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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number: 001-13069
CHOICEPOINT INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-2309650
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1000 Alderman Drive Alpharetta, Georgia 30005
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(Address of principal executive offices) (Zip Code)
(770) 752-6000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1997
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Common Stock, $.10 Par Value 14,630,032
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CHOICEPOINT INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
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Page No.
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Part I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Statements of Income -
Three Months Ended September 30, 1997 and 1996 and
Nine months Ended September 30, 1997 and 1996 3
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 4
Consolidated Statement of Shareholders' Equity -
Nine months Ended September 30, 1997 5
Consolidated Statements of Cash Flows -
Nine months Ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 13-15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Part II. OTHER INFORMATION
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Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities and Use of Proceeds 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18-19
Signatures 20
Exhibit Index 21-22
</TABLE>
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CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenue .......................... $106,489 $ 94,354 $317,964 $268,480
Costs and expenses:
Costs of services ........................ 71,819 64,280 212,761 184,707
Selling, general, and administrative ..... 18,860 16,330 61,636 48,477
-------- -------- -------- --------
Total costs and expenses ............. 90,679 80,610 274,397 233,184
Operating income ........................... 15,810 13,744 43,567 35,296
Interest expense ........................... 1,674 1,608 4,915 4,792
-------- -------- -------- --------
Income before income taxes ................. 14,136 12,136 38,652 30,504
Provision for income taxes ................. 6,358 5,248 18,033 13,191
-------- -------- -------- --------
Net income ................................. $ 7,778 $ 6,888 $ 20,619 $ 17,313
======== ======== ======== ========
Pro forma earnings per share (Note 12) ..... $ .52 $ .32 $ 1.36 $ .98
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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CHOICEPOINT INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
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SEPTEMBER 30, DECEMBER 31,
1997 1996
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(UNAUDITED)
ASSETS (IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................. $ 27,275 $ 1,726
Accounts receivable, net of allowance for doubtful accounts
of $1,867 at September 30, 1997 and $1,578 at
December 31,1996 .................................................... 89,243 78,138
Deferred income tax assets ............................................ 6,859 3,984
Other current assets .................................................. 15,975 8,083
--------- ---------
Total current assets .............................................. 139,352 91,931
Property and equipment, net ............................................. 40,120 35,407
Goodwill, net ........................................................... 122,926 123,997
Deferred income tax assets .............................................. 15,988 15,042
Other ................................................................... 32,572 35,447
--------- ---------
Total Assets ............................................................ $ 350,958 $ 301,824
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .................................. $ 680 $ 927
Accounts payable ...................................................... 13,678 12,828
Accrued salaries and bonuses .......................................... 14,489 11,594
Other current liabilities ............................................. 41,493 19,616
--------- ---------
Total current liabilities ........................................... 70,340 44,965
Long-term debt, less current maturities ................................. 102,560 1,051
Postretirement benefit obligations ...................................... 55,487 55,622
Other long-term liabilities ............................................. 5,104 3,859
--------- ---------
Total liabilities ................................................... 233,491 105,497
Shareholders' equity:
Equifax equity investment ............................................. -- 196,414
Preferred stock, $.01 par value, 10,000,000 shares authorized,
no shares issued and outstanding .................................... -- --
Common stock, $.10 par value, 100,000,000 shares
authorized, 14,570,981 shares issued and outstanding at
September 30, 1997 .................................................. 1,457 --
Paid-in capital ....................................................... 110,747 --
Retained earnings ..................................................... 5,419 --
Foreign currency translation adjustments .............................. (156) (87)
--------- ---------
Total shareholders' equity .......................................... 117,467 196,327
--------- ---------
Total Liabilities and Shareholders' Equity .............................. $ 350,958 $ 301,824
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
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CHOICEPOINT INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
FOREIGN
EQUIFAX CURRENCY
EQUITY COMMON PAID-IN RETAINED TRANSLATION
INVESTMENT STOCK CAPITAL EARNINGS ADJUSTMENTS TOTAL
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(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996 ........... $ 196,414 $ -- $ -- $ -- $ (87) $ 196,327
Net income (from January 1, 1997
through July 31, 1997) ......... 15,200 -- -- -- -- 15,200
Intercompany transactions with
Equifax ........................ 1,609 -- -- -- -- 1,609
Repayment of Equifax intercompany
debt ........................... (72,602) -- -- -- -- (72,602)
Debt assumed from Equifax ......... (29,000) -- -- -- -- (29,000)
Distribution of common stock ...... (111,621) 1,457 110,164 -- -- --
Other ............................. -- -- 583 -- -- 583
Net income (from August 1, 1997
to September 30, 1997) ......... -- -- -- 5,419 -- 5,419
Translation adjustments ........... -- -- -- -- (69) (69)
--------- --------- --------- --------- --------- ---------
Balance September 30, 1997 .......... $ -- $ 1,457 $ 110,747 $ 5,419 $ (156) $ 117,467
========= ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
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CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
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NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1996
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(IN THOUSANDS)
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Cash flows from operating activities:
Net income ......................................... $ 20,619 $ 17,313
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................... 20,400 11,814
Changes in assets and liabilities,
excluding effects of acquisitions:
Accounts receivable, net ....................... (11,169) (10,681)
Current liabilities, excluding debt ............ 25,592 (6,258)
Other current assets ........................... (7,916) 637
Deferred income taxes .......................... (3,822) 6,525
