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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Act
of 1934
For the transition period from to
------- -------
CHOICEPOINT INC.
(Exact name of Registrant as specified in its charter)
Georgia 58-2309650
(State or other jurisdiction of (I.R.S. employer
incorporation 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)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class registered
------------------- -------------------------------
Common Stock, par New York Stock Exchange
value $.10
per share
Securities registered pursuant to Section 12(g) of the Act: None
---------------------
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 [ ]
Aggregate market value of the voting stock held by non-affiliates of
the Registrant:
$759,243,305 as of March 11, 1999
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
14,636,147 shares of Common Stock, par value $.10 per share,
outstanding as of March 11, 1999.
Documents incorporated by reference in this Annual Report on Form 10-K:
Portions of the definitive proxy statement relating to the 1999 Annual
Meeting of Shareholders in Part III, Items 10 (as related to Directors), 11, 12
and 13. Portions of the Annual Report to Shareholders for the year ended
December 31, 1998 in Parts II and IV.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C> <C>
PART I............................................................................................................1
ITEM 1. BUSINESS........................................................................................1
ITEM 2. PROPERTIES......................................................................................6
ITEM 3. LEGAL PROCEEDINGS...............................................................................6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................6
PART II...........................................................................................................8
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................8
ITEM 6. SELECTED FINANCIAL DATA.........................................................................8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........8
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................8
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................................................8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............8
PART III..........................................................................................................9
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............................................9
ITEM 11. EXECUTIVE COMPENSATION..........................................................................9
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT..................................................................................9
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................9
PART IV. .........................................................................................................9
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................9
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
ChoicePoint Inc., a Georgia corporation ("ChoicePoint" or the
"Company"), is a leading provider of intelligent information to help businesses,
governments and individuals make better, more timely and more informed business
decisions. ChoicePoint became an independent public company in August 1997
through the combination of the businesses that had 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. 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.
Based on market share, 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. Since its formation,
the Company has been organized into three service groups: Property & Casualty
Insurance Services; Life & Health Insurance Services; and Business & Government
Services. Following a series of divestitures since the Spinoff, primarily in the
life and health insurance areas, the Company has combined all of its insurance
related operations into one service group, and since January 1, 1999, operates
its business through two primary service groups: Insurance Services and Business
& Government Services.
ChoicePoint provides most major domestic insurance companies with
underwriting and claims information services to assist those companies in
assessing the insurability and associated policy pricing of individuals and
property. The Company furnishes access to motor vehicle reports, maintains a
database of claims histories, provides automated claims verification information
services to both the property and casualty and the life and health insurance
markets, and provides database marketing services, including pre-screened and
direct marketing lists. ChoicePoint also offers pre-employment background
investigations, pre-employment and regulatory compliance drug testing services,
asset recovery services, and due diligence and public record information
searches to other corporate and government organizations, as well as to the
aforementioned insurance markets.
ChoicePoint's strategic goal is to be the leading provider of enhanced
information services to a broad range of industries. The Company is continuing
to expand its database distribution, data gathering and technological
capabilities, and believes that it is positioned to offer a variety of new
products to a diverse set of industries. The Company intends to accomplish its
goals by expanding its presence in business and government markets, pursuing
acquisitions and strategic alliances, developing and enhancing key technological
capabilities and maintaining solid financial performance.
STRATEGIC ACQUISITIONS AND ALLIANCES
Commencing in 1993, the Company initiated a strategy of acquiring
organizations that add new data, markets and technology to ChoicePoint's
operations. In April 1994, ChoicePoint acquired the assets of Programming
Resources Company ("PRC"), headquartered in Hartford, Connecticut, which
develops custom policy rating and issuance software for commercial property and
casualty insurance companies. The PRC acquisition enhanced ChoicePoint's
technological capability by adding a systems development competency and expanded
the Company's presence in the commercial insurance market. In November 1994,
ChoicePoint acquired Osborn Group Inc., formerly known as Osborn Laboratories,
Inc. ("Osborn Group"), a blood, urine and saliva testing business that provides
insurance companies with applicant-specific information. Osborn Group, which is
the second largest laboratory of its kind in the United States, uses
state-of-the-art technologies that incorporate voice, image and other data into
its production and communication processes. Osborn Group also has a highly
skilled research and development team, which researches alternative sampling and
testing techniques for delivery of more effective and lower cost testing
solutions to customers.
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In 1996, ChoicePoint acquired Professional Test Administrators, Inc.
("PTA"), headquartered in Chicago, Illinois, to accelerate the Company's entry
into the occupational health market. The PTA acquisition gave ChoicePoint the
ability to administer all components of substance abuse programs, including
results analysis. By serving the occupational health market, ChoicePoint is able
to enhance the value of its employment services by creating a total hiring
solution for customers. In furtherance of that objective, in 1997 ChoicePoint
acquired the assets of Advanced HR Solutions, Inc., an automated payroll and
employment verification service, and the assets of Drug Free, Inc., a drug
testing information services company.
In August 1996, ChoicePoint acquired 70% of the outstanding capital
stock of CDB Infotek, an automated public records company with more than 1,600
online public record databases, including criminal, bankruptcy, judgment and
lien databases. Thereafter, through the exercise of an option, the Company
acquired the remaining outstanding shares of CDB Infotek, which is now a wholly
owned subsidiary of ChoicePoint. Headquartered in Santa Ana, California, CDB
Infotek serves corporations and the legal, insurance and investigative markets.
The Company believes that significant potential exists to blend CDB Infotek's
data with ChoicePoint's manual and database information gathering services to
offer more comprehensive and effective information solutions to these markets.
In addition, in furtherance of the Company's focus on building its
strategic records capabilities to serve the government, healthcare and insurance
markets, in October 1997 ChoicePoint acquired the assets of Medical Information
Network, LLC ("MediNet"). MediNet is an online physician verification service
that provides background information on physicians, including disciplinary data,
education, board certifications, and criminal and civil convictions from sources
such as the American Medical Association, U.S. Drug Enforcement Agency, U.S.
Food and Drug Administration and state medical boards, to assist in fraud
mitigation.
In December 1997, the Company sold its paramedical examination
business, Physical Measurements Information ("PMI"), to Pediatric Services of
America, Inc. ("PSA"). In connection with that transaction, ChoicePoint entered
into a strategic business alliance with PSA and its subsidiary, Insurance
Medical Reporter, Inc. ("IMR"), pursuant to which ChoicePoint provides automated
order and delivery system, status tracking and customer information system and
laboratory testing services for IMR, and IMR provides paramedical collection and
examination services for ChoicePoint. The Company believes that this strategic
business alliance enables ChoicePoint to focus on providing technology and
information management solutions for customers in the Company's Insurance
Services group, while allowing it to offer those customers paramedical
examination services through the alliance with IMR.
To add to its hiring compliance offerings, during the second quarter of
1998, ChoicePoint 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. In September 1998, ChoicePoint
entered into a strategic alliance with Intertech Information Management, Inc.
("Intertech"), a leading provider of document management and imaging services.
The minority equity investment in Intertech allows the Company to license
document management software that enables ChoicePoint to transform data from
paper to electronic format, thereby enhancing efficiencies.
In October 1998, the Company acquired Informus Corporation ("Informus")
in order to expand its pre-employment screening services offerings. The Informus
acquisition allows the Company to provide complete pre-employment background
services to corporate customers, and the acquisition provides further growth
opportunities for the Company in the small to mid-sized company market. Also in
October 1998, the Company acquired Customer Development Corporation ("CDC"). CDC
is a full-service, fully integrated database marketing company providing
customized marketing programs primarily for clients in the insurance, consumer
finance, publishing and banking industries.
In November 1998, the Company acquired EquiSearch Services, Inc.
("EquiSearch"). The EquiSearch acquisition allows the Company to expand its
value-added applications of Company data, while at the same time takes
ChoicePoint in a new direction of offering consumer-benefit services.
EquiSearch's primary function is to contract with companies or stock transfer
agents to locate lost stockholders of Fortune 1000 and other public
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corporations. Also in November 1998, the Company acquired Tyler-McLennon, Inc.,
a provider of employment background screening services and record searches.
In December 1998, in order to increase the Company's presence in the
personal automobile insurance market, ChoicePoint acquired DATEQ Information
Network, Inc. ("DATEQ"), a provider of underwriting services to that market. The
DATEQ acquisition allowed the Company to bring enhanced risk assessment products
and services to its core insurance customer base.
Also in December 1998, the Company sold its life and health insurance
field underwriting services and insurance claim investigation services to PMSI
Services, Inc. This transaction, when combined with the December 1997 sale of
the paramedical examination business to PSA, completes ChoicePoint's strategy of
exiting the labor-intensive life and health and investigative field businesses.
PRODUCTS AND CUSTOMERS
As indicated above, following a series of divestitures since the
Spinoff, primarily in the life and health insurance areas, the Company has
combined all of its insurance related operations into one service group, and,
since January 1, 1999, operates through two primary service groups: Insurance
Services and Business & Government Services. ChoicePoint's offices are currently
located throughout the United States and in the United Kingdom. The Company's
business is not seasonal. The following table reflects the revenue generated by
each of ChoicePoint's three original service groups from 1996 through 1998 and
the percentage contribution by each group to ChoicePoint's revenue for each such
year.
HISTORICAL REVENUE BY SERVICE GROUP
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands) Amount % Amount % Amount %
Property & Casualty
Insurance Services ........... $218,413 53% $186,759 45% $167,073 46%
Life & Health
Insurance Services ........... 79,730 20 143,979 34 146,696 40
Business & Government
Services ..................... 108,332 27 86,583 21 52,712 14
-------- --- -------- --- -------- ---
Total ............... $406,475 100% $417,321 100% $366,481 100%
======== === ======== === ======== ===
</TABLE>
Property & Casualty Insurance Services. ChoicePoint provides
underwriting information to property and casualty insurance companies in the
United States and the United Kingdom. Personal lines property and casualty
insurance services include automated direct marketing, underwriting and claims
information, such as motor vehicle reports, the Company's Comprehensive Loss
Underwriting Exchange ("C.L.U.E.(R)") database services, vehicle registration
services, credit reports, modeling services, and driver's license information.
C.L.U.E. is a proprietary database comprised of claims information contributed
by major insurance underwriters (and accessed by those same underwriters), which
enables them to assess underwriting risks and pending claims in the auto and
home insurance markets. ChoicePoint's proprietary Auto 2000(R) and Homeowners
2000(R) systems use customer-specific decision making criteria to provide
property and casualty insurance underwriters with decision management tools that
streamline and reduce the cost of the underwriting process. This service group
offers information delivery services to its clients using mainframe, personal
computer and Internet web-based communications.
