UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended JuneSeptember 30, 2006

OR

 

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

For the transition period fromto

Commission file number: 001-31666

FIRST ADVANTAGE CORPORATION

(Exact name of registrant as specified in its charter)

 

Incorporated in Delaware 61-1437565
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)

One Progress Plaza, Suite 2400100 Carillon Parkway

St. Petersburg, Florida 3370133716

(Address of principal executive offices, including zip code)

(727) 214-3411

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yesx    No¨

Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer  ¨            Accelerated filer  x            Non-accelerated filer  ¨

Large accelerated filer ¨Accelerated filer xNon-accelerated filer¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b 2)12b-2).    Yes¨    Nox

There were 10,370,90010,428,843 shares of outstanding Class A Common Stock of the registrant as of August 1,November 2, 2006.

There were 47,726,521 shares of outstanding Class B Common Stock of the registrant as of August 1,November 2, 2006.

 



INDEX

 

Part I.     FINANCIAL INFORMATION  

Item 1.

 

Financial Statements

  13
 

Consolidated Balance Sheets as of JuneSeptember 30, 2006 and December 31, 2005 (unaudited)

  2

3

 

Consolidated Statements of Income and Comprehensive Income for the Three and SixNine Months Ended JuneSeptember 30, 2006 and JuneSeptember 30, 2005 (unaudited)

  3

4

 

Consolidated Statement of Changes in Stockholders’ Equity for the SixNine Months Ended JuneSeptember 30, 2006 (unaudited)

  4

5

 

Consolidated Statements of Cash Flows for the SixNine Months Ended JuneSeptember 30, 2006 and JuneSeptember 30, 2005 (unaudited)

  5

6

 

Notes to Consolidated Financial Statements (unaudited)

  67

Item 2.

 

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

  2019

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  3433

Item 4.

 

Controls and Procedures

  3534

Part II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

  35

Item 1A.

 

Risk Factors

  35

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  3635

Item 3.

 

Defaults Upon Senior Securities

  3635

Item 4.

 

Submission of Matters to a Vote of Security Holders

  3635

Item 5.

 

Other Information

  3635

Item 6.

 

Exhibits

  3635


PART I. FINANCIAL INFORMATION

 

Item 1.Financial Statements

-1-


First Advantage Corporation

Consolidated Balance Sheets (Unaudited)

 

(in thousands)

  June 30,
2006
  December 31,
2005
  September 30,
2006
  December 31,
2005

Assets

        

Current assets:

        

Cash and cash equivalents

  $19,118  $28,380  $31,116  $28,380

Restricted cash

   483   —  

Accounts receivable (less allowance for doubtful accounts of $5,747 and $4,918 in 2006 and 2005, respectively)

   135,914   106,555

Accounts receivable (less allowance for doubtful accounts of $6,070 and $4,918 in 2006 and 2005, respectively)

   139,496   106,555

Income taxes receivable

   2,988   1,250   —     1,250

Deferred income tax asset

   9,500   8,019   10,453   8,019

Due from affiliates

   —     2,756   —     2,756

Prepaid expenses and other current assets

   9,482   6,240   9,302   6,240
            

Total current assets

   177,485   153,200   190,367   153,200

Property and equipment, net

   62,185   56,684   64,150   56,684

Goodwill

   633,718   605,884   649,452   605,884

Intangible assets, net

   109,611   111,274   106,068   111,274

Database development costs, net

   10,459   10,127   10,558   10,127

Investment in equity investee

   46,370   45,710   47,117   45,710

Other assets

   3,715   3,185   3,980   3,185
            

Total assets

  $1,043,543  $986,064  $1,071,692  $986,064
            

Liabilities and Stockholders’ Equity

        

Current liabilities:

        

Accounts payable

  $39,534  $37,152  $40,600  $37,152

Accrued compensation

   27,192   27,448   35,666   27,448

Accrued liabilities

   14,386   21,949   17,065   21,949

Deferred income

   8,168   6,809   7,112   6,809

Due to affiliates

   4,366   —     3,437   —  

Income tax payable

   9,928   —  

Current portion of long-term debt and capital leases

   27,120   38,444   24,848   38,444
            

Total current liabilities

   120,766   131,802   138,656   131,802

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

   200,507   182,127   190,533   182,127

Deferred income tax liability

   36,414   35,232   35,422   35,232

Other liabilities

   5,602   6,343   5,778   6,343
            

Total liabilities

   363,289   355,504   370,389   355,504

Minority interest

   47,444   47,712   48,109   47,712

Commitments and contingencies

        

Stockholders’ equity:

        

Preferred stock, $.001 par value; 1,000 shares authorized, no shares issued or outstanding

   —     —     —     —  

Class A common stock, $.001 par value; 125,000 authorized; 10,338 and 9,689 shares issued and outstanding as of June 30, 2006 and December 31, 2005, respectively

   10   10

Class B common stock, $.001 par value; 75,000 shares authorized; 47,727 and 46,076 shares issued and outstanding as of June 30, 2006 and December 31, 2005, respectively

   48   46

Class A common stock, $.001 par value; 125,000 authorized; 10,394 and 9,689 shares issued and outstanding as of September 30, 2006 and December 31, 2005, respectively

   10   10

Class B common stock, $.001 par value; 75,000 shares authorized; 47,727 and 46,076 shares issued and outstanding as of September 30, 2006 and December 31, 2005, respectively

   48   46

Additional paid-in capital

   450,539   430,026   452,622   430,026

Retained earnings

   181,787   152,405   200,411   152,405

Accumulated other comprehensive income

   426   361   103   361
            

Total stockholders’ equity

   632,810   582,848   653,194   582,848
            

Total liabilities and stockholders’ equity

  $1,043,543  $986,064  $1,071,692  $986,064
            

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

-2-


First Advantage Corporation

Consolidated Statements of Income and Comprehensive Income (Unaudited)

 

  For the Three Months Ended
September 30,
 For the Nine Months Ended
September 30,
 

(in thousands, except per share amounts)

  For the Three Months Ended
June 30,
   For the Six Months Ended
June 30,
           2006                 2005                 2006                 2005         
  2006 2005   2006 2005 

Service revenue

  $191,740  $151,171   $372,959  $279,276   $198,605  $157,746  $571,564  $437,022 

Reimbursed government fee revenue

   13,383   12,253    26,512   24,469    13,431   12,200   39,943   36,669 
                           

Total revenue

   205,123   163,424    399,471   303,745    212,036   169,946   611,507   473,691 
                           

Cost of service revenue

   59,153   45,770    115,742   83,932    62,020   49,881   177,762   133,813 

Government fees paid

   13,383   12,253    26,512   24,469    13,431   12,200   39,943   36,669 
                           

Total cost of service

   72,536   58,023    142,254   108,401    75,451   62,081   217,705   170,482 
                           

Gross margin

   132,587   105,401    257,217   195,344    136,585   107,865   393,802   303,209 
                           

Salaries and benefits

   58,746   44,387    117,380   83,662    60,414   46,646   177,794   130,308 

Facilities and telecommuncations

   7,529   7,776    14,580   12,770 

Facilities and telecommunications

   7,625   6,205   22,205   18,975 

Other operating expenses

   23,500   22,349    46,051   37,676    24,799   20,235   70,850   57,911 

Depreciation and amortization

   9,518   6,645    18,728   12,400    9,641   6,685   28,369   19,085 
                           

Total operating expenses

   99,293   81,157    196,739   146,508    102,479   79,771   299,218   226,279 
                           

Income from operations

   33,294   24,244    60,478   48,836    34,106   28,094   94,584   76,930 
                           

Other (expense) income:

           

Interest expense

   (3,250)  (1,466)   (6,491)  (2,535)   (3,571)  (1,580)  (10,062)  (4,115)

Interest income

   162   14    302   26    252   22   554   48 
                           

Total other (expense), net

   (3,088)  (1,452)   (6,189)  (2,509)   (3,319)  (1,558)  (9,508)  (4,067)

Equity in earnings of investee

   551   485    660   952    747   280   1,407   1,232 
                           

Income before income taxes and minority interest

   30,757   23,277    54,949   47,279    31,534   26,816   86,483   74,095 

Provision for income taxes

   13,387   11,083    23,887   21,093    12,151   10,835   36,038   31,928 
                           

Income before minority interest

   17,370   12,194    31,062   26,186    19,383   15,981   50,445   42,167 

Minority interest

   733   (25)   1,680   (25)   759   (42)  2,439   (67)
                           

Net income

   16,637   12,219    29,382   26,211    18,624   16,023   48,006   42,234 

Other comprehensive income (loss), net of tax:

           

Foreign currency translation adjustments

   84   (44)   65   (60)   (323)  189   (258)  129 
                           

Comprehensive income

  $16,721  $12,175   $29,447  $26,151   $18,301  $16,212  $47,748  $42,363 
             
              

Per share amounts:

           

Basic

  $0.29  $0.23   $0.52  $0.50   $0.32  $0.30  $0.84  $0.81 
                           

Diluted

  $0.29  $0.23   $0.51  $0.50   $0.32  $0.30  $0.83  $0.80 
                           

Weighted-average common shares outstanding:

           

Basic

   57,730   52,828    56,868   52,599    58,096   53,201   57,282   52,133 

Diluted

   57,929   53,226    58,019   52,935    58,155   53,965   58,035   52,617 

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

-3-


First Advantage Corporation

Consolidated Statement of Changes in Stockholders’ Equity

For the SixNine Months Ended JuneSeptember 30, 2006 (Unaudited)

 

(in thousands)

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

Balance at December 31, 2005

  55,765  $56  $430,026  $361  $152,405  $582,848  55,765 $56 $430,026  $361  $152,405 $582,848 

Net income

  —     —     —     —     29,382   29,382  —    —    —     —     48,006  48,006 

Class A Shares issued in connection with prior year acquisitions

  117   —     2,903   —     —     2,903  117  —    2,903   —     —    2,903 

Class A Shares issued in connection with current year acquisitions

  387   —     9,200   —     —     9,200  411  —    9,700   —     —    9,700 

Class A Shares issued in connection with share-based compensation and warrants

  94   —     1,746   —     —     1,746  126  —    2,297   —     —    2,297 

Class A Shares issued in connection with 401(k) match

  52   —     1,261   —     —     1,261  52  —    1,261   —     —    1,261 

Class B Shares issued in connection with the CIG acquisition

  1,650   2   (2)  —     —     —    1,650  2  (2)  —     —    —   

Tax benefit related to stock options

  —     —     82   —     —     82  —    —    46   —     —    46 

Settlement with First American for CIG liabilities prior to merger

  —     —     (62)  —     —     (62) —    —    (1,129)  —     —    (1,129)

Share-based compensation

  —     —     5,385   —     —     5,385  —    —    7,520   —     —    7,520 

Other comprehensive income

  —     —     —     65   —     65  —    —    —     (258)  —    (258)
                                  

Balance at June 30, 2006

  58,065  $58  $450,539  $426  $181,787  $632,810 

Balance at September 30, 2006

 58,121 $58 $452,622  $103  $200,411 $653,194 
                                  

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

-4-


First Advantage Corporation

Consolidated Statements of Cash Flows

For the SixNine Months Ended JuneSeptember 30, 2006 and 2005 (Unaudited)

 

  For the Nine Months Ended
September 30,
 
(in thousands)  For the Six Months Ended
June 30,
         2006             2005       
  2006 2005 

Cash flows from operating activities:

      

Net income

  $29,382  $26,211   $48,006  $42,234 

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

      

Depreciation and amortization

   18,728   12,400    28,369   19,085 

Share-based compensation

   5,962   —      8,484   —   

Minority interest

   1,680   —      2,439   —   

Equity in earnings of investee

   (660)  (952)   (1,407)  (1,232)

Deferred income taxes

   (804)  (2,432) �� (2,770)  (25,823)

Change in operating assets and liabilities, net of acquisitions:

      

Accounts receivable

   (22,979)  (22,658)   (25,263)  (20,675)

Prepaid expenses and other current assets

   (2,284)  (1,244)   (2,102)  (3,363)

Goodwill, intangibles and other assets

   2,762   (4,085)   (5,121)  28,028 

Accounts payable

   (4,050)  (3,169)   (3,635)  (5,933)

Accrued liabilities

   (4,733)  7,373    (6,007)  3,430 

Deferred income

   (480)  (1,556)   (1,536)  (845)

Due to affiliates

   7,122   926    6,676   4,207 

Net change in income tax accounts

   (1,816)  (4,601)   9,922   (4,085)

Accrued compensation and other liabilities

   (164)  2,935    7,890   6,055 

Minority interest liability

   (1,948)  —      (2,042)  —   
              

Net cash provided by operating activities

   25,718   9,148    61,903   41,083 
              

Cash flows from investing activities:

      

Database development costs

   (1,958)  (1,690)   (2,757)  (2,552)

Purchases of property and equipment

   (12,962)  (7,347)   (19,516)  (10,749)

Notes receivable

   —     3,949    —     4,000 

Cash paid for acquisitions

   (25,713)  (20,795)   (30,956)  (31,041)

Cash balance of companies acquired

   2,962   5,385    3,254   6,486 
              

Net cash used in investing activities

   (37,671)  (20,498)   (49,975)  (33,856)
              

Cash flows from financing activities:

      

Proceeds from long-term debt

   32,777   33,000    42,865   114,000 

Repayment of long-term debt

   (31,458)  (15,504)   (53,961)  (95,179)