Other long-term liabilities, excluding debt .... 1,110 1,392
--------- ---------
Net cash provided by operating activities .......... 44,814 20,742
--------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired ................. (4,049) (69,654)
Additions to property and equipment ................ (13,614) (9,452)
Additions to other assets, net ..................... (3,754) (2,309)
--------- ---------
Net cash flows used by investing activities ........ (21,417) (81,415)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt ....................... 112,000 --
Payment of debt assumed in acquisition ............. -- (10,812)
Payments on long-term debt ......................... (10,737) (1,048)
Payment of debt assumed from Equifax ............... (29,000) --
Payment of Equifax intercompany debt ............... (72,602) --
Net transactions with Equifax ...................... 1,609 77,820
Other .............................................. 583 --
--------- ---------
Net cash flows provided by financing activities .... 1,853 65,960
--------- ---------
Effect of foreign currency exchange rates on cash .... 299 6
--------- ---------
Net increase in cash ................................. 25,549 5,293
Cash and cash equivalents, beginning of period ....... 1,726 645
--------- ---------
Cash and cash equivalents, end of period ............. $ 27,275 $ 5,938
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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CHOICEPOINT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. SPIN OFF AND BASIS OF PRESENTATION
In December 1996, The Board of Directors of Equifax Inc. ("Equifax") announced
that it planned to spin off the business conducted through Equifax's Insurance
Services Group to Equifax shareholders (the "Spinoff"). This Spinoff occurred on
August 7, 1997 and was accomplished by forming ChoicePoint Inc. ("ChoicePoint"
or the "Company"), transferring the stock of the companies which comprised the
Insurance Services Group to ChoicePoint and then distributing all of the shares
of common stock of ChoicePoint to Equifax shareholders. Equifax shareholders of
record as of July 24, 1997 received one share of ChoicePoint common stock for
every ten shares of Equifax Common Stock owned (except for certain grantor
trusts of Equifax, which did not receive ChoicePoint common stock pursuant to
the Spinoff). The effective date of the Spinoff was July 31, 1997.
The accompanying unaudited interim consolidated financial statements of
ChoicePoint include substantially all of the assets, liabilities, revenues, and
expenses of the business conducted through Equifax's Insurance Services Group.
All material transactions between entities included in the consolidated
financial statements have been eliminated. The consolidated financial statements
have been prepared on the historical cost basis, and present the Company's
financial position, results of operations and cash flows as derived from
Equifax's historical financial statements where applicable. This information
reflects all adjustments which are, in the opinion of management, necessary for
a fair statement of the financial position of ChoicePoint as of September 30,
1997 and the results of operations for the three months and nine months ended
September 30, 1997 and 1996 and cash flows for the nine months ended September
30, 1997 and 1996. The adjustments have been of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the notes to the financial statements included in ChoicePoint's
Consolidated Financial Statements for the year ended December 31, 1996 as filed
with the Securities and Exchange Commission on Form S-1 (File No. 333-30297),
effective July 18, 1997 and in ChoicePoint's Form 10-Q for the period ending
June 30, 1997, filed August 29, 1997. The current period's results are not
necessarily indicative of results to be expected for a full year.
2. NATURE OF OPERATIONS
ChoicePoint provides most domestic insurance companies with automated and
traditional underwriting and claim information services to assist those
companies in assessing the insurability of individuals and property and the
validity of insurance claims. ChoicePoint provides background investigations,
performs paramedical exams, furnishes access to motor vehicle reports, maintains
a database of claims histories and provides claims verification and
investigative services to both the property and casualty and the life and health
insurance markets. The Company also offers pre-employment background
investigations, pre-employment and regulatory compliance drug testing services
and public record information to other corporate and government organizations as
well as the aforementioned insurance markets. The Company's operations are
predominantly located in the United States.
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3. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
4. REVENUE AND COSTS OF SERVICES PRESENTATION
Historically, motor vehicle records registry revenue, the fee charged by states
for motor vehicle records which is passed on by ChoicePoint to its customers,
had been reflected in Equifax's consolidated statements of income as operating
revenue and costs of services. ChoicePoint has elected to exclude these customer
reimbursed fees from revenue and reduce costs of services by a corresponding
amount. This change in accounting presentation does not impact operating income.
Registry revenue was $66,113,000 and $58,701,000 for the three months ended
September 30, 1997 and 1996, respectively, and $195,833,000 and $166,724,000 for
the nine months ended September 30, 1997 and 1996, respectively.
5. EARNINGS PER SHARE
Historical earnings per share are not presented since the companies that
comprise ChoicePoint were majority owned subsidiaries of Equifax or one of its
affiliates and were recapitalized as part of the Spinoff. Since the Spinoff,
actual earnings per share for August and September of 1997 were $.36. See Note
12 for pro forma earnings per share.
6. TRANSACTIONS WITH EQUIFAX
There are no material purchase or sale transactions between Equifax and
ChoicePoint. Prior to the Spinoff, under Equifax's centralized cash management
system, short-term advances from Equifax and excess cash sent to Equifax were
reflected as intercompany debt and were included in Equifax's equity investment
account through July 31, 1997 (Note 8). As a result of the Spinoff, the net
intercompany debt at July 31, 1997, totaling $72,602,000, was repaid in the
third quarter of 1997. ChoicePoint was charged corporate costs through July 31,
1997. The amount of corporate costs included in the accompanying consolidated
statements of income were $850,000 and $2,815,000 for the three months ended
September 30, 1997 and 1996, respectively, and $5,952,000 and $8,445,000 for the
nine months ended September 30, 1997 and 1996, respectively. These allocations
were based on an estimate of the proportion of corporate expenses related to
ChoicePoint, utilizing such factors as revenues, number of employees, number of
transactions processed and other applicable factors. In the opinion of
management, the corporate charges have been made on a reasonable basis and
approximate all the incremental costs ChoicePoint would have incurred had it
been operating on a stand-alone basis. These amounts have been included in
selling, general, and administrative expenses. ChoicePoint was also charged
corporate interest expense through July 31, 1997, based on the relationship of
its net assets to total Equifax net assets, excluding debt, in amounts of
$518,000 and $1,554,000 for the three months ended September 30, 1997 and 1996,
respectively, and $3,612,000 and $4,662,000 for the nine months ended September
30, 1997 and 1996, respectively.
