attributable to FADV
|
$ | 0.59 | $ | 2.34 | $ | 1.14 | ||||||
|
Weighted-average
common shares outstanding:
|
||||||||||||
| Basic | 59,392 | 59,392 | 57,502 | |||||||||
|
Diluted
|
59,499 | 59,121 | 58,079 | |||||||||
|
Amounts
attributable to FADV shareholders:
|
||||||||||||
|
Income
from continuing operations
|
$ | 39,098 | $ | 126,122 | $ | 66,301 | ||||||
|
Loss
from discontinued operations, net of tax
|
(973 | ) | (152 | ) | (140 | ) | ||||||
|
(Loss)
gain on sale of discontinued operations, net of tax
|
(3,268 | ) | 12,137 | - | ||||||||
|
Net
income
|
$ | 34,857 | $ | 138,107 | $ | 66,161 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
36
First
Advantage Corporation
Consolidated
Statements of Changes in Equity
For
the Years Ended December 31, 2008, 2007 and 2006
|
Accumulated
|
|||||||||||||||||||||||
|
Common
|
Common
|
Additional
|
Other
|
||||||||||||||||||||
|
Stock
|
Stock
|
Paid-in
|
Retained
|
Comprehensive
|
Noncontrolling |
|
|||||||||||||||||
|
(in
thousands)
|
Shares
|
Amount
|
Capital
|
Earnings
|
(Loss)
Income
|
Interests
|
Total
|
||||||||||||||||
|
Balance
at January 1, 2006
|
55,765 | $ | 56 | $ | 430,026 | $ | 152,405 | $ | 361 | $ | 47,712 | $ | 630,560 | ||||||||||
|
Net
income for 2006
|
- | - | - | 66,161 | - | 3,314 | 69,475 | ||||||||||||||||
|
Class
A Shares issued in connection with
|
|||||||||||||||||||||||
|
acquisitions
|
552 | - | 13,103 | - | - | - | 13,103 | ||||||||||||||||
|
Class
A Shares issued in connection with warrants,
|
|||||||||||||||||||||||
|
share-based
compensation, and benefit plans
|
212 | - | 4,106 | - | - | - | 4,106 | ||||||||||||||||
|
Class
B Shares issued in connection
|
|||||||||||||||||||||||
|
with
CIG acquisition
|
1,650 | 2 | (2 | ) | - | - | - | - | |||||||||||||||
|
Settlement
with First American for CIG liabilities
|
|||||||||||||||||||||||
|
prior
to merger
|
- | - | (1,129 | ) | - | - | - | (1,129 | ) | ||||||||||||||
|
Tax
expense related to stock options
|
- | - | (12 | ) | - | - | - | (12 | ) | ||||||||||||||
|
Share-based
compensation
|
- | - | 9,565 | - | - | - | 9,565 | ||||||||||||||||
|
Dividends
paid
|
- | - | - | - | - | (2,613 | ) | (2,613 | ) | ||||||||||||||
|
Foreign
currency translation
|
- | - | - | - | 299 | - | 299 | ||||||||||||||||
|
Balance
at December 31, 2006
|
58,179 | $ | 58 | $ | 455,657 | $ | 218,566 | $ | 660 | $ | 48,413 | $ | 723,354 | ||||||||||
|
Net
income for 2007
|
- | - | - | 138,107 | - | 1,177 | 139,284 | ||||||||||||||||
|
Class
A Shares issued in connection with
|
|||||||||||||||||||||||
|
acquisitions
|
444 | - | 10,912 | - | - | - | 10,912 | ||||||||||||||||
|
Purchase
of subsidiary shares from
|
|||||||||||||||||||||||
|
noncontrolling
interest
|
- | - | - | - | - | 2,761 | 2,761 | ||||||||||||||||
|
Cumulative
effect of the adoption of FIN 48
|
- | - | - | (928 | ) | - | - | (928 | ) | ||||||||||||||
|
Class
A Shares issued in connection with warrants,
|
|||||||||||||||||||||||
|
share-based
compensation, and benefit plans
|
472 | 1 | 11,141 | - | - | - | 11,142 | ||||||||||||||||
|
Tax
benefit related to stock options
|
- | - | 204 | - | - | - | 204 | ||||||||||||||||
|
Share-based
compensation
|
- | - | 10,769 | - | - | - | 10,769 | ||||||||||||||||
|
Dividends
paid
|
- | - | - | - | - | (3,930 | ) | (3,930 | ) | ||||||||||||||
|
Foreign
currency translation
|
- | - | - | - | 3,531 | - | 3,531 | ||||||||||||||||
|
Unrealized
gain on investment, net of tax
|
- | - | - | - | 34,912 | - | 34,912 | ||||||||||||||||
|
Balance
at December 31, 2007
|
59,095 | $ | 59 | $ | 488,683 | $ | 355,745 | $ | 39,103 | $ | 48,421 | $ | 932,011 | ||||||||||
|
Net
(loss) income for 2008
|
- | - | - | 34,857 | - | (6,008 | ) | 28,849 | |||||||||||||||
|
Class
A Shares issued in connection with
|
|||||||||||||||||||||||
|
share-based
compensation
|
404 | 1 | 7,531 | - | - | - | 7,532 | ||||||||||||||||
|
Purchase
of subsidiary shares from
|
|||||||||||||||||||||||
|
noncontrolling
interest
|
- | - | - | - | - | 2,912 | 2,926 | ||||||||||||||||
|
Tax
expense related to stock options
|
- | - | (204 | ) | - | - | - | (204 | ) | ||||||||||||||
|
Share-based
compensation
|
- | - | 6,615 | - | - | - | 6,615 | ||||||||||||||||
|
Dividends
paid
|
- | - | - | - | - | (1,127 | ) | (1,141 | ) | ||||||||||||||
|
Foreign
currency translation
|
- | - | - | - | (6,527 | ) | - | (6,527 | ) | ||||||||||||||
|
Exercise
put on a warrant
|
- | - | (25 | ) | - | - | - | (25 | ) | ||||||||||||||
|
Unrealized
loss on investment, net of tax
|
- | - | - | - | (32,988 | ) | - | (32,988 | ) | ||||||||||||||
|
Balance
at December 31, 2008
|
59,499 | $ | 60 | $ | 502,600 | $ | 390,602 | $ | (412 | ) | $ | 44,198 | $ | 937,048 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
37
First
Advantage Corporation
Consolidated
Statements of Cash Flows
For
the Years Ended December 31, 2008, 2007 and 2006
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 28,849 | $ | 139,284 | $ | 69,475 | ||||||
|
Loss
from discontinued operations
|
(973 | ) | (152 | ) | (140 | ) | ||||||
|
(Loss)
gain on sale of discontinued operations
|
(3,268 | ) | 12,137 | - | ||||||||
|
Income
from continuing operations
|
$ | 33,090 | $ | 127,299 | $ | 69,615 | ||||||
|
Adjustments
to reconcile income from continuing operations to net
|
||||||||||||
|
cash
provided by operating activities:
|
||||||||||||
|
Depreciation
and amortization
|
42,593 | 39,720 | 35,584 | |||||||||
|
Impairment
loss
|
21,750 | 204 | - | |||||||||
|
Bad
debt expense
|
8,826 | 8,422 | 5,492 | |||||||||
|
Share-based
compensation
|
9,115 | 12,775 | 10,136 | |||||||||
|
Equity
in earnings of investee
|
- | (2,939 | ) | (2,299 | ) | |||||||
|
Deferred income
tax
|
2,629 | (4,996 | ) | 6,188 | ||||||||
|
Gain on
investment
|
- | (97,380 | ) | (6,993 | ) | |||||||
|
Change
in operating assets and liabilities, net of acquisitions:
|
||||||||||||
|
Accounts
receivable
|
18,934 | (20,191 | ) | (29,811 | ) | |||||||
|
Prepaid
expenses and other current assets
|
1,666 | (988 | ) | (2,896 | ) | |||||||
|
Other
assets
|
1,802 | (2,685 | ) | 843 | ||||||||
|
Accounts
payable
|
(6,430 | ) | 450 | 933 | ||||||||
|
Accrued
liabilities
|
(2,239 | ) | (8,271 | ) | (4,939 | ) | ||||||
|
Deferred
income
|
(567 | ) | 1,129 | 523 | ||||||||
|
Due to
affiliates
|
(6,036 | ) | 1,951 | 7,532 | ||||||||
|
Income
tax accounts
|
(50,207 | ) | 70,012 | (6,118 | ) | |||||||
|
Accrued
compensation and other liabilities
|
(9,384 | ) | 14,853 | 6,555 | ||||||||
|
Net cash
provided by operating activities - continuing operations
|
65,542 | 139,365 | 90,345 | |||||||||
|
Net cash
provided by (used in) operating activities - discontinued
operations
|
754 | (4,769 | ) | 2,971 | ||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Database
development costs
|
(4,348 | ) | (3,616 | ) | (3,560 | ) | ||||||
|
Purchases of
property and equipment
|
(30,930 | ) | (35,221 | ) | (26,798 | ) | ||||||
|
Proceeds from
sale of investment
|
- | 128,064 | - | |||||||||
|
Cash
paid for acquisitions
|
(51,364 | ) | (21,293 | ) | (34,642 | ) | ||||||
|
Cash
balance of companies acquired
|
331 | 136 | 3,745 | |||||||||
|
Net cash (used
in) provided by investing activities - continuing
operations
|
(86,311 | ) | 68,070 | (61,255 | ) | |||||||
|
Net cash
provided by (used in) investing activities - discontinued
operations
|
1,721 | 22,805 | (2,873 | ) | ||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds from
long-term debt
|
101,143 | 50,222 | 71,516 | |||||||||
|
Repayment of
long-term debt
|
(103,882 | ) | (222,020 | ) | (96,963 | ) | ||||||
|
Cash
contributions from First American to LeadClick Holdings,
LLC
|
2,402 | 3,881 | - | |||||||||
|
Proceeds from
Class A Shares issued in connection with stock option
|
||||||||||||
|
plan and employee stock purchase
plan
|
4,719 | 3,760 | 2,463 | |||||||||
|
Cash
paid for acquisition of noncontrolling interests
|
(8,008 | ) | (12,615 | ) | - | |||||||
|
Distribution to
noncontrolling interests
|
(1,127 | ) | (3,930 | ) | (2,613 | ) | ||||||
|
Tax
(expense) benefit related to stock options
|
(204 | ) | 204 | (12 | ) | |||||||
|
Net cash used
in financing activities - continuing operations
|
(4,957 | ) | (180,498 | ) | (25,609 | ) | ||||||
|
Effect
of exchange rates on cash
|
(988 | ) | 65 | (18 | ) | |||||||
|
Net
(decrease) increase in cash and cash equivalents
|
(24,239 | ) | 45,038 | 3,561 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
76,060 | 31,107 | 27,644 | |||||||||
|
Change
in cash and cash equivalents of discontinued operations
|
540 | (85 | ) | (98 | ) | |||||||
|
Cash
and cash equivalents at end of year
|
$ | 52,361 | $ | 76,060 | $ | 31,107 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
38
First
Advantage Corporation
Consolidated
Statements of Cash Flows
For
the Years Ended December 31, 2008, 2007 and 2006
|
Supplemental
disclosures of cash flow information:
|
||||||||||||
|
Cash
paid for interest
|
$ | 2,544 | $ | 11,311 | $ | 13,238 | ||||||
|
Cash
received for income tax refund
|
$ | 3,515 | $ | - | $ | - | ||||||
|
Cash
paid for income taxes
|
$ | 84,813 | $ | 30,004 | $ | 47,841 | ||||||
|
Non-cash
investing and financing activities:
|
||||||||||||
|
Class A
Shares issued in connection with acquisitions
|
$ | - | $ | 10,912 | $ | 13,103 | ||||||
|
Notes
and deferred payments in connection with acquisitions
|
$ | 3,026 | $ | 3,932 | $ | 9,039 | ||||||
|
Class A
Shares issued for compensation
|
$ | 2,788 | $ | 7,383 | $ | 1,643 | ||||||
|
Unrealized
(loss) gain on investment
|
$ | (32,988 | ) | $ | 34,912 | $ | - | |||||
The
accompanying notes are an integral part of these consolidated financial
statements.
