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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 MARCH 31, 1998
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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
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Commission File Number: 1-13069
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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class Outstanding at April 30, 1998
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<S> <C>
Common Stock, $.10 Par Value 14,640,508
</TABLE>
1
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CHOICEPOINT INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page No.
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Income -
Three Months Ended March 31, 1998 and 1997...................................3
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997.........................................4
Consolidated Statement of Shareholders' Equity -
Three months Ended March 31, 1998............................................5
Consolidated Statements of Cash Flows -
Three months Ended March 31, 1998 and 1997...................................6
Notes to Consolidated Financial Statements.....................................7
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition......................................................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk...............14
Part II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................15
Item 2. Changes in Securities and Use of Proceeds................................15
Item 3. Defaults Upon Senior Securities..........................................15
Item 4. Submission of Matters to a Vote of Security Holders......................15
Item 5. Other Information........................................................15
Item 6. Exhibits and Reports on Form 8-K.........................................15
Signatures.......................................................................16
Exhibit Index....................................................................17
</TABLE>
2
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CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
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THREE MONTHS ENDED
MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
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<S> <C> <C>
Operating revenue.................................. $ 94,550 $ 102,852
Costs and expenses:
Cost of services................................. 59,624 68,359
Selling, general, and administrative............. 19,916 22,295
--------- ---------
Total costs and expenses..................... 79,540 90,654
Operating income................................... 15,010 12,198
Interest expense................................... 1,645 1,619
--------- ---------
Income before income taxes......................... 13,365 10,579
Provision for income taxes......................... 5,787 5,038
--------- ---------
Net income......................................... $ 7,578 $ 5,541
========= =========
Earnings per share - basic (Note 5)................ $ .52 $ --
========= =========
Weighted average shares - basic.................. 14,641 --
========= =========
Earnings per share - diluted (Note 5).............. $ .50 $ --
========= =========
Weighted average shares - diluted............... 15,129 --
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
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CHOICEPOINT INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
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MARCH 31, DECEMBER 31,
(IN THOUSANDS, EXCEPT PAR VALUES) 1998 1997
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(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 15,071 $ 26,858
Marketable securities...................................... 9,000 9,000
Accounts receivable, net of allowance for doubtful accounts
of $1,935 at March 31, 1998 and $1,847 at
December 31,1997......................................... 94,144 90,266
Deferred income tax assets................................. 8,940 10,503
Other current assets....................................... 11,296 9,492
--------- ---------
Total current assets................................... 138,451 146,119
Property and equipment, net.................................. 43,556 42,985
Goodwill, net................................................ 148,569 127,731
Deferred income tax assets................................... 14,607 15,406
Other........................................................ 26,913 27,730
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Total Assets................................................. $ 372,096 $ 359,971
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term debt and current maturities of long-term debt... $ 7,204 $ 593
Accounts payable........................................... 15,204 17,371
Accrued salaries and bonuses............................... 9,784 15,664
Other current liabilities.................................. 46,788 43,610
--------- ---------
Total current liabilities................................ 78,980 77,238
Long-term debt, less current maturities...................... 99,500 95,457
Postretirement benefit obligations........................... 54,114 53,834
Other long-term liabilities.................................. 3,067 5,697
--------- ---------
Total liabilities........................................ 235,661 232,226
Shareholders' equity:
Preferred stock, $.01 par value; shares
authorized - 10,000; no shares issued or outstanding...... -- --
Common stock, $.10 par value; shares authorized -
100,000; shares issued and outstanding -
14,639 in 1998 and 14,641 in 1997......................... 1,464 1,464
Paid-in capital............................................ 113,689 112,655
Retained earnings.......................................... 21,322 13,744
Foreign currency translation adjustments................... (40) (118)
--------- ---------
