<PAGE> 1
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, 1998
--------------------------------
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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-2309650
- ----------------------------------------------- -------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1000 Alderman Drive Alpharetta, Georgia 30005
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(770) 752-6000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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.
<TABLE>
<CAPTION>
Class Outstanding at October 31, 1998
----- -------------------------------
<S> <C>
Common Stock, $.10 Par Value 14,646,840
</TABLE>
1
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CHOICEPOINT INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Income -
Three Months Ended September 30, 1998 and 1997 and 3
Nine Months Ended September 30, 1998 and 1997
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 4
Consolidated Statement of Shareholders' Equity -
Nine Months Ended September 30, 1998 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Part II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
</TABLE>
2
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CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
==================================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
==================================================================================================
<S> <C> <C> <C> <C>
Operating revenue ........................ $101,887 $106,489 $303,139 $317,964
Costs and expenses:
Costs of services ....................... 67,904 71,819 200,823 212,761
Selling, general and administrative ..... 17,741 18,860 54,580 61,636
-------- -------- -------- --------
Total costs and expenses .............. 85,645 90,679 255,403 274,397
Operating income ......................... 16,242 15,810 47,736 43,567
Interest expense ......................... 1,801 1,674 5,271 4,915
-------- -------- -------- --------
Income before income taxes ............... 14,441 14,136 42,465 38,652
Provision for income taxes ............... 6,253 6,358 18,387 18,033
-------- -------- -------- --------
Net income ............................... $ 8,188 $ 7,778 $ 24,078 $ 20,619
======== ======== ======== ========
Earnings per share - basic (Note 5) ...... $ .57 $ -- $ 1.65 $ --
======== ======== ======== ========
Weighted average shares - basic ......... 14,474 -- 14,575 --
======== ======== ======== ========
Earnings per share - diluted (Note 5) .... $ .55 $ -- $ 1.60 $ --
======== ======== ======== ========
Weighted average shares - diluted ....... 14,851 -- 15,029 --
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
3
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CHOICEPOINT INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
====================================================================================================
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PAR VALUES) 1998 1997
====================================================================================================
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................... $ 8,469 $ 26,858
Marketable securities .......................................... -- 9,000
Accounts receivable, net of allowance for doubtful accounts
of $2,756 at September 30, 1998 and $1,847 at
December 31, 1997 ............................................. 100,904 90,266
Deferred income tax assets ..................................... 9,611 10,503
Other current assets ........................................... 10,413 9,492
--------- ---------
Total current assets ........................................ 129,397 146,119
Property and equipment, net ..................................... 42,184 42,985
Goodwill, net ................................................... 159,522 127,731
Deferred income tax assets ...................................... 19,473 15,406
Other ........................................................... 39,067 27,730
--------- ---------
Total Assets .................................................... $ 389,643 $ 359,971
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt ....... $ 11,021 $ 593
Accounts payable ............................................... 21,362 17,371
Accrued salaries and bonuses ................................... 13,588 15,664
Other current liabilities ...................................... 42,426 43,610
--------- ---------
Total current liabilities ................................... 88,397 77,238
Long-term debt, less current maturities ......................... 99,322 95,457
Postretirement benefit obligations .............................. 54,442 53,834
Other long-term liabilities ..................................... 3,935 5,697
--------- ---------
Total liabilities ........................................... 246,096 232,226
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 -
14,646 in 1998 and 14,641 in 1997 ............................. 1,465 1,464
Paid-in capital ................................................. 114,456 112,655
Retained earnings ............................................... 37,822 13,744
Foreign currency translation adjustments ........................ (86) (118)
Stock held by employee benefit trusts, at cost,
207 shares in 1998 ............................................. (10,110) --
--------- ---------
Total shareholders' equity ..................................... 143,547 127,745
--------- ---------
Total Liabilities and Shareholders' Equity ...................... $ 389,643 $ 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 STOCK HELD
COMMON PAID-IN RETAINED TRANSLATION BY BENEFIT
(IN THOUSANDS) STOCK CAPITAL EARNINGS ADJUSTMENTS TRUSTS TOTAL