7. INCOME TAXES
Historically, the Company has been included in the consolidated federal income
tax return of Equifax. ChoicePoint's provision for income taxes in the
accompanying consolidated statements of income reflects federal and state income
taxes calculated on ChoicePoint's separate income, but recognizes the impact of
unitary tax regulations of certain states on ChoicePoint as a member of the
Equifax consolidated group through July 31, 1997, the effective date of the
Spinoff.
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The Company records deferred income taxes using enacted tax laws and rates for
the years in which the taxes are expected to be paid. Deferred income tax assets
and liabilities are recorded based on the differences between the financial
reporting and income tax basis of assets and liabilities.
8. EQUIFAX EQUITY INVESTMENT
Prior to July 31, 1997, Equifax's equity investment included the original
investment in ChoicePoint, accumulated income of ChoicePoint until the Spinoff,
and the net intercompany payable due Equifax reflecting transactions described
in Note 6. The July 31, 1997 net intercompany debt balance that was repaid to
Equifax in the third quarter of 1997 was $72,602,000. The $72,602,000 included
actual intercompany debt of $85,602,000 reduced by $13,000,000 for an employee
benefit obligation assumed by ChoicePoint. As a result of the Spinoff,
ChoicePoint assumed an obligation to contribute to a defined contribution plan
for certain ChoicePoint employees. The additional benefits are intended to
offset the adverse impact of transitioning out of a defined benefit pension plan
and represent the present value of the estimated future contributions. In
exchange for this obligation, Equifax made a capital contribution to ChoicePoint
in the amount of $13,000,000 and ChoicePoint's intercompany liability to Equifax
was reduced accordingly. ChoicePoint anticipates incurring an expense estimated
at $2,300,000 for 1998 to fund the contributions for employees. As of December
31, 1996, the net intercompany payable due Equifax included in Equifax equity
investment in the accompanying consolidated balance sheet was $83,993,000.
9. CREDIT FACILITY
In August 1997, ChoicePoint entered into a $250 million unsecured revolving
credit facility (the "Credit Facility") with a group of banks. The Credit
Facility is a revolving facility expandable to $300 million, subject to approval
of the lenders. Borrowings under the Credit Facility are guaranteed by all
material subsidiaries of ChoicePoint Inc. as defined in the Credit Facility. The
Credit Facility was used by ChoicePoint to repay the net intercompany debt due
to Equifax as of July 31, 1997, to repay $29.0 million of Equifax debt assumed
by ChoicePoint and to fund $10.0 million for two ChoicePoint grantor trusts. The
funds in the grantor trusts may be used to purchase ChoicePoint common stock in
the open market as previously approved by the Board of Directors. Initial
borrowings under the Credit Facility were $112.0 million. During September 1997,
the Company paid down $10.0 million of the amount borrowed, reducing total debt
under the revolver to $102.0 million. The commitment termination date and final
maturity of the Credit Facility will occur in August 2002.
Revolving loans under the Credit Facility will bear interest at the following
rates as applicable and selected by the Company from time to time: (1) the
lender's Base Rate, (2) LIBOR plus the applicable margin, (3) the lender's Cost
of Funds plus the applicable margin, and (4) the Competitive Bid Rate offered by
the syndicate lenders at their discretion. The applicable margin will range from
.16% to .45% per annum based on ChoicePoint's leverage ratio. Any amount not
paid when due shall bear interest at the applicable rate plus 2%. At the end of
the applicable interest period for LIBOR or Bid Rate Loans, interest shall
accrue at the Base Rate plus 2%. The Company will also pay customary annual
facility fees based on its leverage ratio.
The Credit Facility contains covenants customary for facilities of this type.
Such covenants include limitations, in certain circumstances, on the ability of
the Company and its subsidiaries to (i) effect a change of control of the
Company, (ii) incur certain types of liens, and (iii) transfer or sell assets.
The Credit Facility also requires compliance with financial covenants, including
(i) maximum leverage and (ii) minimum fixed charge coverage.
10. LEASE AGREEMENT
In August 1997, the Company entered into a $22.0 million operating lease
agreement for an office facility in Alpharetta, Georgia. Under the agreement,
the lessor purchased the property from a third party and leased the facility to
the Company. The initial term of the lease is ten years at which time the
Company has the
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following three options: to renew for an additional five years, to purchase at
original cost, or to remarket the property.
11. INTEREST RATE SWAP AGREEMENTS
ChoicePoint has entered into four interest rate swap agreements to reduce the
impact of changes in interest rates on its floating rate long-term obligation.
The agreements became effective in August 1997. One of the four agreements has a
notional principal amount of $25.0 million and matures in August 2007. The
agreement effectively changes the Company's interest rate exposure to a fixed
rate of 6.535% plus a credit spread. The other three agreements have notional
principal amounts totaling $60.0 million and mature in August 2004; however, the
other parties have one time options to terminate the swap agreements in April
2002. The three agreements effectively change the Company's interest rate
exposure to a weighted average fixed rate exposure of 6.240% plus a credit
spread. The Company is exposed to credit loss in the event of nonperformance by
the other parties to the interest rate swap agreements. However, the Company
does not anticipate nonperformance by the counterparties.
12. PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated net income and pro forma earnings
per share present the consolidated results of operations of ChoicePoint assuming
that the transactions contemplated by both the Spinoff and ChoicePoint's
acquisition of the 70% interest in CDB Infotek had been completed as of the
beginning of 1996. Historical earnings per share are not presented since the
companies that comprise ChoicePoint were majority owned subsidiaries of Equifax
or one of its affiliates and were recapitalized as part of the Spinoff.
The information presented below is not necessarily indicative of the results of
operations that ChoicePoint would have reported if it had operated as an
independent company.
<TABLE>
<CAPTION>
1997
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Nine Months
First Second Third Ended
(In thousands, except per share amounts) Quarter Quarter Quarter September 30
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<S> <C> <C> <C> <C>
Historical net income $ 5,541 $ 7,300 $ 7,778 $ 20,619
Pro forma adjustments:
Reversal of interest expense from Equifax(a) 928 928 309 2,165
Incremental interest expense(b) (1,129) (1,129) (331) (2,589)
-------- -------- -------- --------
Pro forma net income $ 5,340 $ 7,099 $ 7,756 $ 20,195
======== ======== ======== ========
Pro forma common and common equivalent
shares outstanding(c) 14,837 14,837 14,852 14,852
======== ======== ======== ========
Pro forma earnings per share $ .36 $ .48 $ .52 $ 1.36
======== ======== ======== ========
</TABLE>
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<TABLE>
<CAPTION>
1996
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Nine Months
First Second Third Ended
(In thousands, except per share amounts) Quarter Quarter Quarter September 30
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<S> <C> <C> <C> <C>
Historical net income $ 4,218 $ 6,207 $ 6,888 $ 17,313
Pro forma adjustments:
CDB Infotek net operating results(d) (163) (79) (2,134) (2,376)
Reversal of interest expense from Equifax(a) 932 932 932 2,796
Incremental interest expense(b) (1,155) (1,155) (881) (3,191)
-------- -------- -------- --------
Pro forma net income $ 3,832 $ 5,905 $ 4,805 $ 14,542
======== ======== ======== ========
Pro forma common and common equivalent
shares outstanding(c) 14,837 14,837 14,837 14,837
======== ======== ======== ========
Pro forma earnings per share $ .26 $ .40 $ .32 $ .98
======== ======== ======== ========
</TABLE>
Following are the pro forma adjustments to the accompanying pro forma
consolidated net income:
a) To eliminate the $3.6 million ($2.2 million net of tax)
corporate interest expense for the nine months ended September
30, 1997 and $4.6 million ($2.8 million net of tax) for the
nine months ended September 30, 1996 charged to ChoicePoint.
Equifax charged interest expense through the effective date of
the Spinoff - July 31, 1997.
b) To record $4.3 million ($2.6 million net of tax) for the nine
months ended September 30, 1997 and $5.3 million ($3.2 million
net of tax) for the nine months ended September 30 , 1996 of
interest expense on borrowings to fund the repayment of net
intercompany debt owed to Equifax, the repayment of $29.0
million of Equifax debt assumed by ChoicePoint, and interest
on borrowings to fund $10.0 million for two ChoicePoint
grantor trusts. The interest expense also includes interest
for borrowings for the CDB Infotek acquisition. An interest
rate of 6.5% is assumed on the borrowings.
c) Pro forma common and common equivalent shares outstanding
prior to the Spinoff is based on the number of ChoicePoint
shares issued and outstanding on the date of the Spinoff
(August 7, 1997) plus the dilutive effect of stock options and
restricted stock. The 1997 third quarter and the nine months
ended September 30, 1997 pro forma common and common
equivalent shares outstanding also includes stock activity
from August 8, 1997 through September 30, 1997.
d) Represents the January 1, 1996 to August 30, 1996 operating
results for ChoicePoint's August 30, 1996 acquisition of 70%
of the capital stock of CDB Infotek. The acquisition was
accounted for as a purchase. The pro forma data includes an
additional $3.2 million ($1.9 million net of tax) in expense
for amortization of goodwill and other intangible assets from
January 1, 1996 to August 30, 1996 resulting from this
transaction.
Pro forma operating results in the third quarter of 1996 were
impacted by a non-recurring expense of $5.4 million, ($2.3
million net of tax and minority interest) recorded by CDB
Infotek prior to the acquisition. This non-recurring expense
represented a one-time charge for the vesting of all CDB
Infotek non-qualified stock options on August 30, 1996 and
other stock option expense as a result of ChoicePoint's
acquisition of CDB Infotek. This non-recurring expense also
decreased the third quarter 1996 and the nine months ended
September 30, 1996 pro forma earnings per share by $.15.
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13. ACQUISITIONS
During the second and third quarters of 1997 the Company acquired the assets of
Advanced HR, an automated payroll and employment verification service, and an
additional 2.6% interest in CDB Infotek, bringing ChoicePoint's interest in CDB
Infotek to 72.6%. In October 1997 and November 1997 the Company announced the
acquisitions of Medi-Net, an on-line physician verification service, and Drug
Free, Inc., a drug testing information services company. The total purchase
price of all four acquisitions was approximately $10.9 million.