Proceeds from Class A shares issued in connection with stock option plan and employee stock purchase plan

   1,365   1,221    1,916   3,727 

Distribution to First American from CIG prior to merger

   —     (9,301)   —     (22,335)
              

Net cash provided by financing activities

   2,684   9,416 

Net cash (used in) provided by financing activities

   (9,180)  213 
              

Effect of exchange rates on cash

   7   (2)   (12)  2 

Decrease in cash and cash equivalents

   (9,262)  (1,936)

Increase in cash and cash equivalents

   2,736   7,442 

Cash and cash equivalents at beginning of period

   28,380   9,996    28,380   9,996 
              

Cash and cash equivalents at end of period

  $19,118  $8,060   $31,116  $17,438 
              

Supplemental disclosures of cash flow information:

      

Cash paid for interest

  $5,198  $2,499   $9,872  $4,221 
              

Cash paid for income taxes

  $23,187  $10,548   $30,415  $11,210 
              

Non-cash investing and financing activities:

      

Class A shares issued in connection with acquisitions

  $12,103  $9,733   $12,603  $16,433 
              

Notes issued in connection with acquisitions

  $5,600  $8,905 

Notes and deferred payments related to acquisitions

  $8,758  $16,905 
              

Class A shares issued for benefit plan

  $1,642  $902   $1,642  $902 
              

Class B shares issued for converted debt

  $—    $20,000 
       

Class B shares issued in connection with acquisitions

  $—    $46,000   $—    $46,555 
              

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

-5-


First Advantage Corporation

Notes to Consolidated Financial Statements

JuneSeptember 30, 2006 and 2005 (Unaudited)

 

1.Organization and Nature of Business

First Advantage Corporation (“the Company”) operates in six primary business segments: Lender Services, Data Services, Dealer Services, Employer Services, Multifamily Services, and Investigative and Litigation Support Services. The business lines in the Lender Services segment offer lenders credit reporting solutions for mortgage and home equity information needs. The Data Services segment includes business lines that provide transportation credit reporting, motor vehicle record reporting, fleet management, supply chain theft and damage mitigation consulting, consumer location, criminal records reselling, subprime credit reporting, consumer credit reporting services, and lead generation services. The Dealer Services segment serves the automotive dealer marketplace by delivering consolidated consumer credit reports, credit automation software and automotive lead development services. The Employer Services segment is comprised of the business lines that deliver global employment background verifications, hiring management solutions, occupational health services, tax credits and incentives programs and other business tax consulting services that are frequently sold to support organization’s human resource functions. The Multifamily Services segment’s business lines include resident screening, property management software and renters insurance services. The Investigative and Litigation Support Services segment supports businesses, insurers and law firms nationwide with their insurance fraud investigations, surveillance, computer forensics, electronic discovery, data recovery, due diligence reporting and corporate and litigation investigative needs.

The First American Corporation and affiliates (“First American”) own approximately 82% of the shares of capital stock of the Company as of JuneSeptember 30, 2006. The Class B common stock owned by First American is entitled to ten votes per share on all matters presented to the stockholders for vote.

On March 23, 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”), which included the purchase of First American’s minority 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 minority 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.

 

-6-


First Advantage Corporation

Notes to Consolidated Financial Statements

June 30, 2006 and 2005 (Unaudited)

2.Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial information included in this report has been prepared in accordance with the instructions to Form 10-Q and does not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments are of a normal recurring nature and are considered necessary for a fair statement of the results for the interim period. The year end balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission.

First Advantage Corporation

Notes to Consolidated Financial Statements—(Continued)

September 30, 2006 and 2005 (Unaudited)

First Advantage completed sevennine acquisitions during the sixnine months ended JuneSeptember 30, 2006. The Company’s operating results for the three and sixnine months ended JuneSeptember 30, 2006 and 2005 include results for the acquired entities from their respective dates of acquisition.

Operating results for the three and sixnine months ended JuneSeptember 30, 2006 and 2005 are not necessarily indicative of the results that may be expected for the entire fiscal year.

Certain reclassifications have been made to the 2005 consolidated financial statements to conform with classifications used as of and for the period ended JuneSeptember 30, 2006.

As of JuneSeptember 30, 2006, the Company’s significant accounting polices and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, have not changed from December 31, 2005, except for the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123R (revised 2004), “Share-Based Payment”.Payment.”

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

-7-


First Advantage Corporation

Notes to Consolidated Financial Statements

June 30, 2006 and 2005 (Unaudited)

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 for the three and sixnine months ended JuneSeptember 30, 2006 was $3.1$2.5 million ($2.31.8 million after tax or $0.04$0.03 per basic and diluted share) and $6.0$8.5 million ($4.46.2 million after tax or $0.08$0.11 per basic and diluted share), respectively.

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 value of each option grant is estimated on the date of the grant using the lattice option pricing model. The lattice option pricing model incorporatesmodels incorporate the following.

 

   Three and six months ended June 30, 
   2006  2005 
   (Lattice)  (Black-Scholes) 

Expected dividend yield

  0% 0%

Risk-free interest rate (1)

  4.61% 4.18%

Expected volatility (2)

  30% 25%

Expected life (3)

  5 years  6 years 

   At September 30, 
   2006
(Lattice)
  2005
(Black-Scholes)
 

Expected dividend yield

  0% 0%

Risk-free interest rate (1)

  4.61–4.81% 4.21%

Expected volatility (2)

  30% 25%

Expected life (3)

  5 years  6 years 

(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 grantgrant.
(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.

First Advantage Corporation

Notes to Consolidated Financial Statements—(Continued)

September 30, 2006 and 2005 (Unaudited)

As share-based compensation expense recognized in the Consolidated StatementStatements of Income and Comprehensive Income for the three and sixnine months ended JuneSeptember 30, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based primarily on historical experience. In our pro forma information required under SFAS No. 123 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.

-8-


First Advantage Corporation

Notes to Consolidated Financial Statements

JuneAs of September 30, 2006, and 2005 (Unaudited)

As of June 30, 2006, $14.8$12.5 million of total unrecognized compensation costs related to non-vested awards is expected to be recognized over a weighted average period of 1.71.6 years. There were no share-based compensation costs capitalized as of JuneSeptember 30, 2006.

The Company did not recognize share-based compensation expense for employee share-based awardsrelated to options for the three and sixnine months ended JuneSeptember 30, 2005. The exercise price of the Company’s employee stock awards equaled the market price of the underlying stock on the date of the grant per APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Prior to January 1, 2006, the Company followed SFAS No. 123, “Accounting for Stock Based Compensation,” as amended by SFAS No.148No. 148 “Accounting for Stock-Based Compensation – Compensation—Transition and Disclosure,” through disclosure only. The Company accounted for share-based compensation using the intrinsic value method prescribed in APB Opinion No. 25, and related interpretations. The fair value for each option grant was estimated under SFAS No. 123 using the Black-Scholes pricing model. If the Company had elected or was required to apply the fair value recognition provisions of SFAS No. 123, to share-based employee compensation, net income and net income per share would have been reduced to the pro forma amounts indicated in the following table for the three and sixnine months ended JuneSeptember 30, 2005.

 

(in thousands, except per share amounts)  Three Months Ended
June 30, 2005
  Six Months Ended
June 30, 2005
  Three Months Ended
September 30, 2005
  Nine Months Ended
September 30, 2005

Net income, as reported

  $12,219  $26,211  $16,023  $42,234

Less: share-based compensation expense, net of tax

   1,543   2,851   1,344   4,195
            

Pro forma net income

  $10,676  $23,360  $14,679  $38,039
            

Earnings per share:

        

Basic, as reported

  $0.23  $0.50  $0.30  $0.81

Basic, pro forma

  $0.20  $0.44  $0.28  $0.73

Diluted, as reported

  $0.23  $0.50  $0.30  $0.80

Diluted, pro forma

  $0.20  $0.44  $0.27  $0.72

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for and disclosure of uncertainty in tax positions. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition associated with tax positions. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effects of adoption on its consolidated financial statements and the impact, if any, is not known at this time.

First Advantage Corporation

Notes to Consolidated Financial Statements—(Continued)

September 30, 2006 and 2005 (Unaudited)

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for the fiscal years ending after November 15, 2006. The Company has evaluated the effects of adoption on its consolidated financial statements and the impact is not expected to be material.

 

3.Acquisitions

During the sixnine months ended JuneSeptember 30, 2006, the Company completed sevennine acquisitions for $40.5$49.4 million in cash, notes, deferred payments and stock, and made scheduled payments of $2.9 million of Class A shares and $0.1 million in cash related to previous year’s acquisitions. 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.” The allocations may be revised in 2006. Therevised.

-9-


First Advantage Corporation

Notes to Consolidated Financial Statements

June 30, 2006 and 2005 (Unaudited)

The acquisition of these companies is based on management’s consideration of past and expected future performance as well as the potential strategic fit with the long-term goals of the Company. The expected long-term growth, market position and expected synergies to be generated by inclusion of these companies are the primary factors which gave rise to an acquisition price which resulted in the recognition of goodwill.

The aggregate purchase price of acquisitions completed during 2006 is as follows:

 

(in thousands)      

Cash

  $25,713  $30,956

Notes

   5,600   5,600

Stock (387 Class A shares)

   9,200

Deferred payments

   3,158

Stock (411 Class A shares)

   9,700
      

Purchase price

  $40,513  $49,414
      

The preliminary allocation of the aggregate purchase price of this acquisition isthe acquisitions are as follows:

 

(in thousands)      

Goodwill

  $31,213  $41,568

Identifiable intangible assets

   6,101   6,677

Net assets acquired

   3,199   1,169
      
  $40,513  $49,414
      

The changes in the carrying amount of goodwill, by operating segment, are as follows for the sixnine months ended JuneSeptember 30, 2006:

 

(in thousands)  Balance at
December 31, 2005
  Acquisitions  Adjustments to net
assets acquired
 Balance at
June 30, 2006
  Balance at
December 31, 2005
  Acquisitions  Adjustments to
net assets acquired
 Balance at
September 30, 2006

Lender Services

  $47,082  $—    $—    $47,082  $47,082  $—    $202  $47,284

Data Services

   219,266   —     (2,824)  216,442   219,266   —     1,221   220,487

Dealer Services

   56,893   —     (442)  56,451   56,893   —     (911)  55,982

Employer Services

   180,114   31,213   (139)  211,188   180,114   41,568   247   221,929

Multifamily Services

   46,535   —     26   46,561   46,535   —     1,241   47,776

Investigative and Litigation Support Services

   55,994   —     —     55,994   55,994   —     —     55,994
                        

Consolidated

  $605,884  $31,213  $(3,379) $633,718  $605,884  $41,568  $2,000  $649,452
                        

First Advantage Corporation

Notes to Consolidated Financial Statements—(Continued)

September 30, 2006 and 2005 (Unaudited)

The adjustment to net assets acquired represents changes in the fair value of net assets acquired in connection with acquisitions consummated within the past twelve months.

Unaudited pro forma results of operations assuming all the acquisitions were consummated on January 1, 2005 are as follows:

 

-10-


First Advantage Corporation

Notes to Consolidated Financial Statements

June 30, 2006 and 2005 (Unaudited)

  For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,

(in thousands, except per share amounts)

  For the Three Months Ended
June 30,
  For the Six Months Ended
June 30,
        2006              2005              2006              2005      
  2006  2005  2006  2005

Total revenue

  $210,237  $198,752  $412,368  $385,321  $212,532  $202,000  $627,878  $589,351
                        

Net income

  $17,790  $10,715  $31,100  $25,328  $17,841  $15,687  $48,910  $40,882
                        

Earnings per share:

                

Basic

  $0.31  $0.20  $0.54  $0.46  $0.31  $0.28  $0.85  $0.74
                        

Diluted

  $0.31  $0.19  $0.53  $0.46  $0.31  $0.28  $0.84  $0.74
                        

Weighted-average common shares outstanding:

                

Basic

   58,031   54,920   57,250   54,880   58,105   55,193   57,554   55,001

Diluted

   58,230   55,319   58,401   55,216   58,164   55,957   58,307   55,486

 

4.Goodwill and Intangible Assets

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company will complete the annual goodwill impairment test for all reporting units in the fourth quarter of 2006 (using the September 30 valuation date). There have been no impairments of goodwill during the sixnine months ending JuneSeptember 30, 2006.

