FIRST ADVANTAGE CORP 10-Q

Item 1. Financial Statements First Advantage Corporation Consolidated Financial Statements (Unaudited) For the Three and Nine Months Ended September 30, 2009 and 2008 3 Table of Contents First Advantage Corporation Consolidated Balance Sheets (Unaudited) (in thousands) September 30, December 31, Assets 2009 2008 Current assets: Cash and cash equivalents $ 57,784 $ 52,361 Accounts receivable (less allowance for doubtful accounts of $11,520 and $8,345, respectively) 115,870 121,531 Prepaid expenses and other current assets 8,929 9,032 Income tax receivable 11,968 - Due from affiliates 3,180 - Deferred income tax asset 18,929 16,695 Total current assets 216,660 199,619 Property and equipment, net 76,638 81,807 Goodwill 753,547 731,369 Customer lists, net 45,820 53,813 Other intangible assets, net 14,375 17,245 Database development costs, net 12,406 11,837 Marketable equity securities 48,293 30,365 Other assets 5,994 3,684 Total assets $ 1,173,733 $ 1,129,739 Liabilities and Equity Current liabilities: Accounts payable $ 35,382 $ 38,404 Accrued compensation 27,605 32,423 Accrued liabilities 14,462 11,379 Deferred income 5,704 7,381 Income tax payable - 2,609 Due to affiliates - 714 Current portion of long-term debt and capital leases 20,446 9,891 Total current liabilities 103,599 102,801 Long-term debt and capital leases, net of current portion 1,028 22,938 Deferred income tax liability 76,826 61,652 Other liabilities 4,897 5,300 Total liabilities 186,350 192,691 Equity: First Advantage Corporation's stockholders' equity: Preferred stock, $.001 par value; 1,000 shares authorized, no shares issued or outstanding - - Class A common stock, $.001 par value; 125,000 shares authorized; 12,095 and 11,772 shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively 12 12 Class B common stock, $.001 par value; 75,000 shares authorized; 47,727 shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively 48 48 Additional paid-in capital 502,411 502,600 Retained earnings 425,637 390,602 Accumulated other comprehensive income (loss) 14,414 (412 ) Total First Advantage Corporation's stockholders' equity 942,522 892,850 Noncontrolling interests 44,861 44,198 Total equity 987,383 937,048 Total liabilities and equity $ 1,173,733 $ 1,129,739 The accompanying notes are an integral part of these consolidated financial statements. 4 Table of Contents First Advantage Corporation Consolidated Statements of Income (Unaudited) (in thousands, except per share amounts) For the Three Months Ended For the Nine Months Ended September 30, September 30, 2009 2008 2009 2008 Service revenue $ 155,980 $ 174,664 $ 510,688 $ 545,341 Reimbursed government fee revenue 13,586 13,633 39,905 40,780 Total revenue 169,566 188,297 550,593 586,121 Cost of service revenue 51,429 53,520 191,030 160,723 Government fees paid 13,586 13,633 39,905 40,780 Total cost of service 65,015 67,153 230,935 201,503 Gross margin 104,551 121,144 319,658 384,618 Salaries and benefits 49,920 59,113 151,217 188,489 Facilities and telecommunications 6,741 7,789 20,265 24,073 Other operating expenses 18,453 19,899 56,397 65,642 Depreciation and amortization 10,993 10,898 32,574 31,520 Impairment loss - 1,720 - 2,017 Total operating expenses 86,107 99,419 260,453 311,741 Income from operations 18,444 21,725 59,205 72,877 Other (expense) income: Interest expense (234 ) (640 ) (903 ) (2,140 ) Interest income 103 155 387 746 Total other (expense), net (131 ) (485 ) (516 ) (1,394 ) Income from continuing operations before income taxes 18,313 21,240 58,689 71,483 Provision for income taxes 6,898 8,932 23,856 29,582 Income from continuing operations 11,415 12,308 34,833 41,901 Loss from discontinued operations, net of tax - - - (4,241 ) Net income 11,415 12,308 34,833 37,660 Less: Net loss attributable to noncontrolling interest (35 ) (323 ) (202 ) (648 ) Net income attributable to First Advantage Corporation ("FADV") $ 11,450 $ 12,631 $ 35,035 $ 38,308 Basic income per share: Income from continuing operations attributable to FADV shareholders $ 0.19 $ 0.21 $ 0.59 $ 0.72 Loss from discontinued operations attributable to FADV shareholders, net of tax - - - (0.07 ) Net income attributable to FADV shareholders $ 0.19 $ 0.21 $ 0.59 $ 0.65 Diluted income per share: Income from continuing operations attributable to FADV shareholders $ 0.19 $ 0.21 $ 0.59 $ 0.72 Loss from discontinued operations attributable to FADV shareholders, net of tax - - - (0.08 ) Net income attributable to FADV shareholders $ 0.19 $ 0.21 $ 0.59 $ 0.64 Weighted-average common shares outstanding: Basic 59,803 59,478 59,722 59,358 Diluted 60,086 59,529 59,867 59,446 Amounts attributable to FADV shareholders: Income from continuing operations $ 11,450 $ 12,631 $ 35,035 $ 42,549 Loss from discontinued operations, net of tax - - - (4,241 ) Net income $ 11,450 $ 12,631 $ 35,035 $ 38,308 The accompanying notes are an integral part of these consolidated financial statements. 5 Table of Contents First Advantage Corporation Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended Nine Months Ended (in thousands) September 30, September 30, 2009 2008 2009 2008 Net income $ 11,415 $ 12,308 $ 34,833 $ 37,660 Other comprehensive income (loss) , net of tax: Foreign currency translation adjustments 1,495 (4,515 ) 4,298 (2,435 ) Unrealized gain (loss) on investment, net of tax 2,795 4,174 10,528 (25,483 ) Total other comprehensive income (loss) , net of tax 4,290 (341 ) 14,826 (27,918 ) Comprehensive income 15,705 11,967 49,659 9,742 Less: Comprehensive loss attributable to the noncontrolling interest (35 ) (323 ) (202 ) (648 ) Comprehensive income attributable to FADV $ 15,740 $ 12,290 $ 49,861 $ 10,390 The accompanying notes are an integral part of these consolidated financial statements. 