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The Company's CUE UK database, a proprietary database containing home
and motor insurance claims information, was developed by the Company in response
to growing insurance fraud in the United Kingdom. The success of C.L.U.E.
database services in the United States served as a catalyst for the development
of the CUE UK database, which was specifically designed to serve the United
Kingdom market. The CUE UK database compiles claim information contributed by
the United Kingdom's larger insurers for use by the same insurers to detect
fraudulent claims. The CUE UK database is comprised of the CUE Home and CUE
Motor proprietary databases. In 1998, the Company announced a partnership with
Experian Limited for the joint operation and eventual sale, estimated for the
end of 1999, of the insurance services division in the United Kingdom.
In addition to personal lines underwriting information, ChoicePoint
provides services to the commercial property and casualty insurance market.
Those services include commercial inspections for underwriting purposes, workers
compensation audits of commercial properties, and development of high-end
customized application rating and issuance software for commercial customers.
Life & Health Insurance Services. ChoicePoint also provides laboratory
information services and related technology offerings to major life and health
insurance companies in the United States. The Company also provided medical
records and application collection, health history interview services,
verification of continued disability, investigations of contestable and
accidental death claims and surveillance of claimants' activities in connection
with potentially fraudulent claims until these services were sold in 1998.
Business & Government Services. In addition to serving the property and
casualty and life and health insurance markets, ChoicePoint provides risk
management and fraud prevention services and related technology solutions, asset
recovery services and database marketing services to Fortune 1000 corporations,
asset-based lenders, legal and professional service providers, health care
service providers and local, state and federal government agencies. For
instance, the Company provides information and services to customers in a
variety of industries for use in the hiring and employee regulatory compliance
process, including: (i) pre-employment background screenings, which include
credit and driving record checks, prior employment verification, education and
licensing verification and criminal record searches; and (ii) comprehensive drug
screening program management and administration. ChoicePoint believes that it is
the only company in the United States that offers customers a full range of
proprietary integrated services and products to manage and mitigate risk in the
hiring process.
The Company also provides enhanced information services to government
agencies, such as (i) uncovering ownership of hidden assets, locating
individuals and providing leads for criminal and civil investigations, (ii)
providing parent locator services, which locate for the public sector
individuals who are in violation of court mandates and (iii) screening of
certain Medicare and Medicaid providers and provider applicants to assist in
identifying and reducing health care fraud. In connection with its business and
government services, the Company provides automated and in-demand searches and
filings of public business records, including Uniform Commercial Code searches
and filings, bankruptcy, lien and judgment searches, searches of partnership and
corporation filing records, and criminal record searches to assist organizations
and lending institutions in managing potential risk exposure.
Customers. ChoicePoint's customer base includes substantially all
domestic insurance companies, many Fortune 1000 companies and certain local,
state and federal government agencies. The Company has more than 5,000
customers, most of which are insurance companies. No customer account
represented more than 10% of the Company's total revenue in 1998.
Both of ChoicePoint's current service groups have the capability to
receive orders for and deliver products and services through electronic
communications. The Company supplies software to customers that wish to access
ChoicePoint using private networks.
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COMPETITION
The Company operates in a number of geographic and product and service
markets, which are highly competitive. In the insurance services market,
ChoicePoint's competitors include Trans Union Corporation, American Insurance
Services Group, a unit of Insurance Services Office, Inc., Insurance Information
Exchange, L.L.C., a subsidiary of AMS Services, Inc. and LabOne, Inc. with
respect to insurance laboratory services. In the business and government
services market, ChoicePoint's competitors in the automated public records
market include DBT Online, Inc., Information America, Inc. and the Lexis-Nexis
service of Reed Elsevier PLC, while its competitors in the pre-employment
screening and drug testing services market include various security companies
and clinical laboratories, including Pinkertons Inc., Avert, Inc. and Laboratory
Corporation of America Holdings. Its competitors in other information services
offerings include Acxiom Corporation and Harte-Hanks Communications, Inc. With
respect to its offerings of consumer benefit services such as those provided by
EquiSearch, the Company competes with Keane Tracers, Inc. and Shareholder
Communications Corporation. In each of its markets, the Company competes on the
basis of responsiveness to customer needs, price and the quality and range of
products and services offered.
SOURCES OF SUPPLY
ChoicePoint's operations depend upon information derived from a wide
variety of automated and manual sources. External sources of data include public
records information companies, governmental authorities, and on-line search
systems. ChoicePoint has no reason to anticipate the termination of any
significant relationships with data suppliers. In the event that such a
termination occurred, the Company believes that it could acquire the data from
other sources, and such termination would not have a material adverse effect on
the Company's financial condition or results of operations.
ChoicePoint currently maintains databases that contain information
provided and used by insurance underwriters. The information comprising these
databases is not owned by ChoicePoint, and the participating organizations could
discontinue contributing information to the databases. If this were to occur,
the Company's financial condition and results of operations would be materially
affected. ChoicePoint believes, however, that such an event is unlikely because
contributors to the databases depend upon the aggregated information in such
databases to conduct their business operations.
EMPLOYEES
As of December 31, 1998, ChoicePoint employed approximately 3,500
persons, none of whom were unionized. Substantially all of the Company's
workforce is employed in the United States. As of December 31, 1998, ChoicePoint
employed approximately 330 individuals in Olathe, Kansas in its Osborn Group
facilities, approximately 210 individuals in Hartford, Connecticut in its PRC
facilities, approximately 165 individuals in Santa Ana, California at its CDB
Infotek location, approximately 340 individuals in Peoria, Illinois in its CDC
location, approximately 175 individuals in St. Petersburg, Florida at its
Application Profiles office, approximately 25 employees in White Plains, New
York at its EquiSearch offices and approximately 25 individuals in the United
Kingdom in connection with CUE UK. Approximately 600 individuals are employed
in the Atlanta area in the Company's headquarters and two branch office
locations. The balance of ChoicePoint's employees are located in the Company's
remaining offices. ChoicePoint believes that its relations with its employees
are good.
PROPRIETARY MATTERS
ChoicePoint owns a number of trademarks and trade names that
ChoicePoint believes are important to its business. Except for the ChoicePoint
trademark and logo, however, the Company is not dependent upon any single
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trademark or trade name or group of trademarks or trade names. The current
duration for federal registrations range from seven to fifteen years, but each
registration may be renewed an unlimited number of times. Other trademarks and
trade names used in the Company's business are registered and maintained in the
U.S. and the United Kingdom. C.L.U.E., Auto 2000 and Homeowners 2000 are
registered trademarks of ChoicePoint.
FORWARD-LOOKING INFORMATION
In addition to historical information, this report includes
forward-looking statements and information that are based on management's
beliefs, plans, expectations and assumptions and on information currently
available to the Company. The words "may," "should," "expect," "anticipate,"
"intend," "plan," "continue," "believe," "seek," "estimate," and similar
expressions used in this report that do not relate to historical facts are
intended to identify forward-looking statements, as that term is defined in the
Private Securities Litigation Reform Act of 1995.
The forward-looking statements in this report are not guarantees of
future performance and involve certain risks, uncertainties and assumptions.
Such risks, uncertainties and assumptions include the following: (i) the levels
of demand for ChoicePoint's existing services; (ii) the Company's ability to
develop new services and to adapt existing services to new uses; (iii) the
Company's ability to maintain acceptable margins and its ability to control its
costs; (iv) the impact of federal, state and local regulatory requirements on
the Company's business; (v) the impact of consolidation or other business
developments in the insurance industry, which accounts for approximately 70% of
the Company's revenue; (vi) unanticipated developments in the process of
assessing and addressing issues related to the Year 2000 issue; and (vii) the
uncertainty of economic conditions in general. Many of such factors are beyond
the Company's ability to control or predict. As a result, ChoicePoint's future
actions, financial condition, results of operations and the market price of the
Company's common stock could differ materially from those expressed in any
forward-looking statements made by the Company. Do not put undue reliance on
forward-looking statements. The Company does not intend to publicly update any
forward-looking statements that may be made from time to time by, or on behalf
of, the Company, whether as a result of new information, future events or
otherwise.
ITEM 2. PROPERTIES
ChoicePoint's principal executive offices are located in 206,000 square
feet of office space in Alpharetta, Georgia, a suburb of Atlanta. ChoicePoint
maintains 76 other offices in the United States and one office in the United
Kingdom. These offices, all of which are leased, contain a total of
approximately 534,000 square feet of space. Through Osborn Group, ChoicePoint
owns two laboratory facilities in Olathe, Kansas with approximately 76,000
square feet of space. Through CDC, ChoicePoint owns four buildings in Peoria,
Illinois representing approximately 182,000 square feet of space. The Company
ordinarily leases office space of the general commercial type for conducting its
business.
ITEM 3. 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 condition 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 materially adverse to the Company
could be reached.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders by the Company
during the quarter ended December 31, 1998.
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EXECUTIVE OFFICERS OF REGISTRANT
Set forth below is certain biographical information with respect to
each executive officer of the Company, as of March 11, 1999:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Name and Position Age Executive Officer Since
----------------- --- -----------------------
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Derek V. Smith, President, Chief Executive Officer 44 1997
and a Director
- -----------------------------------------------------------------------------------------
Douglas C. Curling, Executive Vice President, 44 1997
Chief Financial Officer and Treasurer
- -----------------------------------------------------------------------------------------
Dan H. Rocco, Executive Vice President 59 1997
- -----------------------------------------------------------------------------------------
David T. Lee, Senior Vice President 39 1997
- -----------------------------------------------------------------------------------------
J. Michael de Janes, General Counsel and Secretary 41 1997
- -----------------------------------------------------------------------------------------
</TABLE>
Derek V. Smith, 44, has served as President, Chief Executive Officer
and a Director of the Company since May 1997. Mr. Smith served as Executive Vice
President of Equifax and Group Executive of the Insurance Services Group of
Equifax from 1993 until the Spinoff. From 1991 to 1993, he served as Senior Vice
President and Chief Financial Officer of Equifax. He also serves as a director
of Metris Companies Inc.
Douglas C. Curling, 44, has served as Executive Vice President, Chief
Financial Officer and Treasurer of ChoicePoint since the Spinoff. He served as
Senior Vice President - Finance and Administration of the Insurance Services
Group of Equifax from 1993 until the Spinoff.
