| FIRST ADVANTAGE CORP Item 1A Risk Factors |
| You should consider carefully the following risk factors, as well as the other information contained elsewhere in this Annual Report on Form 10-K We face risks other than those listed here, including those that are unknown to us and others of which we may be aware but, at present, consider immaterial |
| Because of the following factors, as well as other variables affecting our operating results, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods |
| We are controlled by First American and as a result other stockholders have little or no influence over stockholders’ decisions |
| As a result of the June 5, 2003 mergers and our acquisition of First American’s CIG and related businesses, First American owns 100prca of our Class B common stock, which have ten votes per share compared to one vote per share of our Class A common stock |
| Consequently, First American controls over 98prca of the total voting power of First Advantage and, therefore, First American has the right to control the outcome of any matter submitted for the vote or consent of First Advantage’s stockholders, unless a separate class vote is required under Delaware law |
| First American has the voting power to control the election of our board of directors and is able to cause an amendment of our certificate of incorporation or bylaws |
| First American also may be able to cause changes in our business without seeking the approval of any other party |
| These changes may not be beneficial to us or in the best interest of our other stockholders |
| For example, First American has the power to prevent, delay or cause a change in control and could take other actions that might be favorable to First American, but not necessarily to other stockholders |
| Similarly, subject to restrictions contained in the standstill agreement entered into as part of the June 5, 2003 mergers, First American has the voting power to exercise a controlling influence over our business and affairs and has the ability to make decisions concerning such things as: • mergers or other business combinations; • purchases or sales of assets; • offerings of securities; • indebtedness that we may incur; and • payments of any dividends |
| We cannot assure you that First American’s ownership of our common stock or its relationship with us will not have a material adverse effect on our overall business strategy or on the market price of our Class A common stock |
| Under Nasdaq corporate governance rules, if a single stockholder holds more than 50prca of the voting power of a company, that company is considered a “controlled company |
| ” A controlled company is exempt from the Nasdaq rules requiring that a majority of the company’s board of directors be independent directors and that the compensation and nomination committees be comprised solely of independent directors |
| First American owns more than 50prca of the voting power of First Advantage and we may take advantage of such exemptions afforded to controlled companies |
| First American could sell its controlling interest in us and therefore we could eventually be controlled by an unknown third party |
| Subject to certain restrictions, First American could elect to sell all or a substantial or controlling portion of its equity interest in us to a third party without offering to our other stockholders the opportunity to participate in the transaction |
| If another party acquires First American’s interest in us, that third party may be able to control us in the same manner that First American is able to control us |
| A sale to a third party also may adversely affect the 12 ______________________________________________________________________ market price of our Class A common stock because the change in control may result in a change in management decisions, business policy and our attractiveness to future investors |
| We have very little operating history as an independent company |
| Before June 5, 2003, we had no operating history as a separate public company |
| Several members of our management team have never operated a stand-alone public company |
| We may need additional capital in order to finance operations or pursue acquisitions |
| Accordingly, we may have to obtain our own financing for operations and perform most of our own administrative functions |
| There can be no assurance that we will be able to develop successfully the financial and managerial resources and structure necessary to operate as an independent public company, or that our available financing and anticipated cash flow from operations will be sufficient to meet all of our cash requirements |
| We are dependent on information suppliers |
| If we are unable to manage successfully our relationships with a number of these suppliers, the quality and availability of our services may be harmed |
| We obtain some of the data used in our services from third party suppliers and government entities |
| If a number of suppliers are no longer able or are unwilling to provide us with certain data, we may need to find alternative sources |
| If we are unable to identify and contract with suitable alternative data suppliers and integrate these data sources into our service offerings, we could experience service disruptions, increased costs and reduced quality of our services |
| Additionally, if one or more of our suppliers terminates our existing agreements, there is no assurance that we will obtain new agreements with third party suppliers on terms favorable to us, if at all |
| Loss of such access or the availability of data in the future due to increased governmental regulation or otherwise could have a material adverse effect on our business, financial condition or results of operations |
| We may be subject to increased regulation regarding the use of personal information |
| Certain data and services we provide are subject to regulation by various federal, state and local regulatory authorities |