6 Table of Contents First Advantage Corporation Consolidated Statement of Changes in Equity For the Nine Months Ended September 30, 2009 (Unaudited) Accumulated (in thousands) Common Common Additional Other Stock Stock Paid-in Retained Comprehensive Noncontrolling Shares Amount Capital Earnings (Loss) Income Interests Total Balance at December 31, 2008 59,499 $ 60 $ 502,600 $ 390,602 $ (412 ) $ 44,198 $ 937,048 Net income - - - 35,035 - (202 ) 34,833 Purchase of subsidiary shares from noncontrolling interest - - (6,779 ) - - 865 (5,914 ) Class A Shares issued in connection with share based compensation 323 - 830 - - - 830 Share based compensation - - 5,760 - - - 5,760 Foreign currency translation - - - - 4,298 - 4,298 Unrealized gain on investment, net of tax - - - - 10,528 - 10,528 Balance at September 30, 2009 59,822 $ 60 $ 502,411 $ 425,637 $ 14,414 $ 44,861 $ 987,383 The accompanying notes are an integral part of these consolidated financial statements. 7 Table of Contents First Advantage Corporation Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2009 and 2008 (Unaudited) (in thousands) For the Nine Months Ended September 30, 2009 2008 Cash flows from operating activities: Net income $ 34,833 $ 37,660 Loss from discontinued operations - (4,241 ) Income from continuing operations $ 34,833 $ 41,901 Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization 32,574 31,520 Impairment loss - 2,017 Bad debt expense 7,013 5,867 Share based compensation 5,760 7,344 Deferred income tax 3,132 4,288 Change in operating assets and liabilities, net of acquisitions: Accounts receivable (2,220 ) 13,206 Prepaid expenses and other current assets 9 541 Other assets (2,597 ) (790 ) Accounts payable (2,908 ) (5,433 ) Accrued liabilities 4,069 (1,478 ) Deferred income (1,630 ) (938 ) Due from affiliates (3,894 ) (5,825 ) Income tax accounts (12,072 ) (52,452 ) Accrued compensation and other liabilities (5,050 ) (6,739 ) Net cash provided by operating activities - continuing operations 57,019 33,029 Net cash provided by operating activities - discontinued operations - 754 Cash flows from investing activities: Database development costs (2,955 ) (3,203 ) Purchases of property and equipment (14,517 ) (24,337 ) Cash paid for acquisitions (19,465 ) (51,191 ) Proceeds from sale of assets 900 - Cash balance of companies acquired - 331 Net cash used in investing activities - continuing operations (36,037 ) (78,400 ) Net cash provided by investing activities - discontinued operations - 1,721 Cash flows from financing activities: Proceeds from long-term debt 50,860 100,260 Repayment of long-term debt (62,260 ) (85,455 ) Cash contributions from First American to LeadClick Holdings, LLC - 2,402 Proceeds from class A shares issued in connection with stock option plan and employee stock purchase plan 830 4,566 Cash paid for acquisition of noncontrolling interests (5,914 ) (8,008 ) Distribution to noncontrolling interests - (1,127 ) Tax expense related to stock options - (204 ) Net cash (used in) provided by financing activities (16,484 ) 12,434 Effect of exchange rates on cash 925 (648 ) Increase (decrease) in cash and cash equivalents 5,423 (31,110 ) Cash and cash equivalents at beginning of period 52,361 76,060 Change in cash and cash equivalents of discontinued operations - 540 Cash and cash equivalents at end of period $ 57,784 $ 45,490 The accompanying notes are an integral part of these consolidated financial statements. 8 Table of Contents First Advantage Corporation Consolidated Statements of Cash Flows, continued For the Nine Months Ended September 30, 2009 and 2008 (Unaudited) For the Nine Months Ended (in thousands) September 30, 2009 2008 Supplemental disclosures of cash flow information: Cash paid for interest $ 684 $ 2,106 Cash received for income tax refunds $ 1,081 $ 1,248 Cash paid for income taxes $ 33,996 $ 75,661 Non-cash investing and financing activities: Notes issued in connection with acquisitions $ - $ 3,026 Class A shares issued for compensation $ 4,997 $ 2,788 Unrealized gain (loss) on investment, net of tax $ 10,528 $ (25,483 ) The accompanying notes are an integral part of these consolidated financial statements. 9 Table of Contents First Advantage Corporation Notes to Consolidated Financial Statements 1. Organization and Nature of Business First Advantage Corporation (the “Company” or “First Advantage” or “FADV”) is a global risk mitigation and business solutions provider and operates in five primary business segments: Credit Services, Data Services, Employer Services, Multifamily Services, and Investigative and Litigation Support Services. In the first quarter of 2009, the Company consolidated the previous Lender Services and Dealer Services segments and moved the consumer credit business from the Data Services segment to create the Credit Services segment. The prior periods have been recast to reflect the changed segments. The First American Corporation and its affiliates (“First American”) currently own or control, directly or indirectly, all of the Company's Class B shares of common stock, which represents approximately 80% of equity interests of the Company and approximately 98% of the voting power of the Company as of September 30, 2009. The Class B common stock owned by First American is entitled to ten votes per share on all matters presented to the stockholders for vote. On October 8, 2009, First American issued a press release announcing the commencement of an exchange offer (the “Offer”) to acquire all of the outstanding shares of the Company’s Class A common stock (“Class A Shares”) not owned or controlled by First American at an exchange ratio of 0.58 of a