14. GRANTOR TRUSTS
ChoicePoint has established two grantor trusts totaling $10.0 million. The funds
in the grantor trusts may be used to purchase ChoicePoint common stock in the
open market as previously approved by the Board of Directors for distribution
under its various compensation and benefit plans. The $10.0 million is included
in cash and cash equivalents in the September 30, 1997 accompanying balance
sheet.
15. SHAREHOLDER RIGHTS PLAN
On October 29, 1997, the Board of Directors of ChoicePoint approved a
shareholder rights plan that is described in Part II, Item 2 of this Form 10-Q.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION
ChoicePoint is a leading provider of risk management and fraud prevention
information and related technology solutions to the insurance industry. The
Company also offers risk management and fraud prevention solutions to
organizations in other industries. ChoicePoint is organized into three service
groups: Property and Casualty Insurance Services, Life and Health Insurance
Services and Business and Government Services. The Company offers the following
products through these groups:
Property and Casualty Insurance Services - Automated underwriting and
claims information for home and auto insurers, commercial inspections,
workers compensation audits of commercial properties, and customized
application rating and issuance software development
Life and Health Insurance Services - Underwriting and claims
information for life and health insurers, including medical records
collection, paramedical services, laboratory services, and
investigative services
Business and Government Services - Pre-employment background searches,
drug screenings, public records searches, people locator services, and
UCC searches and filings
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Consolidated revenue increased $12.1 million, or 12.9%, from $94.4 million for
the three months ended September 30, 1996 to $106.5 million for the three months
ended September 30, 1997, with all three business groups showing operating
revenue improvement year over year. Revenue from Property and Casualty Insurance
Services grew $2.8 million, or 6.6%, from $42.5 million for the three months
ended September 30, 1996 to $45.3 million for the three months ended September
30, 1997, driven by strong performance in personal lines. Revenue from Life and
Health Insurance Services increased $471,000, or 1.3%, from $38.2 million for
the three months ended September 30, 1996 to $38.7 million for the three months
ended September 30, 1997. This increase was primarily the result of growth in
laboratory services and investigative services revenue, largely offset by
declines in the other product lines. Revenue from Business and Government
Services increased $8.8 million, or 64%, from $13.7 million for the three months
ended September 30, 1996 to $22.5 million for the three months ended September
30, 1997. Revenue increased in all business units within Business and Government
Services with $6.1 million coming from the CDB Infotek acquisition. Excluding
this acquisition, Business and Government revenues increased 23.9%.
Operating income increased $2.1 million, or 15.0%, from $13.7 million for the
three months ended September 30, 1996 to $15.8 million for the three months
ended September 30, 1997, primarily as a result of strong revenue performance in
automated underwriting services and continued cost control in labor intensive
offerings. Operating margins increased from 14.6% for the three months ended
September 30, 1996 to 14.8% for the three months ended September 30, 1997.
Net income increased $890,000, or 12.9%, from $6.9 million for the three months
ended September 30, 1996 to $7.8 million for the three months ended September
30, 1997. The effective tax rate increased 1.8 percentage points, as discussed
below.
13
<PAGE> 14
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Consolidated revenue increased $49.5 million, or 18.4%, from $268.5 million in
the first nine months of 1996 to $318.0 million in the first nine months of
1997. The increase was attributable to operating revenue improvements in all
three business groups. Revenue from Property and Casualty Insurance Services
grew $15.5 million, or 13.0%, from $119.0 million in the first nine months of
1996 to $134.5 million in the first nine months of 1997, primarily due to sales
growth in personal lines. Revenue from Life and Health Insurance Services
increased $2.5 million, or 2.2%, from $115.8 million in the first nine months of
1996 to $118.3 million in the first nine months of 1997. This increase was
primarily the result of growth in laboratory services revenue, partially offset
by a relative decline in other product lines. Revenue from Business and
Government Services increased $31.5 million, or 93.5%, from $33.7 million in the
first nine months of 1996 to $65.2 million in the first nine months of 1997.
Revenue increased in all business units within Business and Government Services
with $23.2 million coming from the CDB Infotek acquisition. Excluding this
acquisition, Business and Government revenues increased 26.3%.
Operating income increased $8.3 million, or 23.5%, from $35.3 million in the
first nine months of 1996 to $43.6 million in the first nine months of 1997,
primarily as a result of strong revenue performance in automated underwriting
services. Operating margins increased from 13.1% for the first nine months of
1996 to 13.7% for the first nine months of 1997.
Net income increased $3.3 million, or 19.1%, from $17.3 million in the first
nine months of 1996 to $20.6 million in the first nine months of 1997. The
effective tax rate increased 3.5 percentage points, as discussed below.
INCOME TAXES
Historically, the Company had been included in the consolidated federal income
tax return of Equifax. Prior to the Spinoff on August 7, 1997, ChoicePoint's
provision for income taxes reflected federal and state income taxes calculated
on ChoicePoint's separate income, but recognized the impact of unitary tax
regulations of certain states on ChoicePoint as a member of the Equifax
consolidated group. These unitary tax provisions, as reflected in the
Consolidated Financial Statements, resulted in overall effective tax rates of
45.0% for the three months ended September 30, 1997, 46.7% for the nine months
ended September 30, 1997 and 43.2% for the three months ended September 30, 1996
and the nine months ended September 30, 1996. If the provision for income taxes
had been calculated for ChoicePoint as a separate taxable entity for federal and
state income tax purposes, the Company estimates that its overall effective tax
rate would have been 43.8% for the three months ended September 30, 1997 and the
nine months ended September 30, 1997, and 40.8% for the three months ended
September 30, 1996 and the nine months ended September 30, 1996.