Goodwill and other intangible assets for the periods as of JuneSeptember 30, 2006 and December 31, 2005 are as follows:

 

(in thousands)

  June 30, 2006 December 31, 2005   September 30,
2006
 December 31,
2005
 

Goodwill

  $633,718  $605,884   $649,452  $605,884 
              

Intangible assets:

      

Customer lists

  $96,127  $90,437   $96,413  $90,437 

Noncompete agreements

   13,960   13,530    14,249   13,530 

Trade names

   21,600   21,596    21,606   21,596 

Other

   129   129    129   129 
              
   131,816   125,692    132,397   125,692 

Less accumulated amortization

   (22,205)  (14,418)   (26,329)  (14,418)
              

Intangible assets, net

  $109,611  $111,274   $106,068  $111,274 
              

-11-


First Advantage Corporation

Notes to Consolidated Financial StatementsStatements—(Continued)

JuneSeptember 30, 2006 and 2005 (Unaudited)

 

Amortization of intangible assets totaled approximately $7.8$11.9 million and $3.0$4.9 million for the sixnine months ended JuneSeptember 30, 2006 and 2005, respectively. Estimated amortization expense relating to intangible asset balances as of JuneSeptember 30, 2006, is expected to be as follows over the next five years:

 

(in thousands)

      

2006

  $8,482  $4,329

2007

   16,515   16,899

2008

   15,262   15,607

2009

   14,260   14,478

2010

   13,659   13,854

Thereafter

   41,433   40,901
      
  $109,611  $106,068
      

The changes in the carrying amount of identifiable intangible assets are as follows for the sixnine months ended JuneSeptember 30, 2006:

 

(in thousands)

  Intangible
Assets
   Intangible
Assets
 

Balance, at December 31, 2005

  $111,274   $111,274 

Acquisitions

   6,101    6,677 

Adjustments

   18    23 

Amortization

   (7,782)   (11,906)
        

Balance, at June 30, 2006

  $109,611 

Balance, at September 30, 2006

  $106,068 
        

 

5.Income Taxes

The estimated effective income tax rate was 38.5% and 41.7% for the three and nine months ended September 30, 2006. The Company adjusted the effective income tax rate for the nine months ended September 30, 2006 from 43% to 41.7%, which caused the reduction in the quarterly rate.

6.Debt

Long-term debt consists of the following at JuneSeptember 30, 2006:

 

-12-

(in thousands, except percentages)   

Acquisition notes:

  

Weighted average interest rate of 6.39% with maturities through 2010

  $57,109

Bank notes:

  

$225 million Collateralized Credit Agreement, interest at 30-day LIBOR plus 1.25% (6.63% at September 30, 2006), matures September 2010

   157,500

Capital leases and other debt:

  

Various interest rates with maturities through 2009

   772
    

Total long-term debt and capital leases

   215,381

Less current portion of long-term debt and capital leases

   24,848
    

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

  $190,533
    


First Advantage Corporation

Notes to Consolidated Financial StatementsStatements—(Continued)

JuneSeptember 30, 2006 and 2005 (Unaudited)

 

(in thousands, except percentages)   

Acquisition notes:

  

Weighted average interest rate of 6.30% with maturities through 2010

  $64,215

Bank notes:

  

$225 million Collateralized Credit Agreement, interest at 30-day LIBOR plus 1.25% (6.27% at June 30, 2006), matures September 2010

   162,500

Capital leases and other debt:

  

Various interest rates with maturities through 2006

   912
    

Total long-term debt and capital leases

   227,627

Less current portion of long-term debt and capital leases

   27,120
    

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

  $200,507
    

At JuneSeptember 30, 2006, the Company was in compliance with the financial covenants of its credit agreement.

 

6.7.Earnings Per Share

A reconciliation of earnings per share and weighted-average shares outstanding is as follows:

 

  Three Months Ended
September 30,
  Nine Months Ended
September 30,
(in thousands, except per share amounts)  Three Months Ended
June 30,
  Six Months Ended
June 30,
  2006  2005  2006  2005
  2006  2005  2006  2005

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

  $16,637  $12,219  $29,382  $26,211

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

  $18,624  $16,023  $48,006  $42,234

Denominator:

                

Weighted-average shares for basic earnings per share

   57,730   52,828   56,868   52,599   58,096   53,201   57,282   52,133

Effect of dilutive securities - contingent shares

   —     —     739   —  

Effect of dilutive securities - share-based compensation and warrants

   199   398   412   336

Effect of dilutive securities—contingent shares

   —     —     490   —  

Effect of dilutive securities—share-based compensation and warrants

   59   764   263   484
                        

Denominator for diluted earnings per share

   57,929   53,226   58,019   52,935   58,155   53,965   58,035   52,617
                        

Earnings per share:

                

Basic

  $0.29  $0.23  $0.52  $0.50  $0.32  $0.30  $0.84  $0.81

Diluted

  $0.29  $0.23  $0.51  $0.50  $0.32  $0.30  $0.83  $0.80

For the three months ended JuneSeptember 30, 2006 and 2005, options and warrants totaling 1,581,6622,521,213 and 412,333,361,398, respectively, were excluded from the weighted average diluted shares

-13-


First Advantage Corporation

Notes to Consolidated Financial Statements

June 30, 2006 and 2005 (Unaudited)

outstanding, as they were antidilutive. For the sixnine months ended JuneSeptember 30, 2006 and 2005, options and warrants totaling 1,329,7191,520,983 and 1,241,546,312,125, respectively, were excluded from the weighted average diluted shares outstanding, as they were antidilutive.

 

7.8.Share-Based Compensation

Employee Stock Purchase Plan

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 34,76251,144 and 29,446 shares have been issued in connection with the plan for the sixnine months ended JuneSeptember 30, 2006 and the year ended December 31, 2005, respectively.

First Advantage Corporation

Notes to Consolidated Financial Statements—(Continued)

September 30, 2006 and 2005 (Unaudited)

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 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 401(k) committee, a sub committee of the compensation committee of the board of directors of the Company.

-14-


First Advantage Corporation

Notes to Consolidated Financial Statements

June 30, 2006 and 2005 (Unaudited)

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.

At JuneSeptember 30, 2006, 4,931,7554,964,255 stock options to purchase shares of the Company’s common stock, 122,806 restricted stock awards, and 69,231 restricted stock units were granted under the First Advantage Corporation 2003 Incentive Compensation Plan. Share-based grants generally vest over three years at a rate of 33.4% for the first year and 33.3% for each of the two following years. The option grants expire ten years after the grant date. As of January 1, 2006, the Company accounts for these share-based grants in accordance with SFAS No.123R,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 three and sixnine months ended JuneSeptember 30, 2006 was $3.1$2.5 million ($2.31.8 million after tax or $0.04$0.03 per basic and diluted share) and $6.0$8.5 million ($4.46.2 million after tax or $0.08$0.11 per basic and diluted share), respectively. Prior to adoption of SFAS No.123R,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 Employee Stock Purchase Plan (“ESPP”).Plan.

Warrants and Options to Purchase Class A Common Stock, Assumed in the Merger

The Company agreed to assume the obligations of US SEARCH.com contained in all warrants to purchase common stock of US SEARCH.com 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.com 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 185,158176,218 shares of its common stock at exercise prices ranging from $0.25 to $29.38 per share as of JuneSeptember 30, 2006.

All outstanding stock options, stock appreciation rights, limited stock appreciation rights and stock purchase rights of US SEARCH.com 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.com common stock divided by the exchange ratio, rounded down to the

-15- nearest whole cent. The


First Advantage Corporation

Notes to Consolidated Financial StatementsStatements—(Continued)

JuneSeptember 30, 2006 and 2005 (Unaudited)

 

nearest whole cent. The outstanding stock options, stock appreciation rights, limited stock appreciation rights and stock purchase rights of US SEARCH.com 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.com employees and directors pursuant to the US SEARCH.com Amended and Restated 1998 Stock Incentive Plan and all outstanding stock options issued to US SEARCH.com’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 JuneSeptember 30, 2006, the Company had outstanding options (previously issued by US SEARCH.com) to purchase up to 71,69470,833 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, 2005 is summarized as follows:

 

(in thousands, except weighted average price)  Number of
Shares
 Weighted
Average
Exercise Price
  Number of
Shares
 Weighted
Average
Exercise Price

Options outstanding at December 31, 2005

  3,503  $21.14  3,503  $21.14

Options granted

  848  $24.91  881  $24.75

Options exercised

  (38) $16.50  (55) $16.22

Options canceled

  (94) $22.83  (144) $23.51
            

Options outstanding at June 30, 2006

  4,219  $21.90

Options outstanding at September 30, 2006

  4,185  $21.88
            

Options exercisable, end of the quarter

  1,787  $20.28  2,122  $20.60
            

The following table summarizes information about stock options and warrants outstanding at JuneSeptember 30, 2006:

 

-16-

   Options Outstanding  Options Exercisable

Range of Exercise Prices

  Shares  Weighted Avg
Remaining Contractual
Life in Years
  Weighted
Average
Exercise Price
  Shares  Weighted
Average
Exercise Price

$ 7.00 - $ 12.50

  13  4.8  $10.33  13  $10.34

$12.51 - $ 25.00

  3,477  7.8  $20.64  1,876  $19.39

$25.01 - $ 50.00

  684  8.9  $27.34  222  $27.94

$50.01 - $242.25

  11  3.8  $89.25  11  $89.25
            
  4,185      2,122  
            
   Warrants Outstanding and Exercisable      

Range of Exercise Prices

  Shares  Weighted Avg
Remaining Contractual
Life in Years
  Weighted
Average
Exercise Price
      

$ 0.25 - $22.50

  86  2.29  $17.08    

$22.51 - $26.10

  87  0.45  $26.10    

$26.11 - $29.38

  3  0.39  $29.38    
           
  176        
           


First Advantage Corporation

Notes to Consolidated Financial StatementsStatements—(Continued)

JuneSeptember 30, 2006 and 2005 (Unaudited)

 

(in thousands, except for exercise prices, years and weighted average amounts)
   

Options Outstanding

  

Options Exercisable

Range of Exercise Prices  

Shares

  

Weighted Avg
Remaining Contractual
Life in Years

  

Weighted
Average
Exercise Price

  

Shares

  

Weighted
Average
Exercise Price

$  7.00 - $  12.50  13  5.2  $10.32  13  $10.36
$12.51 - $  25.00  3,493  8.1  $20.63  1,744  $19.71
$25.01 - $  50.00  701  9.1  $27.33  18  $37.43
$50.01 - $242.25  12  3.8  $88.43  12  $88.43
            
  4,219      1,787  
            

   

Warrants Outstanding and Exercisable

Range of Exercise Prices  

Shares

  

Weighted Avg Remaining
Contractual Life in Years

  

Weighted Average Exercise
Price

$  0.25 - $22.50  87  2.54  $17.08
$22.51 - $26.10  95  0.67  $26.10
$26.11 - $29.38  3  0.65  $29.38
         
  185    
       

8.9.Segment Information

The Company operates in six primary business segments: Lender Services, Data Services, Dealer Services, Employer Services, Multifamily Services, and Investigative and Litigation Support Services.

The Lender Services segment offers lenders credit reporting solutions for mortgage and home equity information needs.

The Data Services segment includes business lines that provide transportation credit reporting, motor vehicle record reporting, fleet management, supply chain theft and damage mitigation consulting, consumer location, criminal records reselling, subprime credit reporting, consumer credit reporting services, and lead generation services. Revenue for the Data Services segment includes $1.2$1.1 million and $0.7 million of inter-segment revenue for the three months ended JuneSeptember 30, 2006 and 2005, respectively, and $2.4$3.5 million and $1.3$2.0 million of inter-segment revenue for the sixnine months ended JuneSeptember 30, 2006 and 2005, respectively.

The Dealer Services business segment serves the automotive dealer marketplace by delivering consolidated consumer credit reports, credit automation software and automotive lead development services.

-17-


First Advantage Corporation

Notes to Consolidated Financial Statements

June 30, 2006 and 2005 (Unaudited)

The Employer Services segment includes employment background screening, hiring management solutions, occupational health services and tax incentive services. Products and services relating to employment background screening include criminal records searches, employment and education verification, social security number verification and credit reporting. The hiring management solutions group provides recruiting and hiring systems to manage job applicants. 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, sales and use tax programs and fleet asset management programs. Revenue for the Employer Services segment includes $0.2 million of inter-segment revenue for the three months ended JuneSeptember 30, 2006 and 2005, and $0.5$0.8 million and $0.4$0.6 million of inter-segment revenue for the sixnine months ended JuneSeptember 30, 2006 and 2005, respectively.

The Multifamily Services segment includes resident screening and software services. Resident screening services include criminal background and eviction searches, credit reporting, employment verification and lease performance and payment histories. Revenue for the Multifamily Services segment includes $0.1 million of inter-segment revenue for the three months ended JuneSeptember 30, 2006 and 2005, and $0.2$0.3 million and $0.1$0.2 million of inter-segment revenue for the sixnine months ended JuneSeptember 30, 2006 and 2005, respectively.

The Investigative and Litigation Support Services segment includes all investigative services. Products and services offered by the Investigative and Litigation Support Services segment includesinclude surveillance services, field interviews, computer forensics, electronic discovery, due diligence reports and other high level investigations. Revenue for the Investigative and Litigation Support Services segment includes $0.1 million and $0.2$0.3 million of inter-segment revenue for the three and sixnine months ended JuneSeptember 30, 2006, respectively.

The elimination of inter-segment revenue and cost of service revenue is included in Corporate. These transactions are recorded at cost.

International operations are included in the Employer Services segment and include revenue of $4.4$5.9 million and $2.8$2.9 million for the three months June 31,September 30, 2006 and 2005, respectively, and $7.8$13.7 million and $3.2$6.0 million for the sixnine months ended June 31,September 30, 2006 and 2005, respectively.

First Advantage Corporation

Notes to Consolidated Financial Statements—(Continued)

September 30, 2006 and 2005 (Unaudited)

The following table sets forth segment information for the three and sixnine months ended JuneSeptember 30, 2006 and 2005.