Total shareholders' equity............................... 136,435 127,745
--------- ---------
Total Liabilities and Shareholders' Equity................... $ 372,096 $ 359,971
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
4
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CHOICEPOINT INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
FOREIGN
CURRENCY
COMMON PAID-IN RETAINED TRANSLATION
(IN THOUSANDS) STOCK CAPITAL EARNINGS ADJUSTMENTS TOTAL
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<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997........... $ 1,464 $112,655 $13,744 $ (118) $127,745
Net income......................... -- -- 7,578 -- 7,578
Restricted stock plans, net........ (1) 783 -- -- 782
Stock options exercised............ 1 251 -- -- 252
Translation adjustments............ -- -- -- 78 78
-------- -------- ------- -------- --------
Balance, March 31, 1998.............. $ 1,464 $113,689 $21,322 $ (40) $136,435
======== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
5
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CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
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THREE MONTHS ENDED
MARCH 31,
--------------------------
(IN THOUSANDS) 1998 1997
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<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 7,578 $ 5,541
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................. 6,994 6,327
Compensation recognized under employee stock plans........ 872 --
Changes in assets and liabilities,
excluding effects of acquisitions:
Accounts receivable, net................................ (3,858) (10,555)
Other current assets.................................... (1,798) (2,831)
Current liabilities, excluding debt..................... (5,017) 3,389
Deferred income taxes................................... 2,362 (325)
Other long-term liabilities, excluding debt............. (362) (171)
--------- ---------
Net cash provided by operating activities................... 6,771 1,375
--------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired.......................... (24,135) --
Additions to property and equipment......................... (4,050) (6,120)
Additions to other assets, net.............................. (1,319) (1,065)
--------- ---------
Net cash flows used in investing activities................. (29,504) (7,185)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt................................ 25,043 --
Payments on long-term debt.................................. (21,049) (241)
Net short-term borrowings................................... 6,660
Net transactions with Equifax............................... -- 8,826
Proceeds from exercise of stock options..................... 252 --
--------- ---------
Net cash flows provided by financing activities............. 10,906 8,585
--------- ---------
Effect of foreign currency exchange rates on cash............. 40 (30)
--------- ---------
Net (decrease) increase in cash............................... (11,787) 2,745
Cash and cash equivalents, beginning of period................ 26,858 1,726
--------- ---------
Cash and cash equivalents, end of period...................... $ 15,071 $ 4,471
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
6
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CHOICEPOINT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. SPIN OFF AND BASIS OF PRESENTATION
ChoicePoint Inc., a Georgia corporation ("ChoicePoint" or the "Company"), was
established through the combination of the businesses that comprised the
Insurance Services Group of Equifax Inc. ("Equifax") within a separate company
and the subsequent spinoff (the "Spinoff") of the Company's outstanding stock
by Equifax as a stock dividend to the shareholders of Equifax. In the Spinoff,
each shareholder of Equifax received one share of the Company's common stock,
par value $.10 per share (the "Common Stock"), for every 10 shares of common
stock of Equifax. The effective time of the Spinoff was July 31, 1997, and the
Common Stock began regular trading on the New York Stock Exchange on August 8,
1997. References to ChoicePoint or the Company mean ChoicePoint Inc., its
subsidiaries and divisions after the Spinoff and the Insurance Services Group
of Equifax prior to the Spinoff.
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
March 31, 1998 and the results of operations for the three months ended March
31, 1998 and 1997 and cash flows for the three months ended March 31, 1998 and
1997. 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, 1997 as filed
with the Securities and Exchange Commission on Form 10-K (File No. 1-13069).
The current period's results are not necessarily indicative of results to be
expected for a full year.
2. NATURE OF OPERATIONS
ChoicePoint provides domestic insurance companies with automated and
traditional underwriting and claims information services to assist those
companies in assessing the insurability of individuals and property and the
validity of insurance claims. ChoicePoint provides background investigations,
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. 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 $68,572,000 and $63,922,000 for the
three months ended March 31, 1998 and 1997, respectively.
5. EARNINGS PER SHARE
In February 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share",
which specifies the computation, presentation, and disclosure requirements for
earnings per share. ChoicePoint adopted SFAS No. 128 in the fourth quarter of
1997. Historical earnings per share for the three months ended March 31, 1997
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. See Note 13 for pro forma earnings per
share for the three months ended March 31, 1997. Actual earnings per share -
basic and actual earnings per share - diluted for the three months ended March
31, 1998 were $.52 and $.50, respectively. Earnings per share - diluted include
the dilutive effect of stock options.