First American common share per Class A Share ( See Note 11 – Subsequent Event) . On October 9, 2009, First American filed a Registration Statement on Form S-4 with the Securities and Exchange Commission (the “SEC”), which contains the Offer to Exchange and related materials. On that same day, the Company filed with the SEC a Solicitation/Recommendation on Schedule 14D-9 pursuant to which the Special Committee of the Board of Directors of the Company recommended on behalf of the Board of Directors of the Company, that the stockholders of the Company accept the Offer and tender their shares pursuant to the Offer. The Offer is described in further detail in Note 11 – Subsequent Event. In the event that the Offer is accepted and consummated in the fourth quarter, operating results for the fourth quarter will be negatively impacted due to related costs. As further described in Note 11 – Subsequent Event, u pon meeting certain conditions, First American has announced that it intends to merge the Company with a wholly-owned subsidiary of First American. This merger will constitute a “Change in Control” under the FADV 2003 Incentive Compensation Plan (“the Plan”). Upon a Change in Control, the unvested awards of stock options, restricted stock units and restricted stock issued under the Plan will vest and the unamortized costs of those awards will be expensed. At September 30, 2009, the unamortized compensation expense was approximately $8.5 million and approximately $0.9 million related to the unvested restricted stock and unvested options, respectively. In addition, Morgan Stanley is acting as the Company’s financial advisor related to the Offer. Pursuant to the terms of Morgan Stanley’s engagement, in the event that the Offer is accepted, the Company has agreed to pay Morgan Stanley a transaction fee which is currently estimated to be approximately $3.0 million. 10 Table of Contents First Advantage Corporation Notes to Consolidated Financial Statements For the three and nine months ended September 30, 2009, the Company incurred approximately $1.6 million in legal expenses related to the Offer and related litigation and expects additional professional fees in the fourth quarter related to the Offer and related litigation. As part of the Company’s streamlining initiative, in the second quarter of 2008, First Advantage sold First Advantage Investigative Services (“FAIS”), which was included in our Investigative and Litigation Support Services segment, and Credit Management Solutions, Inc. (“CMSI”), which was included in our Credit Services segment. The results of these businesses’ operations in the prior period are presented in discontinued operations in the Company’s Consolidated Statements of Income. 2. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial information included in this report has been prepared in accordance with the instructions to Form 10-Q and does not include all of the information and notes required by generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments are of a normal, recurring nature and are considered necessary for a fair statement of the results for the interim period. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 and as amended on the Current Form 8-K filed on October 8, 2009 with the Securities and Exchange Commission. Certain amounts for the three and nine months ended September 30, 2008 and at December 31, 2008 have been reclassified to conform with the 2009 presentation. Operating results for the three and nine months ended September 30, 2009 and 2008 are not necessarily indicative of the results that may be expected for the entire fiscal year. Subsequent events have been evaluated through October 29, 2009, the date these financial statements were issued. As of September 30, 2009, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, have not changed from December 31, 2008, except for the adoption of the Financial Accounting Standards Board's (“FASB”) GAAP updates related to business combinations, noncontrolling interest in consolidated financial statements, subsequent events, 11 Table of Contents First Advantage Corporation Notes to Consolidated Financial Statements interim disclosures about fair value of financial instruments, and FASB Accounting Standards Codification. Purchase Accounting In December 2007, the FASB updated GAAP related to business combinations. This update retains the fundamental requirements in previous statements that the acquisition method of accounting (which is called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. In general, the update 1) broadens the guidance, extending its applicability to all events where one entity obtains control over one or more other businesses, 2) broadens the use of fair value measurements used to recognize the assets acquired and liabilities assumed, 3) changes the accounting for acquisition related fees and restructuring costs incurred in connection with an acquisition, and 4) increases required disclosures. The Company will apply the provisions of this update prospectively to business combinations for which the acquisition date is on or after January 1, 2009. Noncontrolling Interest In December 2007, the FASB updated GAAP related to noncontrolling interests in consolidated financial statements. This update requires that a noncontrolling interest in a subsidiary be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest be identified in the consolidated financial statements. It also requires consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. The Company has applied the provisions of this update effective beginning on January 1, 2009 and the adoption did not have a material effect on its consolidated financial statements. Fair