 

-18-

(in thousands)

 

Three Months Ended September 30, 2006

 Revenue  Depreciation
and
Amortization
 Income (Loss)
From Operations
  Assets

Lender Services

 $44,072  $1,649 $14,603  $77,507

Data Services

  48,513   2,836  10,283   321,713

Dealer Services

  31,993   714  4,913   120,294

Employer Services

  56,217   2,110  5,960   333,234

Multifamily Services

  18,616   1,136  4,933   79,451

Investigative and Litigation Support Services

  14,336   791  2,666   85,711

Corporate and Eliminations

  (1,711)  405  (9,252)  53,782
              

Consolidated

 $212,036  $9,641 $34,106  $1,071,692
              

Three Months Ended September 30, 2005

          

Lender Services

 $43,907  $1,760 $12,971  $82,745

Data Services

  32,161   1,465  7,206   137,240

Dealer Services

  29,219   641  3,964   117,427

Employer Services

  40,404   1,371  3,560   221,343

Multifamily Services

  17,544   1,023  4,824   76,847

Investigative and Litigation Support Services

  8,237   385  353   49,169

Corporate and Eliminations

  (1,526)  40  (4,784)  46,777
              

Consolidated

 $169,946  $6,685 $28,094  $731,548
              

Nine Months Ended September 30, 2006

          

Lender Services

 $135,023  $5,112 $42,469  $77,507

Data Services

  141,922   8,838  29,185   321,713

Dealer Services

  92,790   2,101  13,814   120,294

Employer Services

  148,501   5,554  13,961   333,234

Multifamily Services

  54,068   3,373  13,023   79,451

Investigative and Litigation Support Services

  44,451   2,307  8,822   85,711

Corporate and Eliminations

  (5,248)  1,084  (26,690)  53,782
              

Consolidated

 $611,507  $28,369 $94,584  $1,071,692
              

Nine Months Ended September 30, 2005

          

Lender Services

 $128,963  $4,942 $37,596  $82,745

Data Services

  92,083   4,403  20,956   137,240

Dealer Services

  72,252   1,639  10,522   117,427

Employer Services

  112,642   3,846  9,763   221,343

Multifamily Services

  49,134   3,003  14,155   76,847

Investigative and Litigation Support Services

  23,142   1,146  1,032   49,169

Corporate and Eliminations

  (4,525)  106  (17,094)  46,777
              

Consolidated

 $473,691  $19,085 $76,930  $731,548
              


First Advantage Corporation

Notes to Consolidated Financial StatementsStatements—(Continued)

JuneSeptember 30, 2006 and 2005 (Unaudited)

 

(in thousands)  Revenue  Depreciation
and Amortization
  Income (Loss)
From Operations
  Assets

Three Months Ended June 30, 2006

      

Lender Services

  $45,649  $1,705  $14,385  $81,815

Data Services

   46,372   2,992   9,267   310,769

Dealer Services

   31,168   699   4,973   120,199

Employer Services

   49,942   1,832   5,663   330,749

Multifamily Services

   18,759   1,100   4,886   78,907

Investigative and Litigation Support Services

   15,069   765   3,087   85,166

Corporate and Eliminations

   (1,836)  425   (8,967)  35,938
                

Consolidated

  $205,123  $9,518  $33,294  $1,043,543
                

Three Months Ended June 30, 2005

      

Lender Services

  $45,853  $1,792  $12,844  $94,549

Data Services

   30,794   1,476   7,465   150,606

Dealer Services

   23,540   596   3,162   109,011

Employer Services

   39,811   1,403   3,859   225,837

Multifamily Services

   17,088   967   5,677   73,805

Investigative and Litigation Support Services

   7,899   376   494   47,194

Corporate and Eliminations

   (1,561)  35   (9,257)  10,927
                

Consolidated

  $163,424  $6,645  $24,244  $711,929
                

Six Months Ended June 30, 2006

      

Lender Services

  $90,951  $3,463  $27,866  $81,815

Data Services

   93,409   6,002   18,902   310,769

Dealer Services

   60,797   1,387   8,901   120,199

Employer Services

   92,284   3,444   8,001   330,749

Multifamily Services

   35,452   2,237   8,090   78,907

Investigative and Litigation Support Services

   30,115   1,516   6,156   85,166

Corporate and Eliminations

   (3,537)  679   (17,438)  35,938
                

Consolidated

  $399,471  $18,728  $60,478  $1,043,543
                

Six Months Ended June 30, 2005

      

Lender Services

  $85,056  $3,182  $24,625  $94,549

Data Services

   59,922   2,938   13,750   150,606

Dealer Services

   43,033   998   6,558   109,011

Employer Services

   72,239   2,475   6,203   225,837

Multifamily Services

   31,589   1,980   9,332   73,805

Investigative and Litigation Support Services

   14,905   761   679   47,194

Corporate and Eliminations

   (2,999)  66   (12,311)  10,927
                

Consolidated

  $303,745  $12,400  $48,836  $711,929
                
10.Subsequent Event

-19-In October 2006, DealerTrack completed a follow on offering of its stock. In the fourth quarter, the Company will recognize a pretax investment gain of approximately $7.2 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 will decrease from approximately 16% to 14%. The Company will continue to account for the investment under the equity method since it has maintained significant influence at DealerTrack.


Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Note of Caution Regarding Forward Looking Statements

Certain statements in this quarterly report on Form 10-Q relate to future results of the Company and are considered “forward-looking statements”. These statements, which may be expressed in a variety of ways, including the use of future or present tense language, relate to among other things, sufficiency and availability of cash flows and other sources of liquidity, current levels of operations, anticipated growth, future market positions, synergies from integration, ability to execute its growth strategy, levels of capital expenditures and ability to satisfy current debt. These forward-looking statements, and others forward-looking statements contained in other public disclosures of the Company are based on assumptions that involve risks and uncertainties, and that are subject to change based on various important factors (some of which are beyond the Company’s control). Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements. Factors that could cause the anticipated results to differ from those described in the forward-looking statements include: general volatility of the capital markets and the market price of the Company’s Class A common stock; the Company’s ability to successfully raise capital; the Company’s ability to identify and complete acquisitions and to successfully integrate businesses it acquires; changes in applicable government regulations; the degree and nature of the Company’s competition; increases in the Company’s expenses; continued consolidation among the Company’s competitors and customers; unanticipated technological changes and requirements; the Company’s ability to identify suppliers of quality and cost-effective data; and other factors described in this quarterly report on Form 10-Q. Actual results may differ materially from those expressed or implied as a result of these risks and uncertainties. The forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

-20-


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

Overview

First Advantage Corporation (Nasdaq: FADV) (“First Advantage” or the “Company”) is a global risk mitigation and business solutions provider. The Company operates in six primary business segments: Lender Services, Data Services, Dealer Services, Employer Services, Multifamily Services, and Investigative & Litigation Support Services. First Advantage is headquartered in St. Petersburg, Florida, and has approximately 4,2004,400 employees in offices throughout the United States and abroad. During 2006, First Advantage has acquired sevennine companies, which are all included in the Employer Services segment. During the first half ofnine months ended September 30, 2005, the Company acquired threefour companies in the Employer Services segment, one companytwo companies in the Investigative and Litigation Support Services segment, one company in the Lender Services segment, one company in the Multifamily Services segment, and one company in the Dealer Services segment.

Operating results for the three and sixnine months ended JuneSeptember 30, 2006 included total revenue of $205.1$212.0 million and $399.5$611.5 million, respectively. This represents an increase of 25.5%24.8% and 31.5%29% over the same periods in 2005, respectively. The organic growth rate was 3.2%3.1% and 4.9%4.0% for the three and sixnine months ended JuneSeptember 30, 2006, respectively. Net income for the three and sixnine months ended JuneSeptember 30, 2006 was $16.6$18.6 million and $29.4$48.0 million, respectively. Net income increased $4.4$2.6 million for the three months ended and $3.2$5.8 million for the sixnine months ended JuneSeptember 30, 2006 in comparison to the same periods in 2005. Net income for the three and sixnine months ended JuneSeptember 30, 2006 includes the impact of adopting SFASStatement of Financial Accounting Standards (“SFAS”) No. 123R (revised 2004) “Share-Based Payment,” which reduced net income by $2.3$1.8 million and $4.4$6.2 million or $0.04$0.03 and $0.08$0.11 per diluted share, respectively.

The results of operations for the three and sixnine months ended JuneSeptember 30, 2005, included $3.7include $3.2 million of nondeductible merger costs incurred in connection with the acquisition of the Credit Information Group from The First American Corporation, $2.0 million of costs incurred in connection with the relocation of the company’s corporate headquarters and other office consolidations, and $290,000$.6 million of costs related to the launch of the corporate branding initiative in June 2005. The total after-tax impact of theseThese costs on results of operations forare included in the quarter ended June 30, 2005, was to reduce net income by $5.1 million and reduce primary and diluted earnings per share by 10 cents.Company’s Corporate segment.

Critical Accounting Policies and Estimates

Critical accounting policies are those policies used in the preparation of the company’s financial statements that require management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosure of contingencies. A summary of these policies can be found in Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for year ended December 31, 2005.

Share-Based Compensation

Effective January 1, 2006, the Company accounts for employee share-based compensation costs in accordance with SFAS No. 123R. 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 the 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 value of each option grant is estimated on the date of the grant using the lattice option pricing model. The fair value calculation requires the input of highly subjective assumptions, including expected volatility and expected life. Further, as required under SFAS No. 123R, the Company now estimates forfeitures for options granted, which are not expected to vest. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of our share-based compensation.

The following is a summary of the operating results by the Company’s business segments for the three and sixnine months ended JuneSeptember 30, 2006 and 2005.

 

-21-

(in thousands, except percentages)

 

Three Months Ended

September 30, 2006

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

Service revenue

 $44,072  $37,153  $31,993  $53,399  $18,616  $14,336  $(964) $198,605 

Reimbursed government fee revenue

  —     11,360   —     2,818   —     —     (747)  13,431 
                                

Total revenue

  44,072   48,513   31,993   56,217   18,616   14,336   (1,711)  212,036 

Cost of service revenue

  13,913   11,049   17,147   16,421   1,803   2,624   (937)  62,020 

Government fees paid

  —     11,360   —     2,818   —     —     (747)  13,431 
                                

Total cost of service

  13,913   22,409   17,147   19,239   1,803   2,624   (1,684)  75,451 

Gross margin

  30,159   26,104   14,846   36,978   16,813   11,712   (27)  136,585 

Salaries and benefits

  12,381   5,764   3,945   18,771   6,514   5,996   7,043   60,414 

Facilities and telecommunications

  1,855   737   415   2,103   1,007   404   1,104   7,625 

Other operating expenses

  (329)  6,484   4,859   8,034   3,223   1,855   673   24,799 

Depreciation and amortization

  1,649   2,836   714   2,110   1,136   791   405   9,641 
                                

Income (loss) from operations

 $14,603  $10,283  $4,913  $5,960  $4,933  $2,666  $(9,252) $34,106 
                                

Operating margin as a percentage of service revenue

  33.1%  27.7%  15.4%  11.2%  26.5%  18.6%  N/A   17.2%

Three Months Ended

September 30, 2005

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

Service revenue

 $43,907  $22,100  $29,219  $37,673  $17,544  $8,237  $(934) $157,746 

Reimbursed government fee revenue

  —     10,061   —     2,731   —     —     (592)  12,200 
                                

Total revenue

  43,907   32,161   29,219   40,404   17,544   8,237   (1,526)  169,946 

Cost of service revenue

  14,200   3,624   15,635   12,132   1,788   3,443   (941)  49,881 

Government fees paid

  —     10,061   —     2,731   —     —     (592)  12,200 
                                

Total cost of service

  14,200   13,685   15,635   14,863   1,788   3,443   (1,533)  62,081 

Gross margin

  29,707   18,476   13,584   25,541   15,756   4,794   7   107,865 

Salaries and benefits

  12,500   3,922   4,222   13,559   6,064   2,715   3,664   46,646 

Facilities and telecommunications

  1,916   632   422   1,514   808   296   617   6,205 

Other operating expenses

  560   5,251   4,335   5,537   3,037   1,045   470   20,235 

Depreciation and amortization

  1,760   1,465   641   1,371   1,023   385   40   6,685 
                                

Income (loss) from operations

 $12,971  $7,206  $3,964  $3,560  $4,824  $353  $(4,784) $28,094 
                                

Operating margin as a percentage of service revenue

  29.5%  32.6%  13.6%  9.4%  27.5%  4.3%  N/A   17.8%


(in thousands, except percentages)                         

Three Months Ended June 30, 2006

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

Service revenue

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

Reimbursed government fee revenue

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

Total revenue

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

Cost of service revenue

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

Government fees paid

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

Total cost of service

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

Gross margin

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

Salaries and benefits

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

Facilities and telecommunications

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

Other operating expenses

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

Depreciation and amortization

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

Income (loss) from operations

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

Operating margin percentage

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

Three Months Ended June 30, 2005

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

Service revenue

  $45,853  $20,864  $23,540  $36,891  $17,088  $7,899  $(964) $151,171 

Reimbursed government fee revenue

   —     9,930   —     2,920   —     —     (597)  12,253 
                                 

Total revenue

   45,853   30,794   23,540   39,811   17,088   7,899   (1,561)  163,424 

Cost of service revenue

   14,989   2,883   11,893   12,172   1,643   3,154   (964)  45,770 

Government fees paid

   —     9,930   —     2,920   —     —     (597)  12,253 
                                 

Total cost of service

   14,989   12,813   11,893   15,092   1,643   3,154   (1,561)  58,023 

Gross margin

   30,864   17,981   11,647   24,719   15,445   4,745   —     105,401 

Salaries and benefits

   13,499   3,553   3,456   12,683   5,585   2,743   2,868   44,387 

Facilities and telecommunications

   1,845   640   294   1,676   816   267   2,238   7,776 

Other operating expenses

   884   4,847   4,139   5,098   2,400   865   4,116   22,349 

Depreciation and amortization

   1,792   1,476   596   1,403   967   376   35   6,645 
                                 

Income (loss) from operations

  $12,844  $7,465  $3,162  $3,859  $5,677  $494  $(9,257) $24,244 
                                 

Operating margin percentage

   28.0%  35.8%  13.4%  10.5%  33.2%  6.3%  N/A   16.0%

-22-


                  