6. TRANSACTIONS WITH EQUIFAX
Prior to the Spinoff, ChoicePoint was charged corporate costs by Equifax
through July 31, 1997. The amount of corporate costs included in the
accompanying consolidated statements of income were $0 and $2,551,000 for the
three months ended March 31, 1998 and 1997, respectively. These allocations
were based on an estimate of the proportion of corporate expenses of Equifax
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 $0
and $1,547,000 for the three months ended March 31, 1998 and 1997,
respectively.
7. INCOME TAXES
Historically, the Company had 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.
8
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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. DEBT
In August 1997, ChoicePoint entered into a $250 million unsecured revolving
credit facility (the "Credit Facility") with a group of banks. The Credit
Facility bears interest at variable rates and is expandable to $300 million,
subject to approval of the lenders. The commitment termination date and final
maturity of the Credit Facility will occur in August 2002. Total borrowings
under the Credit Facility were $99.0 million at March 31, 1998.
Short-term debt at March 31, 1998 consists of $6.7 million from a line of
credit with a bank. There were no short-term borrowings during 1997.
9. STOCK OPTIONS
During the first quarter of 1998, stock options for approximately 587,000
shares of ChoicePoint common stock were granted at fair market value under the
ChoicePoint Inc. 1997 Omnibus Stock Incentive Plan.
10. ACQUISITIONS
In February 1998, the Company accelerated its option to purchase the remaining
27.4% interest in CDB Infotek, which is now a wholly owned subsidiary of
ChoicePoint, at a mutually agreed-upon price of $24.1 million in cash.
Approximately $22.1 million of the purchase price was allocated to goodwill.
11. 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 accompanying balance
sheet.
12. COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive
Income", which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and distribution to
owners, in an annual financial statement that is displayed with the same
prominence as other annual financial statements. Components of comprehensive
income include net income and foreign currency translation adjustments. Annual
financial statements for prior periods will be reclassified as required. The
Company's total comprehensive income was as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
(IN THOUSANDS) 1998 1997
-------------------------------------------------------------------------------
<S> <C> <C>
Net income...................................... 7,578 5,541
Other comprehensive income, net of tax:
Foreign currency translation adjustment....... 78 (1)
------- ------
Comprehensive income............................ $ 7,656 $5,540
======= ======
</TABLE>
9
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13. 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 Spinoff had been completed as of the beginning of
1997. 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>
------------------------------------------------------------------------
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MARCH 31, 1997
------------------------------------------------------------------------
<S> <C>
Historical net income $ 5,541
Pro forma adjustments:
Reversal of interest expense from Equifax(a) 928
Incremental interest expense (b) (1,129)
-------
Pro forma net income $ 5,340
=======
Pro forma earnings per share - basic $ .37
=======
Pro forma weighted average shares - basic (c) 14,585
=======
Pro forma earnings per share - diluted $ .36
=======
Pro forma weighted average shares - diluted (c) 14,837
=======
</TABLE>
Following are the pro forma adjustments to the accompanying pro forma
consolidated net income:
a) To eliminate the $1.5 million ($928,000 net of tax) corporate interest
expense charged to ChoicePoint. Equifax charged interest expense
through the effective date of the Spinoff - July 31, 1997.
b) To record $2.0 million ($1.1 million net of tax) 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 weighted average shares outstanding prior to the Spinoff is
based on the number of ChoicePoint shares issued and outstanding,
including restricted stock, on the date of the Spinoff (August 7,
1997). The pro forma weighted average shares - diluted also include
the dilutive effect of stock options.