39
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
Note: The
information contained in the Item has been updated to reflect the
following:
|
|
·
|
The retrospective change in
business segments which were effective during the first quarter of 2009
(as discussed in Notes 1,
3 and 16).
|
|
|
·
|
The retrospective adoption of
Statement of Financial Accounting Standard SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No.
51,” effective January 1, 2009 (discussed in Notes 2, 14 and
17).
|
|
|
·
|
The reclassification of
certain amounts presented for prior periods to conform to the 2009
presentation.
|
This
Item has not been updated for other changes since December 31,
2008. For significant developments since the filling of the Company’s
2008 Annual Report on Form 10-K, refer to subsequent 2009 Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K.
1. Organization
and Nature of Business
First
Advantage Corporation (the “Company” or “First Advantage”) is a global risk
mitigation and business solutions provider and operates in 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
Credit Services segment provides consumer credit reporting solutions for
mortgage home equity needs, and automotive lending needs.
The Data
Services segment includes business lines that provide transportation credit
reporting, motor vehicle record reporting, criminal records reselling, specialty
finance credit reporting, and lead generation services.
The
Employer Services segment includes employment background screening, hiring
management solutions, occupational health services, tax incentive services and
payroll and human resource management.
The
Multifamily Services segment includes resident screening services, property
management software and renters’ insurance services.
The
Investigative and Litigation Support Services segment supports businesses and
law firms nationwide with their computer forensics, electronic discovery, data
recovery, due diligence reporting and corporate and litigation investigative
needs.
In
March 2006, the Company issued 1,650,455 shares of its Class B common stock
to FADV Holdings LLC, a subsidiary of First American. The issuance of the Class
B common stock was in accordance with the master transfer agreement with First
American for the purchase of its Credit Information Group (“CIG”) Business,
which included the purchase of First American’s noncontrolling interest in
DealerTrack Holdings, Inc. (“DealerTrack”). The master transfer agreement
required the Company to issue additional shares of Class B common stock to First
American in the event that DealerTrack consummated an initial public offering of
its stock before the second anniversary of the closing of the CIG acquisition
and the value of the noncontrolling interest in DealerTrack exceeded $50
million. The initial public offering was completed by DealerTrack on
December 16, 2005. The master transfer agreement required the Company to
issue the number of shares equal to the quotient of (x) 50% of the amount
by which the value of the DealerTrack interest exceeds $50 million (based on the
average closing price per share of DealerTrack’s stock over the 60 business day
period beginning on the fifth business day after the completion of its initial
public offering), divided by (y) $20.50.
40
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
2. Summary
of Significant Accounting Policies
Basis
of Presentation
The
Company’s operating results for the years ended December 31, 2008, 2007 and 2006
include results for acquired entities from their respective dates of
acquisition.
Certain
amounts for the years ended December 31, 2007 and 2006 have been reclassified to
conform to the 2008 presentation.
Recent
market conditions and economic events have had an overall negative impact on the
Company’s operations and related financial results. As a result of acquisitions,
the Company has goodwill of approximately $731.4 million at December 31, 2008.
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142
“Goodwill and other Intangible Assets” and consistent with prior years, the
Company’s policy is to perform an annual impairment test for each reporting unit
in the fourth quarter or sooner if circumstances indicate a possible impairment.
The valuation of goodwill requires assumptions and estimates of many critical
factors including revenue growth, cash flows, market multiples and discount
rates. Forecasts of future operations are based, in part, on operating results
and management’s expectations as to future market conditions. Many of
the factors used in assessing fair value are outside the control of management
including future economic and market conditions. If the fair value of a
reporting unit exceeds its carrying value, then its goodwill is not considered
impaired. In the event that the carrying value of a reporting unit exceeds its
fair value, then further testing must be performed to determine if the carrying
value of goodwill exceeds the fair value of goodwill. The
Company’s annual evaluation in 2008 resulted in an impairment loss of $19.7
million ($19.5 million net of tax) in the Data Services
segment based primarily upon diminished earnings and cash flow expectations for
the lead generation reporting unit and lower residual valuation multiples
existing in the present market conditions. The lead generation reporting unit is
70% owned by First Advantage and 30% owned by First American; therefore, the
Company recorded a reduction of noncontrolling interest expense of $5.7 million
related to the impairment loss. See Note 5 – Goodwill and Intangible
Assets for additional information regarding the impairment
loss. Due to significant volatility in the current markets,
the Company’s operations may be negatively impacted in the future to the extent
that exposure to impairment losses may be increased.
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 2008 results of these businesses’ operations
are reflected in the Company’s Consolidated Statements of Income and
Comprehensive (Loss) Income as discontinued operations. The results
of these businesses’ operations in the prior periods have been reclassified to
conform to the 2008 classification.
In
October 2007, the Company completed the sale of its US Search
business. US Search was included in our Data Services
segment. With the growth of First Advantage, a
consumer-driven
41
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
people
locator service no longer fit into the Company’s core business
strategy. The 2007 results of this business’ operations are reflected
in the Company’s Consolidated Statements of Income and Comprehensive (Loss)
Income as discontinued operations. The results of this business’
operations in 2006 have been reclassified to conform to the 2007
classification.
In
October 2007, the Company sold approximately 2,875,000 shares of DealerTrack
Holdings, Inc. (“DealerTrack”) common stock. The sale resulted in a pretax
investment gain of approximately $97.4 million or $58.4 million after tax and
$0.99 per diluted share. The Company discontinued using the equity
method of accounting for its remaining investment in DealerTrack, which is
accounted for on the cost method. After the sale, First Advantage continues to
own approximately 2,553,000 shares of DealerTrack common stock, which is
approximately 6% of the outstanding shares.
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 receive cash
severance of $4.4 million; $2.2 million was paid in March 2007 and the remaining
payment of $2.2 million was paid in March 2008. Mr. Long received 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, 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 year ended December 31, 2007 by
$4.7 million or $0.08 per diluted share.
Principles
of Consolidation
The
consolidated financial statements for the three years ended December 31, 2008
include the accounts of the Company and all majority owned
subsidiaries. All significant inter-company transactions and balances
have been eliminated.
Use
of Estimates
The
preparation of financial statements in accordance with generally accepted
accounting principles (“GAAP”) requires management to make estimates and
assumptions that affect the statements. Actual results could differ
from the estimates and assumptions used.
Fair
Value of Financial Instruments
42
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
The
carrying amount of the Company’s financial instruments at December 31, 2008 and
2007, 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% and 7.25%, which are the estimated rates that similar
instruments could be negotiated at December 31, 2008 and 2007,
respectively.
The
estimated fair values of the Company’s financial instruments, none of which are
held for trading purposes, are summarized as follows:
|
December
31, 2008
|
December
31, 2007
|
|||||||||||||||
|
(in
thousands)
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
||||||||||||
|
Amount
|
Fair
Value
|
Amount
|
Fair
Value
|
|||||||||||||
|
Cash
and cash equivalents
|
$ | 52,361 | $ | 52,361 | $ | 76,060 | $ | 76,060 | ||||||||
|
Accounts
receivable
|
121,531 | 121,531 | 148,875 | 148,875 | ||||||||||||
|
Marketable
equity securities
|
30,365 | 30,365 | 85,476 | 85,476 | ||||||||||||
|
Long-term
debt and capital leases
|
(32,829 | ) | (32,699 | ) | (32,686 | ) | (32,464 | ) | ||||||||
Cash
Equivalents
The
Company considers cash equivalents to be all short-term investments that have an
initial maturity of 90 days or less.
Marketable
Equity Securities
Effective
January 1, 2008, we adopted SFAS No. 157, “Fair Value
Measurements.” In accordance with SFAS 157, we value our marketable
equity securities at fair value. Our marketable securities are valued
using quoted market prices (Level 1). FSP No. 157-2, “Effective Date
of FASB Statement No. 157,” delays the effective date of SFAS No. 157 for
non-financial assets and liabilities until January 1, 2009.
Equity
securities consist of the investment in DealerTrack common stock. The
Company classifies the investment in DealerTrack as available for
sale. Any temporary change in the value based on the stock price at
the end of the period is recorded as an unrealized gain or loss in accumulated
other comprehensive (loss) income.
Accounts
Receivable
43
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
Accounts
receivable are due from companies in a broad range of industries located
throughout the United States and abroad. Credit is extended based on an
evaluation of the customer’s financial condition, and generally, collateral is
not required.
The
allowance for all probable uncollectible receivables is based on a combination
of historical data, cash payment trends, specific customer issues, write-off
trends, general economic conditions and other factors. These factors
are continuously monitored by management to arrive at the estimate for the
amount of accounts receivable that may be ultimately
uncollectible. In circumstances where the Company is aware of a
specific customer’s inability to meet its financial obligations, the Company
records a specific allowance for doubtful accounts against amounts due, to
reduce the net recognized receivable to the amount it reasonably believes will
be collected. Management believes that the allowance at December 31,
2008 and 2007 is reasonably stated.
Property
and Equipment
Property
and equipment are recorded at cost. Property and equipment includes computer
software acquired and developed for internal use. Software
development costs are capitalized from the time technological feasibility is
established until the software is ready for use.
The
Company follows Statement of Position (“SOP”) 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use.” SOP 98-1
requires the Company to capitalize interest costs incurred and certain
payroll-related costs of employees directly associated with developing software
in addition to incremental payments to third parties. The Company
capitalized interest of approximately $0.5 million and $0.9 million in the years
ended December 31, 2008 and 2007, respectively.
Depreciation
on leasehold improvements is computed on the straight-line method over the
shorter of the life of the asset, or the lease term, ranging from 3 to 13
years. Depreciation on data processing equipment and furniture and
equipment is computed using the straight-line method over their estimated useful
lives ranging from 3 to 10 years. Capitalized software costs are
amortized using the straight-line method over estimated useful lives of 3 to 7
years.
Database
Development Costs
Database
development costs represent the cost to develop the proprietary databases of
information for customer usage. The costs are capitalized from the
time technological feasibility is established until the information is ready for
use. These costs are amortized using the straight-line method over
estimated useful life of 7 to 10 years.
