<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, 1999
------------------
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
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(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, 1999
----- -------------------------------
<S> <C>
Common Stock, $.10 Par Value 14,757,057
</TABLE>
1
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CHOICEPOINT INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION Page No.
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Income -
Three Months Ended September 30, 1999 and 1998 and 3
Nine Months Ended September 30, 1999 and 1998
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998 4
Consolidated Statement of Shareholders' Equity -
Nine Months Ended September 30, 1999 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998 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 16
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 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 17
Signatures 18
Exhibit Index 19
</TABLE>
2
<PAGE> 3
CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
==============================================================================================
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1999 1998
==============================================================================================
<S> <C> <C> <C> <C>
Operating revenue ............................ $110,513 $101,887 $318,176 $303,139
Costs and expenses:
Costs of services .......................... 69,579 67,904 200,490 200,823
Selling, general, and administrative ....... 19,771 17,741 59,967 54,580
Unusual items .............................. -- -- 1,583 --
-------- -------- -------- --------
Total costs and expenses ............... 89,350 85,645 262,040 255,403
Operating income ............................. 21,163 16,242 56,136 47,736
Gain on sale of businesses, net .............. -- -- 2,513 --
Interest expense ............................. 2,969 1,801 8,438 5,271
-------- -------- -------- --------
Income before income taxes ................... 18,194 14,441 50,211 42,465
Provision for income taxes ................... 7,878 6,253 21,736 18,387
-------- -------- -------- --------
Net income ................................... $ 10,316 $ 8,188 $ 28,475 $ 24,078
======== ======== ======== ========
Earnings per share - basic ................... $ .71 $ .57 $ 1.97 $ 1.65
======== ======== ======== ========
Weighted average shares - basic ............ 14,504 14,474 14,473 14,575
Earnings per share - diluted ................. $ .68 $ .55 $ 1.89 $ 1.60
======== ======== ======== ========
Weighted average shares - diluted .......... 15,202 14,851 15,045 15,029
Proforma earnings per share based on 2- for-1
stock split (Note 6):
Proforma earnings per share - basic .......... $ .36 $ .28 $ .98 $ .83
======== ======== ======== ========
Proforma weighted average shares - basic ... 29,008 28,948 28,946 29,150
Proforma earnings per share - diluted ........ $ .34 $ .28 $ .95 $ .80
======== ======== ======== ========
Proforma weighted average shares - diluted . 30,404 29,702 30,090 30,058
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE> 4
CHOICEPOINT INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
=================================================================================================
September 30, December, 31
(In thousands, except par values) 1999 1998
=================================================================================================
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................. $ 12,681 $ 18,883
Accounts receivable, net of allowance for doubtful accounts
of $3,706 at September 30, 1999 and $3,286 at
December 31,1998 ........................................ 107,515 103,191
Deferred income tax assets ................................ 7,356 8,372
Other current assets ...................................... 11,455 13,160
------------ ------------
Total current assets .................................. 139,007 143,606
Property and equipment, net ................................. 52,197 55,279
Goodwill, net ............................................... 255,138 253,140
Deferred income tax assets .................................. 20,555 19,010
Other ....................................................... 51,095 63,164
------------ ------------
Total Assets ................................................ $ 517,992 $ 534,199
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt .. $ 315 $ 5,623
Notes payable for acquisitions ............................ -- 22,701
Accounts payable .......................................... 21,582 24,645
Accrued salaries and bonuses ............................. 17,872 17,537
Other current liabilities ................................. 42,179 54,454
------------ ------------
Total current liabilities .............................. 81,948 124,960
Long-term debt, less current maturities ..................... 191,560 191,697
Postretirement benefit obligations .......................... 50,366 53,251
Other long-term liabilities ................................. 5,700 4,719
------------ ------------
Total liabilities ....................................... 329,574 374,627
------------ ------------
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 -
14,752 in 1999 and 14,660 in 1998 ....................... 1,475 1,466
Paid-in capital ........................................... 120,836 119,037
Retained earnings ......................................... 77,638 49,163
Foreign currency translation adjustments .................. (113) (176)
Stock held by employee benefit trusts, at cost,
234 shares in 1999 and 203 shares in 1998 .............. (11,418) (9,918)
------------ ------------
Total shareholders' equity .............................. 188,418 159,572