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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 ("P&C") - Automated
underwriting and claims information for home and auto insurers,
commercial inspections, worker's compensation audits of commercial
properties, and customized application rating and issuance software
development
Life and Health Insurance Services ("L&H") - Underwriting and claims
information for life and health insurers, including medical records
collection, laboratory services, and investigative services
Business and Government Services ("B&G") - Pre-employment background
searches, drug screenings, public records searches, people locator
services, and UCC searches and filings
RESULTS OF OPERATIONS
Revenue and operating income for the three months ended March 31, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
(IN THOUSANDS) 1998 1997
------------------------------------------------------
<S> <C> <C>
P&C revenue $ 51,412 $ 45,533
L&H revenue 20,119 37,029
B&G revenue 23,019 20,290
--------- ---------
Operating revenue 94,550 102,852
Costs and expenses 79,540 90,654
--------- ---------
Operating income $ 15,010 $ 12,198
========= =========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Consolidated revenue decreased $8.3 million, or 8.1%, from $102.9 million for
the three months ended March 31, 1997 to $94.6 million for the three months
ended March 31, 1998, primarily due to the sale of ChoicePoint's paramedical
examination business in December 1997. Excluding the effect of that sale,
consolidated revenues increased $7.4 million, or 8.5%, from $87.2 million for
the three months ended March 31, 1997 to $94.6 million for the three months
ended March 31, 1998. Revenue from Property and Casualty Insurance Services
grew $5.9 million, or 12.9%, from $45.5 million for the three months ended
March 31, 1997 to $51.4 million for the three months ended March 31, 1998,
driven by strong unit performance in personal lines and software development
sales. Revenue from Life and Health Insurance Services decreased $16.9 million,
or 45.7%, from $37.0 million for the three months ended March 31,
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1997 to $20.1 million for the three months ended March 31, 1998 due primarily
to the sale of the paramedical examination business noted above. Excluding the
effect of the sale, revenue from Life and Health Insurance Services decreased
$1.3 million or 6.1% from $21.4 million for the three months ended March 31,
1997 to $20.1 million for the three months ended March 31, 1998. Lower unit
sales in field inspection and lab products contributed to the 6.1% decrease.
Revenue from Business and Government Services increased $2.7 million, or 13.4%,
from $20.3 million for the three months ended March 31, 1997 to $23.0 million
for the three months ended March 31, 1998. Revenues increased in the majority
of product lines within Business and Government Services. Acquisitions made in
the second and fourth quarters of 1997 represented $917,000 or 33.6% of the
increase in Business and Government Services' first quarter 1998 revenue.
Operating income increased $2.8 million, or 23.1%, from $12.2 million for the
three months ended March 31, 1997 to $15.0 million for the three months ended
March 31, 1998, primarily as a result of strong revenue performance in
automated products. Operating margins increased from 11.9% for the three months
ended March 31, 1997 to 15.9% for the three months ended March 31, 1998.
Net income increased $2.0 million, or 36.8%, from $5.6 million for the three
months ended March 31, 1997 to $7.6 million for the three months ended March
31, 1998. The effective tax rate decreased 4.3 percentage points, as discussed
below.
INCOME TAXES
The effective income tax rate decreased from 47.6% in the first quarter of 1997
to 43.3% in the first quarter of 1998 due primarily to a reduction in state
income taxes. Prior to the Spinoff, 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. As a result,
ChoicePoint's overall state income taxes in the first quarter of 1998 are lower
since the Company is no longer part of Equifax's consolidated group for unitary
tax purposes.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operations increased from $1.4 million in the first three
months of 1997 to $6.8 million in the first three months of 1998. This increase
was primarily attributable to the increase in net income, as adjusted for
depreciation and amortization and due to accounts receivable increasing at a
lower rate than the first quarter of 1997. During the first three months of
1998, ChoicePoint used $29.5 million for investing activities, primarily in the
acquisition of the remaining 27.4% interest in CDB Infotek. Additions to
property and equipment of $4.1 million were primarily for system upgrades.
During the first three months of 1997, additions to property and equipment
accounted for $6.1 million of the $7.2 million of net cash flows used for
investing activities. The Company anticipates additional capital expenditures
of approximately $14.9 million in 1998, which will be used primarily for system
upgrades. Net cash provided by financing activities was $10.9 million in the
first three months of 1998, as the proceeds from the Credit Facility were used
to fund the CDB Infotek acquisition. Additionally, $6.7 million of cash was
provided by short-term borrowings from a bank. Net cash provided by financing
activities was $8.6 million in the first three months of 1997, which was
reflected in an increase in the intercompany debt due to Equifax that was
repaid in connection with the Spinoff.