Value of Financial Instruments In April 2009, the FASB updated GAAP related to interim disclosures about fair value of financial instruments. This amends previous statements, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This also requires those disclosures in summarized financial information at interim reporting periods. This is effective for interim reporting periods ending after June 15, 2009. The update does not require disclosures for earlier periods presented for comparative purposes at initial 12 Table of Contents First Advantage Corporation Notes to Consolidated Financial Statements adoption. In periods after initial adoption, this update requires comparative disclosures only for periods ending after initial adoption. The Company adopted this new standard effective April 1, 2009. The carrying amount of the Company’s financial instruments at September 30, 2009 and December 31, 2008, which includes cash and cash equivalents, marketable equity securities and accounts receivable, approximates fair value because of the short maturity of those instruments. The Company’s marketable equity securities are classified as available for sale securities. Unrealized holding gains and losses for available for sale securities are excluded from earnings and reported, net of taxes, as accumulated other comprehensive (loss) income. The Company considers its variable rate debt to be representative of current market rates and, accordingly, estimates that the recorded amounts approximate fair market value. Fair value estimates of its fixed rate debt were determined using discounted cash flow methods with a discount rate of 3.25%, which are the estimated rates that similar instruments could be negotiated at September 30, 2009 and December 31, 2008. The estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, are summarized as follows: September 30, 2009 December 31, 2008 (in thousands) Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value Cash and cash equivalents $ 57,784 $ 57,784 $ 52,361 $ 52,361 Accounts receivable 115,870 115,870 121,531 121,531 Marketable equity securities 48,293 48,293 30,365 30,365 Long-term debt and capital leases (21,474 ) (21,508 ) (32,829 ) (32,699 ) Subsequent Events In May 2009, the FASB updated GAAP related to subsequent events. The update establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. It is effective for reporting periods ending after June 15, 2009. The Company adopted this update effective April 1, 2009. Accounting Standards Codification The FASB has adopted the FASB Accounting Standards Codification (the “Codification”) as the single authoritative source for GAAP, replacing the mix of accounting standards that have evolved over the last 50 plus years. The Codification is effective for financial statements that cover interim and annual periods ending after September 15, 2009. While not intended to change GAAP, the Codification significantly changes the way in which accounting literature is organized. It's now organized by accounting topic, which should enable users to more quickly identify the guidance that applies to a specific accounting issue. The Company adopted this new standard effective September 15, 2009. 3. Acquisitions During the nine months ended September 30, 2009, the Company paid consideration of approximately $19.5 million in cash related to earnout provisions from prior year acquisitions, approximately $5.1 million for the final purchase of a portion of noncontrolling interests in LeadClick Media, Inc, and $0.8 million for an additional portion of noncontrolling interest in PrideRock Holding Company. The additional 13 Table of Contents First Advantage Corporation Notes to Consolidated Financial Statements consideration related to earnout provisions was recorded to goodwill and the purchase of noncontrolling interests was recorded to additional paid in capital when paid. The changes in the carrying amount of goodwill, by operating segment, are as follows for the nine months ended September 30, 2009: Acquisitions, Adjustments Balance at (Disposals) to net assets Balance at (in thousands) December 31, 2008 and Earnouts acquired September 30, 2009 Credit Services $ 107,578 $ - $ - $ 107,578 Data Services 218,505 (611 ) - 217,894 Employer Services 272,461 2,266 3,308 278,035 Multifamily Services 49,174 - - 49,174 Investigative and Litigation Support Services 83,651 17,199 16 100,866 Consolidated $ 731,369 $ 18,854 $ 3,324 $ 753,547 The adjustments to net assets acquired represent post acquisition adjustments for those companies acquired in the past periods. 4. Discontinued Operations As discussed in Note 1, as part of the Company’s streamlining initiative, in the second quarter of 2008, the Company sold FAIS, which was included in our Investigative and Litigation Support Services segment, and CMSI, which was included in our Credit Services segment. The results of these businesses’ operations in the prior period are presented in discontinued operations in the Company’s Consolidated Statements of Income. The following amounts have been segregated from continuing operations and are reflected as discontinued operations for the nine months ended September 30, 2008. 