Dan H. Rocco, 59, has served as Executive Vice President of ChoicePoint
since the Spinoff. He served as Senior Vice President - Operations of the
Insurance Services Group of Equifax from 1993 until the Spinoff. Mr. Rocco
served as President and General Manager of the Automated Services Division of
the Insurance Services Group of Equifax from 1991 to 1993.
David T. Lee, 39, has served as Senior Vice President of ChoicePoint
since the Spinoff. He served as Vice President - Property and Casualty Marketing
and Sales of the Insurance Services Group of Equifax from 1991 until the
Spinoff.
J. Michael de Janes, 41, has served as General Counsel of ChoicePoint
since the Spinoff, and has been Secretary of the Company since April 1998. He
served as Vice President and Counsel of the Insurance Services Group of Equifax
from 1993 until the Spinoff.
There are no family relationships among the officers of the Company,
nor are there any arrangements or understandings between any of the officers and
any other persons pursuant to which they were selected as officers. The Board of
Directors may elect an officer or officers at any meeting of the Board of
Directors. Each officer is elected to serve until his successor has been elected
and has duly qualified. Elections of officers generally occur each year at the
Board of Directors meeting held in conjunction with the Company's Annual Meeting
of Shareholders.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is listed and traded on the New York Stock
Exchange under the symbol "CPS." Information regarding the high and low sales
prices and the number of holders of the common stock is set forth under the
captions "Market Information" and "Quarterly Activity" on the page 43 of the
1998 Annual Report to Shareholders (the "Annual Report"), a copy of which page
is included in Exhibit 13 to this Form 10-K and is incorporated herein by
reference.
The Company does not pay cash dividends and does not anticipate paying
any cash dividends in the foreseeable future. The Company currently intends to
retain future earnings to finance its operations and the expansion of its
business. Any future determination to pay cash dividends will be at the
discretion of the Company's Board of Directors and will be dependent upon the
Company's financial condition, operating results, capital requirements and such
other factors as the Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
The information included under the caption "Financial Highlights" on
the inside front cover page of the Annual Report, a copy of which page is
included in Exhibit 13 to this Form 10-K, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information included under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 19 through
23 of the Annual Report, a copy of which pages are included in Exhibit 13 to
this Form 10-K, is incorporated herein by reference.
ITEM 7A. 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 December 31, 1998. The information below should be read
in conjunction with Note 6 of the "Notes to Consolidated Financial Statements."
The Company has entered into a $250 million unsecured floating rate
revolving credit facility (the "Credit Facility") with a group of banks. As of
December 31, 1998, $189 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
million at December 31, 1998 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 December 31,
1998, a near-term change in interest rates would not materially affect the
consolidated financial position, results or operations or cash flows of the
Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information included under the captions "Consolidated Statements of
Income," "Consolidated Balance Sheets," "Consolidated Statements of
Shareholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to
Consolidated Financial Statements" on pages 24 through 41 of the Annual Report,
copies of which pages are included in Exhibit 13 to this Form 10-K, is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The Company has neither changed its independent accountants nor had any
disagreements on accounting and financial disclosures with such accountants.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's Proxy Statement for the Annual Meeting of Shareholders to
be held on May 4, 1999, contains, on pages 2 and 3 thereof, information relating
to the Company's Directors and persons nominated to be elected Directors. Such
information is incorporated herein by reference and made a part hereof.
Information regarding the Company's executive officers is set forth in Part I of
this report.
ITEM 11. EXECUTIVE COMPENSATION
The Company's Proxy Statement for the Annual Meeting of Shareholders to
be held on May 4, 1999, contains, on pages 7 through 10 thereof, information
relating to executive compensation. Such information is incorporated herein by
reference and made a part hereof.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company's Proxy Statement for the Annual Meeting of Shareholders to
be held on May 4, 1999, contains, on pages 5 and 6 thereof, information relating
to security ownership of certain beneficial owners and management. Such
information is incorporated herein by reference and made a part hereof.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's Proxy Statement for the Annual Meeting of Shareholders to
be held on May 4, 1999, contains, on page 9 thereof, information relating to
certain relationships and related transactions. Such information is incorporated
herein by reference and made a part hereof.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) Index to exhibits, financial statements and schedules.
(1) Financial Statements
Consolidated Balance Sheets for the Years Ended December 31,
1998 and 1997 are incorporated by reference from the Annual
Report, and are included in Exhibit 13 hereto.
Consolidated Statements of Income for the Years Ended December
31, 1998, 1997 and 1996 are incorporated by reference from the
Annual Report, and are included in Exhibit 13 hereto.
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996 are incorporated by
reference from the Annual Report, and are included in Exhibit
13 hereto.
9
<PAGE> 12
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 are incorporated by reference
from the Annual Report, and are included in Exhibit 13 hereto.
Notes to Consolidated Financial Statements are incorporated by
reference from the Annual Report, and are included in Exhibit
13 hereto.
Report of Arthur Andersen LLP on the foregoing financial
statements is incorporated by reference from the Annual
Report, and is included in Exhibit 13 hereto.
(2) Financial Statement Schedules
All schedules have been omitted because they are not
applicable or the required information is included in the
consolidated financial statements or notes thereto.
(3) Exhibits required by Item 601 of Regulation S-K:
The following exhibits are included in this Form 10-K:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION
- --------------------------------------------------------------------------------
<S> <C>
3.02 Bylaws of the Company, as amended
- --------------------------------------------------------------------------------
13 The inside front cover
page and pages 19-41
and 43 of the Company's
1998 Annual Report to
Shareholders
- --------------------------------------------------------------------------------
21 Subsidiaries of the Company
- --------------------------------------------------------------------------------
23 Consent of Arthur Andersen LLP,
Independent Public Accountants
- --------------------------------------------------------------------------------
27 Financial Data Schedule (for SEC use
only)
- --------------------------------------------------------------------------------
</TABLE>
The following exhibit is incorporated by reference to the
Company's Current Report on Form 8-K/A, filed on January 12,
1999:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION
- --------------------------------------------------------------------------------
<S> <C>
2.1 Purchase Agreement, by and among
ChoicePoint Services Inc., Thomas C.
Lund, The Lund 1997 GRAT A
Irrevocable Trust, The Lund 1997
GRAT B Irrevocable Trust and Allen
Road Investments, L.P.
- --------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
The following exhibit is incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION
- --------------------------------------------------------------------------------
<S> <C>
10* Form of Employment Agreement between the
Company and each of Derek V. Smith,
Douglas C. Curling, David T. Lee and J.
Michael de Janes
- --------------------------------------------------------------------------------
</TABLE>
The following exhibit is incorporated by reference to the
Company's Form 8-A, filed on November 5, 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION
- --------------------------------------------------------------------------------
<S> <C>
4.02 Rights Agreement, dated as of October 29,
1997, by and between ChoicePoint Inc. and
SunTrust Bank, Atlanta
- --------------------------------------------------------------------------------
</TABLE>
The following exhibits are incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION
- --------------------------------------------------------------------------------
<S> <C>
10.01* ChoicePoint Inc. 1997 Omnibus Stock
Incentive Plan
10.03 Distribution Agreement, dated as of July
31, 1997, by and between Equifax Inc. and
ChoicePoint Inc. 10.04 Employee Benefits
Agreement, dated as of July 31, 1997,
between Equifax Inc. and ChoicePoint Inc.
10.05 Transition Support Agreement, dated as of
July 31, 1997, between Equifax Inc. and
ChoicePoint Inc.
10.06 Intercompany Information Services
Agreement, dated as of July 31, 1997, by
Equifax Inc. and ChoicePoint Inc.
10.07 Tax Sharing and Indemnification Agreement,
dated as of July 31, 1997, by and between
Equifax Inc. and ChoicePoint Inc.
10.08 Intellectual Property Agreement dated as
of July 31, 1997, by and between Equifax
Inc. and ChoicePoint Inc.
10.10 Revolving Credit Agreement, dated as of
August 5, 1997, among ChoicePoint Inc.,
the Lenders Listed Therein and Wachovia
Bank, N.A. as Administrative Agent, and
SunTrust Bank, Atlanta, as Documentation
Agent
10.11(a) Master Agreement, dated as of July 31,
1997, among ChoicePoint Inc., SunTrust
Banks, Inc. and SunTrust Bank, Atlanta, as
Agent
10.11(b) Lease agreement, dated as of July 31,
1997, between ChoicePoint Inc. and
SunTrust Banks, Inc.
- --------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C>
10.11(c) Georgia Lease Supplement, dated as of July
31, 1997, between ChoicePoint Inc. and
SunTrust Banks, Inc.
10.11(d) Operative Guaranty, dated as of July 31,
1997, by ChoicePoint Inc. as Guarantor
10.11(e) Construction Agency Agreement, dated as of
July 31, 1997, between SunTrust Banks,
Inc. and ChoicePoint Inc.
10.12 Sublease Agreement, dated as of July 31,
1997, between Equifax Inc. and Equifax
Services Inc. (for certain property and
building located at 1600 Peachtree Street,
NW, Atlanta, Georgia)
10.13 Sublease Agreement, dated as of July 31,
1997, between Equifax Inc. and Equifax
Services Inc. (for certain property and
building located at 1525 Windward
Concourse, Alpharetta, Georgia [J.V. White
Technology Center])
</TABLE>
The following exhibits are incorporated by reference to the
Company's Registration Statement on Form S-1, as amended
(File No. 333-30297):
<TABLE>
<CAPTION>
Exhibit No. Description
- --------------------------------------------------------------------------------
<S> <C>
3.01 Articles of Incorporation of the Company,
as amended
4.01 Form of Common Stock certificate
10.02 ChoicePoint Inc. 401(k) Profit Sharing
Plan
10.09* Agreement, dated July 24, 1996, by and
between Equifax Inc. and Dan Rocco, to be
effective January 1, 1996 (relating to the
compensation of Mr. Rocco)
</TABLE>
- -----------------------
* Represents a management contract or compensatory plan, contract or
arrangement.
Copies of the Company's Form 10-K that are furnished pursuant to the
written request of the Company's shareholders do not include the exhibits listed
above. Any shareholder desiring copies of one or more of such exhibits should
write to the Company's Director, Investor Relations, specifying the exhibit or
exhibits requested.
(b) Reports on Form 8-K
On November 13, 1998, the Company filed a Current Report on Form 8-K,
which was subsequently amended by a Current Report on Form 8-K/A, filed on
January 12, 1999, reporting the acquisition of Customer Development Corporation
and its affiliated companies.