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 ........ $ 1,464 $112,655 $13,744 $(118) $ -- $ 127,745
Net income ...................... -- -- 24,078 -- -- 24,078
Restricted stock plans, net ..... (1) 1,544 -- -- -- 1,543
Stock options exercised ......... 2 257 -- -- -- 259
Cost of shares repurchased ...... -- -- -- -- (10,110) (10,110)
Translation adjustments ......... -- -- -- 32 -- 32
------- -------- ------- ----- -------- ---------
Balance, September 30, 1998 ....... $ 1,465 $114,456 $37,822 $ (86) $(10,110) $ 143,547
======= ======== ======= ===== ======== =========
</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>
================================================================================================
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1998 1997
================================================================================================
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 24,078 $ 20,619
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................... 22,108 20,400
Compensation recognized under employee stock plans ...... 1,709 --
Changes in assets and liabilities,
excluding effects of acquisitions:
Accounts receivable, net .............................. (8,410) (11,169)
Marketable securities and other current assets ........ 8,197 (7,916)
Current liabilities, excluding debt ................... (977) 25,592
Deferred income taxes ................................. (3,175) (3,822)
Other long-term liabilities, excluding debt ........... 1,087 1,110
-------- ---------
Net cash provided by operating activities ................. 44,617 44,814
-------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired ........................ (43,877) (4,049)
Additions to property and equipment ....................... (9,206) (13,614)
Additions to other assets, net ............................ (14,483) (3,754)
-------- ---------
Net cash used by investing activities ..................... (67,566) (21,417)
-------- ---------
Cash flows from financing activities:
Proceeds from long-term debt .............................. 25,042 112,000
Payments on long-term debt ................................ (21,339) (10,737)
Net short-term borrowings ................................. 10,590 --
Payment of debt assumed from Equifax ...................... -- (29,000)
Payment of Equifax intercompany debt ...................... -- (72,602)
Net transactions with Equifax ............................. -- 1,609
Purchases of stock held by employee benefit trusts ........ (10,110) --
Proceeds from exercise of stock options ................... 259 --
Other ..................................................... -- 583
-------- ---------
Net cash provided by financing activities ................. 4,442 1,853
-------- ---------
Effect of foreign currency exchange rates on cash .......... 118 299
-------- ---------
Net (decrease) increase in cash and cash equivalents ....... (18,389) 25,549
Cash and cash equivalents, beginning of period ............. 26,858 1,726
-------- ---------
Cash and cash equivalents, end of period ................... $ 8,469 $ 27,275
======== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
6
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CHOICEPOINT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. SPINOFF 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 ten shares of Equifax
common stock owned. 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.
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,
1998 and the results of operations for the three months and nine months ended
September 30, 1998 and 1997 and cash flows for the nine months ended September
30, 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.
7
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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 $84,078,000 and $66,113,000 for the three months ended
September 30, 1998 and 1997, respectively, and $227,027,000 and $195,833,000 for
the nine months ended September 30, 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 September 30,
1997 and nine months ended September 30, 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
14 for pro forma earnings per share for the three months ended March 31, 1997
and June 30, 1997 and the three months and nine months ended September 30, 1997.
Earnings per share - diluted includes 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 $850,000 for the three months
ended September 30, 1998 and 1997, respectively and $0 and $5,952,000 for the
nine months ended September 30, 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
$518,000 for the three months ended September 30, 1998 and 1997, respectively,
and $0 and $3,612,000 for the nine months ended September 30, 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.
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<PAGE> 9
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 September 30, 1998.
Short-term debt at September 30, 1998 consists of $10.6 million from a line of
credit with a bank. There were no short-term borrowings during 1997.
Subsequent to the end of the third quarter, in October 1998, the Company
borrowed an additional $90.0 million under the Credit Facility primarily to fund
the acquisition of Customer Development Corporation, discussed below.
In addition, the Company entered into two interest rate swap agreements in
October 1998 to reduce the impact of changes in interest rates on its floating
rate long-term obligation. The two agreements have a combined notional amount of
$90.0 million and mature in October 2000. The agreements effectively change the
Company's interest rate exposure to a fixed rate of 4.58% plus a credit spread.