------------ ------------
Total Liabilities and Shareholders' Equity .................. $ 517,992 $ 534,199
============ ============
</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>
Stock Held
by
Cumulative Employee
Comprehensive Common Paid-in Retained Translation Benefit
(In thousands) Income Stock Capital Earnings Adjustments Trusts Total
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 ... $1,466 $ 119,037 $49,163 $ (176) $ (9,918) $ 159,572
Net income ................ $ 28,475 -- -- 28,475 -- -- 28,475
Restricted stock plans, net -- 2 (276) -- -- -- (274)
Stock options exercised ... -- 7 2,075 -- -- -- 2,082
Cost of shares repurchased -- -- -- -- -- (1,500) (1,500)
Translation adjustments ... 63 -- -- -- 63 -- 63
------------- ------ --------- ------- ----------- --------- ---------
Comprehensive income ........ $ 28,538
=============
Balance September 30, 1999 .. $1,475 $ 120,836 $77,638 $ (113) $ (11,418) $ 188,418
====== ========= ======= =========== ========= =========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
5
<PAGE> 6
CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
=====================================================================================
Nine months ended
September 30,
-----------------------
1999 1998
=====================================================================================
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................... $ 28,475 $ 24,078
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ...................... 28,808 22,108
Provision for unusual items ........................ 1,583 --
Gain on sale of businesses ......................... (2,513) --
Compensation recognized under employee stock plans . 2,411 1,709
Payment on employee stock plans .................... (3,378) --
Changes in assets and liabilities,
excluding effects of acquisitions and divestiture:
Accounts receivable, net ......................... (3,154) (8,410)
Marketable securities and other current assets ... 1,347 8,197
Current liabilities, excluding debt .............. (15,951) (977)
Deferred income taxes ............................ 1,073 (3,175)
Other long-term liabilities, excluding debt ...... (1,904) 1,087
-------- --------
Net cash provided by operating activities ............ 36,797 44,617
-------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired ................... (14,795) (43,877)
Payment of notes payable for acquisitions ............ (22,701) --
Cash proceeds from sale of business unit ............. 22,000 --
Additions to property and equipment .................. (10,557) (9,206)
Additions to other assets, net ....................... (12,116) (14,483)
-------- --------
Net cash flows used by investing activities .......... (38,169) (67,566)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt ......................... 30,000 25,042
Payments on long-term debt ........................... (30,137) (21,339)
Net short-term borrowings ............................ (5,308) 10,590
Purchases of stock held by employee benefit trusts ... (1,500) (10,110)
Proceeds from exercise of stock options .............. 2,082 259
-------- --------
Net cash flows (used) provided by financing activities (4,863) 4,442
-------- --------
Effect of foreign currency exchange rates on cash ...... 33 118
-------- --------
Net decrease in cash ................................... (6,202) (18,389)
Cash and cash equivalents, beginning of period ......... 18,883 26,858
-------- --------
Cash and cash equivalents, end of period ............... $ 12,681 $ 8,469
======== ========
</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, 1999
(UNAUDITED)
1. ORGANIZATION
ChoicePoint Inc., a Georgia corporation ("ChoicePoint" or the "Company"), is a
provider of Actionable Intelligence(TM) that helps businesses, governments and
individuals make better, more timely and more informed business decisions.
ChoicePoint's businesses are focused on two primary markets - Insurance
Services and Business and Government Services.
The Insurance Services group provides information products and services
used in the underwriting, claims, and marketing processes by property and
casualty and life insurers. Major offerings to the personal lines property
and casualty market include claims history databases, motor vehicle
records, credit information, and modeling services. Additionally,
ChoicePoint provides customized policy rating and issuance software and
property inspections and audits to the commercial insurance market, and
laboratory testing services and related technology solutions to the life
and health insurance market.
The Business and Government Services group provides direct marketing and
information products and services to Fortune 1000 corporations, consumer
finance companies, asset-based lenders, legal and professional service
providers, health care service providers and federal, state and local
government agencies. Major offerings include pre-employment background and
drug screenings, public record searches, credential verification, due
diligence information, uniform commercial code searches and filings, and
people and shareholder locator searches.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of ChoicePoint Inc.
and its wholly-owned subsidiaries. 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 reflect all adjustments which are, in the opinion of management,
necessary for a fair statement of the financial position of ChoicePoint as of
September 30, 1999 and the results of operations and cash flows for the three
months and nine months ended September 30, 1999 and 1998. 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, 1998 as filed with the Securities and Exchange
Commission in the Annual Report 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.