| Compliance with existing federal, state and local laws and regulations has not had a material adverse effect on our results of operations or financial condition to date |
| Nonetheless, federal, state and local laws and regulations in the United States designed to protect the public from the misuse of personal information in the marketplace and adverse publicity or potential litigation concerning the commercial use of such information may increasingly affect our operations and could result in substantial regulatory compliance expense, litigation expense and a loss of revenue |
| We face significant security risks related to our electronic transmission of confidential information |
| We rely on encryption and other technologies to provide system security to effect secure transmission of confidential or personal information |
| We may license these technologies from third parties |
| There is no assurance that our use of applications designed for data security, or that of third-party contractors will effectively counter evolving security risks |
| A security or privacy breach could: • expose us to liability; • increase our expenses relating to resolution of these breaches; • deter customers from using our services; and • deter suppliers from doing business with us |
| 13 ______________________________________________________________________ Any inability to protect the security and privacy of our electronic transactions could have a material adverse effect on our business, financial condition or results of operations |
| First Advantage may be adversely affected by recent high-profile events involving data theft at a number of information services companies |
| Several information services companies that are competitors of First Advantage have recently been involved in high-profile events involving data theft |
| These incidents or similar data theft incidents in the future could impact First Advantage |
| In particular, these events could result in increased legal and regulatory scrutiny of the industry in general and specific information services companies in particular and changes in federal, state and local laws and regulations in the United States designed to protect the public from the misuse of personal information in the marketplace |
| Changes in the laws and adverse publicity or potential litigation concerning the commercial use of such information may affect First Advantage’s operations and could result in substantial regulatory compliance expense, litigation expense and a loss of revenue |
| We could face liability based on the nature of our services and the content of the materials provided which may not be covered by insurance |
| We may face potential liability from individuals, government agencies or businesses for defamation, invasion of privacy, negligence, copyright, patent or trademark infringement and other claims based on the nature and content of the materials that appear or are used in our products or services |
| Any imposition of liability, particularly liability that is not covered by insurance or is in excess of our insurance coverage, could have a material adverse effect on our business, financial condition or results of operations |
| We may not be able to pursue our acquisition strategy |
| Our strategy is to grow through acquisitions |
| For example, since January 1, 2005, we completed fifteen acquisitions |
| We may not be able to identify suitable acquisition candidates, obtain the capital necessary to pursue our acquisition strategy or complete acquisitions on satisfactory terms |
| A number of our competitors also have adopted the strategy of expanding and diversifying through acquisitions |
| We likely will experience competition in our effort to execute on our acquisition strategy, and we expect the level of competition to increase |
| As a result, we may be unable to continue to make acquisitions or may be forced to pay more for the companies we are able to acquire |
| The integration of companies we acquire may be difficult and may result in a failure to realize some of the anticipated potential benefits of our acquisitions |
| When we acquire companies or businesses, we may not be able to integrate or manage these businesses so as to produce returns that justify the investment |
| Any difficulty in successfully integrating or managing the operations of the businesses could have a material adverse effect on our business, financial condition, results of operations or liquidity, and could lead to a failure to realize any anticipated synergies |
| Our management also will be required to dedicate substantial time and effort to the integration of our acquisitions |
| These efforts could divert management’s focus and resources from other strategic opportunities and operational matters |
| Successful integration of the Credit Information Group into First Advantage is dependent on several factors, and the failure to realize the expected benefits of the acquisition of the Credit Information Group could have an adverse effect on our operations |
| First Advantage acquired the Credit Information Group from First American in September 2005, and, as a result, First Advantage significantly increased the size of its operations and business |
| The integration of the Credit Information Group into the operations of First Advantage and its subsidiaries involves the integration of 14 ______________________________________________________________________ several businesses that previously operated independently |
| We cannot assure you that First Advantage will be able to integrate the operations of the Credit Information Group without encountering difficulties |
| Any difficulty in integrating the operations of the Credit Information Group successfully could have a material adverse effect on the business, financial condition, results of operations or prospects of First Advantage, and could lead to a failure to realize the anticipated benefits of the acquisition |