Six Months Ended June 30, 2006

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

Nine Months Ended

September 30, 2006

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

Service revenue

  $90,951  $71,159  $60,797  $86,502  $35,452  $30,115  $(2,017) $372,959  $135,023  $108,312  $92,790  $139,901  $54,068  $44,451  $(2,981) $571,564 

Reimbursed government fee revenue

   —     22,250   —     5,782   —     —     (1,520)  26,512   —     33,610   —     8,600   —     —     (2,267)  39,943 
                                                 

Total revenue

   90,951   93,409   60,797   92,284   35,452   30,115   (3,537)  399,471   135,023   141,922   92,790   148,501   54,068   44,451   (5,248)  611,507 

Cost of service revenue

   30,100   21,307   31,940   24,933   3,380   5,976   (1,894)  115,742   44,013   32,356   49,087   41,354   5,183   8,600   (2,831)  177,762 

Government fees paid

   —     22,250   —     5,782   —     —     (1,520)  26,512   —     33,610   —     8,600   —     —     (2,267)  39,943 
                                                 

Total cost of service

   30,100   43,557   31,940   30,715   3,380   5,976   (3,414)  142,254   44,013   65,966   49,087   49,954   5,183   8,600   (5,098)  217,705 

Gross margin

   60,851   49,852   28,857   61,569   32,072   24,139   (123)  257,217   91,010   75,956   43,703   98,547   48,885   35,851   (150)  393,802 

Salaries and benefits

   25,134   11,703   8,514   32,871   13,654   11,780   13,724   117,380   37,515   17,467   12,459   51,642   20,168   17,776   20,767   177,794 

Facilities and telecommunications

   3,581   1,455   780   3,987   1,804   846   2,127   14,580   5,436   2,192   1,195   6,090   2,811   1,250   3,231   22,205 

Other operating expenses

   807   11,790   9,275   13,266   6,287   3,841   785   46,051   478   18,274   14,134   21,300   9,510   5,696   1,458   70,850 

Depreciation and amortization

   3,463   6,002   1,387   3,444   2,237   1,516   679   18,728   5,112   8,838   2,101   5,554   3,373   2,307   1,084   28,369 
                                                 

Income (loss) from operations

  $27,866  $18,902  $8,901  $8,001  $8,090  $6,156  $(17,438) $60,478  $42,469  $29,185  $13,814  $13,961  $13,023  $8,822  $(26,690) $94,584 
                                                 

Operating margin as a percentage of service revenue

  31.5%  26.9%  14.9%  10.0%  24.1%  19.8%  N/A   16.5%

Operating margin percentage

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

Six Months Ended June 30, 2005

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

Nine Months Ended

September 30, 2005

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

Service revenue

  $85,056  $39,760  $43,033  $66,779  $31,589  $14,905  $(1,846) $279,276  $128,963  $61,860  $72,252  $104,451  $49,134  $23,142  $(2,780) $437,022 

Reimbursed government fee revenue

   —     20,162   —     5,460   —     —     (1,153)  24,469   —     30,223   —     8,191   —     —     (1,745)  36,669 
                                                 

Total revenue

   85,056   59,922   43,033   72,239   31,589   14,905   (2,999)  303,745   128,963   92,083   72,252   112,642   49,134   23,142   (4,525)  473,691 

Cost of service revenue

   27,573   5,304   21,119   22,463   3,073   6,246   (1,846)  83,932   41,773   8,928   36,754   34,595   4,862   9,689   (2,788)  133,813 

Government fees paid

   —     20,162   —     5,460   —     —     (1,153)  24,469   —     30,223   —     8,191   —     —     (1,745)  36,669 
                                                 

Total cost of service

   27,573   25,466   21,119   27,923   3,073   6,246   (2,999)  108,401   41,773   39,151   36,754   42,786   4,862   9,689   (4,533)  170,482 

Gross margin

   57,483   34,456   21,914   44,316   28,516   8,659   —     195,344   87,190   52,932   35,498   69,856   44,272   13,453   8   303,209 

Salaries and benefits

   25,264   7,239   6,213   23,616   10,598   5,131   5,601   83,662   37,764   11,161   10,435   37,175   16,662   7,846   9,265   130,308 

Facilities and telecommunications

   3,404   1,207   443   3,105   1,664   505   2,442   12,770   5,320   1,839   865   4,619   2,472   801   3,059   18,975 

Other operating expenses

   1,008   9,322   7,702   8,917   4,942   1,583   4,202   37,676   1,568   14,573   12,037   14,453   7,980   2,628   4,672   57,911 

Depreciation and amortization

   3,182   2,938   998   2,475   1,980   761   66   12,400   4,942   4,403   1,639   3,846   3,003   1,146   106   19,085 
                                                 

Income (loss) from operations

  $24,625  $13,750  $6,558  $6,203  $9,332  $679  $(12,311) $48,836  $37,596  $20,956  $10,522  $9,763  $14,155  $1,032  $(17,094) $76,930 
                                                 

Operating margin percentage

   29.0%  34.6%  15.2%  9.3%  29.5%  4.6%  N/A   17.5%

Operating margin as a percentage of service revenue

  29.2%  33.9%  14.6%  9.3%  28.8%  4.5%  N/A   17.6%

Lender Services Segment

Three Months Ended JuneSeptember 30, 2006 Compared to Three Months Ended JuneSeptember 30, 2005

Service revenue was $45.6 million$44.1 and $45.9$43.9 million for the three months ended JuneSeptember 30, 2006 and 2005, respectively. The acquisition of a mortgage credit reporting business during the fourth quarter of 2005 increased revenue by $1.3 million. This is$1.2 million, and revenue from businesses owned for more than one year decreased by $1.1 million or 2.4%. The Company has been able to gain market share in the Lender Services segment to partially offset by a 3%the overall decrease in the credit reporting portion of the business, due to a decline in the overall mortgage market.and housing markets.

Cost of service revenue was $15.0$13.9 million which isas of September 30, 2006, a decrease of $.3 million compared to cost of service revenue of $14.2 million as of September 30, 2005.

Salaries and benefits were comparable to the same period in 2005.

Salaries and benefits decreased by $1.1 million. Salaries and benefits were 27.2%28.1% of service revenue infor the second quarter ofthree months ended September 2006 compared to 29.4% in28.5% during the same period ofin 2005. Salaries and benefits expense decreasedThe decrease is due to operational efficiencies consolidation of the acquired businesses,achieved, an increase in capitalized personnel costs related to software development projects and a decrease in benefit costs.

Facilities and telecommunication expenses were comparable to the same period in 2005. Facilities and telecommunication expenses were 3.8%4.2% of service revenue for the three months ended September 2006 compared to 4.4% for the same period in 2005. Facilities and telecommunication expenses decreased due to a reduction in telecommunication expenses related to the March 2005 acquisition.

Other operating expenses decreased by $.9 million. Other operating expenses were (0.7)% of service revenue in the secondthird quarter of 2006 and 4.0%1.3% in the same period of 2005.

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Other operating expenses decreased by $.5 million. Other operating expenses were 0.8% of service revenue in the second quarter of 2006 and 1.9% in the same period of 2005. The decrease in 2006 is primarily due to a reductiondecrease in Corporatecorporate related allocations, offset by an increase duein the amounts allocated to acquisitions.the Data Services segment for IT costs related to supporting the credit platform utilized to process direct to consumer oriented credit reporting solutions, and an increase in the amounts allocated to the Dealer Services and Data Services segments for shared services and product development initiatives.

Depreciation and amortization waswere comparable to the same period in 2005. Depreciation and amortization were 3.7% of service revenue for the three months ended JuneSeptember 30, 2006 compared to 3.9%4.0% in the same period in 2005. The addition of acquisition intangibles is offset by a decrease in depreciation expense from fully depreciated assets.

Income from operations was $14.4$14.6 million for the three months ended JuneSeptember 2006 compared to $12.8$13.0 million asin the same period of June 30, 2005. The operating margin percentage increased from 28.0%29.5% to 33.1% primarily due to lower cost of service revenue, lower salaries and benefit costs, and lower other operating expenses for the three months ended June 30, 2005September 2006 compared to 31.5% for the same period in 2006 primarily due to the overall decrease in operational costs related to increased efficiencies. Operating income from existing businesses increased by $1.0 million.2005.

Data Services Segment

Three Months Ended JuneSeptember 30, 2006 Compared to Three Months Ended JuneSeptember 30, 2005

Service revenue was $35.3$37.2 million for the three months ended JuneSeptember 30, 2006, an increase of $14.4$15.1 million compared to service revenue of $20.9$22.1 million in the same period of 2005. The acquisition of a lead generation business in fourth quarter 2005 accounted for $12.1$12.2 million of the revenue growth. The organic growth in this segment was 11.3%12.9% comparing the three months ended JuneSeptember 30, 2006 and 2005. The organic growth is due to new products and an increased transaction volume to current customers.

Cost of service revenue was $10.6$11.0 million for the three months ended JuneSeptember 30, 2006, an increase of $7.7$7.4 million compared to cost of service revenue of $2.9$3.6 million in the same period of 2005. The fourth quarter 2005 acquisition and the overall increase in service revenue accounted for the increase in the cost of service revenue.

Salaries and benefits increased by $2.4$1.8 million. Salaries and benefits were 16.8%15.5% of service revenue in the secondthird quarter of 2006 compared to 17.0%17.7% in the same period of 2005. The increase in expense is due to additional employees brought in through the 2005 acquisition. Approximately $.2 million of the increase is related to share-based compensation expense recorded in 2006. The decrease as a percentage of service revenue is due to operating efficiencies gained on increased revenues.

Facilities and telecommunication expenses were comparable to the same period in 2005. Facilities and telecommunication expenses were 2.1%2.0% and 2.9% of service revenue in the secondthird quarter of 2006 and 3.1% in the second quarter of 2005.2005, respectively. The decrease in the percentage is due to facilities and telecommunication expenses remaining stable as revenues increased. In addition, the acquired lead generation business’ facility and telecommunications expenses were 1% of services revenue for the three months ended September 30, 2006.

Other operating expenses increased by $.9$1.2 million. Other operating expenses were 16.2%17.5% of service revenue in the secondthird quarter of 2006 and 23.2%23.8% in the second quartersame period of 2005. The increase in other operating expenses is primarily related to the acquisition and an increase in marketing expenses related to an overall increase in advertising channels. The decrease as a percentage of service revenue is due to operating efficiencies gained on increased revenues.

Depreciation and amortization increased by $1.5 million$1.4 million. The increase is due to an increase in amortizationthe November 2005 acquisition of intangible assets of thea lead generation business acquired.business.

Income from operations was $9.3$10.3 million for the secondthird quarter of 2006 compared to $7.5$7.2 million in the secondthird quarter of 2005. The operating margin percentage decreased from 35.8%32.6% to 26.3%27.7%. The operating margin decrease is related to the sales mix and related margins. The lead generation business acquired in 2005 has a relatively lower operating margin in relation to the other businesses in the segment.segment in part due to the amortization of intangible assets.

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Dealer Services Segment

Three Months Ended JuneSeptember 30, 2006 Compared to Three Months Ended JuneSeptember 30, 2005

Service revenue was $31.2$32.0 million for the three months ended JuneSeptember 30, 2006, an increase of $7.7$2.8 million compared to service revenue of $23.5$29.2 million in the same period of 2005. Approximately $4.6 millionAn increase in transactions from market share gains accounted for substantially all of the increase is due to the May 2005 acquisition of an automotive lead generation business. The remainder is due to increased volume.growth in service revenue.

Cost of service revenue was $16.2$17.1 million for the three months ended JuneSeptember 30, 2006, an increase of $4.3$1.5 million compared to cost of service revenue of $11.9$15.6 million in the same period of 2005. Cost of service revenue was 52%53.6% of service revenue in the secondthird quarter of 2006 compared to 50.5%53.5% in the same period of 2005. An increase in transactions, higher credit data costs, and an increase in commissions paid to our partners accounted for the increase in the cost of service revenue.

Salaries and benefits decreased by $.3 million. Salaries and benefits were 12.3% of service revenue in the third quarter of 2006 compared to 14.4% in the same period of 2005. The increase is due to the 2005 acquisition and related increase in service revenue.

Salaries and benefits increased by $.7 million. Salaries and benefits were 13.3% of service revenue in the second quarter of 2006 compared to 14.7% in the same period of 2005. Salaries and benefits expense increased due to the acquisition of the automotive lead generation business, and the percentage decrease is due to operational efficienciesincreased sales volume and a decrease in benefitbenefits costs.