Goodwill,
Customer Lists and Other Identifiable Intangible Assets
Customer
lists are amortized using the straight-line method over their estimated useful
lives, ranging from 4 to 20 years. Other identifiable intangibles,
which include covenants not to
44
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
compete
and trade names, are amortized straight-line method over their estimated useful
lives, ranging from 2 to 20 years. The Company regularly evaluates
the amortization period assigned to each intangible asset to ensure that there
have not been any events or circumstances that warrant revised estimates of
useful lives. The annual test for impairment was performed in the
fourth quarter of 2008 by management, and no impairment of customer lists and
other identifiable intangible assets was recorded.
Under
SFAS No.142, “Goodwill and Other Intangible Assets,” the impairment testing
process includes two steps. The first step (“Step 1”) compares the
fair value of each reporting unit to its book value. The fair value
of each reporting unit is determined by using discounted cash flow analysis and
market approach valuations. If the fair value of the reporting unit
exceeds its book value, the goodwill is not considered impaired and no
additional analysis is required. However, if the book value is
greater than the fair value, a second step (“Step 2”) must be completed to
determine if the fair value of the goodwill exceeds the book value of the
goodwill.
Step 2
involves calculating an implied fair value of goodwill for each reporting unit
for which the first step indicated impairment. The implied fair value of
goodwill is determined in a manner similar to the amount of goodwill calculated
in a business combination, by measuring the excess of the estimated fair value
of the reporting unit, as determined in the first step, over the aggregate
estimated fair values of the individual assets, liabilities and identifiable
intangibles as if the reporting unit was being acquired in a business
combination. If the implied fair value of goodwill exceeds the carrying value of
goodwill assigned to the reporting unit, there is no impairment. If the carrying
value of goodwill assigned to a reporting unit exceeds the implied fair value of
the goodwill, an impairment loss is recorded for the excess. An impairment loss
cannot exceed the carrying value of goodwill assigned to a reporting unit, and
the loss establishes a new basis in the goodwill. Subsequent reversal of
goodwill impairment losses is not permitted.
The
Company’s annual evaluation in 2008 resulted in an impairment loss of $19.7
million ($19.5 million net of tax) in the Data Services
segment based primarily upon diminished earnings and cash flow expectations for
the lead generation reporting unit and lower residual valuation multiples
existing in the present market conditions. The lead generation reporting unit is
70% owned by First Advantage and 30% owned by First American; therefore, the
Company recorded a reduction of noncontrolling interest expense of $5.7 million
related to the impairment loss. See Note 5 – Goodwill and Intangible
Assets for additional information regarding the impairment
loss.
Purchase
Accounting
The
purchase method of accounting requires companies to assign values to assets and
liabilities acquired based upon their fair values. In most instances
there is not a readily defined or listed market price for individual assets and
liabilities acquired in connection with a business, including intangible
assets. The determination of fair value for assets and liabilities in
many instances requires a high degree of estimation. The valuation of
intangible assets, in particular is very
45
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
subjective. The
Company generally uses internal cash flow models and in certain instances third
party valuations in estimating fair values. The use of different
valuation techniques and assumptions could change the amounts and useful lives
assigned to the assets and liabilities acquired, including goodwill and other
identifiable intangible assets and related amortization expense. The
Company does not anticipate that revisions to the amounts allocated to the
acquired assets and liabilities, if any, will be significant to the Company’s
financial statements.
Income
Taxes
Taxes are
based on income for financial reporting purposes and include deferred taxes
applicable to temporary differences between the financial statement carrying
amount and the tax basis of certain of the Company’s assets and
liabilities.
Impairment
or Disposal of Long-Lived Assets
With
respect to long-lived assets to be held and used, an asset (or group of assets)
will be considered impaired when the expected undiscounted cash flows from use
and/or disposition are less than the asset’s carrying value. The
amount of any impairment loss will be based on the difference between the
carrying and fair value of the asset. The determination of fair
values considers quoted market prices, if available, and prices for similar
assets and the results of other valuation techniques. See Note 5 – Goodwill and Intangible
Assets for additional information regarding the impairment
loss.
For
assets to be sold, an asset (or group of assets) that meets the criteria
established by SFAS No. 144, “Accounting for the Impairment of Disposal of Long
Lived Assets” for classification of assets held for sale will be carried at the
lower of carrying amount or fair value less cost to sell.
As part
of the Company’s streamlining initiative, in the second quarter of 2008, First
Advantage sold FAIS and CMSI. In October 2007, the Company completed
the sale of its US Search business. See Note 4 – Discontinued Operations
for additional information regarding the sales.
Revenue
Recognition
Revenue
from the sale of reports and leads is recognized at the time of delivery, as the
Company has no significant ongoing obligation after delivery. Revenue
from investigative services is recognized as services are
performed. In accordance with generally accepted accounting
principles, the Company includes reimbursed government fees in revenue and in
cost of service.
Revenue
via the eAdvertising network of the Data Services segment is recognized when
transactions are completed as evidenced by qualifying actions by end users of
the publishers and/or advertiser on the proprietary eAdvertising
network. Revenue as a result of list management services is
recognized when transactions are completed as evidenced by qualifying actions of
end users. In most instances, the qualifying action that completes
the earnings process is the submission of an on-line form that generates a sales
lead via the internet.
46
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
Membership
fees, billed monthly to member’s accounts, are recognized in the month the fee
is earned. A portion of the membership revenue received is paid in the form of a
commission to clients and is reflected in cost of service revenue. Revenue
earned from providing services to third party issuers of membership based
consumer products is recognized at the time the service is provided, generally
on a monthly basis.
Software
maintenance revenues are recognized ratably over the term of the maintenance
period. Custom programming and professional consulting service revenue is
recognized using the percentage-of-completion method pursuant to Accounting
Research Bulletin (ARB) No. 45 “Long-Term Construction-Type Contracts.” To the
extent that interim amounts billed to clients exceed revenue earned, deferred
income is recorded. Other revenue is recognized upon completion of the
contractual obligation, which is typically evidenced by delivery of the product
or performance of the service.
Comprehensive
(Loss) Income
SFAS No.
130, “Reporting Comprehensive Income”, governs the financial statement
presentation of changes in stockholders’ equity resulting from non-owner
sources. Comprehensive income includes all changes in equity except
those resulting from investments by owners and distribution to
owners. Specifically, foreign currency translation adjustments and
unrealized gains on investment are recorded in other comprehensive (loss)
income.
Share-Based
Compensation
Effective
January 1, 2006, the Company adopted SFAS No. 123R (revised 2004), “Share-Based
Payment,” which is a revision of SFAS No. 123 “Accounting for Stock-Based
Compensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25
“Accounting for Stock Issued to Employees” and its
related implementation guidance. The Statement focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123R requires a public
entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award
(with limited exceptions). The cost is recognized over the period
during which an employee is required to provide services in exchange for the
award. The Company adopted SFAS No. 123R using the modified
prospective method. Under this method, results of prior periods are
not restated.
Commencing
with the first quarter of fiscal 2006, the Company began transitioning from the
Black-Scholes options model to a lattice model to estimate the fair value of new
employee stock options on the date of grant. The Company believes the lattice
option pricing model provides a more refined estimate of the fair value of our
employee stock options. The fair value of each option grant was estimated on the
date of the grant using the Black-Scholes option pricing model for all grants
prior to January 1, 2006. For option grants in January 2006 and thereafter, the
fair
47
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
value of
each option grant is estimated on the date of the grant using the lattice option
pricing model. The option pricing models incorporate the following. There were
no options granted in the year ended December 31, 2008.
|
At
December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(Lattice)
|
(Lattice)
|
|||||||
|
Expected
dividend yield
|
0 | % | 0 | % | ||||
|
Risk-free
interest rate (1)
|
4.61 | % | 4.56 - 4.81 | % | ||||
|
Expected
volatility (2)
|
30 | % | 30 | % | ||||
|
Expected
life (3)
|
5.25 | 5.00 | ||||||
|
(1) The risk-free rate
for the periods within the contractual term of the options is based on the
U.S. Treasury
|
||||||||
|
yield
curve in effect at the time of the grant.
|
||||||||
|
(2)
The expected volatility is a measure of the amount by which a stock price
has fluctuated or is expected
|
||||||||
|
to
fluctuate based primarily on the Company's historical
data.
|
||||||||
|
(3)
The expected life is the period of time, on average, that participants are
expected to hold their options
|
||||||||
|
before
exercise based primarily on the Company's historical
data.
|
||||||||
As
share-based compensation expense recognized in the Consolidated Statements of
Income and Comprehensive (Loss) Income for the years ended December 31, 2008,
2007 and 2006 is based on awards ultimately expected to vest, it has been
reduced for forfeitures.
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. See Note 15 –
Stock Option Plans for additional information related to options and restricted
stock.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141R (revised 2007) “Business
Combinations” (“SFAS 141(R)”). This replaces SFAS 141, “Business
Combinations,” and requires an acquirer to recognize the assets acquired, the
liabilities assumed, including those arising from contractual contingencies, any
contingent consideration, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited
exceptions specified in the statement. SFAS 141(R) also requires the
acquirer in a business combination achieved in stages (sometimes referred to as
a step acquisition) to recognize the identifiable assets and liabilities, as
well as the noncontrolling interest in the acquiree, at the full amounts of
their fair values (or other amounts determined in accordance with SFAS
141(R)). In addition, SFAS 141(R)’s requirement to measure the
noncontrolling interest in the acquiree at fair value will result in recognizing
the goodwill attributable to the noncontrolling interest in addition to
that
48
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
attributable
to the acquirer. SFAS 141(R) amends SFAS 109, “Accounting for Income
Taxes,” to require the acquirer to recognize changes in the amount of its
deferred tax benefits that are recognizable because of a business combination
either in income from continuing operations in the period of the combination or
directly in contributed capital, depending on the circumstances. SFAS
141(R) is effective at the beginning of a company's first fiscal year after
December 15, 2008. The adoption of SFAS 141(R) will change our accounting
treatment for business combinations on a prospective basis beginning the first
quarter of 2009.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160 amends
Accounting Research Bulletin 51, “Consolidated Financial Statements,” to
establish accounting and reporting standards for the noncontrolling interest in
a subsidiary and for the deconsolidation of a subsidiary. It also
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 also changes the way the
consolidated income statement is presented by requiring consolidated net income
to be reported at amounts that include the amounts attributable to both the
parent and the noncontrolling interest. It also requires disclosure,
on the face of the consolidated statement of income, of the amounts of
consolidated net income attributable to the parent and to the noncontrolling
interest. SFAS 160 is effective at the beginning of a company's first
fiscal year after December 15, 2008. The provisions of the standard were applied
to all noncontrolling interests prospectively, except for the presentation and
disclosure requirements, which were applied retrospectively to all periods
presented. The adoption did not have a material impact on the
Company’s consolidated financial position or results of operations.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). This statement identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in accordance with GAAP. With the issuance of this statement, the FASB
concluded that the GAAP hierarchy should be directed toward the entity and not
its auditor, and reside in the accounting literature established by the FASB as
opposed to the American Institute of Certified Public Accountants Statement on
Auditing Standards No. 69, “The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles.” This statement is effective 60
days following the Securities and Exchange Commission’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.” We have evaluated the new statement and have determined that it
will not have a significant impact on the determination or reporting of our
financial results.