14 Table of Contents First Advantage Corporation Notes to Consolidated Financial Statements Nine months ended September 30, (in thousands, except per share amounts) 2008 Total revenue $ 7,671 Loss from discontinued operations before income taxes $ (7,155 ) Income tax benefit (2,914 ) Loss from discontinued operations, net of tax $ (4,241 ) Loss per share: Basic $ (0.07 ) Diluted $ (0.08 ) Weighted-average common shares outstanding: Basic 59,358 Diluted 59,446 5. Goodwill and Intangible Assets In accordance with GAAP, the Company will perform the goodwill impairment test for all reporting units in the fourth quarter of 2009. There have been no impairments of goodwill during the nine months ended September 30, 2009. Given the current economic environment and the uncertainties regarding the impact on the Company’s business, there can be no assurance that the Company’s estimates and assumptions regarding the duration of the ongoing economic downturn, or the period or strength of recovery, made for purposes of the Company’s goodwill impairment testing during the year ended December 31, 2008 will prove to be accurate predictions of the future. If the Company’s assumptions regarding forecasted revenue or margin growth rates of certain reporting units are not achieved, the Company may be required to record additional goodwill impairment losses in connection with the Company’s next annual impairment testing in the fourth quarter of 2009 or in future periods. It is not possible at this time to determine if any such future impairment loss would result or, if it does, whether such charge would be material. 15 Table of Contents First Advantage Corporation Notes to Consolidated Financial Statements Goodwill and other identifiable intangible assets as of September 30, 2009 and December 31, 2008 are as follows: (in thousands) September 30, 2009 December 31, 2008 Goodwill $ 753,547 $ 731,369 Customer lists $ 93,757 $ 95,446 Less accumulated amortization (47,937 ) (41,633 ) Customer lists, net $ 45,820 $ 53,813 Other identifiable intangible assets: Noncompete agreements $ 9,097 $ 11,783 Trade names 20,468 21,631 29,565 33,414 Less accumulated amortization (15,190 ) (16,169 ) Other identifiable intangible assets, net $ 14,375 $ 17,245 Amortization of customer lists and other identifiable intangible assets totaled approximately $3.6 million and $5.3 million for the three months ended September 30, 2009 and 2008, respectively, and approximately $11.0 million and $13.8 million for the nine months ended September 30, 2009 and 2008, respectively. An impairment loss of $1.3 million was recorded for the three and nine months ended September 30, 2008 in the Credit Services segment. The charge is related to the write-off of the net book value of the automotive lead generation business’ identifiable intangible assets and customer list. The impairment loss was incurred due to the challenging credit market and the negative impact to the automotive lead generation business. Estimated amortization expense relating to intangible asset balances as of September 30, 2009, is expected to be as follows over the next five years: (in thousands) Remainder of 2009 $ 3,609 2010 13,956 2011 11,323 2012 10,231 2013 8,831 Thereafter 12,245 $ 60,195 16 Table of Contents First Advantage Corporation Notes to Consolidated Financial Statements The changes in the carrying amount of identifiable intangible assets are as follows for the nine months ended September 30, 2009: Other Identifiable Intangible Customer (in thousands) Assets Lists Balance, at December 31, 2008 $ 17,245 $ 53,813 Adjustments 37 57 Amortization (2,907 ) (8,050 ) Balance, at September 30, 2009 $ 14,375 $ 45,820 6. Debt Long-term debt consists of the following at September 30, 2009: (in thousands, except percentages) Acquisition notes: Weighted average interest rate of 3.64% with maturities through 2011 $ 9,657 Bank notes: $225 million Secured Credit Facility, interest at 30-day LIBOR plus 1.13% (1.37% at September 30, 2009) matures September 2010 10,000 Capital leases and other debt: Various interest rates with maturities through 2011 1,817 Total long-term debt and capital leases $ 21,474 Less current portion of long-term debt and capital leases 20,446 Long-term debt and capital leases, net of current portion $ 1,028 At September 30, 2009, the Company was in compliance with the financial covenants of its loan agreement. In the event that the First American Offer is accepted and consummated with a merger, this may be determined to be an “Event of Default,” under the terms of the Credit Agreement. 17 Table of Contents 7. Earnings Per Share A reconciliation of earnings per share and weighted-average shares outstanding is as follows: Three Months Ended Nine Months Ended (in thousands, except per share amounts) September 30, September 30, 2009 2008 2009 2008 Income from continuing operations attributable to FADV shareholders $ 11,450 $ 12,631 $ 35,035 $ 42,549 Loss from discontinued operations attributable to FADV shareholders, net of tax - - - (4,241 ) Net income attributable to FADV shareholders $ 11,450 $ 12,631 $ 35,035 $ 38,308 Denominator: Weighted-average shares for basic earnings per share 59,803 59,478 59,722 59,358 Effect of restricted stock 255 42 135 72 Effect of dilutive securities - employee stock options and warrants 28 9 10 16 Denominator for diluted earnings per share 60,086 59,529 59,867 59,446 Earnings per share: Basic Income from continuing operations attributable to FADV shareholders $ 0.19 $ 0.21 $ 0.59 $ 0.72 Loss from discontinued operations attributable to FADV shareholders, net of tax - - - (0.07 ) Net income attributable to FADV shareholders $ 0.19 $ 0.21 $ 0.59 $ 0.65 Diluted Income from continuing operations attributable to FADV shareholders $ 0.19 $ 0.21 $ 0.59 $ 0.72 Loss from discontinued operations attributable to FADV shareholders, net of tax - - - (0.08 ) Net income attributable to FADV shareholders $ 0.19 $ 0.21 $ 0.59 $ 0.64 For the three months ended September 30, 2009 and 2008, options and warrants totaling 2,962,431 and 3,999,719, respectively, were excluded from the weighted average diluted shares outstanding, as they were antidilutive. For the nine months ended September 30, 2009 and 2008, options and warrants totaling 3,162,930 and 3,895,234, respectively, were excluded from the weighted average diluted shares outstanding, as they were antidilutive. 