12
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Alpharetta, State of Georgia, on March 26, 1999.
CHOICEPOINT INC.
By: /s/ Derek V. Smith
-------------------------------------
Derek V. Smith
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Derek V. Smith President, Chief Executive March 26, 1999
- ---------------------- Officer and Director
Derek V. Smith
/s/ Douglas C. Curling Executive Vice President, March 26, 1999
- ---------------------- Chief Financial Officer
Douglas C. Curling and Treasurer (Principal
Financial and Accounting
Officer)
/s/ C. B. Rogers, Jr.
- ---------------------- Chairman and Director March 29, 1999
C. B. Rogers, Jr.
/s/ Ron D. Barbaro
- ---------------------- Director March 26, 1999
Ron D. Barbaro
/s/ James M. Denny
- ---------------------- Director March 29, 1999
James M. Denny
/s/ Tinsley H. Irvin
- ---------------------- Director March 26, 1999
Tinsley H. Irvin
/s/ Ned C. Lautenbach
- ---------------------- Director March 29, 1999
Ned C. Lautenbach
/s/ Julia B. North
- ---------------------- Director March 29, 1999
Julia B. North
/s/ Charles I. Story
- ---------------------- Director March 26, 1999
Charles I. Story
13
<PAGE> 1
CHOICEPOINT INC.
BYLAWS
Effective as of October 23, 1998
<PAGE> 2
CHOICEPOINT INC.
--------
BYLAWS
--------
CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
ARTICLE ONE MEETINGS OF THE SHAREHOLDERS 1
Section 1.1 Annual Meeting 1
Section 1.2 Special Meetings 1
Section 1.3 Notice of Meetings 1
Section 1.4 Voting Groups 1
Section 1.5 Quorum 2
Section 1.6 Vote Required for Action 2
Section 1.7 Adjournments 2
Section 1.8 Presiding Officer 2
Section 1.9 Voting of Shares 2
Section 1.10 Proxies 3
Section 1.11 Record Date 3
Section 1.12 Shareholder Proposals and Nominations 3
ARTICLE TWO BOARD OF DIRECTORS 5
Section 2.1 General 5
Section 2.2 Number of Directors and Term of Office 5
Section 2.3 Election of Directors 6
Section 2.4 Vacancies 6
Section 2.5 Term Limits 6
Section 2.6 Stock Ownership Requirement 7
Section 2.7 Meetings 7
Section 2.8 Special Meetings 7
Section 2.9 Notice of Meetings 7
Section 2.10 Quorum; Adjournments 7
Section 2.11 Vote Required for Action 7
Section 2.12 Action by Directors Without a Meeting 7
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
Section 2.13 Compensation of Directors 8
ARTICLE THREE ELECTIONS OF OFFICERS AND COMMITTEES 8
Section 3.1 Election of Officers 8
Section 3.2 Executive Committee 8
Section 3.3 Other Committees 9
ARTICLE FOUR OFFICERS 9
Section 4.1 Officers 9
Section 4.2 Compensation of Officers 9
Section 4.3 Chairman of the Board 10
Section 4.4 Vice Chairman of the Board 10
Section 4.5 Chief Executive Officer 10
Section 4.6 President 10
Section 4.7 Executive Vice Presidents 11
Section 4.8 Vice Presidents 11
Section 4.9 Treasurer 11
Section 4.10 Secretary 11
Section 4.11 Voting of Stock 12
ARTICLE FIVE INDEMNIFICATION 12
Section 5.1 Definitions 12
Section 5.2 Basic Indemnification Arrangement 13
</TABLE>
- 3 -
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
Section 5.3 Advances for Expenses 14
Section 5.4 Court-Ordered Indemnification and Advances for Expenses 15
Section 5.5 Determination of Reasonableness of Expenses 15
Section 5.6 Indemnification of Employees and Agents 16
Section 5.7 Liability Insurance 16
Section 5.8 Witness Fees 16
Section 5.9 Report to Shareholders 16
Section 5.10 No Duplication of Payments 16
Section 5.11 Subrogation 17
Section 5.12 Contract Rights 17
Section 5.13 Amendments 17
ARTICLE SIX CAPITAL STOCK 17
Section 6.1 Direct Registration of Shares 17
Section 6.2 Certificates for Shares 18
Section 6.3 Transfer of Shares 18
Section 6.4 Duty of Company to Register Transfer 18
Section 6.5 Lost, Stolen or Destroyed Certificates 19
</TABLE>
- 4 -
<PAGE> 5
<TABLE>
<S> <C> <C> <C>
Section 6.6 Authorization to Issue Shares and Regulations Regarding
Transfer and Registration 19
ARTICLE SEVEN DISTRIBUTIONS AND DIVIDENDS 19
Section 7.1 Authorization or Declaration 19
Section 7.2 Record Date with Regard to Distributions and Share
Dividends 19
ARTICLE EIGHT MISCELLANEOUS 20
Section 8.1 Corporate Seal 20
Section 8.2 Inspection of Books and Records 20
Section 8.3 Conflict with Articles of Incorporation or Code 20
Section 8.4 Severability 20
ARTICLE NINE AMENDMENTS 20
Section 9.1 Amendments 20
ARTICLE TEN FAIR PRICE REQUIREMENTS 21
Section 10.1 Fair Price Requirements 21
ARTICLE ELEVEN BUSINESS COMBINATIONS 21
Section 11.1 Business Combinations 21
- 5 -
</TABLE>
<PAGE> 6
BYLAWS OF CHOICEPOINT INC.
-------------------
ARTICLE ONE
MEETINGS OF THE SHAREHOLDERS
Section 1.1 Annual Meeting. The Annual Meeting of the Shareholders of the
Company shall be held during the first five months after the end of each fiscal
year of the Company at such time and place, within or without the State of
Georgia, as shall be fixed by the Board of Directors, for the purpose of
electing Directors and for the transaction of such other business as may be
properly brought before the meeting.
Section 1.2 Special Meetings Special meetings of the Shareholders may be
held at the principal office of the Company in the State of Georgia or at such
other place, within or without the State of Georgia, as may be named in the
call therefor. Such special meetings may be called by the Chairman of the Board
of Directors, the Vice Chairman, the Chief Executive Officer, the President,
the Board of Directors by vote at a meeting, a majority of the Directors in
writing without a meeting, or by unanimous call of the Shareholders.
Section 1.3 Notice of Meetings. Unless waived in accordance with the
Georgia Business Corporation Code as amended from time-to-time (the "Code"), a
notice of each meeting of Shareholders stating the date, time and place of the
meeting shall be given not less than 10 days nor more than 60 days before the
date thereof to each Shareholder entitled to vote at that meeting. In the case
of an Annual Meeting, the notice need not state the purpose or purposes of the
meeting unless the Articles of Incorporation or the Code requires the purpose
or purposes to be stated in the notice of the meeting. Any irregularity in such
notice shall not affect the validity of the Annual Meeting or any action taken
at such meeting. In the case of a special meeting of the Shareholders, the
notice of meeting shall state the purpose or purposes for which the meeting is
called, and only business within the purpose or purposes described in such
notice may be conducted at the meeting.
Section 1.4 Voting Groups. Voting group means all shares of one or more
classes or series that are entitled to vote and be counted together
collectively on a matter at a meeting of Shareholders. All shares entitled to
vote generally on the matter are for that purpose a single
<PAGE> 7
voting group.
Section 1.5 Quorum. With respect to shares entitled to vote as a separate
voting group on a matter at a meeting of Shareholders, the presence, in person
or by proxy, of a majority of the votes entitled to be cast on the matter by
the voting group shall constitute a quorum of that voting group for action on
that matter unless the Articles of Incorporation or the Code provides
otherwise. Once a share is represented for any purpose at a meeting, other than
solely to object to holding the meeting or to transacting business at the
meeting, it is deemed present for quorum purposes for the remainder of the
meeting and for any adjournment of the meeting unless a new record date is or
must be set for the adjourned meeting pursuant to Section 1.11 of these Bylaws.
Section 1.6 Vote Required for Action. If a quorum exists, action on a
matter (other than the election of Directors) is approved if the votes cast
favoring the action exceed the votes cast opposing the action, unless the
Articles of Incorporation, provisions of these Bylaws validly adopted by the
Shareholders, or the Code requires a greater number of affirmative votes. If
the Articles of Incorporation or the Code provide for voting by two or more
voting groups on a matter, action on that matter is taken only when voted upon
by each of those voting groups counted separately.
Section 1.7 Adjournments. Whether or not a quorum is present to organize a
meeting, any meeting of Shareholders (including an adjourned meeting) may be
adjourned by the holders of a majority of the voting shares represented at the
meeting to reconvene at a specific time and place, but no later than 120 days
after the date fixed for the original meeting unless the requirements of the
Code concerning the selection of a new record date have been met.
Section 1.8 Presiding Officer. The Chairman of the Board shall call the
meeting of the Shareholders to order and shall act as Chairman of such meeting.
In the absence of the Chairman of the Board, the meeting shall be called to
order by any one of the following officers then present, in the following
order: the Vice Chairman of the Board, the Chief Executive Officer, the
President, the senior Executive Vice President, the next senior Executive Vice
President, or any one of the Vice Presidents, who shall act as chairman of the
meeting. The Secretary of the Company shall act as secretary of the meeting of
the Shareholders. In the absence of the Secretary, at any meeting of the
Shareholders, the presiding officer may appoint any person to act as Secretary
of the meeting.
Section 1.9 Voting of Shares. Unless the Articles of Incorporation or the
Code provides
- 8 -
<PAGE> 8
otherwise, each outstanding share having voting rights shall be entitled to one
vote on each matter submitted to a vote at a meeting of Shareholders.
Section 1.10 Proxies. A Shareholder entitled to vote pursuant to Section
1.9 may vote in person or by proxy pursuant to an appointment of proxy executed
in writing by the Shareholder. An appointment of proxy shall be valid for only
one meeting to be specified therein, and any adjournments of such meeting, but
shall not be valid for more than eleven months unless expressly provided
therein. Appointments of proxy shall be dated and filed with the records of the
meeting to which they relate. If the validity of any appointment of proxy is
questioned, it must be submitted for examination to the Secretary of the
Company or to a proxy officer or committee appointed by the Board of Directors.