3. Acquisitions
During
2008, the Company acquired one business for approximately $16.3 million
cash. The acquisition was in the Employer Services
segment. The preliminary allocation of the purchase price is based
upon estimates of the assets and liabilities acquired in accordance with SFAS
No.141, “Business Combinations.” In addition, the Company paid
consideration of
49
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
approximately
$35.1 million in cash and $3.0 million in debt related to earnout provisions
from prior year acquisitions and $8.0 million for the purchase of a portion of
the noncontrolling interest in LeadClick.
The
aggregate purchase price of the acquisition and the earnouts completed during
2008 is as follows:
|
(in
thousands)
|
||||
|
Cash
|
$ | 51,364 | ||
|
Notes
payable
|
3,026 | |||
| $ | 54,390 | |||
The
preliminary allocation of the aggregate purchase price of these acquisitions,
the earnouts, and the purchase of a portion of the noncontrolling interest in
LeadClick are as follows:
|
(in
thousands)
|
||||
|
Goodwill
|
$ | 59,417 | ||
|
Identifiable
intangible assets
|
2,308 | |||
|
Net
assets acquired
|
673 | |||
| $ | 62,398 | |||
The
changes in the carrying amount of goodwill, by operating segment, for the year
ended December 31, 2008 are as follows:
|
Balance
at
|
Impairment
|
Adjustments
to net
|
Balance
at
|
|||||||||||||||||
|
(in
thousands)
|
December
31, 2007
|
Acquisitions
|
loss
|
assets
acquired
|
December
31, 2008
|
|||||||||||||||
|
Credit
Services
|
$ | 106,636 | $ | 894 | $ | - | $ | 47 | $ | 107,577 | ||||||||||
|
Data
Services
|
229,722 | 8,008 | (19,734 | ) | 510 | 218,506 | ||||||||||||||
|
Employer
Services
|
245,316 | 30,406 | - | (3,261 | ) | 272,461 | ||||||||||||||
|
Multifamily
Services
|
49,100 | - | - | 74 | 49,174 | |||||||||||||||
|
Investigative
and Litigation Support Services
|
63,745 | 20,109 | - | (203 | ) | 83,651 | ||||||||||||||
|
Consolidated
|
$ | 694,519 | $ | 59,417 | $ | (19,734 | ) | $ | (2,833 | ) | $ | 731,369 | ||||||||
The
adjustments to net assets acquired represent post acquisition adjustments for
those companies not acquired in the period.
In
applying the purchase method of accounting, management undertook a comprehensive
review of the acquired entity to ensure that all identifiable assets and
liabilities are properly recorded at their fair value. The
acquisition of this company was based on management’s consideration of past and
expected future performance as well as the potential strategic fit with the
long-term goals
50
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
of First
Advantage. The expected long-term growth, market position and
expected synergies to be generated by inclusion of this company are the primary
factors which gave rise to an acquisition price which resulted in the
recognition of goodwill.
In
determining fair value, the Company utilizes a variety of valuation techniques
including discounted cash flow analysis. All excess purchase price is
appropriately recorded as goodwill. The useful lives for all assets
recorded in purchase accounting are based on market conditions, contractual
terms and other appropriate factors.
In
connection with the 2005 acquisition of LeadClick, the Company and First
American are obligated to purchase the remaining 25% interest in LeadClick
ratably over the following three years unless the period is extended by mutual
agreement of the parties. During 2008, the Company acquired 8.5%
interest for $8.0 million. During 2007, the Company acquired 8.5%
interest for $12.6 million.
Certain
acquisitions have success consideration payments or earn-out provisions included
in the purchase agreements. At December 31, 2008, the Company
estimates that approximately $23.6 million in additional consideration will be
paid in the next twelve months in connection with these
acquisitions. The payments will be in the form of cash and/or
stock. The actual amount of the consideration is dependent upon the
future operating results of the respective acquisitions. The Company
will record the fair value of the additional consideration issued as an
additional cost of the respective acquired entities at such time as the
contingency is resolved and the additional consideration is
distributable. The additional cost will be recorded to
goodwill.
4. Discontinued
Operations
As
discussed in Note 2, in the second quarter of 2008, First Advantage sold FAIS,
which was included in our Investigative and Litigation Support Services segment,
and CMSI, which was included in our Credit Services segment. The 2008
results of these businesses’ operations are reflected in the Company’s
Consolidated Statements of Income and Comprehensive (Loss) Income as
discontinued operations. The results of these businesses’ operations
in the prior periods have been reclassified to conform to the 2008
classification.
In
October 2007, the Company completed the sale of its consumer business, US
Search. US Search was included in our Data Services
segment. With the growth of First Advantage, a consumer-driven people
locator service no longer fit into the Company’s core business
strategy. The 2007 results of this business’ operations are reflected
in the Company’s Consolidated Statements of Income and Comprehensive (Loss)
Income as discontinued operations. The results of this business’
operations in 2006 have been reclassified to conform to the 2007
classification.
The
following amounts have been segregated from continuing operations and are
reflected as discontinued operations for the years ended December 31, 2008, 2007
and 2006.
51
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
|
(in
thousands, except per share amounts)
|
2008
|
2007
|
2006
|
|||||||||
|
Total
revenue
|
$ | 7,671 | $ | 41,176 | $ | 43,952 | ||||||
|
Loss
from discontinued operations before income taxes
|
$ | (1,651 | ) | $ | (280 | ) | $ | (237 | ) | |||
|
(Loss)
gain on sale of discontinued operations before income
taxes
|
(5,504 | ) | 20,440 | - | ||||||||
|
Income
tax (benefit) expense
|
(2,914 | ) | 8,175 | (97 | ) | |||||||
|
(Loss)
income from discontinued operations, net of tax
|
$ | (4,241 | ) | $ | 11,985 | $ | (140 | ) | ||||
|
(Loss)
earnings per share:
|
||||||||||||
|
Basic
|
$ | (0.07 | ) | $ | 0.21 | $ | - | |||||
|
Diluted
|
$ | (0.07 | ) | $ | 0.21 | $ | - | |||||
|
Weighted-average
common shares outstanding:
|
||||||||||||
|
Basic
|
59,392 | 58,871 | 57,502 | |||||||||
|
Diluted
|
59,499 | 59,121 | 58,079 | |||||||||
At
December 31, 2007, the Company classified certain assets and liabilities
associated with the discontinued operations as assets of discontinued operations
and liabilities of discontinued operations in the Consolidated Balance Sheets in
accordance with the guidance in the SFAS 144, “Accounting for Impairment or
Disposal of Long-Lived Assets.”
|
(in
thousands)
|
|||||
|
Cash
and cash equivalents
|
$ | 540 | |||
|
Accounts
receivable, net of allowance for doubtful accounts of $410
|
2,765 | ||||
|
Prepaid
expenses and other assets
|
309 | ||||
|
Property
and equipment, net
|
4,641 | ||||
|
Goodwill
|
1,225 | ||||
|
Customer
lists, net
|
2,552 | ||||
|
Other
intangible assets, net
|
4 | ||||
|
Other
assets
|
16 | ||||
|
Total
assets of discontinued operations
|
12,052 | ||||
|
Accounts
payable
|
585 | ||||
|
Accrued
compensation
|
2,145 | ||||
|
Accrued
liabilities
|
239 | ||||
|
Deferred
income
|
1,526 | ||||
|
Other
long term liabilities
|
494 | ||||
|
Total
liabilities of discontinued operations
|
4,989 | ||||
|
Total
net assets of businesses held for sale
|
$ | 7,063 | |||
5. Goodwill
and Intangible Assets
The
Company’s reporting units for purposes of allocating goodwill and testing for
impairment are the following: (i) lender services; (ii) data services
(specialty finance lending, transportation, consumer credit, lead generation);
(iii) dealer services; (iv) employer services; (v) multifamily services; and
(vi) investigative and litigation services.
In
accordance with SFAS No.142, “Goodwill and Other Intangible Assets,” the
Company’s management completed the 2008 goodwill impairment test performed in
the fourth quarter for all reporting units. The goodwill impairment
analysis is performed on an annual basis and whenever
52
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
events or
changes in circumstances indicate that the carrying value may not be
recoverable. The recoverability of goodwill is measured at the reporting unit
level, by comparing the reporting unit’s carrying amount, including goodwill, to
the fair market value of the reporting unit. The Company determines the fair
market value of our reporting units based on projected discounted future results
and the use of comparative market multiples where available. The use of
comparative market multiples (the market approach) compares the reporting unit
to other comparable companies based on valuation multiples to arrive at a fair
value. The use of projected discounted future results (discounted cash flow
approach) is based on assumptions that are consistent with our estimates of
future growth and the strategic plan used to manage the underlying business.
Factors requiring significant judgment include assumptions related to future
growth rates, discount factors, cash flow and market capitalization analysis,
amongst other considerations. Changes in economic and operating conditions that
occur after the annual impairment analysis or an interim impairment analysis,
and that impact these assumptions, may result in a future goodwill impairment
loss.
The
Company’s annual evaluation in 2008 resulted in an impairment loss of $19.7
million ($19.5 million net of tax) in the Data Services
segment based primarily upon diminished earnings expectations for the lead
generation reporting unit. The lead generation reporting unit is 70%
owned by First Advantage and 30% owned by First American; therefore, the Company
recorded a reduction of noncontrolling interest of $5.7 million related to the
impairment loss.
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 future periods, whether in connection with the Company’s next annual
impairment testing in the fourth quarter of 2009 or prior to that, if any such
change constitutes a triggering event in other than the quarter in which the
annual goodwill impairment test is performed. 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.
Goodwill
and other identifiable intangible assets for the years ended December 31, 2008
and 2007 are as follows:
53
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Goodwill
|
$ | 731,369 | $ | 694,519 | ||||
|
Customer
lists
|
$ | 95,446 | $ | 93,712 | ||||
|
Less
accumulated amortization
|
(41,633 | ) | (30,229 | ) | ||||
|
Customer
lists, net
|
$ | 53,813 | $ | 63,483 | ||||
|
Other
identifiable intangible assets:
|
||||||||
|
Noncompete
agreements
|
11,783 | 14,717 | ||||||
|
Trade
names
|
21,631 | 21,620 | ||||||
| 33,414 | 36,337 | |||||||
|
Less
accumulated amortization
|
(16,169 | ) | (13,326 | ) | ||||
|
Other
identifiable intangible assets, net
|
$ | 17,245 | $ | 23,011 | ||||
An
impairment loss of $1.3 million was recorded for the year ended December 31,
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.
Goodwill
of approximately $0.8 million in 2008 and $1.7 million in 2007 was disposed of
as part of the sale of CMSI and FAIS, and US Search, respectively.