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
During the third quarter of 1998, ChoicePoint made a minority equity investment
in Intertech Information Management Inc., a provider of document management and
imaging services. During the second quarter of 1998, the Company acquired the
assets of Attest National Drug Testing, Inc., a drug testing information
services company, and Application Profiles, Inc., a full service pre-employment
screening company. During the first quarter of 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. The total purchase price of all three
acquisitions and the equity investment was approximately $43.9 million.
Approximately $36.1 million of that amount was allocated to goodwill. The
acquisitions were accounted for as purchases.
Subsequent to September 30, 1998, the Company announced the acquisitions of
Informus Corporation, a provider of web-based, pre-employment screening
services, and Customer Development Corporation, a database marketing company.
The total purchase price of these two acquisitions was $89.5 million plus
transaction costs and net worth adjustments.
11. GRANTOR TRUSTS
ChoicePoint has established two grantor trusts totaling $10.0 million plus
accumulated interest earnings. The funds in the grantor trusts are 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. During the second and third quarters of 1998, funds from the
grantor trusts totaling $10.1 million were used to purchase 206,600 shares of
ChoicePoint common stock, which are reflected as stock held by employee benefit
trusts, at cost, in the September 30, 1998 balance sheet. Approximately $376,000
of cash
9
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remains in the grantor trusts at September 30, 1998 and is included in cash and
cash equivalents in the accompanying balance sheets.
12. SOFTWARE DEVELOPMENT
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires
companies to capitalize certain direct costs, including external, payroll and
interest costs. The Company has historically capitalized significant costs of
software developed or obtained for internal use. For the nine months ended
September 30, 1998, approximately $5.6 million of costs of software developed
for internal use was capitalized.
13. 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1998 1997 1998 1997
==========================================================================================================
<S> <C> <C> <C> <C>
Net income ................................ $8,188 $ 7,778 $24,078 $ 20,619
Other comprehensive income, net of tax:
Foreign currency translation adjustment ... 35 (85) 32 (69)
------ ------- ------- --------
Comprehensive income ...................... $8,223 $ 7,693 $24,110 $ 20,550
====== ======= ======= ========
</TABLE>
14. 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.
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<PAGE> 11
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
===========================================================
NINE MONTHS
FIRST SECOND THIRD ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER SEPTEMBER 30
===================================================================================================================
<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 earnings per share - basic ................ $ .37 $ .49 $ .53 $ 1.38
======== ======== ======== ========
Pro forma weighted average shares - basic (c) ....... 14,585 14,585 14,584 14,584
======== ======== ======== ========
Pro forma earnings per share - diluted .............. $ .36 $ .48 $ .52 $ 1.36
======== ======== ======== ========
Pro forma weighted average shares - diluted (c) ..... 14,837 14,837 14,852 14,852
======== ======== ======== ========
</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 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) 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. 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, UCC searches and filings, and database marketing services
RESULTS OF OPERATIONS
Revenue and operating income for the three months and nine months ended
September 30, 1998 and 1997 were as follows (note: certain prior year amounts
have been reclassified to conform with the current year presentation):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1998 1997 1998 1997
===================================================================================
<S> <C> <C> <C> <C>
P&C revenue ............. $ 55,498 $ 48,272 $167,181 $142,171
L&H revenue ............. 19,434 35,690 59,830 110,621
B&G revenue ............. 26,955 22,527 76,128 65,172
-------- -------- -------- --------
Operating revenue ....... 101,887 106,489 303,139 317,964
Costs and expenses ...... 85,645 90,679 255,403 274,397
-------- -------- -------- --------
Operating income ........ $ 16,242 $ 15,810 $ 47,736 $ 43,567
======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
Consolidated revenue decreased $4.6 million, or 4.3%, from $106.5 million for
the three months ended September 30, 1997 to $101.9 million for the three months
ended September 30, 1998, primarily due to the sale of ChoicePoint's paramedical
examination business in December 1997. Excluding the effect of that sale,
consolidated revenues increased $10.3 million, or 11.2%, from $91.6 million for
the three months ended September 30, 1997 to $101.9 million for the three months
ended September 30, 1998.