8. Share-Based Compensation In the first quarter of 2008, the Company changed from granting stock options as the primary means of share-based compensation to granting restricted stock units (“RSU”). The fair value of any RSU grant is based on the market value of the Company’s shares on the date of the grant and is recognized as compensation expense over the vesting period. RSUs generally vest over three years at a rate of 33.3% for the first two years and 33.4% for last year. Restricted stock activity since December 31, 2008 is summarized as follows: Weighted (in thousands, except weighted average fair value prices) Average Number of Grant-Date Shares Fair Value Nonvested restricted stock outstanding at December 31, 2008 632 $ 21.93 Restricted stock granted 423 $ 10.89 Restricted stock forfeited (30 ) $ 17.99 Restricted stock vested (253 ) $ 23.06 Nonvested restricted stock outstanding at September 30, 2009 772 $ 15.66 18 Table of Contents First Advantage Corporation Notes to Consolidated Financial Statements The following table illustrates the share-based compensation expense recognized for the three and nine months ended September 30, 2009 and 2008. Three Months Ended Nine Months Ended September 30, September 30, (in thousands) 2009 2008 2009 2008 Stock options $ 457 $ 1,165 $ 1,578 $ 3,875 Restricted stock 1,363 1,169 4,109 3,357 Employee stock purchase plan 20 26 73 112 $ 1,840 $ 2,360 $ 5,760 $ 7,344 Stock option activity under the Company’s stock plan since December 31, 2008 is summarized as follows: Weighted Aggregate (in thousands, except exercise prices) Number of Average Intrinsic Shares Exercise Price Value Options outstanding at December 31, 2008 3,492 $ 23.06 $ 863 Options exercised (26 ) $ 15.51 Options forfeited (294 ) $ 24.66 Options outstanding at September 30, 2009 3,172 $ 22.98 $ 697 Options exercisable, end of the quarter 2,956 $ 22.83 $ 692 The following table summarizes information about stock options outstanding at September 30, 2009: (in thousands, except for exercise prices, years and weighted average amounts) Options Outstanding Options Exercisable Weighted Avg Weighted Weighted Remaining Contractual Average Average Range of Exercise Prices Shares Life in Years Exercise Price Shares Exercise Price $ 7.00 - $ 12.50 9 1.9 $ 11.13 9 $ 11.13 $ 12.51 - $ 25.00 2,075 4.6 $ 20.90 2,018 $ 20.91 $ 25.01 - $ 50.00 1,084 6.1 $ 26.97 925 $ 27.01 $ 50.01 - $242.25 4 1.8 $ 50.25 4 $ 50.25 3,172 2,956 The Company had outstanding warrants to purchase up to 41,462 shares of its common stock at exercise prices of $12.05 per share as of September 30, 2009. The weighted average remaining contractual life in years for the warrants outstanding is 1.68. 9. Income Taxes The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and foreign jurisdictions. 19 Table of Contents First Advantage Corporation Notes to Consolidated Financial Statements With few exceptions, the Company is no longer subject to U.S. federal examinations by tax authorities for years before 2005, and state and local, and non-U.S. income tax examinations by tax authorities before 2003. In April 2009, the Internal Revenue Service (“IRS”) concluded an examination of First Advantage’s consolidated 2005 federal income tax return without any material adjustments. In March 2009, the IRS initiated an examination of First Advantage’s consolidated 2006 and 2007 federal income tax returns, which the Company does not anticipate will result in material adjustments. As of September 30, 2009, the Company has a $4.9 million total liability recorded for unrecognized tax benefits as well as a $0.5 million total liability for income tax related interest. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $3.3 million. The majority of the unrecognized tax benefits that would affect the effective tax rate and associated interest relates to foreign operations. The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. The Company does not currently anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease by the end of 2009. 10. Segment Information The Company operates in five primary business segments: Credit Services, Data Services, Employer Services, Multifamily Services, and Investigative and Litigation Support Services. In the first quarter of 2009, the Company consolidated the previous Lender Services and Dealer Services segments and moved the consumer credit business from the Data Services segment to create the Credit Services segment. The prior periods have been recast to reflect the changed segments. The Credit Services segment include business lines that offer lenders credit reporting solutions for mortgage and home equity needs, that provide consumer credit reporting services and serve the automotive dealer marketplace by delivering consolidated consumer credit reports. The Data Services segment includes business lines that provide transportation credit reporting, motor vehicle record reporting, fleet management, criminal records reselling, specialty finance credit reporting, and lead generation services. Revenue for the Data Services segment includes $0.9 million and $1.2 million of inter-segment sales for the three months ended September 30, 2009 and 2008, respectively, and $2.8 million and $4.0 million of inter-segment sales for the nine months ended September 30, 2009 and 2008, respectively. The Employer Services segment includes employment background screening, occupational health services, tax incentive services and hiring solutions. Products and services relating to employment background screening include criminal records searches, employment and education verification, social security number verification 20 Table of Contents First Advantage Corporation Notes to Consolidated Financial Statements and credit reporting. Occupational health services include drug-free workplace programs, physical examinations and employee assistance programs. Hiring solutions include applicant tracking software, recruiting services and outsourced management of payroll and human resource functions. Tax incentive services include services related to the administration of employment-based and location-based tax credit and incentive programs, sales and use tax programs and fleet asset management programs. Revenue for the Employer Services segment includes $0.6 million of inter-segment sales for the nine months ended September 30, 2009 and 2008. 