Amortization
expense of customer lists and other identifiable intangible assets was
approximately $17.5 million, $16.0 million and $15.9 million for the years ended
December 31, 2008, 2007 and 2006, respectively. Amortization expense
relating to customer lists and other identifiable intangible asset balances as
of December 31, 2008 is expected to be as follows over the next five
years:
|
(in
thousands)
|
||||
|
Year
ending December 31,
|
||||
|
2009
|
$ | 14,592 | ||
|
2010
|
13,881 | |||
|
2011
|
11,278 | |||
|
2012
|
10,202 | |||
|
2013
|
8,797 | |||
|
Thereafter
|
12,308 | |||
| $ | 71,058 | |||
The
change in the carrying amount of identifiable intangible assets is as follows
for the year ended December 31, 2008:
54
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
|
Other
|
||||||||
|
Intangible
|
Customer
|
|||||||
|
(in
thousands)
|
Assets
|
Lists
|
||||||
|
Balance,
at December 31, 2007
|
$ | 23,011 | $ | 63,483 | ||||
|
Acquisitions
|
- | 2,082 | ||||||
|
Adjustments
|
216 | 29 | ||||||
|
Impairment
loss
|
(1,120 | ) | (461 | ) | ||||
|
Amortization
|
(4,862 | ) | (11,320 | ) | ||||
|
Balance,
at December 31, 2008
|
$ | 17,245 | $ | 53,813 | ||||
6. Property
and Equipment
As of
December 31, 2008 and 2007, property and equipment is as follows:
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Furniture
and equipment
|
$ | 18,504 | $ | 18,628 | ||||
|
Data
processing equipment
|
30,635 | 28,322 | ||||||
|
Capitalized
software
|
133,972 | 115,480 | ||||||
|
Leasehold
improvements
|
11,520 | 11,552 | ||||||
| 194,631 | 173,982 | |||||||
|
Less
accumulated depreciation
|
(112,824 | ) | (97,674 | ) | ||||
|
Property
and equipment, net
|
$ | 81,807 | $ | 76,308 | ||||
Depreciation
and amortization expense was approximately $23.6 million, $21.0 million and
$16.8 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
7. Database
Development Costs
Database
development costs for the years ended December 31, 2008 and 2007 are as
follows:
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Eviction
data
|
$ | 15,290 | $ | 18,349 | ||||
|
Criminal
data
|
5,225 | 4,333 | ||||||
|
Sub-prime
credit data
|
2,016 | 1,912 | ||||||
|
Less
accumulated amortization
|
(10,694 | ) | (13,489 | ) | ||||
|
Database
development costs
|
$ | 11,837 | $ | 11,105 | ||||
Amortization
expense relating to database development costs was approximately $3.1
million, $2.9 million and $2.8 million for the years ended December 31, 2008,
2007 and 2006, respectively.
55
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
8. Investment
in Marketable Equity Securities
During
March 2003, the Company exchanged its equity interest in a subsidiary of CMSI, a
division of the CIG Business, for a 21% equity interest in DealerTrack, a
leading provider of transformational business processes for the auto finance
industry. The transaction was accounted for at fair value. The investment in
DealerTrack was accounted for using the equity method. An investor using the
equity method initially records an investment at cost. Subsequently,
the carrying amount of the investment is increased to reflect the investor's
share of income of the investee and is reduced to reflect the investor's share
of losses of the investee or dividends received from the
investee. The cost of the investment exceeded the Company’s ownership
interest in the equity of DealerTrack by approximately $28.6 million at the date
of acquisition and the excess purchase price was accounted for as
goodwill.
In
March 2006, the Company issued approximately 1.7 million shares of its
Class B common stock to FADV Holdings LLC, a subsidiary of First American. The
issuance of the Class B common stock was in accordance with the master transfer
agreement with First American for the purchase of its Credit Information Group,
which included the purchase of First American’s noncontrolling interest in
DealerTrack. The master transfer agreement required the Company to issue
additional shares of Class B common stock to First American in the event that
DealerTrack consummated an initial public offering of its stock before the
second anniversary of the closing of the CIG Business acquisition and the value
of the noncontrolling interest in DealerTrack exceeded $50 million. The initial
public offering (“IPO”) was completed by DealerTrack on December 16, 2005.
The master transfer agreement required the Company to issue the number of shares
equal to the quotient of (x) 50% of the amount by which the value of the
DealerTrack interest exceeds $50 million (based on the average closing price per
share of DealerTrack’s stock over the 60 business day period beginning on the
fifth business day after the completion of its initial public offering), divided
by (y) $20.50.
In
October 2006, DealerTrack completed a follow-on offering of its
stock. As a result of the offering, the Company recognized a pretax
investment gain of approximately $7.0 million. The sale of the stock
was at a price per share in excess of its carrying value. As a result
of the issuance of the shares, the Company’s ownership interest in DealerTrack
decreased from approximately 16% to 14%.
In
October 2007, the Company sold 2,875,000 shares of DealerTrack common
stock. The sale resulted in a gain, before income taxes, of
approximately $97.4 million or $0.99 per diluted share. After the
sale, First Advantage owns approximately 2,553,000 shares of DealerTrack common
stock, which is approximately 6% of the outstanding shares. As a
result, the Company discontinued using the equity method of accounting for its
remaining investment in DealerTrack. The investment is classified as marketable
equity securities on the Consolidated Balance Sheets at December 31, 2008 and
2007. The unrealized loss of $55.1 million ($33.0 million net of tax) and
unrealized gain of $58.2 million ($34.9 million net of tax) for the years ended
December 31, 2008 and 2007, respectively were recorded in accumulated other
comprehensive (loss) income, as a component of stockholders’
equity. As of February 25, 2009, the market value of the DealerTrack
stock has decreased to approximately $27.1 million.
56
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
9. Debt
On
September 29, 2005, the Company executed a revolving credit agreement, with a
bank syndication (the “Credit Agreement”). Borrowings available under the Credit
Agreement total up to $225 million. The Credit Agreement includes a $10 million
sub-facility for the issuance of letters of credit and up to a $5 million
swing loan facility. The credit facility maturity date is September 28,
2010.
The
interest rate is based on one of two options consisting of
1) the higher of Federal Funds Rate plus ½% and Bank of America’s announced
“Prime Rate” or 2) a "LIBOR based rate". The "LIBOR based rate" is based
on LIBOR plus a margin that can range from 1.125% to 1.75% (based on
progressive levels of leverage). First Advantage management must
elect one of the term based LIBOR options up to three days prior to
its utilization.
The
Credit Agreement contains usual and customary negative covenants for
transactions of this type including but not limited to those regarding liens,
investments, creation of indebtedness and fundamental changes, as well as
financial covenants of consolidated leverage ratio and minimum consolidated
fixed charge coverage ratio.
The
Credit Agreement contains usual and customary provisions regarding acceleration.
In the event of a default by the Company under the credit facility, the lenders
will have no further obligation to make loans or issue letters of credit and in
some cases may, at the option of a majority of the lenders, declare all amounts
owed by the Company immediately due and payable and require the Company to
provide collateral, and in some cases any amounts owed by the Company under the
credit facility will automatically become immediately due and payable. The
Credit Agreement is collateralized by the stock and accounts receivable of the
Company’s subsidiaries.
At
December 31, 2008 and 2007, the Company was in compliance with the financial
covenants of its loan agreements, except for the Consolidated to Fixed Charge
Coverage Ration for the quarter ended December 31, 2008. The Company
was not in default under the credit agreement in that compliance with this
covenant was waived by the required members of the loan syndicate for the
quarter ended December 31, 2008.
Long-term
debt consists of the following at December 31:
57
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Acquisition
notes:
|
||||||||
|
Weighted
average interest rate of 3.7% and 6.3% at December
|
||||||||
|
31,
2008 and 2007, respectively, with maturities through 2011
|
$ | 16,697 | $ | 32,520 | ||||
|
Bank
notes:
|
||||||||
|
$225
million Secured Credit Facility, interest at 30-day LIBOR
|
||||||||
|
plus
1.13% (2.08% at December 31, 2008)
|
||||||||
|
matures
September 2010
|
15,000 | - | ||||||
|
Capital
leases and other debt:
|
||||||||
|
Various
interest rates with maturities through 2011
|
1,132 | 166 | ||||||
|
Total
long-term debt and capital leases
|
32,829 | 32,686 | ||||||
|
Less
current portion of long-term debt and capital leases
|
9,891 | 18,282 | ||||||
|
Long-term
debt and capital leases, net of current portion
|
$ | 22,938 | $ | 14,404 | ||||
Aggregate
maturities of long-term borrowings over the next three years are as
follows:
|
(in
thousands)
|
||||
|
Year
ending December 31,
|
||||
|
2009
|
$ | 9,891 | ||
|
2010
|
22,514 | |||
|
2011
|
424 | |||
|
Total
|
$ | 32,829 | ||
10. Income
Taxes
For
income tax purposes, the domestic and foreign components of income from
continuing operations before income taxes, including noncontrolling interest
were as follows:
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Domestic
|
$ | 75,586 | $ | 206,430 | $ | 111,935 | ||||||
|
Foreign
|
591 | 5,223 | 2,236 | |||||||||
|
Total
|
$ | 76,177 | $ | 211,653 | $ | 114,171 | ||||||
58
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
The
provision (benefit) for income taxes from continuing operations is summarized as
follows:
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 28,077 | $ | 71,574 | $ | 36,366 | ||||||
|
State
|
4,728 | 14,927 | 2,893 | |||||||||
|
Foreign
|
1,644 | 2,575 | 1,065 | |||||||||
| 34,449 | 89,076 | 40,324 | ||||||||||
|
Federal
|
2,821 | (3,060 | ) | 6,427 | ||||||||
|
State
|
956 | (20 | ) | 1,343 | ||||||||
|
Foreign
|
(1,147 | ) | (465 | ) | (224 | ) | ||||||
| 2,630 | (3,545 | ) | 7,546 | |||||||||
|
Total
current and deferred
|
$ | 37,079 | $ | 85,531 | $ | 47,870 | ||||||
Income
taxes for continuing operations differ from the amounts computed by applying the
federal income tax rate of 35.0%. A reconciliation of the difference
is as follows:
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Taxes
calculated at federal rate
|
$ | 26,655 | $ | 74,079 | $ | 39,877 | ||||||
|
State
taxes, net of federal benefit
|
3,772 | 9,689 | 2,753 | |||||||||
|
Impairment
of non-deductible goodwill
|
6,778 | - | - | |||||||||
|
Other
items, net
|
(126 | ) | 1,763 | 5,240 | ||||||||
| $ | 37,079 | $ | 85,531 | $ | 47,870 | |||||||
59
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
The
primary components of temporary differences that give rise to the Company’s net
deferred tax liability are as follows:
|
(in
thousands)
|
2008
|
2007
|
||||||
|
Deferred
tax assets:
|
||||||||
|
Federal
net operating loss carryforwards
|
$ | 6,983 | $ | 7,717 | ||||
|
State
net operating loss carryforwards
|
4,263 | 4,546 | ||||||
|
Foreign
net operating loss carryforwards
|
853 | - | ||||||
|
State
tax
|
4,429 | 6,394 | ||||||
|
Bad
debt reserves
|
3,514 | 2,978 | ||||||
|
Employee
benefits
|
17,350 | 15,532 | ||||||
|
Accrued
expenses and loss reserves
|
2,727 | 2,055 | ||||||
|
Other
|
226 | 298 | ||||||
|
Less:
valuation allowance
|
(4,242 | ) | (3,690 | ) | ||||
|
|
36,103 | 35,830 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Depreciable
and amortizable assets
|
72,225 | 66,533 | ||||||
|
Marketable
equity securities
|
5,682 | 29,241 | ||||||
|
Other
|
3,153 | 4,818 | ||||||
|
|
81,060 | 100,592 | ||||||
|
Net
deferred tax liability
|
$ | 44,957 | $ | 64,762 | ||||
As of
December 31, 2008, the Company estimates that federal and state net operating
loss carry forwards of approximately $20.0 million and $0.3 million,
respectively, will be available to reduce future taxable income after taking
into account various federal and state limitations on the utilization of such
net operating loss carry forwards.