The increase in effective tax rates from 1996 to 1997 is primarily the result of
foreign income being subject to tax and increased goodwill amortization not
deductible for income tax purposes. The increase in the effective income tax
rate for the three months ended September 30, 1997 was partially offset by a
reduction in the state income tax rate due to ChoicePoint no longer being part
of Equifax's consolidated group for unitary tax purposes.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operations increased from $20.7 million in the first nine
months of 1996 to $44.8 million in the first nine months of 1997. This increase
was primarily attributable to the increase in net income, as adjusted for
depreciation and amortization and increased current liabilities. During the
first nine months of 1997, ChoicePoint used $21.4 million for investing
activities, which included $13.6 million of property and equipment additions.
Building and leasehold improvements for the expansion of the existing Osborn
Laboratories, Inc. facility in Olathe, Kansas represented approximately $3.1
million of the $13.6 million
14
<PAGE> 15
additions with the remainder due primarily to system upgrades. During the first
nine months of 1996, acquisitions accounted for $69.7 million of the $81.4
million of net cash flows used for investing activities. Net cash provided by
financing activities was $1.9 million in the first nine months of 1997, as the
proceeds from the Credit Facility were used to pay Spinoff related costs,
discussed below. Net cash provided by financing activities was $66.0 million in
the first nine months of 1996, which was reflected in an increase in the
intercompany debt due to Equifax in connection with the acquisitions completed
in 1996.
EBITDA increased $4.5 million, or 24.4%, from $18.3 million for the three months
ended September 30, 1996 to $22.8 million for the three months ended September
30, 1997. EBITDA increased $16.9 million, or 35.8%, from $47.1 million for the
first nine months of 1996 to $64.0 million for the first nine months of 1997.
EBITDA represents income before taxes, plus depreciation and amortization and
interest expense. EBITDA is presented not as a substitute for income from
operations, net income or cash flows from operating activities. The Company has
included EBITDA data (which is not a measure of financial performance under
generally accepted accounting principles) because such data is used by certain
investors to analyze and compare companies on the basis of operating
performance, leverage and liquidity, and to determine a company's ability to
service debt.
The Company's short-term and long-term liquidity depends primarily upon its
level of net income, accounts receivable, accounts payable and accrued expenses.
In order to meet its working capital needs after the Spinoff, ChoicePoint
entered into a five-year $250 million revolving Credit Facility with a group of
banks in August 1997. The Credit Facility bears interest at variable rates and
is expandable to $300 million, subject to approval of the lenders. Borrowings
under the Credit Facility are guaranteed by all material subsidiaries of
ChoicePoint Inc. as defined in the Credit Facility. The Credit Facility was used
by ChoicePoint in the third quarter of 1997 to repay the net intercompany debt
due to Equifax as of July 31, 1997, to repay $29.0 million of Equifax debt
assumed by ChoicePoint and to fund $10.0 million for two ChoicePoint grantor
trusts. The funds in the grantor trusts may be used to purchase ChoicePoint
common stock in the open market as previously approved by the Board of
Directors. Initial borrowings under the Credit Facility were $112.0 million.
During September 1997, the company paid down $10.0 million of the amount
borrowed, reducing total debt under the revolver to $102.0 million at September
30, 1997. ChoicePoint may use additional borrowings under the Credit Facility to
finance acquisitions and general corporate cash requirements. For a more
complete description of the terms of the Credit Facility, see Note 9 to the
Consolidated Financial Statements.
Interest expense was $1.7 million and $1.6 million for the three months ended
September 30, 1997 and 1996, respectively, and $4.9 million and $4.8 million for
the nine months ended September 30, 1997 and 1996, respectively. Prior to the
Spinoff on August 7, 1997, ChoicePoint was charged corporate interest expense
from Equifax based on the relationship of its net assets to total Equifax net
assets, excluding corporate debt. ChoicePoint's results may be effected by an
increase in interest expense resulting from potential higher borrowing costs as
an independent company and for future acquisitions. Interest expense will also
be affected by the current borrowings of $102.0 million under the Credit
Facility.
This report contains certain forward-looking statements. These statements
reflect the Company's assessment of a number of risks and uncertainties as
described herein and in ChoicePoint's prospectus dated July 18, 1997. The
Company's actual results could differ materially from the results anticipated in
these forward-looking statements as a result of such risks and uncertainties.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, The Financial Accounting Standards Board issued Financial
Accounting Standard Number 128 (SFAS No. 128), "Earnings Per Share", which
specifies the computation, presentation, and disclosure requirements for
earnings per share. The Company will be required to adopt the new Standard in
the fourth quarter of 1997. All prior period earnings per share data will be
restated to conform with the provisions of SFAS No. 128. Based on a preliminary
evaluation of this Standard's requirements, the Company does not expect the
earnings per share data reported under SFAS No. 128 to be materially different
from those calculated and presented under APB Opinion 15.