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 $0.2 million of inter-segment sales for each of the three months ended September 30, 2009 and 2008, and $0.5 million of inter-segment sales for the nine months ended September 30, 2009 and 2008. The Investigative and Litigation Support Services segment includes all investigative services. Products and services offered by the Investigative and Litigation Support Services segment includes computer forensics, electronic discovery, due diligence reports and other high level investigations. The elimination of intra-segment revenue and cost of service revenue is included in Corporate. These transactions are recorded at cost. Service revenue for international operations included in the Employer Services segment was $8.0 million and $11.9 million for the three months ended September 30, 2009 and 2008, respectively, and $21.4 million and $35.3 million for the nine months ended September 30, 2009 and 2008, respectively. Service revenue for international operations included in the Investigative and Litigation Support Services segment was $0.4 million and $7.6 million for the three months ended September 30, 2009 and 2008, respectively, and $1.3 million and $32.3 million for the nine months ended September 30, 2009 and 2008, respectively. 21 Table of Contents First Advantage Corporation Notes to Consolidated Financial Statements The following table sets forth segment information for the three and nine months ended September 30, 2009 and 2008. (in thousands) Service Depreciation Income (Loss) Three Months Ended September 30, 2009 Revenue and Amortization From Operations Assets Credit Services $ 59,443 $ 1,533 $ 12,489 $ 202,380 Data Services 25,514 2,435 3,590 298,524 Employer Services 41,731 3,771 3,929 388,095 Multifamily Services 19,879 1,542 7,268 84,458 Investigative and Litigation Support Services 9,804 724 1,337 120,971 Corporate and Eliminations (391 ) 988 (10,169 ) 79,305 Consolidated $ 155,980 $ 10,993 $ 18,444 $ 1,173,733 Three Months Ended September 30, 2008 Credit Services $ 60,837 $ 1,728 $ 7,063 $ 196,406 Data Services 21,922 2,570 3,680 312,606 Employer Services 54,199 3,255 6,644 408,139 Multifamily Services 19,702 1,444 6,654 87,782 Investigative and Litigation Support Services 18,600 837 6,347 111,259 Corporate and Eliminations (596 ) 1,064 (8,663 ) 64,606 Consolidated $ 174,664 $ 10,898 $ 21,725 $ 1,180,798 Nine Months Ended September 30, 2009 Credit Services $ 191,567 $ 4,470 $ 44,820 $ 202,380 Data Services 113,456 7,367 11,389 298,524 Employer Services 119,350 11,058 6,110 388,095 Multifamily Services 57,467 4,553 20,521 84,458 Investigative and Litigation Support Services 30,224 2,176 2,753 120,971 Corporate and Eliminations (1,376 ) 2,950 (26,388 ) 79,305 Consolidated $ 510,688 $ 32,574 $ 59,205 $ 1,173,733 Nine Months Ended September 30, 2008 Credit Services $ 202,723 $ 4,480 $ 35,371 $ 196,406 Data Services 60,422 7,601 11,214 312,606 Employer Services 163,397 9,629 13,119 408,139 Multifamily Services 58,037 4,242 17,995 87,782 Investigative and Litigation Support Services 63,281 2,460 23,407 111,259 Corporate and Eliminations (2,519 ) 3,108 (28,229 ) 64,606 Consolidated $ 545,341 $ 31,520 $ 72,877 $ 1,180,798 22 Table of Contents First Advantage Corporation Notes to Consolidated Financial Statements 11. Subsequent Event Proposed Offer to Exchange by First American On October 8, 2009, First American commenced an exchange offer (the “Offer”) to acquire all of the outstanding shares of the Company’s Class A common stock (“Class A Shares”) not owned or controlled by First American at an exchange ratio of 0.58 of a First American common share per Class A Share. The offer is scheduled to expire at 5:00 P.M. on Tuesday, November 10, 2009 (the “Expiration Time”). First American has stated that the offer is conditioned upon, among other things, satisfaction of the “Minimum Condition”, which means that there must be validly tendered, and not properly withdrawn prior to the Expiration Time, at least a majority of the Class A Shares owned by stockholders other than certain parties described in the Offer as the “Excluded Parties.” As of October 26, 2009, there were 12,098,680 Class A Shares outstanding, of which we believe 632,544 Class A Shares are held by Excluded Parties. Accordingly, we believe that at least 5,733,069 Class A Shares not owned by the Excluded Parties would have to be validly tendered into the Offer, and not have been properly withdrawn, as of the Expiration Time, in order to satisfy this condition. In addition, among others, the following conditions must also be satisfied or waived (except as noted below): • the Merger Condition — which means there must be sufficient Class A Shares validly tendered, and not properly withdrawn as of the Expiration Time, such that once such tendered Class A Shares are purchased by First American in the Offer, First