Revenue from Property and Casualty Insurance Services increased $7.2 million, or
15.0%, from $48.3 million for the three months ended September 30, 1997 to $55.5
million for the three months ended September 30, 1998, due to continued strong
unit performance in personal lines products and a $1.6 million
12
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progress payment from the installation of a new generation of workers
compensation software at a large insurance customer. These two areas of revenue
growth were partially offset by revenue unit declines in the field related
property businesses.
Revenue from Life and Health Insurance Services decreased $16.3 million, or
45.5%, from $35.7 million for the three months ended September 30, 1997 to $19.4
million for the three months ended September 30, 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 $1.4 million, or
6.5%, from $20.8 million for the three months ended September 30, 1997 to $19.4
million for the three months ended September 30, 1998, due primarily to unit
decline in traditional field-based life and health inspection products and was
consistent with the run-rate decreases in the first six months of the year.
Revenue from Business and Government Services increased $4.4 million, or 19.7%,
from $22.5 million for the three months ended September 30, 1997 to $27.0
million for the three months ended September 30, 1998. Revenue increased in the
majority of product lines within this market, with incremental revenue from
acquisitions made since the third quarter of 1997 contributing $3.3 million of
the increase.
Operating income increased $432,000, or 2.7%, from $15.8 million for the three
months ended September 30, 1997 to $16.2 million for the three months ended
September 30, 1998, primarily as a result of strong revenue performance in
property and casualty personal lines products. Included in operating results
were $1.8 million of expenses for the three months ended September 30, 1998, and
$300,000 for the three months ended September 30, 1997, incurred to modify
existing computer systems and applications to address the Year 2000 issues.
Operating margins increased from 14.8% for the three months ended September 30,
1997 to 15.9% for the three months ended September 30, 1998.
Net income increased $410,000, or 5.3%, from $7.8 million for the three months
ended September 30, 1997 to $8.2 million for the three months ended September
30, 1998, primarily as a result of the increase in operating income and
favorable tax rates discussed below.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Consolidated revenue decreased $14.8 million, or 4.7%, from $318.0 million in
the first nine months of 1997 to $303.1 million in the first nine months of
1998, primarily due to the sale of ChoicePoint's paramedical examination
business in December 1997. Excluding the effect of that sale, consolidated
revenues increased $31.6 million, or 11.7%, from $271.5 million in the first
nine months of 1997 to $303.1 million in the first nine months of 1998.
Revenue from Property and Casualty Insurance Services increased $25.0 million,
or 17.6%, from $142.2 million in the first nine months of 1997 to $167.2 million
in the first nine months of 1998, primarily due to continued strong unit
performance in personal lines products and the installation of a new generation
of commercial worker's compensation software at a large insurance customer which
resulted in software development progress payments of $8.2 million in the second
quarter of 1998 and $1.6 million in the third quarter of 1998. These two areas
of revenue growth were partially offset by revenue unit declines in the field
related property businesses.
Revenue from Life and Health Insurance Services decreased $50.8 million, or
45.9%, from $110.6 million in the first nine months of 1997 to $59.8 million in
the first nine months of 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 $4.3 million, or 6.7%, from $64.1
million for the nine months ended September 30, 1997 to $59.8 million for the
nine months ended September 30, 1998, due primarily to unit decline in
traditional field-based life and health inspection reports and laboratory
services. The unit declines in laboratory services was due primarily to the loss
of a customer in the fourth quarter of 1997.
13
<PAGE> 14
Revenue from Business and Government Services increased $11.0 million, or 16.8%,
from $65.2 million in the first nine months of 1997 to $76.1 million in the
first nine months of 1998. Incremental revenue from acquisitions made since the
first quarter of 1997 contributed $6.2 million of the increase.
Operating income increased $4.2 million, or 9.6%, from $43.6 million in the
first nine months of 1997 to $47.7 million in the first nine months of 1998,
primarily as a result of strong revenue performance in property and casualty
personal lines products. Included in operating results were $3.0 million of
expenses for the nine months ended September 30, 1998, and $787,000 for the nine
months ended September 30, 1997, incurred to modify existing computer systems
and applications to address the Year 2000 issues. Operating margins increased
from 13.7% for the first nine months of 1997 to 15.7% for the first nine months
of 1998.