15
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ChoicePoint is involved in litigation from time to time in the ordinary course
of its business. The Company does not believe that the outcomes of any pending
or threatened litigation will have a material adverse effect on the financial
position or results of operations of ChoicePoint. However, as is inherent in
legal proceedings where issues may be decided by finders of fact, there is a
risk that unpredictable decisions adverse to the Company could be reached.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Board of Directors of ChoicePoint has declared a dividend distribution of
one right (a "Right") for each outstanding share of common stock, par value
$0.10 per share (the "Common Stock"), of the Company. The distribution is
payable to the shareholders of record as of the close of business on November
14, 1997. The description and terms of the Rights are set forth in a Rights
Agreement, dated as of October 29, 1997 (the "Rights Agreement"), between the
Company and SunTrust Bank, Atlanta, as Rights Agent. The Rights Agreement
contains provisions to protect the Company's shareholders in the event of an
unsolicited offer to acquire the Company, including offers that do not treat all
shareholders equally, the acquisition in the open market of shares constituting
control without offering fair value to all shareholders, and other coercive,
unfair or inadequate takeover bids and practices that could impair the ability
of the ChoicePoint Board of Directors to represent shareholders' interests
fully. The Rights will be represented by, and trade together with, the Company's
Common Stock. The Rights will not be currently exercisable and will not become
exercisable unless certain triggering events occur. Among the triggering events
will be the acquisition of 20% or more of the Company's Common Stock by a person
or group of affiliated or associated persons. Unless previously redeemed by the
ChoicePoint Board of Directors, upon the occurrence of one of the specified
triggering events, each Right that is not held by the 20% or more shareholder
will entitle its holder to purchase one share of ChoicePoint Common Stock or,
under certain circumstances, additional shares of Common Stock at a discounted
price. The Rights will cause substantial dilution to a person or group that
attempts to acquire ChoicePoint on terms not approved by the ChoicePoint Board
of Directors. Thus, the Rights are intended to encourage persons who may seek to
acquire control of ChoicePoint to initiate such an acquisition through
negotiations with the Board of Directors. The Company filed the Rights Agreement
with the Securities and Exchange Commission on November 5, 1997 as an Exhibit to
a Registration Statement on Form 8-A pursuant to the Securities Exchange Act of
1934, as amended. A copy of the Rights Agreement is available free of charge
from the Company. This summary of the Rights does not purport to be complete and
is qualified in its entirety by reference to the Rights Agreement, which is
incorporated herein by reference.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.01* Articles of Incorporation of the Company, as amended
3.02* Bylaws of the Company, as amended
4.01* Form of Common Stock certificate
4.02# Rights Agreement, dated as of October 29, 1997, by and between
ChoicePoint Inc. and SunTrust Bank, Atlanta.
10.01## ChoicePoint Inc. 1997 Omnibus Stock Incentive Plan
10.02** ChoicePoint Inc. 401(k) Profit Sharing Plan
10.03## Distribution Agreement, dated as of July 31, 1997, by and
between Equifax Inc. and ChoicePoint Inc.
10.04## Employee Benefits Agreement, dated as of July 31, 1997,
between Equifax Inc. and ChoicePoint Inc.
10.05## Transition Support Agreement, dated as of July 31, 1997,
between Equifax Inc. and ChoicePoint Inc.
10.06## Intercompany Information Services Agreement, dated as of July
31, 1997, by Equifax Inc. and ChoicePoint Inc.
10.07## Tax Sharing and Indemnification Agreement, dated as of July
31, 1997, by and between Equifax Inc. and ChoicePoint Inc.
10.08## Intellectual Property Agreement, dated as of July 31, 1997, by
and between Equifax Inc. and ChoicePoint Inc.
10.09** Agreement by and between ChoicePoint Inc. (as successor to
Equifax Inc.) and Dan Rocco, effective January 1, 1996
(relating to compensation of Mr. Rocco)
10.10## Revolving Credit Agreement, dated as of August 5, 1997, among
ChoicePoint Inc., the Lenders Listed Therein and Wachovia
Bank, N.A. as Administrative Agent, and SunTrust Bank, Atlanta
as Documentation Agent
10.11(a)## Master Agreement, dated as of July 31, 1997, among ChoicePoint
Inc., SunTrust Banks, Inc. and SunTrust Bank, Atlanta, as
Agent
10.11(b)## Lease agreement, dated as of July 31, 1997, between
ChoicePoint Inc. and SunTrust Banks, Inc.
10.11(c)## Georgia Lease Supplement, dated as of July 31, 1997, between
ChoicePoint Inc. and SunTrust Banks, Inc.
10.11(d)## Operative Guaranty, dated as of July 31, 1997, by ChoicePoint
Inc. as Guarantor
10.11(e)## Construction Agency Agreement, dated as of July 31, 1997,
between SunTrust Banks, Inc. and ChoicePoint Inc.
10.12## Sublease Agreement, dated as of July 31, 1997, between Equifax
Inc. and Equifax Services Inc. (for certain property and
building located at 1600 Peachtree Street, NW, Atlanta,
Georgia)
10.13## Sublease Agreement, dated as of July 31, 1997, between Equifax
Inc. and Equifax Services Inc. (for certain property and
building located at 1525 Windward Concourse, Alpharetta,
Georgia (J.V. White Technology Center))
10.14## Form of Employment and Compensation Agreement by and between
each of Derek V. Smith, Dan H. Rocco, Douglas C. Curling,
David T. Lee and J. Michael de Janes
21.01## Subsidiaries of the Company
27.01 Financial Data Schedule
* Previously filed as an exhibit to Registration Statement No. 333-30297
filed June 30, 1997 and incorporated herein by reference.
** Previously filed as an exhibit to Pre-Effective Amendment No. 1 to
Registration Statement No. 333-30297 filed July 16, 1997 and
incorporated herein by reference.
18
<PAGE> 19
# Previously filed as an exhibit to Form 8-A (Commission File No.
001-13069), filed November 5, 1997 and incorporated herein by
reference.
## Previously filed as an exhibit to Form 10-Q (Commission File No.
001-13069), filed August 29, 1997 and incorporated herein by reference.