| Moreover, First Advantage’s management will be required to dedicate substantial time and effort to the integration of the Credit Information Group |
| During the integration process, these efforts could divert management’s focus and resources from other strategic opportunities and operational matters |
| The continued success of the Credit Information Group is dependent on a number of factors, some of which may be beyond First Advantage’s control |
| A substantial proportion of the revenue of the Credit Information Group is derived from the resale to end users of credit reports provided exclusively by the three repositories of credit information in the United States |
| In certain transactions, such as those involving the resale of residential property, end users require the Credit Information Group to provide a credit report derived from merged information supplied by all three repositories |
| These repositories also sell credit reports directly to end users |
| There can be no assurance that a credit repository will not attempt to gain a competitive advantage over the Credit Information Group by increasing the price it charges the Credit Information Group for credit reports or by selling credit reports to end users at a lower price than the Credit Information Group can offer |
| Such practices may make the credit report products of the Credit Information Group less profitable or less attractive to end-users and, thus, may have a material adverse effect on the results of operations or financial condition of the Credit Information Group |
| In addition, a portion of the Credit Information Group’s revenues that may in the future be received under an outsourcing agreement with First American are dependent upon the performance of RELS, LLC (“RELS”), an entity that is managed and controlled by First American, and thus are beyond the control of First Advantage |
| The commercial arrangements under which RELS provides services and it derives revenues are based on agreements with RELS’ single customer, which is the other member of RELS, whose interests may be different from and/or adverse to First Advantage |
| These underlying arrangements are terminable with little or no notice |
| Accordingly, there can be no assurances as to revenues, if any, that may in the future be received by First Advantage under the outsourcing agreement |
| The loss of such revenues could be material to First Advantage |
| In connection with its acquisition of the Credit Information Group, First Advantage entered into a new services agreement under which First American agrees to provide a number of key services to First Advantage |
| Under this agreement, First American and its affiliates agree to serve as the exclusive resellers of credit reports and related services compiled by the Credit Information Group to the mortgage market |
| First American has agreed to provide these services for only a limited period of time, and there is no guarantee that First American will continue to provide these services to First Advantage following the expiration of the term of the applicable service under the amended and restated services agreement, or continue the price or other terms on which First American might be willing to do so |
| In addition, since the sale of Credit Information Group reports and services in the mortgage industry will be made exclusively by First American, the sale of these reports and services will be in accordance with the terms of the amended and restated services agreement, and there can be no assurances as to the future amount of such sales or level of services beyond the term or in excess of the levels required under the services agreement |
| Finally, demand for a substantial portion of the Credit Information Group’s products generally decreases as the number of lending transactions in which the Credit Information Group’s products are purchased decreases |
| Management of the Credit Information Group has found that the number of lending transactions in which the Credit Information Group’s products are purchased decreases when interest rates are high, the supply of funds for borrowing are limited or the United States economy is weak |
| First Advantage believes that this trend could continue when these factors occur |
| 15 ______________________________________________________________________ We may not be able to realize the entire book value of goodwill from acquisitions |
| As of December 31, 2005, we have approximately dlra606 million of goodwill |
| We have implemented the provisions of Statement of Financial Accounting Standards (“SFAS”) Nodtta 142, “Goodwill and Other Intangible Assets,” which requires that existing goodwill not be amortized, but instead be assessed annually for impairment or sooner if circumstances indicate a possible impairment |
| We will monitor for impairment of goodwill on past and future acquisitions |
| In the event that the book value of goodwill is impaired, any such impairment would be charged to earnings in the period of impairment |
| There can be no assurances that future impairment of goodwill under SFAS Nodtta 142 will not have a material adverse effect on our business, financial condition or results of operations |
| The goodwill valuation is performed by management |
| We currently do not plan to pay dividends |
| We intend to retain future earnings, if any, which may be generated from operations to help finance the growth and development of our business |
| As a result, we do not anticipate paying dividends to stockholders for the foreseeable future |
| Our business depends on technology that may become obsolete |
| We use the US SEARCH DARWIN^™ technology and other information technology to better serve our clients and reduce costs |
| These technologies likely will change and may become obsolete as new technologies develop |