The Secretary or, if appointed, the proxy officer or committee shall determine
the validity or invalidity of any appointment of proxy submitted, and reference
by the Secretary in the minutes of the meeting to the regularity of an
appointment of proxy shall be received as prima facie evidence of the facts
stated for the purpose of establishing the presence of a quorum at the meeting
and for all other purposes.
Section 1.11 Record Date. For the purpose of determining Shareholders
entitled to notice of a meeting of the Shareholders, to demand a special
meeting, to vote, or to take any other action, the Board of Directors may fix a
future date as the record date, which date shall be not more than 70 days prior
to the date on which the particular action, requiring a determination of the
Shareholders, is to be taken. A determination of the Shareholders entitled to
notice of or to vote at a meeting of the Shareholders is effective for any
adjournment of the meeting unless the Board of Directors fixes a new record
date, which it must do if the meeting is adjourned to a date more than 120 days
after the date fixed for the original meeting. If no record date is fixed by
the Board of Directors, the 70th day preceding the date on which the particular
action, requiring a determination of the Shareholders, is to be taken shall be
the record date for that purpose.
Section 1.12 Shareholder Proposals and Nominations.
(a) No proposal for a Shareholder vote (other than a proposal that
appears in the Company's proxy statement after compliance with the procedures
set forth in Securities and Exchange Commission Rule 14a-8) shall be submitted
by a Shareholder (a "Shareholder Proposal") to the Company's Shareholders
unless the Shareholder submitting such proposal (the "Proponent") shall have
filed a written notice setting forth with particularity (i) the names and
business addresses of the Proponent and all natural persons, corporations,
partnerships, trusts or any other type of legal entity or recognized ownership
vehicle (collectively, a "Person") acting in concert with the Proponent; (ii)
the name and address of the Proponent and the Persons identified in clause (i),
as they appear on the Company's books (if they so appear); (iii) the class and
number of shares of
- 9 -
<PAGE> 9
the Company beneficially owned by the Proponent and by each Person identified
in clause (i); (iv) a description of the Shareholder Proposal containing all
material information relating thereto; and (v) such other information as the
Board of Directors reasonably determines is necessary or appropriate to enable
the Board of Directors and Shareholders of the Company to consider the
Shareholder Proposal. The presiding officer at any meeting of the Shareholders
may determine that any Shareholder Proposal was not made in accordance with the
procedures prescribed in these Bylaws or is otherwise not in accordance with
law, and if it is so determined, such officer shall so declare at the meeting
and the Shareholder Proposal shall be disregarded.
(b) Only persons who are selected and recommended by the Board of
Directors or the committee of the Board of Directors designated to make
nominations, or who are nominated by Shareholders in accordance with the
procedures set forth in this Section 1.12, shall be eligible for election, or
qualified to serve, as Directors. Nominations of individuals for election to
the Board of Directors of the Company at any Annual Meeting or any special
meeting of Shareholders at which Directors are to be elected may be made by any
Shareholder of the Company entitled to vote for the election of Directors at
that meeting by compliance with the procedures set forth in this Section 1.12.
Nominations by Shareholders shall be made by written notice (a "Nomination
Notice"), which shall set forth (i) as to each individual nominated, (A) the
name, date of birth, business address and residence address of such individual;
(B) the business experience during the past five years of such nominee,
including his or her principal occupations and employment during such period,
the name and principal business of any corporation or other organization in
which such occupations and employment were carried on, and such other
information as to the nature of his or her responsibilities and level of
professional competence as may be sufficient to permit assessment of such prior
business experience; (C) whether the nominee is or has ever been at any time a
director, officer or owner of five percent or more of any class of capital
stock, partnership interests or other equity interest of any corporation,
partnership or other entity; (D) any directorships held by such nominee in any
company with a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934, as amended, or subject to the requirements of
Section 15(d) of such Act or any company registered as an investment company
under the Investment Company Act of 1940, as amended; and (E) whether such
nominee has ever been convicted in a criminal proceeding or has ever been
subject to a judgment, order, finding or decree of any federal, state or other
governmental entity, concerning any violation of federal, state or other law,
or any proceeding in bankruptcy, which conviction, order, finding, decree or
proceeding may be material to an evaluation of the ability or integrity of the
nominee; and (ii) as to the Person submitting the Nomination Notice and any
Person acting in concert with such Person, (X) the name and business address of
such Person, (Y) the name and address of such Person as they appear on the
Company's books (if they so appear), and (Z) the class and number of shares of
the Company that are beneficially owned by
- 10 -
<PAGE> 10
such Person. A written consent to being named in a proxy statement as a
nominee, and to serve as a Director if elected, signed by the nominee, shall be
filed with any Nomination Notice. If the presiding officer at any meeting of
the Shareholders determines that a nomination was not made in accordance with
the procedures prescribed by these Bylaws, such officer shall so declare to the
meeting and the defective nomination shall be disregarded.
(c) If a Shareholder Proposal or Nomination Notice is to
be submitted at an Annual Meeting of the Shareholders, it shall be delivered to
the Secretary of the Company at the principal executive office of the Company
within the time period specified in Securities and Exchange Commission Rule
14a-8(a)(3)(i). Subject to Section 1.3 as to matters that may be acted upon at
a special meeting of the Shareholders, if a Shareholder Proposal or Nomination
Notice is to be submitted at a special meeting of the Shareholders, it shall be
delivered to the Secretary of the Company at the principal executive office of
the Company no later than the close of business on the earlier of (i) the 30th
day following the public announcement that a matter will be submitted to a vote
of the Shareholders at a special meeting, or (ii) the 15th day following the
day on which notice of the special meeting was given.
ARTICLE TWO
BOARD OF DIRECTORS
Section 2.1 General. Subject to the Articles of Incorporation, all
corporate powers shall be exercised by or under the authority of, and the
business and affairs of the Company shall be managed under the direction of,
the Board of Directors. In addition to the powers and authority expressly
conferred upon it by these Bylaws and the Articles of Incorporation, the Board
of Directors may exercise all such lawful acts and things as are not by law, by
the Articles of Incorporation or by these Bylaws directed or required to be
exercised or done by the Shareholders.
Section 2.2 Number of Directors and Term of Office. The number of
Directors shall be not less than seven, nor more than fifteen Shareholders, and
shall be fixed within such range by the Board of Directors. The Directors shall
be divided into three classes, designated as Class I, Class II and Class III.
Each class shall consist, as nearly as may be possible, of one-third of the
total number of Directors constituting the entire Board of Directors. At each
Annual Meeting of the Shareholders, successors to the class of Directors whose
term expires at that Annual Meeting of Shareholders shall be elected for a
three-year term. If the number of Directors has changed, any increase or
decrease shall be apportioned among the classes so as to maintain the number of
- 11 -
<PAGE> 11
Directors in each class as nearly equal as possible, and any additional
Director of any class elected to the Board of Directors to fill a vacancy
resulting from an increase in such a class shall hold office for a term that
shall coincide with the remaining term of that class, unless otherwise required
by law, but in no case shall a decrease in the number of Directors for a class
shorten the term of an incumbent Director. A Director shall hold office until
the Annual Meeting of Shareholders for the year in which such Director's term
expires and until his or her successor shall be elected and qualified, subject,
however, to prior death, resignation, retirement, disqualification or removal
from office.
Section 2.3 Election of Directors. A Director shall be elected by a
plurality of the votes cast by the shares entitled to vote in the election at a
meeting of Shareholders at which a quorum is present.
Section 2.4 Vacancies. Any vacancy on the Board of Directors that results
from an increase in the number of Directors or from prior death, resignation,
retirement, disqualification or removal from office of a Director shall be
filled by a majority of the Board of Directors then in office, though less than
a quorum, or by the sole remaining Director. Any Director elected to fill a
vacancy resulting from prior death, resignation, retirement, disqualification
or removal from office of a director, shall have the same remaining term as
that of his or her predecessor.
Section 2.5 Term Limits. The Chairman of the Board may serve as a Director
until reaching 70 years of age. Any other Director reaching 70 years of age (or
65 years of age for Directors, other than Chairman of the Board, who are also
employees of the Company) or who ceases to continue a regular business
relationship (as defined below) shall automatically retire from the Board,
except that a non-employee Director who ceases to continue a regular business
relationship may continue serving as a Director until the next Annual Meeting
of the Shareholders, or 70 years of age, whichever first occurs.
Notwithstanding the preceding, a non-employee Director may, at the request of
the Chairman and if ratified by the Board, continue to serve until age 70 if
the Director continues in a position or business activity that the Board
determines would be of substantial benefit to the Company. For purposes of this
Section 2.5, the expression "regular business relationship" means a
relationship as an employee, consultant or officer of a substantial business,
professional or educational organization, which requires exercise of business
judgment on a regular basis, and which is not lower in seniority than the
position with such organization occupied by the Director at the time of the
Director's first election to the Board of Directors of the Company.
- 12 -
<PAGE> 12
Section 2.6 Stock Ownership Requirement. Every Director shall be a
Shareholder of the Company. Directors shall serve for the terms for which they
are elected and until their successors shall have been duly chosen, unless any
such term is sooner ended as herein permitted; provided, however, that if a
Director ceases to be a Shareholder, the disposition of the stock shall
constitute a resignation of the Director's office as a Director.
Section 2.7 Meetings. Regular meetings of the Board of Directors shall be
held at such times as the Board of Directors may determine from time to time.
Section 2.8 Special Meetings. Special meetings of the Board of Directors
shall be held whenever called by the direction of the Chairman of the Board, or
in his or her absence, by the Vice Chairman, or in his or her absence, by
either the Chief Executive Officer or the President. Special meetings of the
Board may also be called by one-third of the Directors then in office. Unless
otherwise indicated in the notice thereof, any and all business of the Company
may be transacted at any special meeting of the Board of Directors.
Section 2.9 Notice of Meetings. Unless waived in accordance with the Code,
notice of each regular or special meeting of the Board of Directors, stating
the date, time and place of the meeting, shall be given not less than two days
before the date thereof to each Director.
Section 2.10 Quorum; Adjournments. A majority of the Board of Directors
shall constitute a quorum for the transaction of business. Whether or not a
quorum is present to organize a meeting, any meeting of Directors (including a
reconvened meeting) may be adjourned by a majority of the Directors present, to
reconvene within 120 days at a specific time and place. At any adjourned
meeting, any business may be transacted that could have been transacted at the
meeting prior to adjournment. If notice of the original meeting was properly
given, it shall not be necessary to give any notice of the adjourned meeting or
of the business to be transacted if the date, time and place of the adjourned
meeting are announced at the meeting prior to adjournment.