Net income increased $3.5 million, or 16.8%, from $20.6 million in the first
nine months of 1997 to $24.1 million in the first nine months of 1998 as a
result of the strong operating performance and favorable tax rates discussed
below.
INCOME TAXES
The effective income tax rate decreased from 46.7% in the first nine months of
1997 to 43.3% in the first nine months 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 nine months 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 decreased from $44.8 million in the first nine
months of 1997 to $44.6 million in the first nine months of 1998. This decrease
was primarily attributable to decreased current liabilities partially offset by
decreased marketable securities and other current assets and higher net income
and depreciation and amortization. During the first nine months of 1998,
ChoicePoint used $67.6 million for investing activities, of which $43.9 million
was used in the acquisitions of Attest National Drug Testing, Inc., Application
Profiles, Inc., the remaining 27.4% interest in CDB Infotek, and a minority
equity investment in Intertech Information Management Inc. Additions to property
and equipment of $9.2 million in the first nine months of 1998 were primarily
for system upgrades. During the first nine months of 1997, additions to property
and equipment accounted for $13.6 million of the $21.4 million of net cash flows
used for investing activities. Building and leasehold improvements for an office
facility in Alpharetta, Georgia and the expansion of the existing Osborn
Laboratories, Inc. facility in Olathe, Kansas represented approximately $3.1
million of the $13.6 million of additions in the first nine months of 1997 with
the remainder due primarily to system upgrades. The Company anticipates
additional capital expenditures of approximately $4.0 million in 1998, which
will be used primarily for system upgrades. Net cash provided by financing
activities was $4.4 million in the first nine months of 1998, as the proceeds
from a credit facility and two lines of credit were used to fund the
acquisitions, as discussed above. 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.
EBITDA increased $5.8 million, or 9.2%, from $64.0 million for the nine months
ended September 30, 1997 to $69.8 million for the nine months ended September
30, 1998. EBITDA represents income before taxes, plus depreciation and
amortization and interest expense. EBITDA is not presented 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.
14
<PAGE> 15
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. Total debt outstanding under the Credit Facility was
$99.0 million at September 30, 1998 and $95.0 million at December 31, 1997. The
Company also utilized lines of credit ("Lines of Credit") with two banks in the
first nine months of 1998. As of September 30, 1998, $10.6 million was
outstanding on these Lines of Credit. In October 1998, the Company borrowed an
additional $90.0 million under the Credit Facility, primarily to fund the
acquisition of Customer Development Corporation, disclosed in Note 10 to the
accompanying notes to the consolidated financial statements. In addition, the
Company entered into two interest rate swap agreements in October 1998, as
discussed in Note 8 to the accompanying notes to the consolidated financial
statements. In the future, ChoicePoint may use additional borrowings under the
Credit Facility and Lines of Credit to finance acquisitions and for general
corporate cash requirements.
Interest expense was $1.8 million and $1.7 million for the three months ended
September 30, 1998 and 1997, respectively, and $5.3 million and $4.9 million for
the nine months ended September 30, 1998 and 1997, respectively. Prior to the
Spinoff, 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
The term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000
approaches. 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 interpret four digit entries.
The Company's State of Readiness - ChoicePoint has established a central Year
2000 department to coordinate and report, on a continuing basis, with regard to
the assessment, remediation planning, implementation, and contingency planning
processes directed toward addressing the Company's Year 2000 issues.
ChoicePoint is engaged in a continuous process of assessing the impact of the
Year 2000 issue on its reporting system and operations. As part of that process,
certain computer systems and software programs used, and in some cases
developed, by ChoicePoint have been or will need to be upgraded in order to
address Year 2000 requirements. The Company is also assessing its
non-information technology systems, which includes systems that contain embedded
technology. However, the Company anticipates that these systems present less of
a risk to the Company's operations.
ChoicePoint is also continuing to supply and receive data and inquiries from its
vendors and customers. Current remediation efforts are in place to accept and
transmit data in both 2-digit and 4-digit formats within applicable ChoicePoint
applications.