American will own or control at least 90% of the outstanding Class A Shares (after giving effect to the conversion of the Class B Shares into Class A Shares on a one-for-one basis). We calculate that, based on the number of outstanding Class A Shares as of October 26, 2009, approximately 6,112,774 Class A Shares would have to be tendered in order to satisfy this condition; • the Registration Statement Effectiveness Condition — which means the registration statement on Form S-4 filed by First American shall have been declared effective by the Securities and Exchange Commission (the “SEC”); • the Listing Condition — which means the First American common shares to be issued in the Offer and the Merger shall have been approved for listing on the New York Stock Exchange; and • the absence of legal impediments to the Offer or the Merger and other General Conditions. The Minimum Condition, the Registration Statement Effectiveness Condition and the Listing Condition will not be waived in the Offer. The Merger Condition is waivable in First American’s sole discretion. In the event that all of the conditions to the Offer have 23 Table of Contents First Advantage Corporation Notes to Consolidated Financial Statements not been satisfied or waived at the then scheduled Expiration Time, First American may, in its discretion, extend the Expiration Time in such increments as it may determine. However, First American is under no obligation to extend the Offer if the conditions have not been satisfied, or waived if permitted, as of the Expiration Time. If the Offer is not consummated the market price of the Class A Shares may decline. The conditions to the Offer are for the sole benefit of First American and may be asserted by it in its sole discretion, regardless of the circumstances giving rise to such conditions, or, except as set forth above, may be waived by First American, in whole or in part, in its sole discretion, whether or not any other condition of the Offer also is waived. First American has also announced that if the Merger Condition is satisfied and First American consummates the Offer, First American will convert (or cause to be converted) all of the Class B Shares that it owns or controls into Class A Shares and cause all such Class A Shares and the Class A Shares acquired by First American in the Offer to be contributed to Algonquin Corp., a wholly-owned subsidiary of First American (“Merger Sub”). If First American consummates the Offer, and thereafter owns or controls 90% or more of the outstanding Class A Shares (after giving effect to the conversion of Class B Shares into Class A Shares on a one-for-one basis), First American has stated that it shall promptly thereafter effect a short form merger with Merger Sub merging into First Advantage (the “Merger”) unless prohibited by court order or other applicable legal requirement. As provided by Delaware law, the Merger may be effected without the approval of First Advantage’s board of directors or any remaining public stockholders. If First American consummates the Offer and does not own or control 90% or more of the outstanding Class A Shares (after giving effect to the conversion of Class B Shares into Class A Shares on a one-for-one basis), First American will use commercially reasonable efforts to acquire additional Class A Shares such that after such acquisition, Merger Sub owns or controls at least 90 % of each class of the issued and outstanding capital stock of First Advantage (after giving effect to the conversion of Class B Shares into Class A Shares on a one-for-one basis); provided, however, that such use of commercially reasonable efforts to acquire additional Class A Shares shall not require First American to exchange more than 0.58 of a First American share (or equivalent value) for any Class A Share. In such event, once First American owns or controls 90% or more of the outstanding Class A Shares (after giving effect to the conversion of Class B Shares into Class A Shares on a one-for-one basis), First American shall effect the Merger promptly thereafter unless prohibited by court order or other applicable legal requirement. As a result of the Merger, any Class A Shares not previously purchased by First American in the Offer (and in subsequent purchases, if any) would be converted into First American common shares at the Exchange Ratio, other than the Class A Shares in respect of which appraisal rights have been properly perfected under Delaware law. On October 8, 2009, First American filed the Offer to Exchange and related materials with the SEC on a Registration Statement on Form S-4. In addition, on October 8, 2009, the Company filed with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9. Stockholders are urged to read the Offer to Exchange and related materials and the Solicitation/Recommendation Statement and any amendments thereto 24 Table of Contents First Advantage Corporation Notes to Consolidated Financial Statements filed from time to time, because they will contain important information. Stockholders will be able to obtain a free copy of the Offer to Exchange and related materials and the Solicitation/Recommendation Statement at the SEC’s website at www.sec.gov . In addition, the Solicitation/Recommendation Statement, as well as the Company’s other public SEC filings, can be obtained at www.fadv.com . Stockholders may also read and copy any reports, statements and other information filed by First American or the Company with the SEC at the SEC public reference room at 100 F Street N.E., Washington, D.C. 20549. Please call the SEC at (800) 732-0330 or visit the SEC’s website for further information on its public reference room. 25 Table of Contents