The
Company evaluates the realizability of its deferred tax assets by assessing the
valuation allowance and by adjusting the amount of such allowance if necessary.
The factors used to assess the likelihood of realization are the Company’s
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the net deferred tax assets. Based
upon a sustained pattern of historical taxable income, projections for future
taxable income over the periods in which the net operating losses will be
deductible, management believes it is more likely than not that the Company will
not realize the benefits of a portion of the net operating loss carry
forwards. The valuation allowance consists of the estimated tax
effect of the unutilized net operating loss carry forward.
As of
December 31, 2008, United States taxes were not provided on income of our
foreign subsidiaries, as we have invested or expect to invest the undistributed
earnings indefinitely. Income from continuing operations before income taxes for
foreign subsidiaries was $0.6 million for the year ended December 31,
2008. If in the future this income is repatriated to the United
States, or if we determine that the earnings will be remitted in the foreseeable
future, additional tax provisions may be required.
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 2005, and
state
60
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
and
local, and non-U.S. income tax examinations by tax authorities before
2003. In February 2008, the Internal Revenue Service (“IRS”)
initiated an examination of First Advantage’s consolidated 2005 federal income
tax return which the Company does not anticipate will result in material
adjustments. In 2007, the IRS initiated an examination of the
separately filed 2005 federal income tax return of Leadclick Media,
Inc. The IRS completed this examination with no material adjustments
to the financial statements.
As of
December 31, 2008, the Company has a $4.2 million total liability recorded for
unrecognized tax benefits as well as a $0.3 million total liability for income
tax related interest. As of December 31, 2007, the Company recorded
unrecognized tax benefits related liabilities for interest and penalties of $0.3
million and $0.6 million, respectively. The total amount of
unrecognized tax benefits that, if recognized, would affect the effective tax
rate is $1.9 million. The majority of the unrecognized tax benefits
that would affect the effective tax rate and associated interest, 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 2009.
|
Total
Uncertain
|
||||||||||||
|
Federal
|
Tax
Liabilities
|
|||||||||||
|
and
State
|
International
|
and
Benefits
|
||||||||||
|
Balance,
at December 31, 2006
|
$ | 770 | $ | - | $ | 770 | ||||||
|
Increase
in current period balances
|
143 | 1,065 | 1,208 | |||||||||
|
Decrease
in current period balances
|
(324 | ) | - | (324 | ) | |||||||
|
Balance,
at December 31, 2007
|
$ | 589 | $ | 1,065 | $ | 1,654 | ||||||
|
Increase
in current period balances
|
2,810 | 201 | 3,011 | |||||||||
|
Decrease
in current period balances
|
(335 | ) | - | (335 | ) | |||||||
|
Reductions
due to expired statutes of limitations
|
(150 | ) | - | (150 | ) | |||||||
|
Balance,
at December 31, 2008
|
$ | 2,914 | $ | 1,266 | $ | 4,180 | ||||||
11. Employee
Benefits
Effective
January 1, 2004, the Company created the First Advantage Corporation 401(k) Plan
(the “Savings Plan”). All employees of the Company who participated
in the First American Corporation 401(k) Savings Plan (the “First American
Plan”) were transferred into the Savings Plan. A total of
2.0 million shares of First Advantage Class A common stock are reserved for
issuance in connection with the Company’s Savings Plan. The Savings
Plan allows for employee-elective contributions up to the maximum deductible
amount as determined by the Internal Revenue Code. In previous years,
the Company made contributions to the Savings Plan based on profitability, as
well as contributions of the participants. Beginning for the 2006
plan year, the Company is matching dollar for dollar up to three percent of the
employees’ eligible
61
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
pay. The
Company’s expense related to the Savings Plan amounted to approximately $3.9
million, $4.1 million, and $3.4 million for the years ended December 31, 2008,
2007, and 2006 respectively.
Certain
employees of the Company are eligible to participate in First American’s defined
benefit pension plan. The Company expensed payments to the pension plan of
approximately $0.3 million and $0.5 million for the years ended December 31,
2007 and 2006, respectively. There was no pension expense for the
year ended December 31, 2008. The actuarial present value of
accumulated plan benefits and net assets available for benefits to the Company’s
employees under this plan is not readily available.
In August
2003, the Company’s board of directors approved the First Advantage Corporation
2003 Employee Stock Purchase Plan (the “Stock Purchase Plan”). The
Stock Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, allows eligible employees to purchase First Advantage
Class A common stock through payroll deductions for 85% of the fair market value
of the First Advantage Class A common stock. Participation in the
plan is voluntary. Eligible employees may participate by authorizing
payroll deductions of up to 15% of their base pay for each payroll
period. At the end of each one-month offering period, each
participant will receive an amount of First Advantage Class A common stock equal
to the sum of that participant’s payroll deductions during such period divided
by 85% of the fair market value of the common stock at the end of the
period. No employee may participate in the plan if such employee owns
or would own after the purchase of shares under the plan, 5% or more of the
voting power of all classes of First Advantage stock. Shares of First
Advantage Class A common stock issued under the Stock Purchase Plan must be held
for a period of one year. A total of 1.0 million shares of First
Advantage Class A common stock are reserved for issuance under the
plan. A total of 55,660; 62,044 and 63,608 shares were issued in
connection with the plan during the years ended December 31, 2008, 2007 and
2006, respectively.
12. Related
Parties
First
American provides certain legal, financial, technology, administrative and
managerial support services to the Company. A service agreement was
entered into on January 1, 2004. Under the terms of the agreement,
human resources systems and payroll systems and support, network services and
financial systems are provided at an annual cost of approximately $0.3
million. The initial term of the agreement is for one year, and self
renews every six months. In addition, certain other services
including corporate insurance, personal property leasing, software licensing and
maintenance, and company car programs are provided at actual cost. The
Company incurred approximately $8.5 million, $9.5 million, and $9.5 million in
operating expenses for the years ended December 31, 2008, 2007 and 2006,
respectively.
First
American and certain affiliates provided sales and marketing, legal, financial,
technology, leased facilities, leased equipment and other administrative
services to the CIG Business. As part of the acquisition of the CIG Business, an
amended and restated services agreement was entered into on September 14,
2005. Under the terms of the new agreement, human resources
systems
62
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
and
payroll systems and support, network services and financial systems are provided
at an annual cost of approximately $4.5 million. The amounts
allocated to the CIG Business prior to September 14, 2005 were based on
management’s assumptions (primarily usage, time incurred and number of
employees) as to the proportion of the services used by the CIG Business in
relation to the actual costs incurred by First American and affiliates in
providing the services. The Company incurred approximately $4.5
million in service fees for the years ended December 31, 2008, 2007 and 2006,
respectively. The initial term of the agreement was for one year, and
self renews every six months.
The
Company also entered into an agreement with First American to lease the
Company’s headquarters’ office space in Poway, California. The lease
was for an initial lease term of five years to commence on the closing date with
a one-time option to renew the term for an additional five years. The
rent payable under the lease is approximately $169,000 a month and the Company
is obligated to pay all costs and expenses related to the property, including
operating expenses, maintenance and taxes. The Company incurred
approximately $2.0 million in rent expense for the years ended December 31,
2008, 2007 and 2006.
Effective
January 1, 2003, the Company and a subsidiary of First American entered into an
agreement whereby the Company will act as an agent in selling renters'
insurance. The Company receives a commission of 12% of the insurance
premiums and 20% of the profits (as defined in the agreement) of the insurance
premiums written. Commissions earned in 2008, 2007 and 2006 were
approximately $2.5 million, $1.9 million and $0.9 million,
respectively.
The
Company performs employment screening, credit reporting and hiring management
services for First American. Total revenue from First American was
approximately $4.1 million, $3.0 million and $2.8 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
First
American Real Estate Solutions, LLC (“FARES”), a joint venture between First
American and Experian Information Solutions, Inc. (“Experian”), owns 50% of a
joint venture that provides mortgage credit reports and operations support to a
nationwide mortgage lender. FARES records the 50% share of the earnings of the
joint venture using the equity method of accounting. In connection with the 2005
acquisition of the CIG Business, FARES entered into an outsourcing agreement
where the Company continues to provide these services to the nationwide mortgage
lender. These joint venture related earnings are included in service
revenue in the accompanying combined statements of income and totaled $5.3
million, $4.8 million, and $5.2 million, for the years ended December 31, 2008,
2007 and 2006, respectively. Effective January 1, 2008, the Company entered into
two agreements (Computer License agreement and a Service Agreement) with Rels
Reporting Services, which replaced the original agreements that had provided for
charging merge fees on credit reports issued and the reimbursement of the
majority of operating costs. These new agreements incorporate a transaction fee
and a fixed fee for services, and minimize the reimbursement of operating costs.
This management fee is included in service revenue and was $9.8 million for the
year ended December 31, 2008. The prior years merge fees and the
reimbursed operating costs were $9.4 million, and $10.3 million for the years
ended December 31, 2007 and 2006, respectively and are included in service
revenue in the
63
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
accompanying
combined statement of income. The residual reimbursement for
operating costs were $0.4 million, $0.5 million, and $2.7 million, for the years
ended December 31, 2008, 2007 and 2006, respectively. The
reimbursement of operating costs is reflected as a reduction in operating
expenses in the accompanying financial statements.
First
American CoreLogic ("FACL") and First Advantage's Credit Services segment have
partnered to provide a major national lender consumer data from the FACL
databases in a Fair Credit Reporting Act ("FCRA") compliant method. The Company
purchases of data from FACL totaled $1.9 million and $0.2 million in 2008 and
2007 respectively. The Company did not purchase any data in 2006.
Experian
owns approximately 6% of a combination of First Advantage’s Class A and Class B
common shares and is considered a related party. The cost of credit
reports purchased by the Company from Experian was $24.9 million, $28.8 million,
and $30.0 million for the years ended December 31, 2008, 2007 and 2006,
respectively. The Company sells background and lead generation services to
Experian. Total revenue from these sales was $0.1 million, $0.1
million and $0.2 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
13. Commitments
and Contingencies
Operating
Leases
The
Company leases certain office facilities, automobiles and equipment under
operating leases, which, for the most part, are renewable. The
majority of these leases also provide that the Company will pay insurance and
taxes. Rent expense under operating leases was approximately $21.7
million, $23.3 million and $22.9 million for the years ended December 31, 2008,
2007 and 2006, respectively.