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.
7
<PAGE> 8
4. REVENUE AND COSTS OF SERVICES PRESENTATION
Motor vehicle records registry revenue, the fee charged by states for motor
vehicle records which is passed on by ChoicePoint to its customers, is excluded
from revenue and is recorded as a reduction to cost of services in the
consolidated financial statements. Registry revenue was $89,308,000 and
$84,078,000 for the three months ended September 30, 1999 and 1998,
respectively, and $266,604,000 and $227,027,000 for the nine months ended
September 30, 1999 and 1998, respectively.
ChoicePoint Direct Inc., formally Customer Development Corporation, a business
acquired in the fourth quarter of 1998, passes on material, shipping and
postage charges to its customers. These charges are excluded from revenue and
are recorded as a reduction to cost of services in the consolidated financial
statements. Charges passed through to customers for the three months and nine
months ended September 30, 1999 were $10,308,000 and $29,521,000, respectively.
5. EARNINGS PER SHARE
The net income amount used in the numerator of the Company's earnings per share
calculations is the same for both basic and diluted earnings per share. The
average outstanding shares used in the denominator of the calculation for
earnings per share - diluted includes only the dilutive effect of stock
options.
6. STOCK SPLIT
During the October 19, 1999 meeting of the Company's Board of Directors, the
Board approved a 2-for-1 stock split, to be effected in the form of a stock
dividend, payable on November 24, 1999. Shareholders of record on November 10,
1999 will receive one additional share of common stock for each share held on
the record date. See the Consolidated Statements of Income for proforma
earnings per share.
7. 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 $189,000,000 at September 30, 1999. In addition,
there was $2,875,000 of other long-term debt and no short-term debt outstanding
as of September 30, 1999.
8. STOCK OPTIONS
During the nine months ended September 30, 1999, stock options to purchase
approximately 644,000 shares of ChoicePoint common stock were granted at fair
market value under the ChoicePoint Inc. 1997 Omnibus Stock Incentive Plan.
9. ACQUISITIONS
During the second quarter of 1999, the Company acquired Washington Document
Service, Inc., a leading nationwide court document research and retrieval
company. In the third quarter of 1999, the Company announced the acquisition of
Data Tracks Technology, Inc., d/b/a Public Records On Line, a privately-held
online public record information company, and the assets of its affiliates. In
addition, the Company made additional minority equity investments in Intertech
Information Management Inc., a provider of document management and imaging
services. The total purchase price of the acquisitions, which were accounted
for as purchases, and the equity investment was approximately $15,048,000, with
approximately $10,785,000 of that amount allocated to goodwill.
8
<PAGE> 9
10. GAIN ON SALE OF BUSINESSES
In December 1998, the Company sold its life and health insurance field
underwriting services and insurance claims investigation services to PMSI
Services, Inc. and recorded a gain on the sale. The proceeds from the sale
included $12.0 million in warrants and $10.0 million in a note receivable. The
warrants were discounted by $4.6 million at December 31, 1998. In March 1999,
ChoicePoint received $22.0 million plus interest from PMSI Services, Inc. for
the prepayment of the note receivable and the repurchase of the warrants. As a
result, ChoicePoint recognized an additional net pretax gain on the sale of
$2.5 million. The net pretax gain includes the unamortized discount of $4.3
million less transaction-related costs including lease termination, additional
asset write-offs and personnel-related costs of $1.8 million.
In December 1998, the net pretax gain was also net of transaction-related
costs, including lease termination and personnel-related costs of $5.9 million
that were accrued at the time of the divestiture. As of September 30, 1999,
approximately $4.2 million has been charged against the total $7.7 million
accrued transaction-related costs.
11. UNUSUAL ITEMS
Operating income for the first quarter of 1999 includes $1.6 million of unusual
expense items. The unusual expense items relate primarily to asset impairments
($732,000), severance costs ($451,000) and other one-time costs ($400,000).