EBITDA increased $3.5 million, or 18.9%, from $18.5 million for the three
months ended March 31, 1997 to $22.0 million for the three months ended March
31, 1998. 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
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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
("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. During the first quarter of 1998, ChoicePoint used
borrowings under the Credit Facility and from operations to purchase the
remaining 27.4% interest in CDB Infotek. Total debt outstanding under the
Credit Facility was $99.0 million at March 31, 1998 and $112.0 million at
December 31, 1997. The Company also utilized a line of credit ("Line of
Credit") with a bank in the first quarter of 1998. As of March 31, 1998, $6.7
million was outstanding on this Line of Credit. ChoicePoint may use additional
borrowings under the Credit Facility and Line of Credit to finance acquisitions
and general corporate cash requirements.
Interest expense for the first quarter remained unchanged over the prior year
at $1.6 million in 1998 and 1997. 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.
No cash dividends have been paid. The Company does not anticipate paying any
cash dividends on its common stock in the near future.
YEAR 2000
ChoicePoint has assessed and continues to assess the impact of the Year 2000
issue on its reporting systems and operations. The Year 2000 issue exists
because many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. In order to
distinguish 21st century dates from 20th century dates, these date code fields
must be able to accept four digit entries. As a result, certain computer
systems and software programs used, and in some cases developed, by ChoicePoint
may need to be upgraded in order to address Year 2000 requirements.
To address this issue, ChoicePoint is either replacing systems with new systems
that are Year 2000 compliant, or modifying existing systems to be compliant.
During the first quarter of 1998, the Company incurred approximately $321,000
to modify existing computer systems and applications to address the Year 2000
issue and estimates that an additional $1.8 million will be incurred in 1998
and $500,000 in 1999.
If the Company's remediation plan is not successful, there could be a
significant disruption of the Company's ability to transact business with its
major customers and suppliers.
FORWARD-LOOKING STATEMENTS
This report may contain certain information that constitutes forward-looking
statements as that term is defined in the Private Securities Litigation Reform
Act of 1995. Those statements, to the extent they are not historical facts,
should be considered forward-looking and subject to various risks and
uncertainties. Such forward-looking statements are made based upon management's
assessments of various risks and uncertainties, as well as assumptions made in
accordance with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. 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, including those identified in the
Company's Annual Report on Form 10-K for the fiscal year ending December 31,
1997 and the other filings made by the Company from time to time with the
Securities and Exchange Commission. The Company undertakes no obligation to
publicly release any revisions to any forward-looking statement contained
herein to reflect events or circumstances occurring after the date hereof or to
reflect the occurrence of unanticipated events.
13
<PAGE> 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
14
<PAGE> 15
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 outcome 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
Not Applicable.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.01 Financial Data Schedule (for SEC use only).
(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.
15
<PAGE> 16
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)
May 13, 1998 /s/ Derek V. Smith
- ------------------------- --------------------------------------------
Date D.V. Smith, President and
Chief Executive Officer
May 13, 1998 /s/ Doug C. Curling
- ------------------------- --------------------------------------------
Date D. C. Curling, Executive Vice President,
Chief Financial Officer and Treasurer
16
<PAGE> 17
EXHIBIT INDEX
Exhibit Description of Exhibit
27.01 Financial Data Schedule (for SEC use only).
17
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<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 15,071
<SECURITIES> 9,000
<RECEIVABLES> 94,144
<ALLOWANCES> 1,935
<INVENTORY> 0
<CURRENT-ASSETS> 138,451
<PP&E> 93,540
<DEPRECIATION> 49,984
<TOTAL-ASSETS> 372,096
<CURRENT-LIABILITIES> 78,980
<BONDS> 0
0
0
<COMMON> 1,464
<OTHER-SE> 134,971
<TOTAL-LIABILITY-AND-EQUITY> 372,096
<SALES> 94,550
<TOTAL-REVENUES> 94,550
<CGS> 79,540
<TOTAL-COSTS> 79,540
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,645
<INCOME-PRETAX> 13,365
<INCOME-TAX> 5,787
<INCOME-CONTINUING> 7,578
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,578
<EPS-PRIMARY> .52
<EPS-DILUTED> .50
</TABLE>