Future
minimum rental payments under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of December 31, 2008, are as
follows:
|
(in
thousands)
|
||||
|
Year
ending December 31,
|
||||
|
2009
|
$ | 14,164 | ||
|
2010
|
10,695 | |||
|
2011
|
8,265 | |||
|
2012
|
6,608 | |||
|
2013
|
6,751 | |||
|
Thereafter
|
14,465 | |||
| $ | 60,948 | |||
Litigation
64
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
The
Company is involved in litigation from time to time in the ordinary course of
business. The Company does not believe that the outcome of any
pending or threatened litigation will have a material adverse effect on the
Company’s financial position or operating results.
14. Earnings
Per Share
Pursuant
to the provisions of SFAS No.128 “Earnings Per Share”, basic earnings per share
is computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per
share is computed by dividing net income by the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. Dilutive common stock equivalents represent shares issuable
upon assumed exercise of stock options and warrants. Options and
warrants totaling 3,310,547; 2,872,378 and 1,531,733 in 2008, 2007 and 2006,
respectively, were excluded from the weighted average diluted shares
outstanding, as they were antidilutive.
A
reconciliation of earnings per share and weighted-average shares outstanding is
as follows:
|
(in
thousands, except per share amounts)
|
2008
|
2007
|
2006
|
|||||||||
|
Income
from continuing operations attributable to FADV
shareholders
|
$ | 39,098 | $ | 126,122 | $ | 66,301 | ||||||
|
Loss
from discontinued operations attributable to FADV shareholders, net of
tax
|
(973 | ) | (152 | ) | (140 | ) | ||||||
|
(Loss)
gain on sale of discontinued operations attributable to FADV shareholders,
net of tax
|
(3,268 | ) | 12,137 | - | ||||||||
|
Net income
attributable to FADV
|
$ | 34,857 | $ | 138,107 | $ | 66,161 | ||||||
|
Denominator:
|
||||||||||||
|
Weighted-average
shares for basic earnings per share
|
59,392 | 58,871 | 57,502 | |||||||||
|
Effect
of restricted stock
|
97 | 101 | 47 | |||||||||
|
Effect
of contingent shares related to DealerTrack
|
- | - | 367 | |||||||||
|
Effect
of dilutive securities - employee stock options and
warrants
|
10 | 149 | 163 | |||||||||
|
Denominator for
diluted earnings per share
|
59,499 | 59,121 | 58,079 | |||||||||
|
Earnings
per share:
|
||||||||||||
|
Basic:
|
||||||||||||
|
Income from
continuing operations attributable to FADV shareholders
|
$ | 0.66 | $ | 2.14 | $ | 1.15 | ||||||
|
Loss from
discontinued operations attributable to FADV shareholders, net of
tax
|
(0.02 | ) | - | - | ||||||||
|
(Loss) gain
on sale of discontinued operations attributable to FADV shareholders, net
of tax
|
(0.05 | ) | 0.21 | - | ||||||||
|
Net income attributable to
FADV
|
$ | 0.59 | $ | 2.35 | $ | 1.15 | ||||||
|
Diluted:
|
||||||||||||
|
Income from
continuing operations attributable to FADV shareholders
|
$ | 0.66 | $ | 2.13 | $ | 1.14 | ||||||
|
Loss from
discontinued operations attributable to FADV shareholders, net of
tax
|
(0.02 | ) | - | - | ||||||||
|
(Loss) gain
on sale of discontinued operations attributable to FADV shareholders, net
of tax
|
(0.05 | ) | 0.21 | - | ||||||||
|
Net income attributable to
FADV
|
$ | 0.59 | $ | 2.34 | $ | 1.14 | ||||||
15. Stock
Option Plans
Incentive
Compensation Plan
The
Company’s board of directors and stockholders have adopted the 2003 First
Advantage Incentive Compensation Plan. The plan is intended to
promote the long-term success of the Company and increase stockholder value by
attracting, motivating, and retaining key employees
65
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
of the
Company and its subsidiaries and affiliates, and by motivating consultants who
provide significant services to the Company and its subsidiaries and
affiliates. To achieve this purpose, the plan allows the granting of
stock options, stock appreciation rights, restricted stock awards, performance
unit awards, performance share awards and cash-based awards to eligible
persons.
Subject
to adjustment for certain changes in the Company’s capitalization, a total of
7.0 million shares of First Advantage Class A common stock are available for
issuance under the plan. The plan is administered by the compensation
committee of the board of directors of the Company.
Upon the
occurrence of a change of control transaction (as defined in the plan),
generally all awards under the plan accelerate, all restrictions are lifted and
all performance goals are achieved, subject to certain
limitations. The committee may provide that any award, the payment of
which was deferred under the plan, will be paid or distributed as of, or
promptly following, a change of control transaction. The committee
may also provide that any awards subject to any such acceleration, payment,
adjustment or conversion cannot be exercised after, or will terminate as of, a
change of control transaction.
Options
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 grant expires 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 expense for the years ended
December 31, 2008, 2007 and 2006 was $9.1 million ($6.0 million after tax or
$0.10 per basic and diluted share), $12.8 million ($8.3 million after tax or
$0.15 per basic and diluted share) and $10.1 million ($7.4 million after tax or
$0.13 per basic and diluted share), respectively. Prior to adoption
of SFAS No.123R, the Company applied APB Opinion No. 25 to account for its
share-based awards. Under the provisions of APB Opinion No. 25, the
company was not required to recognize compensation expense for the cost of stock
options or shares issued under the Company’s Stock Purchase Plan.
As of
December 31, 2008, $2.6 million of total unrecognized compensation costs related
to non-vested options is expected to be recognized over a weighted average
period of 0.79 years. There were no share-based compensation costs capitalized
as of December 31, 2008.
As of
December 31, 2008, $13.1 million of total unrecognized compensation costs
related to non-vested restricted stock awards is expected to be recognized over
a weighted average period of 1.75 years.
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.
66
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
Warrants
and Options to Purchase Class A Common Stock, Assumed in the Merger
The
Company agreed to assume the obligations of US Search contained in all warrants
to purchase common stock of US Search outstanding on the closing date of the
merger. Pursuant to the merger agreement and the terms of the
warrants, the holders of the warrants are entitled to receive upon exercise
thereof 0.04 of a share of First Advantage Class A common stock for each share
of US Search common stock that such warrant holder would have been entitled
to receive pursuant to the warrant prior to the closing of the
merger. The Company had outstanding warrants to purchase up to 41,462
shares of its common stock at an exercise price of $12.05 per share as of
December 31, 2008.
All
outstanding stock options, stock appreciation rights, limited stock appreciation
rights and stock purchase rights of US Search were assumed by the Company and
converted automatically into options to purchase shares of First Advantage Class
A common stock calculated in accordance with the exchange ratio, rounded down to
the nearest whole share. The exercise price is equal to the exercise
price per share of US Search common stock divided by the exchange ratio, rounded
down to the nearest whole cent. The outstanding stock options, stock
appreciation rights, limited stock appreciation rights and stock purchase rights
of US Search otherwise continue to be exercisable and vest subject to the terms
and conditions applicable to them before the mergers. However, all
outstanding stock options issued to US Search employees and directors pursuant
to the US Search Amended and Restated 1998 Stock Incentive Plan and all
outstanding stock options issued to US Search’s non-employee directors pursuant
to the US SEARCH.com 1999 Non-Employee Directors’ Stock Option Plan accelerated
and became fully vested upon the occurrence of the mergers. As of
December 31, 2008, the Company had outstanding options (previously issued by US
Search) to purchase up to 43,944 shares of its common stock at exercise prices
ranging from $7.03 to $225.00 per share.
Stock
option activity under the Company’s stock plan since December 31, 2007 is
summarized as follows:
|
Weighted
|
Aggregate
|
|||||||||||
|
(in
thousands, except weighted average price)
|
Number
of
|
Average
|
Intrinsic
|
|||||||||
|
Shares
|
Exercise
Price
|
Value
|
||||||||||
|
Options
outstanding at December 31, 2007
|
4,615 | $ | 22.60 | $ | 47 | |||||||
|
Options
exercised
|
(223 | ) | $ | 17.72 | ||||||||
|
Options
canceled
|
(900 | ) | $ | 21.88 | ||||||||
|
Options
outstanding at December 31, 2008
|
3,492 | $ | 23.09 | $ | 28 | |||||||
|
Options
exercisable, end of the year
|
2,881 | $ | 22.65 | $ | 28 | |||||||
67
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
In 2007,
approximately 157,000 options were exercised at an average price of $16.53,
approximately 253,000 options were forfeited at an average price of $23.84, and
approximately 824,000 options were granted at an average price of
$25.47.
In 2006,
approximately 75,000 options were exercised at an average price of $16.16,
approximately 174,000 options were forfeited at an average price of $23.44, and
approximately 947,000 options were granted at an average price of
$24.46.
The total
intrinsic value of options exercised was $0.9 million $1.3 million and $0.6
million for the years ended December 31, 2008, 2007, and 2006,
respectively.
A total
of 8,408 shares were issued in conjunction with the exercise of warrants at an
average price of $13.26 in 2007. A total of 1,482 shares were issued
in conjunction with the exercise of warrants at an average price of $26.10 in
2006.
The
following table summarizes information about stock options outstanding at
December 31, 2008:
|
(in
thousands, except weighted average price and life)
|
||||||
|
Options
Outstanding
|
Options
Exercisable
|
|||||
|
Weighted
Avg
|
Weighted
|
Weighted
|
||||
|
Remaining
Contractual
|
Average
|
Average
|
||||
|
Range
of Exercise Prices
|
Shares
|
Life
in Years
|
Exercise
Price
|
Shares
|
Exercise
Price
|
|
|
$ 7.00
- $ 12.50
|
9
|
2.7
|
$11.13
|
9
|
$11.13
|
|
|
$12.51
- $ 25.00
|
2,319
|
5.3
|
$20.85
|
2,054
|
$20.55
|
|
|
$25.01
- $ 50.00
|
1,153
|
6.7
|
$27.08
|
807
|
$27.23
|
|
|
$50.01
- $242.25
|
11
|
1.5
|
$87.63
|
11
|
$87.63
|
|
|
3,492
|
2,881
|
|||||
Restricted
stock activity since December 31, 2007 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, 2007
|
336 | $ | 26.10 | |||||
|
Restricted
stock granted
|
492 | $ | 19.61 | |||||
|
Restricted
stock forfeited
|
(69 | ) | $ | 22.38 | ||||
|
Restricted
stock vested
|
(127 | ) | $ | 25.70 | ||||
|
Nonvested
restricted stock outstanding at December 31, 2008
|
632 | $ | 21.53 | |||||
68
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
In 2007,
approximately 297,000 RSUs were granted at an average price of $26.43,
approximately 16,000 were forfeited at an average price of $26.43, and
approximately 114,000 were vested at an average price of $25.14.
In 2006,
approximately 136,000 RSUs were granted at an average price of $26.23,
approximately 19,000 were vested at an average price of $20.46.