12. SEGMENT DISCLOSURES
As a result of the recent divestitures of certain field businesses in December
1998 (Note 10) and changes in the Company's internal organizational structure,
ChoicePoint now operates in two reportable segments: Insurance Services
("Insurance") and Business and Government Services ("B&G"). See Note 1 for a
description of each segment. Revenues and operating income for the three months
and nine months ended September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
====================================================================================================================
Three months ended Three months ended
(In Thousands) September 30, 1999 September 30, 1998
====================================================================================================================
Operating Operating
Income before Income before
Operating Acquisition Operating Acquisition
Revenue Income Amortization Revenue Income Amortization
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Insurance $ 67,281 $ 25,986 $ 26,751 $ 62,178 $ 21,541 $ 22,222
B&G 43,174 4,250 7,348 25,638 1,036 3,211
Divested & Discontinued 58 (490) (490) 14,071 364 364
Corporate -- (8,583) (8,583) -- (6,699) (6,699)
--------- -------- -------------- -------- --------- -------------
Total $110,513 $ 21,163 $ 25,026 $101,887 $ 16,242 $ 19,098
========= ======== ============== ======== ========= =============
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
==========================================================================================================
Nine months ended Nine months ended
(In Thousands) September 30, 1999 September 30, 1998
==========================================================================================================
Operating Operating
Income before Income before
Operating Acquisition Operating Acquisition
Revenue Income Amortization Revenue Income Amortization
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Insurance $195,895 $ 72,335 $ 74,630 $187,609 $ 63,443 $ 65,486
B&G 121,989 9,831 18,959 72,325 3,262 9,307
Divested & Discontinued 292 (522) (522) 43,205 538 538
Corporate -- (23,925) (23,925) -- (19,507) (19,507)
Unusual items (Note 11) -- (1,583) (1,583) -- -- --
-------- -------- ------------- -------- -------- -------------
Total $318,176 $ 56,136 $ 67,559 $303,139 $ 47,736 $ 55,824
======== ======== ============= ======== ======== =============
</TABLE>
Corporate expenses represent costs of support functions, incentives and profit
sharing that benefit both segments. Acquisition amortization includes goodwill
and other intangible amortization related to acquisitions.
Total depreciation and amortization for the three months and nine months ended
September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
=============================================================================================
Three Months Ended Nine months Ended
September 30, September 30,
(In Thousands) 1999 1998 1999 1998
=============================================================================================
<S> <C> <C> <C> <C>
Insurance $ 3,618 $ 3,594 $ 11,625 $ 10,151
B&G 5,180 3,540 15,374 9,939
Divested & Discontinued 2 200 45 612
Corporate 626 493 1,764 1,406
------- ------- -------- --------
Total $ 9,426 $ 7,827 $ 28,808 $ 22,108
======= ======= ======== ========
</TABLE>
ChoicePoint's balance sheets are generally managed on a consolidated basis and
therefore it is impracticable to report assets by segment. Substantially all of
the Company's operations are located in the United States and no customer
represents more than 10% of total operating revenue.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION
ChoicePoint Inc., a Georgia corporation ("ChoicePoint" or the "Company") is a
provider of Actionable Intelligence(TM) that helps businesses, governments and
individuals make better, more timely and more informed business decisions.
ChoicePoint's businesses are focused on two primary markets - Insurance
Services and Business and Government Services. See Notes 1 and 12 to the
consolidated financial statements for a description and summary of operating
results of each market.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Consolidated revenue increased $8.6 million, or 8.4%, to $110.5 million for the
three months ended September 30, 1999 from $101.9 million for the three months
ended September 30, 1998. Excluding the effect of revenue from certain field
businesses sold in December 1998, consolidated revenues increased $22.7
million, or 25.8%, to $110.5 million for the three months ended September 30,
1999 from $87.8 million for the three months ended September 30, 1998 primarily
as a result of strong revenue performance in automated products and in new
acquisitions. Consolidated operating income increased $4.9 million, or 30.3%,
to $21.2 million for the three months ended September 30, 1999 from $16.2
million for the three months ended September 30, 1998. Operating margins
increased to 19.1% for the three months ended September 30, 1999 from 15.9% for
the three months ended September 30, 1998.
Revenue from Insurance Services, excluding the effect of revenue from the field
businesses noted above and a $1.6 million progress payment on a significant
systems development project in the third quarter of 1998, grew $6.7 million, or
11.1%, to $67.3 million for the three months ended September 30, 1999 from
$60.6 million for the three months ended September 30, 1998, driven by strong
unit performance in personal lines products and laboratory services. Operating
income increased $4.4 million, or 20.6%, to $26.0 million for the three months
ended September 30, 1999 from $21.5 million for the three months ended
September 30, 1998, primarily as a result of revenue growth noted above.