| Our future success will depend upon our ability to remain current with the rapid changes in the technologies used in our business, to learn quickly to use new technologies as they emerge and to develop new technology-based solutions as appropriate |
| If we are unable to do this, we could be at a competitive disadvantage |
| Our competitors may gain exclusive access to improved technology, which also could put us at a competitive disadvantage |
| If we cannot adapt to these changes, our business, financial condition or results of operations may be materially effected in an adverse manner |
| Our Class A common stock has minimal liquidity due to its small public float |
| Although as of December 31, 2005 there were approximately 56 million total shares of First Advantage common stock outstanding, approximately 77prca are owned by First American, approximately 6prca are owned by Experian and approximately 4prca are held of record by Pequot Private Equity Fund II, LP Currently only approximately 13prca of our issued and outstanding shares are freely transferable without restriction under the Securities Act |
| Accordingly, only a small number of shares of First Advantage actually trade—between January 1, 2005 and December 31, 2005 the average daily trading volume of our Class A common stock was approximately 56cmam000 shares per trading day |
| Consequently, our stockholders may have difficulty selling shares of our Class A common stock |
| Significant stockholders may sell shares of our common stock that may cause our share price to fall |
| Subject to certain restrictions, First American may at any time convert each of its shares of our Class B common stock into one share of Class A common stock |
| First American or Pequot may transfer shares of our common stock in a privately-negotiated transaction or to affiliates or stockholders |
| Any transfers, sales or distributions by First American or Pequot of a substantial amount of our Class A common stock in the marketplace, or to stockholders, or the market perception that these transfers, sales or distributions could occur, could materially and adversely affect the prevailing market prices for our Class A common stock |
| Conflict of interest may arise because certain of our directors and officers are also directors and officers of First American |
| Certain persons associated with the Company have a continuing relationship with First American |
| Parker Kennedy, Chairman of the Board of First Advantage, also serves as Chief Executive Officer and Chairman of 16 ______________________________________________________________________ First American and as an executive officer and board member of certain of its affiliates |
| As such he may have great influence on our business decisions |
| Kennedy, currently associated with First American, was asked to serve as a director and officer of First Advantage because of his knowledge of, and experience with, our business and its operations |
| Kennedy owns stock, and options to acquire stock, of First American |
| Additionally, two of our directors, David Chatham and D Van Skilling serve on the First American board |
| These affiliations with both First American and First Advantage could create, or appear to create, potential conflicts of interest when this director and executive officer is faced with decisions that could have different implications for First American and First Advantage |
| We are a party to a stockholders agreement that may impact corporate governance |
| First Advantage, First American and Pequot have entered into a stockholders agreement pursuant to which First American has agreed to vote as many of its shares in First Advantage as is necessary to ensure that our board of directors has no more than ten members and that a representative of Pequot who meets certain requirements is elected a director of First Advantage or, at Pequot’s request, a board observer of First Advantage |
| Pequot’s right to designate a board member or observer will continue until such time as Pequot and its affiliates’ collective ownership of First Advantage stock is less than 75prca of the holdings Pequot received in the June 5, 2003 mergers |
| As a result of this arrangement and First American’s dominant ownership position in First Advantage, holders of First Advantage Class A common stock (other than Pequot) will have little or no ability to cause a director selected by such holders to be appointed to our board of directors and, consequently, little or no ability to influence the direction or management of First Advantage |
| Our results of operations may be affected by the seasonality of our business |
| Historically, we have seen a decrease in our volumes in certain segments of our business, in particular our enterprise screening segment, due to the holiday season and inclement weather that results in declines in hiring and apartment rental activity |
| Accordingly, there may be a decrease in earnings in the first and fourth quarter as compared to the second and third quarter |
| We cannot assure that our stock price will not fall |
| The market price of our Class A common stock could be subject to significant fluctuations |
| Among the factors that could affect our stock price are: • quarterly variations in our operating results; • changes in revenue or earnings estimates or publication of research reports by analysts; • failure to meet analysts’ revenue or earnings estimates; • speculation in the press or investment community; • strategic actions by us or our competitors, such as acquisitions or restructurings; • actions by institutional stockholders; • general market conditions; • domestic and international economic factors unrelated to our performance; and • changes in internal controls over financial reporting |
| If we raise additional capital by issuing equity securities, the issuance will result in ownership dilution to our existing stockholders |
| The extent of the dilution will vary based upon the amount of capital raised |