(b) Reports on Form 8-K
Registrant did not file any reports on Form 8-K during the quarter for which
this report was filed.
19
<PAGE> 20
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.
CHOICEPOINT INC.
--------------------------
(Registrant)
November 12, 1997 /s/ Derek V. Smith
- --------------------------- --------------------------------------------
Date D.V. Smith, President and
Chief Executive Officer
November 12, 1997. /s/ Doug C. Curling
- --------------------------- --------------------------------------------
Date D. C. Curling, Executive Vice President,
Chief Financial Officer and Treasurer
20
<PAGE> 21
EXHIBIT INDEX
Exhibit Description of Exhibit
- ------- ----------------------
3.01* Articles of Incorporation of the Company, as amended
3.02* Bylaws of the Company, as amended
4.01* Form of Common Stock certificate
4.02# Rights Agreement, dated as of October 29, 1997, by and between
ChoicePoint Inc. and SunTrust Bank, Atlanta.
10.01## ChoicePoint Inc. 1997 Omnibus Stock Incentive Plan
10.02** ChoicePoint Inc. 401(k) Profit Sharing Plan
10.03## Distribution Agreement, dated as of July 31, 1997, by and
between Equifax Inc. and ChoicePoint Inc.
10.04## Employee Benefits Agreement, dated as of July 31, 1997,
between Equifax Inc. and ChoicePoint Inc.
10.05## Transition Support Agreement, dated as of July 31, 1997,
between Equifax Inc. and ChoicePoint Inc.
10.06## Intercompany Information Services Agreement, dated as of July
31, 1997, by Equifax Inc. and ChoicePoint Inc.
10.07## Tax Sharing and Indemnification Agreement, dated as of July
31, 1997, by and between Equifax Inc. and ChoicePoint Inc.
10.08## Intellectual Property Agreement, dated as of July 31, 1997, by
and between Equifax Inc. and ChoicePoint Inc.
10.09** Agreement by and between ChoicePoint Inc. (as successor to
Equifax Inc.) and Dan Rocco, effective January 1, 1996
(relating to compensation of Mr. Rocco)
10.10## Revolving Credit Agreement, dated as of August 5, 1997, among
ChoicePoint Inc., the Lenders Listed Therein and Wachovia
Bank, N.A. as Administrative Agent, and SunTrust Bank, Atlanta
as Documentation Agent
10.11(a)## Master Agreement, dated as of July 31, 1997, among ChoicePoint
Inc., SunTrust Banks, Inc. and SunTrust Bank, Atlanta, as
Agent
10.11(b)## Lease agreement, dated as of July 31, 1997, between
ChoicePoint Inc. and SunTrust Banks, Inc.
10.11(c)## Georgia Lease Supplement, dated as of July 31, 1997, between
ChoicePoint Inc. and SunTrust Banks, Inc.
10.11(d)## Operative Guaranty, dated as of July 31, 1997, by ChoicePoint
Inc. as Guarantor
10.11(e)## Construction Agency Agreement, dated as of July 31, 1997,
between SunTrust Banks, Inc. and ChoicePoint Inc.
10.12## Sublease Agreement, dated as of July 31, 1997, between Equifax
Inc. and Equifax Services Inc. (for certain property and
building located at 1600 Peachtree Street, NW, Atlanta,
Georgia)
10.13## Sublease Agreement, dated as of July 31, 1997, between Equifax
Inc. and Equifax Services Inc. (for certain property and
building located at 1525 Windward Concourse, Alpharetta,
Georgia (J.V. White Technology Center))
10.14## Form of Employment and Compensation Agreement by and between
each of Derek V. Smith, Dan H. Rocco, Douglas C. Curling,
David T. Lee and J. Michael de Janes
21.01## Subsidiaries of the Company
27.01 Financial Data Schedule
* Previously filed as an exhibit to Registration Statement No. 333-30297
filed June 30, 1997 and incorporated herein by reference.
21
<PAGE> 22
** Previously filed as an exhibit to Pre-Effective Amendment No. 1 to
Registration Statement No. 333-30297 filed July 16, 1997 and
incorporated herein by reference.
# Previously filed as an exhibit to Form 8-A (Commission File No.
001-13069), filed November 5, 1997 and incorporated herein by
reference.
## Previously filed as an exhibit to Form 10-Q (Commission File No.
001-13069), filed August 29, 1997 and incorporated herein by reference.
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CHOICEPOINT, INC. FOR THE 9 MONTH PERIOD ENDED SEPTEMBER
30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 27,275
<SECURITIES> 0
<RECEIVABLES> 91,110
<ALLOWANCES> 1,867
<INVENTORY> 0
<CURRENT-ASSETS> 139,352
<PP&E> 87,270
<DEPRECIATION> 47,150
<TOTAL-ASSETS> 350,958
<CURRENT-LIABILITIES> 70,340
<BONDS> 0
0
0
<COMMON> 1,457
<OTHER-SE> 116,010
<TOTAL-LIABILITY-AND-EQUITY> 117,467
<SALES> 317,964
<TOTAL-REVENUES> 317,964
<CGS> 212,761
<TOTAL-COSTS> 212,761
<OTHER-EXPENSES> 61,636
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,915
<INCOME-PRETAX> 38,652
<INCOME-TAX> 18,033
<INCOME-CONTINUING> 20,619
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,619
<EPS-PRIMARY> 0
<EPS-DILUTED> 1.36<F1>
<FN>
<F1>(1) Proforma earnings per share
</FN>
</TABLE>