Acquisition amortization, which includes goodwill and other intangible
amortization related to acquisitions, increased to $765,000 for the three
months ended September 30, 1999 from $681,000 for the three months ended
September 30, 1998 due to an acquisition made in 1998. Excluding acquisition
amortization, the operating margin in Insurance Services for the second quarter
of 1999 was 39.8%.
Revenue from Business and Government Services, excluding the effect of revenue
from its payroll verification business sold in April 1999 and other
discontinued product lines, increased $17.5 million, or 68.4%, to $43.2 million
for the three months ended September 30, 1999 from $25.6 million for the three
months ended September 30, 1998. Comparable internal revenue growth for
Business and Government Services, excluding the effect of revenue from
acquisitions made since the third quarter of 1998, was 9.9% over prior year.
Operating income increased $3.2 million to $4.3 million for the three months
ended September 30, 1999 from $1.0 million for the three months ended September
30, 1998, primarily as a result of new acquisitions. Acquisition amortization,
which includes goodwill and other intangible amortization related to
acquisitions, increased to $3.1 million for the three months ended September
30, 1999 from $2.2 million for the three months ended September 30, 1998 due to
acquisitions made in 1998. Excluding acquisition amortization, the operating
margin in Business and Government Services for the second quarter of 1999 was
17.0%.
Divested and discontinued operations include the operating results from the
field businesses sold in December 1998, the payroll verification business sold
in May of 1999, the discontinued medical device registry business and from the
shutdown of certain remaining business and government field offices where
revenue did not justify sustained physical presence.
11
<PAGE> 12
Corporate expenses represent costs of support functions, incentives and profit
sharing that benefit both segments. The increase to $8.6 million for the three
months ended September 30, 1999 from $6.7 million for the three months ended
September 30, 1998 is primarily due to the increase in compensation expense
recognized under employee stock plans and incentives and additional research
and development type costs for e-commerce initiatives.
Consolidated operating income increased $4.9 million, or 30.3%, to $21.2
million for the three months ended September 30, 1999 from $16.2 million for
the three months ended September 30, 1998. Included in operating results for
the three months ended September 30, 1999 and 1998 were $1.5 million and $1.8
million, respectively, of expenses incurred to modify existing computer systems
and applications to address the Year 2000 compliance issues.
Interest expense was $3.0 million and $1.8 million for the three months ended
September 30, 1999 and 1998, respectively.
Net income increased $2.1 million, or 26.0%, to $10.3 million for the three
months ended September 30, 1999 from $8.2 million for the three months ended
September 30, 1998. The effective tax rate remained unchanged at 43.3%.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
Consolidated revenue increased $15.0 million, or 5.0%, to $318.2 million for
the nine months ended September 30, 1999 from $303.1 million for the nine
months ended September 30, 1998. Excluding the effect of revenue from certain
field businesses sold in December 1998, consolidated revenues increased $58.0
million, or 22.2%, to $317.9 million for the nine months ended September 30,
1999 from $259.9 million for the nine months ended September 30, 1998,
primarily as a result of strong revenue performance in automated products and
in new acquisitions. Consolidated operating income before unusual items
increased $10.0 million, or 20.9%, to $57.7 million for the nine months ended
September 30, 1999 from $47.7 million for the nine months ended September 30,
1998. Operating margins (excluding the effects of unusual items) increased to
18.1% for the nine months ended September 30, 1999 from 15.7% for the nine
months ended September 30, 1998.
Revenue from Insurance Services, excluding the effect of revenue from the field
businesses noted above and $9.8 million in progress payments on a significant
systems development project during the first nine months of 1998, grew $18.1
million, or 10.2%, to $195.9 million for the nine months ended September 30,
1999 from $177.8 million for the nine months ended September 30, 1998, driven
by strong unit performance in personal lines products and laboratory services.
Operating income increased $8.9 million, or 14.0%, to $72.3 million for the
nine months ended September 30, 1999 from $63.4 million for the nine months
ended September 30, 1998, primarily as a result of strong revenue growth noted
above. Acquisition amortization, which includes goodwill and other intangible
amortization related to acquisitions, increased to $2.3 million for the nine
months ended September 30, 1999 from $2.0 million for the nine months ended
September 30, 1998 due to acquisitions made in 1998. Excluding acquisition
amortization, the operating margin in Insurance Services for the first nine
months of 1999 was 38.1%.