The
following table illustrates the share-based compensation expense recognized for
the three years ended December 31, 2008, 2007 and 2006. Approximately
$3.4 million of the year ended December 31, 2007 share-based compensation
expense is related to the former CEO’s 2007 transition agreement.
|
(in
thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Stock
options
|
$ | 4,603 | $ | 7,742 | $ | 8,638 | ||||||
|
Restricted
stock
|
4,373 | 4,826 | 1,293 | |||||||||
|
Employee
stock purchase plan
|
139 | 207 | 205 | |||||||||
| $ | 9,115 | $ | 12,775 | $ | 10,136 | |||||||
16. Segment
Information
The
Company 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
Credit Services segment offers lenders across the country credit reporting
solutions for mortgage and home equity needs, consumer credit reporting and
automotive lending services. Total assets for Credit Services
include approximately $30.4 million, $85.5 million and $38.5 million related to
the DealerTrack investment at December 31, 2008, 2007 and 2006, respectively.
Approximately $7.3 million and $8.6 million in assets for discontinued
operations are excluded from the Credit Services segment total in 2007 and 2006,
respectively related to the sale of CMSI.
The Data
Services segment includes business lines that provide transportation credit
reporting, motor vehicle record reporting, criminal records reselling, specialty
finance credit reporting, and lead generation services. Revenue for
the Data Services segment includes $5.1 million, $5.0 million and $4.6 million
of inter-segment sales for the years ended December 31, 2008, 2007, and 2006,
respectively. Approximately $6.7 million in assets for discontinued
operations are excluded from the Data Services segment total in 2006 related to
the sale of US Search.
The
Employer Services segment includes employment background screening, occupational
health services, tax incentive services and hiring
solutions. Products and services relating to
69
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
employment
background screening include criminal records searches, employment and education
verification, social security number verification and credit
reporting. Occupational health services include drug-free workplace
programs, physical examinations and employee assistance
programs. Hiring solutions include applicant tracking software,
recruiting services and outsourced management of payroll and human resource
functions. Tax incentive services include services related to the
administration of employment-based and location-based tax credit and incentive
programs and fleet asset management programs. Revenue for the
Employer Services segment includes $0.6 million, $0.8 million and $1.0 million
of inter-segment sales for the years ended December 31, 2008, 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 $0.7 million, $0.6 million, and $0.4 million of
inter-segment sales for the years ended December 31, 2008, 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 computer forensics, electronic
discovery, due diligence reports and other high level
investigations. Revenue from the Investigative and Litigation Support
Services segment includes $0.3 million of inter-segment sales for the year ended
December 31, 2006. Approximately $4.8 million and $5.0 million in assets for
discontinued operations are excluded from the Investigative and Litigation
Support Services segment total in 2007 and 2006, respectively related to the
sale of FAIS.
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
$43.8 million, $42.8 million, and $21.0 million for the years ended December 31,
2008, 2007, and 2006, respectively. Total assets for the foreign
background division under the Employer Services segment were $67.7 million,
$69.3 million and $40.0 million at December 31, 2008, 2007 and 2006,
respectively. International operations included in the Investigative and
Litigation Support Services segment include service revenue of $43.3 million and
$43.6 million for the years ended December 31, 2008 and 2007, respectively.
Total international assets for the Investigative and Litigation Support Services
segment were $11.3 million and $22.2 million at December 31, 2008 and 2007,
respectively.
Selected
financial information for the Company’s operations by segment for each of the
past three years is as follows:
70
|
Income
(Loss)
|
||||||||||||||||
|
(in
thousands)
|
Service
|
Depreciation
|
From
Continuing
|
|||||||||||||
|
2008
|
Revenue
|
and
Amortization
|
Operations
|
Assets
|
||||||||||||
|
Credit
Services
|
$ | 254,278 | $ | 6,237 | $ | 41,099 | $ | 181,208 | ||||||||
|
Data
Services
|
109,788 | 10,131 | (1,550 | ) | 298,189 | |||||||||||
|
Employer
Services
|
211,101 | 13,045 | 16,708 | 396,901 | ||||||||||||
|
Multifamily
Services
|
73,337 | 5,747 | 21,146 | 83,703 | ||||||||||||
|
Investigative
and Litigation Support Services
|
81,723 | 3,180 | 31,051 | 110,079 | ||||||||||||
|
Corporate
and Eliminations
|
(2,951 | ) | 4,253 | (36,634 | ) | 59,659 | ||||||||||
|
Consolidated
|
$ | 727,276 | $ | 42,593 | $ | 71,820 | $ | 1,129,739 | ||||||||
|
2007
|
||||||||||||||||
|
Credit
Services
|
$ | 292,286 | $ | 8,155 | $ | 56,027 | $ | 232,769 | ||||||||
|
Data
Services
|
87,904 | 9,985 | 25,920 | 308,686 | ||||||||||||
|
Employer
Services
|
233,824 | 10,421 | 29,126 | 386,096 | ||||||||||||
|
Multifamily
Services
|
72,276 | 4,880 | 18,621 | 83,318 | ||||||||||||
|
Investigative
and Litigation Support Services
|
86,720 | 2,954 | 37,068 | 108,033 | ||||||||||||
|
Corporate
and Eliminations
|
(2,845 | ) | 3,325 | (45,633 | ) | 96,570 | ||||||||||
|
Consolidated
(excluding Assets for Discontinued Operations)
|
$ | 770,165 | $ | 39,720 | $ | 121,129 | $ | 1,215,472 | ||||||||
|
2006
|
||||||||||||||||
|
Credit
Services
|
$ | 318,860 | $ | 8,568 | $ | 76,500 | $ | 191,316 | ||||||||
|
Data
Services
|
100,651 | 9,754 | 34,329 | 304,592 | ||||||||||||
|
Employer
Services
|
195,737 | 8,507 | 19,832 | 345,747 | ||||||||||||
|
Multifamily
Services
|
68,811 | 4,522 | 15,128 | 78,131 | ||||||||||||
|
Investigative
and Litigation Support Services
|
45,007 | 2,607 | 12,256 | 80,092 | ||||||||||||
|
Corporate
and Eliminations
|
(3,757 | ) | 1,626 | (37,418 | ) | 69,714 | ||||||||||
|
Consolidated
(excluding Assets for Discontinued Operations)
|
$ | 725,309 | $ | 35,584 | $ | 120,627 | $ | 1,069,592 | ||||||||
71
First
Advantage Corporation
Notes
to Consolidated Financial Statements
For
the Years Ended December 31, 2008, 2007 and 2006
17. Unaudited
Quarterly Financial Data
The
following table sets forth certain unaudited financial data of the Company for
the periods as indicated. The Company’s operating results for the years ended
December 31, 2008 and 2007 include results for the acquired entities from their
respective dates of acquisition.
As part
of the Company’s streamlining initiative, in the second quarter of 2008, FAIS,
which was included in our Investigative and Litigation Support Services segment,
and CMSI, which was included in our Credit Services segment. These
businesses are presented in discontinued operations at December 31,
2008. The results of these businesses’ operations in the prior
periods have been reclassified to conform to the 2008
classification.
72
|
(in
thousands, except per share amounts)
|
For
the quarters ended
|
|||||||||||||||
|
3/31/2008
|
6/30/2008
|
9/30/2008
|
12/31/2008
|
|||||||||||||
|
Total
revenue
|
$ | 202,279 | $ | 195,545 | $ | 188,297 | $ | 193,842 | ||||||||
|
Gross
margin
|
$ | 134,538 | $ | 128,936 | $ | 121,144 | $ | 112,678 | ||||||||
|
Income
from continuing operations attributable to FADV
shareholders
|
$ | 16,266 | $ | 13,652 | $ | 12,631 | $ | (3,451 | ) | |||||||
|
Loss
from discontinued operations attributable to FADV shareholders, net of
tax
|
(2,977 | ) | (1,264 | ) | - | - | ||||||||||
|
Net
income attributable to FADV shareholders
|
$ | 13,289 | $ | 12,388 | $ | 12,631 | $ | (3,451 | ) | |||||||
|
Per
share amounts
|
||||||||||||||||
|
Basic:
|
||||||||||||||||
|
Income
from continuing operations attributable to FADV
shareholders
|
$ | 0.27 | $ | 0.23 | $ | 0.21 | $ | (0.06 | ) | |||||||
|
Loss
from discontinued operations attributable to FADV shareholders, net of
tax
|
(0.05 | ) | (0.02 | ) | - | - | ||||||||||
|
Net
income attributable to FADV shareholders
|
$ | 0.22 | $ | 0.21 | $ | 0.21 | $ | (0.06 | ) | |||||||
|
Diluted:
|
||||||||||||||||
|
Income
from continuing operations attributable to FADV
shareholders
|
$ | 0.27 | $ | 0.23 | $ | 0.21 | $ | (0.06 | ) | |||||||
|
Loss
from discontinued operations attributable to FADV shareholders, net of
tax
|
(0.05 | ) | (0.02 | ) | - | - | ||||||||||
|
Net
income attributable to FADV shareholders
|
$ | 0.22 | $ | 0.21 | $ | 0.21 | $ | (0.06 | ) | |||||||
|
Weighted-average
common shares outstanding:
|
||||||||||||||||
|
Basic
|
59,159 | 59,435 | 59,478 | 59,492 | ||||||||||||
|
Diluted
|
59,234 | 59,617 | 59,529 | 59,546 | ||||||||||||
|
For
the quarters ended
|
||||||||||||||||
|
3/31/2007
|
6/30/2007
|
9/30/2007
|
12/31/2007
|
|||||||||||||
|
Total
revenue
|
$ | 205,261 | $ | 210,111 | $ | 208,585 | $ | 200,314 | ||||||||
|
Gross
margin
|
$ | 132,348 | $ | 138,180 | $ | 140,541 | $ | 139,817 | ||||||||
|
Income
from continuing operations attributable to FADV
shareholders
|
$ | 11,153 | $ | 18,195 | $ | 18,764 | $ | 78,010 | ||||||||
|
Income from
discontinued operations attributable to FADV shareholders, net of
tax
|
90 | 152 | 189 | 11,554 | ||||||||||||
|
Net
income attributable to FADV shareholders
|
$ | 11,243 | $ | 18,347 | $ | 18,953 | $ | 89,564 | ||||||||
|
Per
share amounts:
|
||||||||||||||||
|
Basic:
|
||||||||||||||||
|
Income
from continuing operations attributable to FADV
shareholders
|
$ | 0.19 | $ | 0.31 | $ | 0.32 | $ | 1.32 | ||||||||
|
Income from
discontinued operations attributable to FADV shareholders, net of
tax
|
- | - | - | 0.20 | ||||||||||||
|
Net
income attributable to FADV shareholders
|
$ | 0.19 | $ | 0.31 | $ | 0.32 | $ | 1.52 | ||||||||
|
Diluted:
|
||||||||||||||||
|
Income
from continuing operations attributable to FADV
shareholders
|
$ | 0.19 | $ | 0.31 | $ | 0.32 | $ | 1.31 | ||||||||
|
Income
from discontinued operations attributable to FADV shareholders, net of
tax
|
- | - | - | 0.20 | ||||||||||||
|
Net
income attributable to FADV shareholders
|
$ | 0.19 | $ | 0.31 | $ | 0.32 | $ | 1.51 | ||||||||
|
Weighted-average
common shares outstanding:
|
||||||||||||||||
|
Basic
|
58,371 | 58,954 | 59,064 | 59,084 | ||||||||||||
|
Diluted
|
58,888 | 59,445 | 59,222 | 59,188 | ||||||||||||
73