ChoicePoint uses the Gartner Group's COMpliance Progress And REadiness (COMPARE)
Scale to measure its progress in addressing the Year 2000 issue. The COMPARE
scale has five levels:
Level One - PRELIMINARY ACTIVITY (problem not determined and risk is
high)
Level Two - PROBLEM DETERMINATION (IT and non-IT inventories completed,
risk levels understood)
Level Three - PLAN COMPLETE/RESOURCES COMMITTED (estimated costs have
been determined, required resources have been committed, initial
project plans complete)
15
<PAGE> 16
Level Four - OPERATIONAL SUSTAINABILITY (systems and key partners are
compliant and certified)
Level Five - FULLY COMPLIANT (all systems are compliant and the Year
2000 threat has been completely neutralized throughout the business
process chain)
At a minimum, all significant ChoicePoint applications have achieved level three
and several areas have reached level four.
The Costs to Address the Company's Year 2000 Issues - During 1997 and the first
nine months of 1998, the Company incurred approximately $1.3 million and $3.0
million, respectively, to modify existing computer systems and applications to
address the Year 2000 issue and estimates that an additional $3.0 million will
be incurred in 1998. The Company's previous estimate of Year 2000 costs for 1999
was $2.5 million; however, this amount is now being revised and could increase
up to the 1998 levels. The Company has funded and expects to continue to fund,
the costs of Year 2000 assessment and remediation from available cash flows.
The Risks of the Company's Year 2000 Issues - ChoicePoint is continuously
identifying Year 2000 risks and developing contingency plans to address these
risks as they are identified. If the Company's remediation plan is not
successful, there would be a significant disruption of the Company's ability to
transact business with its major customers and suppliers and it could have a
material adverse effect on the Company's financial position and results of
operations. The Company has not begun the systems integration testing phase of
its Year 2000 initiative. Until system integration testing is substantially in
process, the Company cannot completely determine the success of its remediation
plan. However, ChoicePoint believes it is devoting the resources necessary to
achieve a level of readiness that will meet its Year 2000 challenges in a timely
manner. ChoicePoint believes its assessment, remediation planning, and plan
implementation processes will be effective to achieve Year 2000 readiness.
The Company's Contingency Plans - The Company is developing contingency plans as
business risks are identified to help mitigate the risk of a disruption in
operations resulting from a Year 2000-related event. The Company will
continuously reassess Year 2000 risks and develop contingency plans for
reasonably likely worst case scenarios.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of the transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the statement as of the beginning of any fiscal
quarter after issuance.
The Company has not yet quantified the impact of adopting SFAS No. 133 on it's
financial statements and has not determined the timing of or method of it's
adoption of the statement. The adoption of SFAS No. 133 is not expected to have
a material impact on earnings or other comprehensive income. However, changes in
the Company's derivative instruments and hedging activities could increase
volatility in earnings and other comprehensive income.
16
<PAGE> 17
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
17
<PAGE> 18
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
(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.
18
<PAGE> 19
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, 1998 /s/ Derek V. Smith
- -------------------- ----------------------------------
Date Derek V. Smith, President and
Chief Executive Officer
November 12, 1998 /s/ Doug C. Curling
- -------------------- ----------------------------------
Date Doug C. Curling, Executive Vice President,
Chief Financial Officer and Treasurer
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description of Exhibit
- ------- ----------------------
<S> <C>
27.01 Financial Data Schedule
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 8,469
<SECURITIES> 0
<RECEIVABLES> 103,660
<ALLOWANCES> 2,756
<INVENTORY> 0
<CURRENT-ASSETS> 129,397
<PP&E> 97,487
<DEPRECIATION> 55,303
<TOTAL-ASSETS> 389,643
<CURRENT-LIABILITIES> 88,397
<BONDS> 0
0
0
<COMMON> 1,465
<OTHER-SE> 142,082
<TOTAL-LIABILITY-AND-EQUITY> 389,643
<SALES> 303,139
<TOTAL-REVENUES> 303,139
<CGS> 200,823
<TOTAL-COSTS> 200,823
<OTHER-EXPENSES> 54,580
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,271
<INCOME-PRETAX> 42,465
<INCOME-TAX> 18,387
<INCOME-CONTINUING> 24,078
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,078
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.60
</TABLE>