Revenue from Business and Government Services, excluding the effect of revenue
from its payroll verification business sold in April 1999 and other
discontinued product lines, increased $49.7 million, or 68.7%, to $122.0
million for the nine months ended September 30, 1999 from $72.3 million for the
nine months ended September 30, 1998. Comparable internal revenue growth for
Business and Government Services, excluding the effect of revenue from
acquisitions made since the first quarter of 1998, was 7.2% over prior year.
Operating income increased $6.6 million to $9.8 million for the nine months
ended September 30, 1999 from $3.3 million for the nine months ended September
30, 1998, primarily as a result of new acquisitions. Acquisition amortization,
which includes goodwill and other intangible amortization related to
acquisitions, increased to $9.1 million for the nine months ended September 30,
1999 from $6.0
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<PAGE> 13
million for the nine months ended September 30, 1998 due to acquisitions made
since the first quarter of 1998. Excluding acquisition amortization, the
operating margin in Business and Government Services for the first nine months
of 1999 was 15.5%.
Divested and discontinued operations include the operating results from the
field businesses sold in December 1998, the payroll verification business sold
in May of 1999, the discontinued medical device registry business and from the
shutdown of certain remaining business and government field offices where
revenue did not justify sustained physical presence.
Corporate expenses represent costs of support functions, incentives and profit
sharing that benefit both segments. The increase to $23.9 million for the nine
months ended September 30, 1999 from $19.5 million for the nine months ended
September 30, 1998 is primarily due to the increase in incentives and
additional research and development type costs for e-commerce initiatives.
Unusual items of $1.6 million in the first quarter of 1999 relate primarily to
asset impairments ($732,000), severance costs ($451,000) and other one-time
costs ($400,000).
In the first quarter of 1999, an additional gain on the sale of certain field
businesses of $2.5 million was recorded in connection with the prepayment of a
note receivable and the repurchase of warrants issued by PMSI Services, Inc. in
the transaction. See Note 10 to the consolidated financial statements.
Consolidated operating income after unusual items increased $8.4 million, or
17.6%, to $56.1 million for the nine months ended September 30, 1999 from $47.7
million for the nine months ended September 30, 1998. Before unusual items,
operating income increased 20.9%. Included in operating results for the nine
months ended September 30, 1999 and 1998 were $5.8 million and $3.0 million,
respectively, of expenses incurred to modify existing computer systems and
applications to address the Year 2000 compliance issues.
Interest expense was $8.4 million and $5.3 million for the nine months ended
September 30, 1999 and 1998, respectively. Interest expense for the first
quarter of 1999 is net of $431,000 of interest income from the PMSI Services,
Inc. note receivable and warrants prior to the prepayment and repurchase made
in March 1999.
Net income increased $4.4 million, or 18.3%, to $28.5 million for the nine
months ended September 30, 1999 from $24.1 million for the nine months ended
September 30, 1998. The effective tax rate remained unchanged at 43.3%.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operations was $36.8 million in the first nine months of 1999
as increased net income and depreciation and amortization were offset by
reductions in current liabilities. During the first nine months of 1998, cash
provided by operations was $44.6 million. During the first nine months of 1999,
ChoicePoint used $38.2 million for investing activities, primarily comprised of
$14.8 million for acquisitions, $12.1 million for additions to other assets and
$10.6 million for additions to property and equipment. Additions to property
and equipment were primarily system upgrades while additions to other assets
were primarily software, purchased data files, and software developed for
internal use. During the first nine months of 1998, ChoicePoint used $67.6
million for investing activities, primarily for acquisitions and for additions
to property and equipment and other assets. Net cash used by financing
activities was $4.9 million in the first nine months of 1999, primarily due to
paydowns of short-term borrowings. During the first nine months of 1998, net
cash provided by financing activities was $4.4 million, as the proceeds from a
credit facility and two lines of credit were used to fund acquisitions.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
increased $17.6 million, or 25.2%, to $87.5 million for the nine months ended
September 30, 1999 from $69.8 million for the nine months ended September 30,
1998. The Company has included EBITDA data (which is not a measure of
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<PAGE> 14
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. EBITDA is not presented as a substitute for
income from operations, net income or cash flows from operating activities.
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, 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 nine months of 1999, ChoicePoint used borrowings under the
Credit Facility for acquisitions. Total debt outstanding under the Credit
Facility was $189.0 million at September 30, 1999 and December 31, 1998.