Facilities and telecommunication expenses were comparable for the same period in 2005. Facilities and telecommunication expenses were 1.3% of service revenue in the secondthird quarter of 2006 and 1.2%1.4% in the secondthird quarter of 2005.

Other operating expenses increased by $.6$.5 million. Other operating expenses were 15.2% of service revenue in the secondthird quarter of 20052006 and 17.6%14.8% in the same period of 2005. The increase is primarily due to an increase in consulting expenses, an increase in the 2005 acquisition.allowance reserve, and an increase in amounts allocated from the Lender Services segment for IT costs, related to supporting an increase in transactions via the credit platform utilized to process auto related credit reporting solutions, and an increase in the amounts allocated for shared services and product development initiatives.

Depreciation and amortization were comparable to the same period in 2005. Depreciation and amortization expenses were 2.2% of service revenue in the three months ended September 2006 and 2005.

Income from operations was $4.9 million for the three months ended September 2006 compared to $4.0 million for the same period in 2005. The operating margin percentage decrease isincreased from 13.6% to 15.4% primarily due to operational efficiencies realized on the increased revenues.

Depreciationincrease in revenues and amortization were comparable for the same perioda decrease in 2005.

Income from operations was $5.0 million for the three months ended June 2006 compared to $3.2 million for the same period in 2005. Operating income from existing businesses increased by $1.8 million. The operating margin percentage increased from 13.4% to 16.0% primarily due to the sales mix and related margins.benefit costs.

Employer Services Segment

Three Months Ended JuneSeptember 30, 2006 Compared to Three Months Ended JuneSeptember 30, 2005

Service revenue was $46.8$53.4 million for the three months ended JuneSeptember 30, 2006, an increase of $9.9$15.7 million compared to service revenue of $36.9$37.7 million in the same period of 2005. The increase is primarily due to acquisitions.acquisitions, specifically in the hiring solutions group. Organic growth for this segment was 1.5%. Organic growth is low due to decreased volumes in the occupational health group. In addition, the segment has seen increased volumes from the Hurricane Katrina tax credit program, offset by decreased revenue from the delayed passing of the Work Opportunity Tax Credit (“WOTC”) program.

Salaries and benefits increased by $4.2$5.2 million. Salaries and benefits were 36.0%35.2% of service revenue in the secondthird quarter of 2006 compared to 34.4%36.0% in the same period of 2005. The number of employees has increased significantly due to acquisitions and the growth of this segment in comparison to the same period in 2005. Approximately $.4 million of the increase is related to the share-based compensation expense recorded in 2006.

Facilities and telecommunication expenses increased by $.5$.6 million. Facilities and telecommunication expenses were 4.6%3.9% of service revenue in the secondthird quarter of 2006 and 4.5%4.0% in the secondthird quarter of 2005. The increase is due to the additional expense at the acquired companies for their respective facilities.

Other operating expenses increased by $1.7$2.5 million. Other operating expenses were 14.5%15.0% of service revenue in the secondthird quarter of 2006 and 13.8%14.7% for the same period of 2005. The increase in other operating expenses is due to additional costs from acquired companies offset by efficiencies gained at existing companies. There were sevennine Employer Services companies acquired in 2006.

Depreciation and amortization increased by $.4$.7 million primarily due to the addition of intangible assets related to the acquisitions.

Income from operations was $5.7$6.0 million for the three months ended JuneSeptember 2006 compared to $3.9$3.6 million for the same period in 2005. The operating margin percentage increased from 10.5%9.4% to 12.1%11.2% primarily due to higher margin product offerings in 2006 related to acquisitions.acquisitions, specifically in the hiring solutions group.

-25-


Multifamily Services Segment

Three Months Ended JuneSeptember 30, 2006 Compared to Three Months Ended JuneSeptember 30, 2005

Service revenue was $18.8$18.6 million for the three months ended JuneSeptember 30, 2006, an increase of $1.7$1.1 million compared to service revenue of $17.1$17.5 million in the same period of 2005. The increase is derived from organic growth of 3.4%2.9% and two acquisitions in the second half of 2005. The organic growth is driven by new customers and selling additional services to current customers.

Salaries and benefits increased by $1.2$.5 million. Salaries and benefits were 36.1%35.0% of service revenue for the secondthird quarter of 2006 compared to 32.7%34.6% of service revenue in the same period of 2005. Approximately $.3$.2 million of the increase is related to share-based compensation expense recorded in the secondthird quarter of 2006. The remaining increase is due to increased number of employees from acquisitions offset by efficiencies achieved by integrating these acquisitions.

Facilities and telecommunication expenses are comparable to the same period of 2005.increased by $.2 million. Facilities and telecommunication expenses were 4.8%5.4% and 4.6% of service revenue in the secondthird quarter of 2006 and 2005.2005, respectively.

Other operating expenses increased by $.9$.2 million and were 17.4%17.3% of service revenue in the secondthird quarter of 2006 compared to 14.0% in the same period ofand 2005. The increase is due primarily to an increase in professional fees, regulatory costs, and marketing costs offset by the successful integration of 2005 acquisitions.

Depreciation and amortization was comparable to the same period of 2005. Depreciation and amortization was 5.9%6.1% of service revenue in the secondthird quarter of 2006 compared to 5.7%5.8% in the same period of 2005. Amortization of intangibles increased due to acquisitions, offset by a decrease in depreciation from fully depreciated fixed assets.

Income from operations was $4.9 million in the secondthird quarter of 2006 compared to income from operations of $5.7$4.8 million in the same period of 2005. The operating margin percentage decreased from 33.2%27.5% to 26.0%26.5% due to an increase in revenue offset by increased professional fees, regulatory costs, marketing costs and compensation expense.expenses.

Investigative and Litigation Services Segment

Three Months Ended JuneSeptember 30, 2006 Compared to Three Months Ended JuneSeptember 30, 2005

Service revenue was $15.1$14.3 million for the three months ended JuneSeptember 30, 2006, an increase of $7.2$6.1 million compared to service revenue of $7.9$8.2 million in the same period of 2005. The increase is predominantly driven by the three 2005two acquisitions in this segment.the second half of 2005. These acquisitions expanded the product services in the segment, primarily electronic discovery and computer forensics.

Salaries and benefits increased by $3.2$3.3 million. Salaries and benefits were 39.1%41.8% of service revenue in the secondthird quarter of 2006 compared to 34.7%33.0% in the same period of 2005. The increases are mainly due to the acquisitions and the related increase in employees.

Facilities and telecommunication expenses were comparable to the same period in 2005. Facilities and telecommunication expenses were 2.8% of service revenue in the secondthird quarter of 2006 and 3.4%3.6% in the secondthird quarter of 2005.

Other operating expenses increased by $1.1$.8 million. Other operating expenses were 13.3%12.9% of service revenue in the secondthird quarter of 2006 and 11.0%12.7% for the same period of 2005. The increase is predominantly driven by the three 2005two acquisitions in this segment.the second half of 2005.

-26-


Depreciation and amortization increased by $.4 million. The increase ismillion due to the increase in acquisition related intangibles.

Income from operations was $3.1$2.7 million for the secondthird quarter of 2006 compared to $.5$.4 million in the same period of 2005. The operating margin percentage increased from 6.3%4.3% to 20.5%18.6%. The increase is primarily due to the acquisition in the thirdfourth quarter of 2005 of an investigative business that concentrates on higher margin electronic discovery services as opposed to surveillance services.

Corporate

Three Months Ended JuneSeptember 30, 2006 Compared to Three Months Ended JuneSeptember 30, 2005

Corporate costs and expenses represent primarily compensation and benefits for senior management, administrative staff, technology personnel and their related expenses in addition to an administrative fee paid to First American. Additional costs were incurred for the increased level of professional fees for audit related services, Sarbanes-Oxley compliance, data security, and increased staffing in the technology, accounting, human resources and legal departments to support corporate growth. The corporate expenses were $9.0$9.3 million in the secondthird quarter of 2006, an increase of $4.5 million compared to expenses of $9.3 million in the same period of 2005. The prior year includes the following charges; (a) $3.7 million related to CIG acquisition costs; (b) $2.0 million related to relocation expenses; and (c) $.3 million related to launching the Company’s brand initiative. Without these prior year expenses the increase in Corporate expenses would be $5.7 million. Approximately $3.8 million is due to an increase in salariesSalaries and benefits increased $3.4 million, of which, approximately $1.7$1.3 million is share-based compensation expense recorded in 2006 related to the adoption of SFAS No. 123R and the remaining is due to an increase in employees.employees related to overall corporate growth.

Consolidated Results

Three Months Ended JuneSeptember 30, 2006 Compared to Three Months Ended JuneSeptember 30, 2005

Consolidated service revenue for the three months ended JuneSeptember 30, 2006 was $191.7$198.6 million, an increase of $40.5$40.9 million compared to service revenue of $151.2$157.7 million in the same period in 2005. Acquisitions accounted for $35.9$36.1 million of the increase. Organic growth for the company was 3.1%.

Salaries and benefits increased by $14.4$13.8 million compared to the same period in 2005. Salaries and benefits were 30.6%30.4% of service revenue for the three months ended JuneSeptember 30, 2006 and 29.4%29.6% for the same period in 2005. The increase is related to additional employees added through acquisitions and company growth. In addition, approximately $3.1$2.5 million in expense was recorded for share-based compensation in the secondthird quarter 2006.

Facilities and telecommunication decreasedexpenses increased by $.3$1.4 million compared to the same period in 2005. Facilities and telecommunication expenses were 3.9%3.8% of service revenue in the secondthird quarter of 2006 and 5.1%3.9% in the second quartersame period of 2005. The decreaseincrease in expense is due to the $2.0 million relocation expenses recorded in 2005, offset by the increase related to acquisitions and the new corporate facilities.facilities offset by the continued integration efforts to reduce costs.

Other operating expenses increased by $1.2$4.6 million compared to the same period in 2005. Other operating expenses were 12.3%12.5% of service revenue for the three months ended JuneSeptember 30, 2006 and 14.8%12.8% compared to the same period for 2005. The decrease in other operating expenses as a percentage of service revenue is due to the continued integration of acquisitions and the prior year charges related to the CIG acquisition costs, relocation expenses and launching the Company’s brand initiative.

Depreciation and amortization increased by $2.9$3.0 million due to an overall increase in acquired intangible assets and asset additions, related to the new corporate facilities.offset by assets maturing and becoming fully depreciated.

-27-


The consolidated operating margin was 17.4%17.2% for the three months ended JuneSeptember 30, 2006, compared to 16.0%17.8% for the same period in 2005. The increasemargin decrease is related to increased expenses due to share-based compensation, regulatory and compliance costs, and intangible asset amortization, offset by continued revenue growth in addition to increased operational efficiencies and acquisitions.at existing companies.

Income from operations was $33.3$34.1 million for the three months ended JuneSeptember 30, 2006 compared to $24.2$28.1 million for the same period in 2005. The increase of $9.1$6.0 million is comprised of an increase in operating income of $1.5$1.6 million in Lender Services, $1.8$3.1 million in Data Services, $1.8$1.0 million in Dealer Services, $1.8$2.4 million in Employer Services, and $2.6$2.3 million in Investigative and Litigation Support Services, offset by decreases in operating income of $.8and $.1 million at Multifamily Services, andoffset by an increase of corporate expenses of $.3$4.5 million. The improvement in income from operations is primarily due to the 2005 acquisitions in the Investigative and Litigation Support Services and Data Services segments and the 2006 acquisitions in the Employer Services segment.

Lender Services Segment

SixNine Months Ended JuneSeptember 30, 2006 Compared to SixNine Months Ended JuneSeptember 30, 2005

Service revenue was $91.0$135.0 million for the sixnine months ended JuneSeptember 30, 2006, an increase of $5.9$6.0 million compared to service revenue of $85.1$129.0 million in the same period of 2005. The acquisition of mortgage credit reporting businesses during the first and fourth quarters of 2005 increased revenue by $8.6 million for the nine months ended September 30, 2006 as compared to same period in 2005. Service revenue increasedfrom existing businesses decreased by $2.6 million or 2.2% due to acquisitionsthe overall decrease in the housing and market share gain,mortgage markets partially offset by a declinegains in the overall mortgage market.market share.

Cost of service revenue was $30.1$44.0 million for the sixnine months ended JuneSeptember 30, 2006, an increase of $2.5$2.2 million compared to cost of service revenue of $27.6$41.8 million in the same period of 2005. CostThe acquisitions during the first and fourth quarters of 2005 accounted for the increase in the cost of service revenue.

Salaries and benefits expenses decreased $.2 million. Salaries and benefits were 27.8% of service revenue was 33.1% of service revenue infor the nine months ended September 30, 2006 compared to 32.4%29.3% in the same period of 2005. The increase is primarily due to the 2005 acquisitions.

Salaries and benefits expenses were comparableexpense decreased due to the same period in 2005. Salaries and benefits were 27.6% of service revenue for the six months ended June 30, 2006 compared to 29.7% in the same period of 2005. The slighta decrease in salariesbenefit costs, and benefits expense is due to operational efficiencies, consolidation of the acquired businesses, an increase in capitalized personnel costs related to software development projects,projects. The percentage decrease is primarily due to operational efficiencies, consolidation of the acquired businesses, and a decrease in benefit costs. This is offset by an increase in expense related to acquisitions and share-based compensation of $.4$.5 million recorded in 2006.