Section 2.11 Vote Required for Action. If a quorum is present when a vote
is taken, the affirmative vote of a majority of Directors present is the act of
the Board of Directors unless the Code, the Articles of Incorporation, or these
Bylaws require the vote of a greater number of Directors.
Section 2.12 Action by Directors Without a Meeting. Any action required or
permitted to be
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taken at any meeting of the Board of Directors or any action that may be taken
at a meeting of a committee of the Board of Directors may be taken without a
meeting if the action is taken by all the members of the Board of Directors or
of the committee, as the case may be. The action must be evidenced by one or
more written consents describing the action taken, signed by each Director or
each Director serving on the committee, as the case may be, and delivered to
the Company for inclusion in the minutes or filing with the corporate records.
Section 2.13 Compensation of Directors. Directors who are salaried officers
or employees of the Company shall receive no additional compensation for
service as a Director or as a member of a committee of the Board of Directors.
Each Director who is not a salaried officer or employee of the Company shall be
compensated as established from time-to-time by the Board of Directors.
ARTICLE THREE
ELECTIONS OF OFFICERS AND COMMITTEES
Section 3.1 Election of Officers. At the April meeting of the Board of
Directors in each year, or, if not done at that time, then at any subsequent
meeting, the Board of Directors shall proceed to the election of executive
officers of the Company, and of the Executive Committee, as hereinafter
provided for.
Section 3.2 Executive Committee. The Board of Directors may elect from
their members an Executive Committee which shall include the Chairman of the
Board, the Chief Executive Officer, and the President. The Executive Committee
shall consist of not less than three nor more than five members, the precise
number to be fixed by resolution of the Board of Directors from time to time.
Each member shall serve for one year and until his or her successor
shall have been elected, unless that term is sooner terminated by the Board of
Directors. The Board of Directors shall fill the vacancies in the Executive
Committee by election. The Chairman of the Board shall serve as Chairman of the
Executive Committee, if so designated by the Board of Directors.
All action by the Executive Committee shall be reported to the Board
of Directors at its meeting next succeeding such action, and shall be subject
to revision or alteration by the Board
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<PAGE> 14
of Directors, provided that no rights or interests of third parties shall be
affected by any such revision or alteration. The Executive Committee shall fix
its own rules and proceedings, and shall meet where and as provided by such
rules or by resolution of the Board of Directors. In every case, the
affirmative vote of a majority of all the members of the Committee shall be
necessary to its adoption of any resolution.
Except as prohibited by the Code, during the interval between the
meetings of the Board of Directors, the Executive Committee shall possess and
may exercise all the powers of the Board in the management of all the affairs
of the Company, including the making of contracts, the purchase and sale of
property, the execution of legal instruments, and all other matters in which
specific direction shall not have been given by the Board of Directors.
Section 3.3 Other Committees. The Board of Directors is authorized and
empowered to appoint from its own body or from the officers of the Company, or
both, such other committees as it may think best, and may delegate to or confer
upon such committees all or such part of its powers except as prohibited by the
Code, and may prescribe the exercise thereof as it may deem proper.
ARTICLE FOUR
OFFICERS
Section 4.1 Officers. The officers of the Company, unless otherwise
provided by the Board from time to time, shall consist of the following: a
Chairman of the Board, a Chief Executive Officer, a President, one or more Vice
Presidents (one or more of whom may be designated Executive Vice President, one
or more of whom may be designated Corporate Vice President and one or more of
whom may be designated Senior Vice President), a Treasurer, and a Secretary,
who shall be elected by the Board of Directors. The Board of Directors may from
time to time elect a Vice Chairman of the Board. The Board of Directors, or any
officer to whom the Board may delegate such authority, may also appoint such
other officers as it or they may see fit, and may prescribe their respective
duties. All officers, however elected or appointed, may be removed with or
without cause by the Board of Directors, and any officer appointed by another
officer may also be removed, with or without cause, by the appointing officer
or any officer senior to the appointing officer. Any two or more of the offices
may be filled by the same person.
Section 4.2 Compensation of Officers. The Executive Committee shall
approve salaries of
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<PAGE> 15
all elected officers and such other employees as may be designated by the
Executive Committee, except that salaries of members of the Executive Committee
shall be fixed by the Management Compensation Committee of the Board of
Directors or by the Board of Directors.
Section 4.3 Chairman of the Board. The Chairman of the Board of Directors
shall have such powers and duties as from time to time may be assigned by the
Board of Directors and serve as Chief Executive Officer of the Company if so
designated by the Board of Directors. The Chairman of the Board shall preside
at all meetings of the Shareholders and shall preside at all meetings of the
Board of Directors and the Executive Committee. Except where by law the
signature of the Chief Executive Officer or President is required, the Chairman
of the Board shall have the same power as the Chief Executive Officer or
President to sign all authorized certificates, contracts, bonds, deeds,
mortgages, and other instruments.
Section 4.4 Vice Chairman of the Board. If the Chairman of the Board is
not designated Chief Executive Officer by the Board of Directors, then, if so
designated by the Board of Directors, the Vice Chairman shall serve as Chief
Executive Officer. It shall be the duty of the Vice Chairman of the Board, in
the absence of the Chairman of the Board, to preside at meetings of the
Shareholders, at meetings of the Directors, and at meetings of the Executive
Committee. The Vice Chairman shall do and perform all acts incident to the
office of Vice Chairman and, if so designated, those of Chief Executive
Officer, subject to the approval and direction of the Board of Directors.
Section 4.5 Chief Executive Officer. The Chief Executive Officer shall
direct the business and policies of the Company and shall have such other
powers and duties as from time to time may be assigned by the Board of
Directors. In the event of a vacancy in the office of Chairman and Vice
Chairman of the Board or during the absence or disability of the Chairman and
the Vice Chairman, the Chief Executive Officer shall have all of the rights,
powers and authority given hereunder to the Chairman of the Board. The Chief
Executive Officer may sign all authorized certificates, contracts, bonds,
deeds, mortgages and other instruments, except in cases in which the signing
thereof shall have been expressly delegated to some other officer or agent of
the Company. In general, the Chief Executive Officer shall have the usual
powers and duties incident to the office of a Chief Executive Officer of a
corporation and such other powers and duties as from time to time may be
assigned by the Board of Directors or Chairman of the Board.
Section 4.6 President. The President shall be the Chief Operating Officer
of the Company
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<PAGE> 16
and shall have general charge of the business of the Company subject to the
specific direction and approval of the Board of Directors or its Chairman or
Vice Chairman or the Executive Committee. The President shall also serve as
Chief Executive Officer of the Company if so designated by the Board of
Directors. In the event of a vacancy in the office of Chairman and Vice
Chairman of the Board or during the absence or disability of both the Chairman,
the Vice Chairman, and the Chief Executive Officer, the President shall serve
as Chief Executive Officer and shall have all of the rights, powers and
authority given hereunder to the Chairman of the Board. The President may sign
all authorized certificates, contracts, bonds, deeds, mortgages and other
instruments, except in cases in which the signing thereof shall have been
expressly delegated to some other officer or agent of the Company. In general,
the President shall have the usual powers and duties incident to the office of
a president of a corporation and such other powers and duties as from time to
time may be assigned by the Board or Chairman or Vice Chairman of the Board.
Section 4.7 Executive Vice Presidents. Each shall have authority, on
behalf of the Company, to execute, approve, or accept agreements for service,
bids, or other contracts, and shall sign such other instruments as each is
authorized or directed to sign by the Board of Directors or its Committee or by
the Chief Executive Officer or the President. Each shall do and perform all
acts incident to the office of the Executive Vice President of the Company or
as may be directed by its Board of Directors or its Committee or the Chief
Executive Officer or the President.
Section 4.8 Vice Presidents. There shall be one or more Vice Presidents of
the Company, as the Board of Directors may from time to time elect. Each Vice
President shall have such power and perform such duties as may be assigned by
or under the authority of the Board of Directors.
Section 4.9 Treasurer. The Treasurer shall be responsible for the custody
of all funds and securities belonging to the Company and for the receipt,
deposit or disbursement of funds and securities under the direction of the
Board of Directors. The Treasurer shall cause to be maintained full and true
accounts of all receipts and disbursements and shall make reports of the same
to the Board of Directors, the Chief Executive Officer, and the President upon
request. The Treasurer shall perform all duties as may be assigned from time to
time by the Board of Directors.
Section 4.10 Secretary. The Secretary shall be responsible for preparing
minutes of the acts and proceedings of all meetings of the Shareholders and of
the Board of Directors and any
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<PAGE> 17
committees thereof. The Secretary shall have authority to give all notices
required by law or these Bylaws, and shall be responsible for the custody of
the corporate books, records, contracts and other documents. The Secretary may
affix the corporate seal to any lawfully executed documents and shall sign any
instruments as may require the Secretary's signature. The Secretary shall
authenticate records of the Company and shall perform whatever additional
duties and have whatever additional powers the Board of Directors may from time
to time assign. In the absence or disability of the Secretary or at the
direction of the Chief Executive Officer, any Assistant Secretary may perform
the duties and exercise the powers of the Secretary.
Section 4.11 Voting of Stock. Unless otherwise ordered by the Board of
Directors or Executive Committee, the Chairman of the Board, the Vice Chairman,
the Chief Executive Officer, the President or any Executive Vice President of
the Company shall have full power and authority in behalf of the Company to
attend and to act and to vote at any meetings of shareholders of any
corporation in which the Company may hold stock, and at such meetings may
possess and shall exercise any and all rights and powers incident to the
ownership of such stock which such owner thereof (the Company) might have
possessed and exercised if present. The Board of Directors or Executive
Committee, by resolution from time to time, may confer like powers upon any
other person or persons.
ARTICLE FIVE
INDEMNIFICATION
Section 5.1 Definitions. As used in this Article, the term:
(a) "Company" includes any domestic or foreign predecessor entity
of the Company in a merger or other transaction in which the
predecessor's existence ceased upon consummation of the
transaction.
(b) "Director" or "Officer" means an individual who is or was a
member of the Board of Directors or an officer elected by the
Board of Directors, respectively, or who, while a Director or
Officer, is or was serving at the Company's request as a
director, officer, partner, trustee, employee, or agent of
another domestic or foreign corporation, partnership, joint
venture, trust, employee benefit plan, or other entity. A
Director or Officer is considered to be serving an employee
benefit plan at the Company's request if his or her duties to
the Company also
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<PAGE> 18
impose duties on, or otherwise involve services by, the
Director or Officer to the plan or to participants in or
beneficiaries of the plan. "Director" or "Officer" includes,
unless the context otherwise requires, the estate or personal
representative of a Director or Officer.