ChoicePoint may use additional borrowings under the Credit Facility to finance
acquisitions and for general corporate cash requirements.
No cash dividends have been paid and the Company does not anticipate paying any
cash dividends on its common stock in the near future.
YEAR 2000
The term "Year 2000 compliance 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 compliance 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 established a central Year 2000
department to coordinate and report to management, on a continuing basis, with
regard to the assessment, remediation planning, implementation, and contingency
planning processes directed toward addressing the Company's Year 2000
compliance issues.
ChoicePoint has been engaged in a continuous process of assessing the impact of
the Year 2000 compliance issue on its reporting systems and operations. As part
of that process, certain computer systems and software programs used, and in
some cases developed, by ChoicePoint required upgrading in order to address
Year 2000 requirements. The Company has assessed its noninformation technology
systems, which include systems that contain embedded technology. However, the
Company has determined 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 compliance
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)
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)
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<PAGE> 15
All significant ChoicePoint applications have achieved level three and the
majority of them have reached level four. ChoicePoint continues to work with
its key business partners to monitor their Year 2000 readiness. All ChoicePoint
applications have been remediated and certified as Year 2000 compliant. In
addition, all significant ChoicePoint applications have been through initial
integration testing. The first round of integration testing was completed
successfully with only minor problems discovered and corrected. Additional
rounds of testing will be performed throughout the rest of the year as
necessary.
The Costs to Address the Company's Year 2000 Compliance Issues - During the
first nine months of 1999, the Company incurred approximately $5.8 million to
modify existing computer systems and applications to address the Year 2000
compliance issue and estimates total 1999 expenditures to be approximately $7.0
to $8.0 million. 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 Compliance 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 which could
have a material adverse effect on the Company's financial position and results
of operations. The Company is continuing the systems integration testing phase
of its Year 2000 initiative. Until final system integration testing is
complete, 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 the assessment, remediation
planning, and plan implementation processes will be effective to achieve Year
2000 readiness.
The Company's Contingency Plans - The Company is continuing to develop
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 worst case scenarios for which there is a reasonable likelihood.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133" or the "Statement"),
"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 quarters beginning after June 15, 2000. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance.
Although 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, it 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.
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
15
<PAGE> 16
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
ended December 31, 1998 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
The Company is exposed to market risk from changes in interest rates. The
information below summarizes the Company's market risk associated with its debt
obligations as of September 30, 1999. The information below should be read in
conjunction with Note 7 of the "Notes to Consolidated Financial Statements".
As of September 30, 1999, $189.0 million was outstanding under the Credit
Facility. The Company has also entered into six interest rate swap agreements
(the "Swap Agreements") to reduce the impact of changes in interest rates on
its floating rate obligation. The Swap Agreements have a combined notional
amount of $175.0 million at September 30, 1999 and mature at various dates from
2000 to 2007. The Swap Agreements involve the exchange of variable rate for
fixed rate payments and effectively change the Company's interest rate exposure
to a weighted average fixed rate of 5.43% plus a credit spread.
Based on the Company's overall interest rate exposure at September 30, 1999, a
near-term change in interest rates would not materially affect the consolidated
financial position, results of operations or cash flows of the Company.
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 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
On June 21, 1999, ChoicePoint Inc. amended the Rights Agreement, dated October
29, 1997 and filed on Form 8-A Registration Statement on November 4, 1997, (the
"Plan"), to modify the definition of "Acquiring Person" while continuing to
provide that Acquiring Person shall mean any person who is the Beneficial Owner
(as defined in the Plan) of 15% or more of ChoicePoint Common Stock. A copy of
Amendment No. 1 to the Plan, dated as of June 21, 1999, was filed as
Exhibit 4.02 to the Company's Form 8-A/A on August 17, 1999.
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.
17
<PAGE> 18
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, 1999 /s/ Derek V. Smith
- ----------------- ------------------------------------
Date Derek V. Smith, Chairman and
Chief Executive Officer
November 12, 1999 /s/ David E. Trine
- ----------------- --------------------------------------------
Date David E. Trine, Vice President and
Corporate Controller (Principal Accounting Officer)
18
<PAGE> 19
EXHIBIT INDEX
Exhibit Description of Exhibit
27.01 Financial Data Schedule (for SEC use only)
19
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