Facilities and telecommunication expenses were comparable to the same period in 2005. Facilities and telecommunication expenses were 3.9%4.0% of service revenue infor the first half ofnine months ended September 30, 2006 and 4.0%4.1% in the same period of 2005. Facilities and telecommunication expenses increased due to the absence in 2006 of credits from telecom vendors that were received during the same period in 2005, and due to the acquisitions. The percentage decrease is primarily due to operational efficiencies and the reduction of telecom expense in 2006 with respect to the 2005 acquisitions.

Other operating expenses decreased by $.2$1.1 million. Other operating expenses were 0.9%0.4% of service revenue infor the first half ofnine months ended September 2006 and 1.2% in the same period of 2005. The change in 2006 is primarily due to the acquisitions which increased other operating expenses, offset by a decrease in corporate related allocations, an increase in the amounts allocated to the Data Services segment for IT costs related to supporting the credit platform utilized to process direct to consumer oriented credit reporting solutions, and an increase in the amounts allocated to the Dealer Services and Data Services segments for shared services and product development initiatives.

Depreciation and amortization increased by $.3$.2 million due to an increase in amortization of intangible assets as a result of the acquisitions. Depreciation and amortization were 3.8% of service revenue as of JuneSeptember 30, 2006 comparedand 2005. The increase is primarily due to 3.7% inamortization and depreciation expense related to the same period in 2005.acquisitions.

Income from operations was $27.9$42.5 million for the sixnine months ended JuneSeptember 30, 2006 compared to $24.6$37.6 million in the same period in 2005. The operating margin percentage increased from 29.0%29.2% to 30.6%.31.5% primarily due to lower salaries and benefit costs and lower other operating expenses for the nine months ended September 2006 compared to the same period in 2005. Operating income from existing businesses increased $1.6$2.3 million.

Data Services Segment

SixNine Months Ended JuneSeptember 30, 2006 Compared to SixNine Months Ended JuneSeptember 30, 2005

Service revenue was $71.2$108.3 million for the sixnine months ended JuneSeptember 30, 2006, an increase of $31.4$46.4 million compared to service revenue of $39.8$61.9 million in the same period of 2005. Approximately $25.2$37.4 million of that increase is due to a 2005 acquisition. Organic growth was 15.5%14.6% for the segment. The organic growth is due to new products, several new customers and increased transaction volume to current customers.

Cost of service revenue was $21.3$32.4 million for the sixnine months ended JuneSeptember 30, 2006, an increase of $16.0$23.5 million compared to cost of service revenue of $5.3$8.9 million in the same period of 2005. TheApproximately $20.0 million of that increase in cost of service revenue is due to the increase sales and the acquisition of a lead generation business in November 2005.2005 acquisition.

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Salaries and benefits increased by $4.5$6.3 million. Salaries and benefits were 16.4%16.1% of service revenue in the first half ofnine months ended September 30, 2006 compared to 18.2%18.0% in the same period of 2005. The increase in salaries expense is primarily related to the 2005 acquisition and the share-based expense of $.5$.7 million recorded in 2006.2006 offset by increased efficiencies at existing businesses.

Facilities and telecommunication expenses were comparable to the same period in 2005.increased $.4 million. Facilities and telecommunication expenses were 2.0% of service revenue for the sixnine months ended JuneSeptember 30, 2006 and 3.0% in the same period of 2005.

Other operating expenses increased by $2.5$3.7 million. Other operating expenses were 16.6%16.9% of service revenue in the first half ofnine months ended September 30, 2006 and 23.4%23.6% in the same period of 2005. The increase in operating expenses is due to an increase in marketing expenses, purchased services, and credit card fees.fees and the 2005 acquisition. The decrease as a percentage of revenue is due to operating efficiencies achieved on the higher revenue for the sixnine months ended 2006.

Depreciation and amortization increased by $3.1$4.4 million due to an increase in amortization of intangible assets as a result of the acquisitions.acquisition.

Income from operations was $18.9$29.2 million for the first half ofnine months ended September 30, 2006 compared to $13.8$21.0 million in the first halfsame period of 2005. The increase is primarily related to the 2005 acquisition. The operating margin percentage decreased from 34.6%33.9% to 26.6%26.9%. The decrease in the operating margin is primarily due to the sales mix and related margins. The lead generation business acquired in 2005 has a relatively lower operating margin in relation to the other businesses in the segment.segment primarily due to amortization of intangibles.

Dealer Services Segment

SixNine Months Ended JuneSeptember 30, 2006 Compared to SixNine Months Ended JuneSeptember 30, 2005

Service revenue was $60.8$92.8 million for the sixnine months ended JuneSeptember 30, 2006, an increase of $17.8$20.5 million compared to service revenue of $43.0$72.3 million in the same period of 2005. Approximately $12.1$12.0 million is related to the acquisition of an automotive lead generation business in May 2005. The remainder is due to increased volume.customer transactions from market share gains.

Cost of service revenue was $31.9$49.1 million for the sixnine months ended JuneSeptember 30, 2006, an increase of $10.8$12.3 million compared to cost of service revenue of $21.1$36.8 million in the same period of 2005. The acquisition of an automotive lead generation business during the second quarter of 2005 accounted for $7.5 million of the increase, is due to the 2005 acquisition and the overallan increase in transactions, higher credit data costs, and an increase in commissions paid to our partners accounted for the additional increase in the cost of service revenue.

Salaries and benefits increased by $2.3$2.0 million. Salaries and benefits were 14.0%13.4% of service revenue in the first half of 2006 which is comparablecompared to 14.4% in the same period of 2005. The increase isSalaries and benefits expense increased primarily due to the 2005 acquisition.acquisition of the automotive lead generation business and $.3 million in share-based compensation recorded, and the percentage decrease is due to operational efficiencies and a decrease in benefit costs.

Facilities and telecommunication expenses increased by $.3 million. Facilities and telecommunication expenses were 1.3% of service revenue in the first half ofnine months ended September 30, 2006 and 1.0% in the first half of 2005.

Other operating expenses increased by $1.6 million. Other operating expenses were 15.3% of service revenue in the first half of 2005 and 17.9%1.2% in the same period of 2005. The decrease as aincrease is primarily due to the acquisition of the automotive lead generation business.

Other operating expenses increased by $2.1 million. Other operating expenses were 15.2% of service revenue in the nine months ended September of 2006 and 16.7% in the same period of 2005. The increase in 2006 is due primarily to the acquisition and due to an increase in the amounts allocated from the Lender Services segment for shared services and product development initiatives, and the percentage of revenuedecrease is due to operational efficiencies and management’s focusrealized on controlling costs.the increase in revenues.

Depreciation and amortization increased by $.4$.5 million due to an increase in amortization of intangible assets as a result of the acquisition.

Income from operations was $8.9$13.8 million for the sixnine months ended JuneSeptember 30, 2006 compared to $6.6$10.5 million for the same period in 2005. The operating margin percentage decreasedincreased from 15.2%14.6% to 14.6% primarily due to the impact of the acquisition in 2005.14.9%. Operating income from existing businesses increased by $2.3$3.6 million.

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Employer Services Segment

SixNine Months Ended JuneSeptember 30, 2006 Compared to SixNine Months Ended JuneSeptember 30, 2005

Service revenue was $86.5$139.9 million for the sixnine months ended JuneSeptember 30, 2006, an increase of $19.7$35.4 million compared to service revenue of $66.8$104.5 million in the same period of 2005. The increase was primarily driven by the addition of $19.3 million of revenue from acquisitions.acquisitions, specifically in the hiring solutions group. In addition, the segment has seen increased volumes from the Hurricane Katrina tax credit program, offset by decreased revenue from the delayed passing of the Work Opportunity Tax Credit (“WOTC”) program.

Salaries and benefits increased by $9.3$14.5 million. Salaries and benefits were 38.0%36.9% of service revenue in the first half ofnine months ended September 30, 2006 compared to 35.4%35.6% in the same period of 2005. The increase is primarily related to acquisitions in 2006 and in the second half of 2005 and the $.9$1.3 million in share-based compensation.compensation expense recorded.

Facilities and telecommunication expenses increased by $.9$1.5 million. Facilities and telecommunication expenses were 4.6%4.4% of service revenue infor the first half ofnine months ended September 30, 2006 and 2005. The increase in expense is primarily due to acquisitions.acquisitions and the expansion of the international background business.

Other operating expenses increased by $4.3$6.8 million. Other operating expenses were 15.3%15.2% of service revenue in the first half ofnine months ended September 30, 2006 and 13.4%13.8% for the same period of 2005. The increase is due to acquisitions and international expansion, offset by a decrease in professional fees.temporary labor at existing businesses.

Depreciation and amortization increased by $1.0$1.7 million primarily due to the addition of intangible assets related to the acquisitions.

Income from operations increased $1.8$4.2 million compared to the same period in 2005. The operating margin percentage decreasedwas 10.0% and 9.3% for the nine months ended September 30, 2006 and 2005, respectively. The increase is primarily due to acquisitions and reduction of costs from 9.3% to 9.2%.successful integration of these and prior year acquisitions offset by share-based compensation of $1.3 million.

Multifamily Services Segment

SixNine Months Ended JuneSeptember 30, 2006 Compared to SixNine Months Ended JuneSeptember 30, 2005

Service revenue was $35.5$54.1 million for the sixnine months ended JuneSeptember 30, 2006, an increase of $3.9$5.0 million compared to service revenue of $31.6$49.1 million in the same period of 2005. Acquisitions account for approximately $2.2$2.8 million of the increase. Organic growth was 5.2%4.4% for the segment.

Salaries and benefits increased by $3.1$3.5 million. Salaries and benefits were 38.5%37.3% of service revenue for the first half ofnine months ended September 30, 2006 compared to 33.5%33.9% of service revenue in the same period of 2005. The increase is related to employees added related to the acquisitions in the second half of 2005 and the share-based compensation of $.5$.7 million recorded in 2006.

Facilities and telecommunication expenses are comparable to the same period of 2005.increased by $.3 million. Facilities and telecommunication expenses were 5.1%5.2% of service revenue for the sixnine months ended JuneSeptember 30, 2006 and 5.3%5.0% for the same period in 2005.

Other operating expenses increased by $1.3$1.5 million and were 17.7%17.6% of service revenue in the first half ofnine months ended September 30, 2006 compared to 15.6%16.2% in the same period of 2005. The increase is due to acquisitions and additional professional fees related to data security and compliance.

Depreciation and amortization increased $.3$.4 million compared to the same period of 2005. Depreciation and amortization was 6.3%were comparable at approximately 6.1% of service revenue infor the first half ofnine months ended September 30, 2006 and 2005. The increase is due to amortization on intangibles related to the 2005 acquisitions.

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Income from operations was $8.1$13.0 million infor the first half ofnine months ended September 30, 2006 compared to income from operations of $9.3$14.2 million in the same period of 2005. The operating margin percentage decreased from 29.5%28.8% to 22.8%24.1%. The decrease in operating income and margins is primarily due to costs incurred in connection with increased data security and compliance, and revenue mix.

Investigative and Litigation Services Segment

SixNine Months Ended JuneSeptember 30, 2006 Compared to SixNine Months Ended JuneSeptember 30, 2005

Service revenue was $30.1$44.5 million for the sixnine months ended JuneSeptember 30, 2006, an increase of $15.2$21.4 million compared to service revenue of $14.9$23.1 million in the same period of 2005. The increase is predominantly driven by the three 2005 acquisitions. These acquisitions expanded the product services in the segment, primarily electric discovery and computer forensics.

Salaries and benefits increased by $6.6$9.9 million. Salaries and benefits were 39.1%40.0% of service revenue in the first half of 2006 compared to 34.4%33.9% in the same period of 2005. The increases are mainly due to the acquisitions and the related increase in employees. In addition, $.5 million in share-based compensation expense was recorded for the nine months ended September 30, 2006.

Facilities and telecommunication expenses increased by $.3$.4 million. Facilities and telecommunication expenses were 2.8% of service revenue for the sixnine months ended JuneSeptember 30, 2006 and 3.4%3.5% in the same period of 2005. The increase is due to the 2005 acquisitions, offset by efficiencies gained at existing businesses.

Other operating expenses increased by $2.3$3.1 million. Other operating expenses were 12.8% of service revenue in the first half ofnine months ended September 30, 2006 and 10.6%11.4% for the same period of 2005. The increase is predominantly driven by the three 2005 acquisitions.

Depreciation and amortization increased by $.8 million. The increase is$1.2 million due to the increase in acquisition related intangibles.

Income from operations was $6.2$8.8 million for the sixnine months ended JuneSeptember 30, 2006 compared to $.7$1.0 million of income from operations in the same period of 2005. The operating margin percentage increased from 4.6%4.5% to 20.4%19.8%. The increase is primarily due to the acquisition in the third quarter of 2005 of an investigative business that concentrates on higher margin electronic discovery services as opposed to surveillance services.