(c) "Disinterested Director" or "Disinterested Officer" means a
Director or Officer, respectively who at the time of an
evaluation referred to in subsection 5.5(b) is not:
(1) A Party to the Proceeding; or
(2) An individual having a familial, financial,
professional, or employment relationship with the
person whose advance for Expenses is the subject of
the decision being made with respect to the
Proceeding, which relationship would, in the
circumstances, reasonably be expected to exert an
influence on the Director's or Officer's judgment
when voting on the decision being made.
(d) "Expenses" includes counsel fees.
(e) "Liability" means the obligation to pay a judgment,
settlement, penalty, fine (including an excise tax assessed
with respect to an employee benefit plan), and reasonable
Expenses incurred with respect to a Proceeding.
(f) "Party" includes an individual who was, is, or is threatened
to be made a named defendant or respondent in a Proceeding.
(g) "Proceeding" means any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal,
administrative, arbitrative or investigative and whether
formal or informal.
(h) "Reviewing Party" shall mean the person or persons making the
determination as to reasonableness of Expenses pursuant to
Section 5.5 of this Article, and shall not include a court
making any determination under this Article or otherwise.
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<PAGE> 19
Section 5.2 Basic Indemnification Arrangement.
(a) The Company shall indemnify an individual who is a Party to a
Proceeding because he or she is or was a Director or Officer
against Liability incurred in the Proceeding; provided,
however, that the Company shall not indemnify a Director or
Officer under this Article for any Liability incurred in a
Proceeding in which the Director or Officer is adjudged
liable to the Company or is subjected to injunctive relief in
favor of the Company:
(1) For any appropriation, in violation of his or her
duties, of any business opportunity of the Company;
(2) For acts or omissions which involve intentional
misconduct or a knowing violation of law;
(3) For the types of liability set forth in Section
14-2-832 of the Code; or
(4) For any transaction from which he or she received an
improper personal benefit.
(b) If any person is entitled under any provision of this Article
to indemnification by the Company for some portion of
Liability incurred, but not the total amount thereof, the
Company shall indemnify such person for the portion of such
Liability to which such person is entitled.
Section 5.3 Advances for Expenses.
(a) The Company shall, before final disposition of a Proceeding,
advance funds to pay for or reimburse the reasonable Expenses
incurred by a Director or Officer who is a Party to a
Proceeding because he or she is a Director or Officer if he
or she delivers to the Company:
(1) A written affirmation of his or her good faith
belief that his or her conduct does not constitute
behavior of the kind described in subsection 5.2(a)
above; and
(2) His or her written undertaking (meeting the
qualifications set forth below
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<PAGE> 20
in subsection 5.3(b)) to repay any funds advanced if
it is ultimately determined that he or she is not
entitled to indemnification under this Article or the
Code.
(b) The undertaking required by subsection 5.3(a)(2) above must
be an unlimited general obligation of the proposed indemnitee
but need not be secured and shall be accepted without
reference to the financial ability of the proposed indemnitee
to make repayment. If a Director or Officer seeks to enforce
his or her rights to indemnification in a court pursuant to
Section 5.4 below, such undertaking to repay shall not be
applicable or enforceable unless and until there is a final
court determination that he or she is not entitled to
indemnification, as to which all rights of appeal have been
exhausted or have expired.
Section 5.4 Court-Ordered Indemnification and Advances for Expenses. A
Director or Officer who is a Party to a Proceeding shall have the rights to
court-ordered indemnification and advances for expenses as provided in the
Code.
Section 5.5 Determination of Reasonableness of Expenses.
(a) The Company acknowledges that indemnification of a Director
or Officer under Section 5.2 has been pre-authorized by the
Company as permitted by Section 14-2-859(a) of the Code, and
that pursuant to Section 14-2-856 of the Code, no
determination need be made for a specific Proceeding that
indemnification of the Director or Officer is permissible in
the circumstances because he or she has met a particular
standard of conduct. Nevertheless, except as set forth in
subsection 5.5(b) below, evaluation as to reasonableness of
Expenses of a Director or Officer for a specific Proceeding
shall be made as follows:
(1) If there are two or more Disinterested Directors, by
the Board of Directors of the Company by a majority
vote of all Disinterested Directors (a majority of
whom shall for such purpose constitute a quorum) or
by a majority of the members of a committee of two
or more Disinterested Directors appointed by such a
vote; or
(2) If there are fewer than two Disinterested Directors,
by the Board of Directors (in which determination
Directors who do not qualify as Disinterested
Directors may participate); or
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<PAGE> 21
(3) By the Shareholders, but shares owned by or voted
under the control of a Director or Officer who at
the time does not qualify as a Disinterested
Director or Disinterested Officer may not be voted
on the determination.
(b) Notwithstanding the requirement under subsection 5.5(a) that
the Reviewing Party evaluate the reasonableness of Expenses
claimed by the proposed indemnitee, any Expenses claimed by
the proposed indemnitee shall be deemed reasonable if the
Reviewing Party fails to make the evaluation required by
subsection 5.5(a) within sixty (60) days following the
proposed indemnitee's written request for indemnification or
advance for Expenses.
Section 5.6 Indemnification of Employees and Agents. The Company may
indemnify and advance Expenses under this Article to an employee or agent of
the Company who is not a Director or Officer to the same extent and subject to
the same conditions that a Georgia corporation could, without shareholder
approval under Section 14-2-856 of the Code, indemnify and advance Expenses to
a Director, or to any lesser extent (or greater extent if permitted by law)
determined by the Chief Executive Officer, in each case consistent with public
policy.
Section 5.7 Liability Insurance. The Company may purchase and maintain
insurance on behalf of an individual who is a Director, Officer, employee or
agent of the Company or who, while a Director, Officer, employee or agent of
the Company, serves at the Company's request as a director, officer, partner,
trustee, employee or agent of another domestic or foreign corporation,
partnership, joint venture, trust, employee benefit plan, or other entity
against Liability asserted against or incurred by him or her in that capacity
or arising from his or her status as a Director, Officer, employee, or agent,
whether or not the corporation would have power to indemnify or advance
Expenses to him or her against the same Liability under this Article or the
Code.
Section 5.8 Witness Fees. Nothing in this Article shall limit the
Company's power to pay or reimburse Expenses incurred by a person in connection
with his or her appearance as a witness in a Proceeding at a time when he or
she is not a Party.
Section 5.9 Report to Shareholders. To the extent and in the manner
required by the Code from time to time, if the Company indemnifies or advances
Expenses to a Director or Officer in connection with a Proceeding by or in the
right of the Company, the Company shall report the
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<PAGE> 22
indemnification or advance to the Shareholders.
Section 5.10 No Duplication of Payments. The Company shall not be liable
under this Article to make any payment to a person hereunder to the extent such
person has otherwise actually received payment (under any insurance policy,
agreement or otherwise) of the amounts otherwise payable hereunder.
Section 5.11 Subrogation. In the event of payment under this Article, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the indemnitee, who shall execute all papers required and shall
do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to
bring suit to enforce such rights.
Section 5.12 Contract Rights. The right to indemnification and advancement
of Expenses conferred hereunder to Directors and Officers shall be a contract
right and shall not be affected adversely to any Director or Officer by any
amendment of these Bylaws with respect to any action or inaction occurring
prior to such amendment; provided, however, that this provision shall not
confer upon any indemnitee or potential indemnitee (in his or her capacity as
such) the right to consent or object to any subsequent amendment of these
Bylaws.
Section 5.13 Amendments. It is the intent of the Company to indemnify and
advance Expenses to its Directors and Officers to the full extent permitted by
the Code, as amended from time to time. To the extent that the Code is
hereafter amended to permit a Georgia business corporation to provide to its
directors greater rights to indemnification or advancement of Expenses than
those specifically set forth hereinabove, this Article shall be deemed amended
to require such greater indemnification or more liberal advancement of Expenses
to the Company's Directors and Officers, in each case consistent with the Code
as so amended from time to time. No amendment, modification or rescission of
this Article, or any provision hereof, the effect of which would diminish the
rights to indemnification or advancement of Expenses as set forth herein shall
be effective as to any person with respect to any action taken or omitted by
such person prior to such amendment, modification or rescission.
ARTICLE SIX
CAPITAL STOCK
Section 6.1 Direct Registration of Shares. The Company may, with the Board
of Directors'
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<PAGE> 23
approval, participate in a direct registration system approved by the
Securities and Exchange Commission and by the New York Stock Exchange or any
securities exchange on which the stock of the Company may from time to time be
traded, whereby shares of capital stock of the Company may be registered in the
holder's name in uncertificated, book-entry form on the books of the Company.
Section 6.2 Certificates for Shares. Except for shares represented in
book-entry form under a direct registration system contemplated in Section 6.1,
the interest of each Shareholder in the Company shall be evidenced by a
certificate or certificates representing shares of the Company which shall be
in such form as the Board of Directors from time to time may adopt. Share
certificates shall be numbered consecutively, shall be in registered form,
shall indicate the date of issuance, the name of the Company and that it is
organized under the laws of the State of Georgia, the name of the Shareholder,
and the number and class of shares and the designation of the series, if any,
represented by the certificate. Each certificate shall be signed by the
Chairman of the Board, the President or other Chief Executive Officer and by a
Vice President or the Secretary or may be signed with the facsimile signatures
of the Chairman of the Board, the President or other Chief Executive Officer
and by a Vice President or the Secretary, and in all cases a stock certificate
must also be signed by the transfer agent for the stock. The corporate seal
need not be affixed.
Section 6.3 Transfer of Shares. The Board of Directors shall have
authority to appoint a transfer agent and/or a registrar for the shares of its
capital stock, and to empower them or either of them in such manner and to such
extent as it may deem best, and to remove such agent or agents from time to
time, and to appoint another agent or other agents. Transfers of shares shall
be made upon the transfer books of the Company, kept at the office of the
transfer agent designated to transfer the shares, only upon direction of the
registered owner, or by an attorney lawfully constituted in writing. With
respect to certificated shares, before a new certificate is issued, the old
certificate shall be surrendered for cancellation or, in the case of a
certificate alleged to have been lost, stolen, or destroyed, the requirements
of Section 6.5 of these Bylaws shall have been met. Transfer of shares shall be
in accordance with such reasonable rules and regulations as may be made from
time to time by the Board of Directors.