Corporate

SixNine Months Ended JuneSeptember 30, 2006 Compared to SixNine Months Ended JuneSeptember 30, 2005

Corporate costs and expenses represent primarily compensation and benefits for senior management, administrative staff, technology personnel and their related expenses in addition to an administrative fee paid to First American. Additional costs were incurred for the increased level of professional fees for audit related services, Sarbanes-Oxley compliance, data security and increased staffing in the technology, accounting, human resources and legal departments to support corporate growth. The prior year expense amount includes the following charges; (a) $3.2 million related to CIG acquisition costs; (b) $2.0 million related to relocation expenses; and (c) $.6 million related to launching the Company’s brand initiative. The corporate expenses were $17.4$26.7 million for the sixnine months ended JuneSeptember 30, 2006, an increase of $9.6 million compared to expenses of $12.3 million in the same period of 2005. Approximately $8.1Salaries and benefits increased $11.5 million is due to an increase in salariescorporate growth and benefits, of which, approximately $3.2$4.5 million is share-based compensation expense recorded in 2006 related to the adoption of SFAS No. 123R. The prior year includes the following charges; (a) $3.7 million related to CIG acquisition costs; (b) $2.0 million related to relocation expenses; and (c) $.3 million related to launching the Company’s brand initiative.

-31-


Consolidated Results

SixNine Months Ended JuneSeptember 30, 2006 Compared to SixNine Months Ended JuneSeptember 30, 2005

Consolidated service revenue for the sixnine months ended JuneSeptember 30, 2006 was $373.0$571.6 million, an increase of $93.7$134.6 million compared to service revenue of $279.3$437.0 million in the same period in 2005. Acquisitions accounted for $80.7$118.3 million of the increase. Organic growth for the nine months ended September 30, 2006 was 4.0% compared to the same period in 2005.

Salaries and benefits were 31.5%31.1% of service revenue for the sixnine months ended JuneSeptember 30, 2006 and 30.0%29.8% for the same period in 2005. The increase is related to additional employees added through acquisitions and company growth. In addition, approximately $6.0$8.5 million in expense was recorded for share-based compensation in first half ofnine months ended September 30, 2006.

Facilities and telecommunication increased by $1.8$3.2 million compared to the same period in 2005. Facilities and telecommunication expenses were 3.9% of service revenue infor the first half ofnine months ended September 2006 and 4.6%4.3% in the same period of 2005. Approximately $2.0 million in relocation expenses was recorded in 2005. The increase in facilities and telecommunication expenses is primarily due to acquisitions and increased costs related to the new corporate facilities.

Other operating expenses increased by $8.4$12.9 million compared to the same period in 2005. Other operating expenses were 12.3%12.4% of service revenue for the sixnine months ended JuneSeptember 30, 2006 and 13.5%13.3% compared to the same period for 2005. The increase is due to acquisitions, and increased marketing, legal and professional fees.

Depreciation and amortization increased by $6.3$9.3 million due to an overall increase in amortization of intangible assets as a result of acquisitions and asset additions related to the new corporate facilities.property, plant and equipment additions.

Income from operations was $60.5$94.6 million for the sixnine months ended JuneSeptember 30, 2006 compared to $48.8$76.9 million for the same period in 2005. The increase of $11.7$17.7 million is comprised of an increase in operating income of $3.2$4.9 million in Lender Services, $5.2$8.2 million in Data Services, $2.3$3.3 million in Dealer Services, $1.8$4.2 million in Employer Services and $5.5$7.8 million in Investigative and Litigation Support Services offset by decreasesa decrease in operating income $1.2of $1.1 million at Multifamily Services and an increase of corporate expenses of $5.1$9.6 million.

The consolidated operating margin was 16.2%16.5% for the sixnine months ended JuneSeptember 30, 2006, compared to 17.5%17.6% for the same period in 2005. The decrease in margin is primarily due to the increase in infrastructure, security and compliance costs incurred to support company-wide growth.

Liquidity and Capital Resources

The Company’s primary source of liquidity is cash flow from operations and amounts available under credit lines the Company has established with a bank. As of JuneSeptember 30, 2006, cash and cash equivalents were $19.1$31.1 million.

Net cash provided by operating activities was $25.7$61.9 million and $9.1$41.1 million for the sixnine months ended JuneSeptember 30, 2006 and 2005, respectively.

Cash provided by operating activities increased by $16.6$20.8 million from the sixnine months ended JuneSeptember 30, 2005 to the same period in 2006. Net income was $29.4$48.0 million infor the first half ofnine months ended September 30, 2006 and $26.2$42.2 million for the same period in 2005. The increase in cash provided by operating activities was primarily due to the increase in net income, the share-based compensation expense recorded in 2006, an increase in minority interest expense and an increase in depreciation and amortization, offset by payments made for accrued liabilities (including $23.2$30.4 million for income tax), accrued compensation, and accounts payable.

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Cash used in investing activities was $37.7$50.0 million and $20.5$33.9 million for the sixnine months ended JuneSeptember 30, 2006 and 2005, respectively. In the first half of 2006, net cashCash in the amount of $25.7$31.0 million was used for acquisitions compared to $20.8 million infor the nine months ended September 30, 2006 and 2005. Purchases of property and equipment were $13.0$19.5 million in the first half of 2006 compared to $7.3$10.7 million in the same period of 2005.

Cash used in financing activities was $9.2 million for the nine months ended September 30, 2006, compared to cash provided by financing activities was $2.7of $.2 million for the sixnine months ended June 30, 2006, compared to $9.4 million for the six months ended JuneSeptember 30, 2005. In the first twothree quarters of 2006, proceeds from existing credit facilities were $32.8$42.9 million compared to $33.0$114.0 million in 2005. Repayment of debt was $31.5$54.0 million for the sixnine months ended JuneSeptember 30, 2006 and $15.5$95.2 million in the same period of 2005. Approximately $9.3$22.3 million in distributions were made to First American in 2005 prior to the CIG merger.

Certain acquisitions have success consideration payments or earn-out provisions included in the purchase agreements. At September 30, 2006, the Company estimates that approximately $25.7 million in additional consideration will be recorded in the next twelve months in connection with these acquisitions. Approximately $5.9 million of this amount is related to the purchase of a portion of the minority interests of a subsidiary. The actual amount of the consideration is dependent upon the future operating results of the respective acquisitions.

First Advantage filed a Registration Statement with the Securities and Exchange Commission for the issuance of up to 5,000,000 shares of our Class A common stock, par value $.001 per share, from time to time as full or partial consideration for the acquisition of businesses, assets or securities of other business entities. The Registration Statement was declared effective on January 9, 2006. A total of 812,290836,344 shares were issued for acquisitions completed through JuneSeptember 30, 2006.

First Advantage filed a Registration Statement with the Securities and Exchange Commission for the issuance of up to 2,000,000 shares of our Class A common stock, par value $.001 per share, from time to time for general corporate purposes. The Registration Statement was declared effective on January 3, 2005. No shares have been issued through JuneSeptember 30, 2006.

In 2006, First Advantage seeks to acquire other businesses as part of its growth strategy. The Company will continue to evaluate acquisitions in order to achieve economies of scale, expand market share and enter new markets. The extent of future acquisitions, however, is dependent upon the availability of capital and liquidity to fund such acquisitions.

While uncertainties within the Company’s industry exist, management is not aware of any trends or events likely to have a material adverse effect on liquidity or the accompanying financial statements. The Company believes that, based on current levels of operations and anticipated growth, the Company’s cash flow from operations, together with available sources of liquidity, will be sufficient to fund operations, anticipated capital expenditures, make required payments of principal and interest on debt, and satisfy other long-term contractual commitments. However, any material adverse change in our operating results from our business plan, or acceleration of existing debt obligations or in the amount of investment in acquisitions, technology or products could require the Company to seek other funding alternatives including raising additional capital.

The following is a schedule of long-term contractual commitments, as of JuneSeptember 30, 2006, over the periods in which they are expected to be paid.

 

(In thousands)  2006  2007  2008  2009  2010  Thereafter  Total

Advertising commitments

  $105  $20  $—    $—    $—    $—    $125

Minimum contract purchase commitments

   1,701   2,673   2,298   195   195   —     7,062

Operating leases

   10,432   17,866   14,019   10,814   7,996   24,761   85,888

Debt and capital leases

   14,042   20,517   16,609   7,099   169,360   —     227,627

Interest payments related to debt (1)

   7,162   13,096   12,040   11,191   8,138     51,627
                            

Total

  $33,442  $54,172  $44,966  $29,299  $185,689  $24,761  $372,329
                            

(In thousands) 2006 2007 2008 2009 2010 Thereafter Total

Advertising commitments

 $141 $314 $—   $—   $—   $—   $455

Minimum contract purchase commitments

  1,443  3,228  2,740  511  195  —    8,117

Operating leases

  5,534  18,630  14,816  11,566  8,345  24,689  83,580

Debt and capital leases

  6,840  21,680  16,662  6,699  163,500  —    215,381

Interest payments related to debt (1)

  3,529  13,410  12,349  11,495  8,291  —    49,074
                     

Total

 $17,487 $57,262 $46,567 $30,271 $180,331 $24,689 $356,607
                     

(1)Estimated interest payments are calculated assuming current interest rates over minimum maturity periods specified in debt agreements.

 

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

The Company considered the provision of Financial Reporting Release No. 48 “Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent In Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments.” The Company had no holdings of derivative financial instruments at JuneSeptember 30, 2006 and our total liabilities as of JuneSeptember 30, 2006 consist primarily of notes payable, accounts payable and accrued liabilities. Although the Company has operations in certain foreign countries, these operations, in the aggregate, are not material to the Company’s financial condition or results of operations.

The Company’s fixed rate debt consists primarily of uncollateralized term notes. In addition, the Company has $189.5$183.0 million of variable rate debt outstanding. A 1%100 basis point increase in interest rates, due to increased rates nationwide, would result in $1.9$1.8 million additional annual interest payments which could be significant to the Company.

 

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Item 4.Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, have concluded that, as of the end of the fiscal quarter covered by this report on Form 10-Q, the Company’s disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports filed or submitted under such Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There was no change in the Company’s internal control over financial reporting during the quarter ended JuneSeptember 30, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1.Legal Proceedings

First Advantage’s subsidiaries are involved in litigation from time to time in the ordinary course of their businesses. The Company does not believe that the outcome of any pending or threatened litigation involving these entities will have a material adverse effect on our financial position, operating results or cash flows.

A subsidiary of the Company is a defendant in a class action lawsuit that is pending in federal court in New York. The plaintiffs allege that our subsidiary, directly and through its agents, violated the Fair Credit Reporting Act, New York’s Fair Credit Reporting Act and New York’s Deceptive Practices Act by failing to use reasonable procedures to ensure the maximum possible accuracy when issuing tenant reports. The action seeks injunctive and declaratory relief, compensatory, punitive and statutory damages, plus attorneys’ fees and costs. The Company does not believe that the ultimate resolution of this action will have a material adverse affect on its financial condition, results of operations or cash flows.

Two subsidiaries are defendants in separate class action lawsuits that are pending in state court in California. The plaintiffs in both cases allege that our subsidiaries, directly and through their agents, violated the California Consumer Credit Reporting Agencies Act and California Business and Professions Code by failing to use reasonable procedures to ensure the maximum possible accuracy when issuing tenant reports. The actions seek injunctive relief, an accounting, restitution, statutory damages, interest, punitive damages and attorneys’ fees and costs. The Company does not believe that the ultimate resolution of these actions will have a material adverse affect on its financial condition, results of operations or cash flows.

 

Item 1A.Risk Factors

There have been no material changes from the risk factors previously disclosed in the Company’s Form 10-K for Fiscal Year Ending December 31, 2005.

 

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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None

 

Item 3.Defaults Upon Senior Securities

None

 

Item 4.Submission of Matters to a Vote of Security Holders

(a) The annual meeting of the shareholders (the “Meeting”) of First Advantage Corporation (the “Company”) was held on May 11, 2006.

(b) The names of the persons who were nominated to serve as directors of the Company for the ensuing year are listed below, together with a tabulation of the results of the voting with respect to each nominee. Each of the persons named was recommended by the Board of Directors and Nominating Committee of the Company and all such nominees were elected.None

 

Name of Nominee

 

Votes For

 

Votes Withheld

Parker Kennedy

 

486,710,775

 

  19,512

John Long

 

486,709,679

 

  20,608

J. David Chatham

 

486,663,910

 

  66,377

Barry Connelly

 

486,663,144

 

  67,143

Lawrence Lenihan

 

486,482,510

 

247,777

Frank McMahon

 

486,709,784

 

  20,503

Donald Nickelson

 

486,488,933

 

241,354

Donald Robert

 

486,484,897

 

245,390

Adelaide Sink

 

486,487,898

 

242,389

D. Van Skilling

 

486,664,689

 

  65,598

David Walker

 486,661,158 

  69,129

(c) No other matters were voted upon at the meeting.

Item 5.Other Information

None

 

Item 6.Exhibits

 

(a)Exhibits

 

31.1  Certification pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2  Certification pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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32.1  Certifications pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2  Certifications pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FIRST ADVANTAGE CORPORATION

(Registrant)

 

Date: August 7, 2006By:

  /s/ JOHN LONG

  

FIRST ADVANTAGE CORPORATION

        (Registrant)

Date: November 8, 2006

By:

   John Long/s/    JOHN LONG        
   

John Long

Chief Executive Officer

Date: August 7,November 8, 2006  

By:

  /s/ JOHN LAMSON

   John Lamson/s/    JOHN LAMSON        
   

John Lamson

Chief Financial Officer


EXHIBIT INDEX

 

Exhibit No.  

Description

31.1  Certification pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2  Certification pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1  Certifications pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2  Certifications pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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