Section 6.4 Duty of Company to Register Transfer. Notwithstanding any of
the provisions of Section 6.3 of these Bylaws, the Company is under a duty to
register the transfer of its shares only if:
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<PAGE> 24
(a) the certificate or transfer instruction is endorsed by the
appropriate person or persons; and
(b) reasonable assurance is given that the endorsement or
affidavit is genuine and effective; and
(c) the Company either has no duty to inquire into adverse claims
or has discharged that duty; and
(d) the requirements of any applicable law relating to the
collection of taxes have been met; and
(e) the transfer in fact is rightful or is to a bona fide
purchaser.
Section 6.5 Lost, Stolen or Destroyed Certificates. Any person claiming a
share certificate to be lost, stolen or destroyed shall make an affidavit or
affirmation of the fact in the manner required by the Company and, if the
Company requires, shall give the Company a bond of indemnity in form and
amount, and with one or more sureties satisfactory to the Company, as the
Company may require, whereupon an appropriate new certificate may be issued in
lieu of the one alleged to have been lost, stolen or destroyed.
Section 6.6 Authorization to Issue Shares and Regulations Regarding
Transfer and Registration. The Board of Directors and the Executive Committee
shall have power and authority to issue shares of capital stock of the Company
and to make all such rules and regulations as, respectively, they may deem
expedient concerning the transfer and registration of shares of the capital
stock of the Company.
ARTICLE SEVEN
DISTRIBUTIONS AND DIVIDENDS
Section 7.1 Authorization or Declaration. Unless the Articles of
Incorporation provide otherwise, the Board of Directors from time to time in
its discretion may authorize or declare distributions or share dividends in
accordance with the Code.
Section 7.2 Record Date with Regard to Distributions and Share Dividends.
For the purpose of determining Shareholders entitled to a distribution (other
than one involving a purchase,
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<PAGE> 25
redemption, or other reacquisition of the Company's shares) or a share
dividend, the Board of Directors may fix a date as the record date. If no
record date is fixed by the Board of Directors, the record date shall be
determined in accordance with the provisions of the Code.
ARTICLE EIGHT
MISCELLANEOUS
Section 8.1 Corporate Seal. If the Board of Directors determines that
there should be a corporate seal for the Company, it shall be in the form as
the Board of Directors may from time to time determine.
Section 8.2 Inspection of Books and Records. The Board of Directors shall
have power to determine which accounts, books and records of the Company shall
be opened to the inspection of Shareholders, except those as may by law
specifically be made open to inspection, and shall have power to fix reasonable
rules and regulations not in conflict with the applicable law for the
inspection of accounts, books and records which by law or by determination of
the Board of Directors shall be open to inspection. Without the prior approval
of the Board of Directors in its discretion, the right of inspection set forth
in Section 14-2-1602(c) of the Code shall not be available to any Shareholder
owning two percent or less of the shares outstanding.
Section 8.3 Conflict with Articles of Incorporation or Code. To the extent
that any provision of these Bylaws conflicts with any provision of the Articles
of Incorporation, such provision of the Articles of Incorporation shall govern.
To the extent that any provision of these Bylaws conflicts with any
non-discretionary provision of the Code, such provision of the Code shall
govern.
Section 8.4 Severability. In the event that any of the provisions of these
Bylaws (including any provision within a single section, subsection, division
or sentence) is held by a court of competent jurisdiction to be invalid, void
or otherwise unenforceable, the remaining provisions of these Bylaws shall
remain enforceable to the fullest extent permitted by law.
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<PAGE> 26
ARTICLE NINE
AMENDMENTS
Section 9.1 Amendments. Subject, in each case, to the Articles of
Incorporation:
(a) the Board of Directors shall have power to alter,
amend or repeal these Bylaws or adopt new Bylaws; and
(b) any Bylaws adopted by the Board of Directors may be
altered, amended or repealed, and new Bylaws may be adopted, by the
Shareholders, as provided by the Code; and
(c) Articles Ten and Eleven of these Bylaws shall be
amended only in the manner provided by relevant provisions of the
Code.
ARTICLE TEN
FAIR PRICE REQUIREMENTS
Section 10.1 Fair Price Requirements. All of the requirements of Article
11, Part 2, of the Code, included in Sections 14-2-1110 through 1113 (and any
successor provisions thereto), shall be applicable to the Company in connection
with any business combination, as defined therein, with any interested
shareholder, as defined therein.
ARTICLE ELEVEN
BUSINESS COMBINATIONS
Section 11.1 Business Combinations. All of the requirements of Article 11,
Part 3, of the Code, included in Sections 14-2-1131 through 1133 (and any
successor provisions thereto), shall be applicable to the Company in connection
with any business combination, as defined therein, with any interested
shareholder, as defined therein.
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<PAGE> 1
[SELECTED PAGES FROM THE COMPANY'S 1998 ANNUAL REPORT TO SHAREHOLDERS]
EXHIBIT 13
<PAGE> 2
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(thousands of dollars) 1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenue $406,475(*) $417,321 $366,481 $328,990 $284,566
Operating income
before unusual items and
restructuring provision 65,166 52,286 47,611 41,078 16,577
Operating income 61,408 46,077 47,611 31,928 16,577
Net income 35,419 28,944 23,280 14,865 6,612
Total assets 534,199 359,971 301,824 200,779 193,820
Long-term debt, less current maturities 191,697 95,457 1,051 -- 5
Total shareholders' equity 159,572 127,745 196,327 104,641 98,028
EBITDA(**) 101,247 87,753 66,265 45,249 26,610
Employees 3,500 3,700 4,600 4,400 4,600
</TABLE>
* 1998 comparable revenues were impacted by the December 1997 divestiture of the
paramedical services business, which accounted for approximately $58.8 million
in 1997 revenues; and by revenues from acquisitions of approximately $15.9
million in 1998.
**EBITDA represents earnings before interest, taxes, depreciation and
amortization.
<PAGE> 3
19
ChoicePoint
Management's Discussion and Analysis
of Financial Condition and
Results of Operations
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 was formed as a result of the
spinoff of the Insurance Services Group of Equifax Inc. into a separate, public
company, in August of 1997 (the "Spinoff").
Since its formation, ChoicePoint has been organized into three service
groups: Property and Casualty Insurance Services, Life and Health Insurance
Services and Business and Government Services. The Company has offered 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, Uniform Commercial Code searches and
filings, and database marketing services.
In December 1998, ChoicePoint divested its labor-intensive life and
health and investigative field businesses, as described below. Beginning in
1999, ChoicePoint will report revenue in two service groups: Insurance
Services and Business and Government Services.
Results of Operations
Revenue and operating income for the years ended December 31, 1998, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
============================================================
Year Ended December 31, 1998 1997 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
P&C revenue $218,413 $186,759 $167,073
L&H revenue 79,730 143,979 146,696
B&G revenue 108,332 86,583 52,712
- ------------------------------------------------------------
Operating revenue 406,475 417,321 366,481
Costs and expenses 341,309 365,035 318,870
- ------------------------------------------------------------
Operating income
before unusual items 65,166 52,286 47,611
Unusual items 3,758 6,209 --
============================================================
Operating income $ 61,408 $ 46,077 $ 47,611
============================================================
</TABLE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Consolidated revenue decreased $10.8 million, or 2.6%, from $417.3
million in 1997 to $406.5 million in 1998, primarily due to the sale of
ChoicePoint's paramedical examination business in December 1997. Excluding the
effect of that sale, consolidated revenues increased $48.0 million, or 13.4%,
from $358.5 million in 1997 to $406.5 million in 1998.
Revenue from Property and Casualty Insurance Services grew $31.7
million, or 16.9%, from $186.8 million in 1997 to $218.4 million in 1998, driven
primarily by strong unit performance in personal lines products and the
development of a new generation of commercial worker's compensation software at
a large insurance customer. In total, revenue from the sale of this new software
was approximately $10.8 million in 1998. Revenues in the field-based claims and
inspection products decreased approximately $4.8 million in 1998.
Revenue from Life and Health Insurance Services decreased $64.2
million, or 44.6%, from $144.0 million in 1997 to $79.7 million in 1998
primarily due to the sale of the paramedical examination business noted above.
Excluding the effect of that sale, revenue from Life and Health Insurance
Services decreased $5.4 million, or 6.3%, from $85.1 million in 1997 to $79.7
million in 1998, due primarily to unit
<PAGE> 4
ChoicePoint
decline in traditional field-based life and health inspection reports and
laboratory services.
Revenue from Business and Government Services increased $21.7 million,
or 25.1%, from $86.6 million in 1997 to $108.3 million in 1998. Incremental
revenue from acquisitions made since the first quarter of 1997 contributed $15.9
million of the increase.
Operating income before unusual items increased $12.9 million, or
24.6%, from $52.3 million in 1997 to $65.2 million in 1998. Operating margins
(excluding the effects of unusual items) increased from 12.5% in 1997 to 16.0%
in 1998, primarily as a result of strong revenue performance in property and
casualty personal lines products. Included in operating results in 1998 and 1997
were $6.2 million and $1.3 million, respectively, of expenses incurred to modify
existing computer systems and applications to address the Year 2000 issues.
Unusual items of $3.8 million in 1998 include $2.0 million for the
writedown of a noncompete agreement and $1.8 million for writedowns of certain
software and database assets and severance expenses.
Operating income after unusual items increased by $15.3 million, or
33.3%, from $46.1 million in 1997 to $61.4 million in 1998.
ChoicePoint recognized a pre-tax gain of $8.8 million as a result of
the sale of its life and health insurance field underwriting services and
insurance claim investigative services (collectively the "field businesses") to
PMSI Services, Inc., an affiliate of Examination Management Services, Inc. and
the planned sale of its payroll verification business. The Company sold the
field businesses in December 1998 for approximately $23.0 million in a
combination of cash, a note receivable, and warrants. In addition, the Company
retained certain net assets, primarily accounts receivable. See Note 4 to the
consolidated financial statements.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Consolidated revenue increased $50.8 million, or 13.9%, from $366.5
million in 1996 to $417.3 million in 1997. Revenue improvements in two of the
three business groups were partially offset by revenue declines in Life and
Health Insurance Services.
Revenue from Property and Casualty Insurance Services grew $19.7
million, or 11.8%, from $167.1 million in 1996 to $186.8 million in 1997, driven
primarily by strong unit performance in personal lines products.
Revenue from Life and Health Insurance Services decreased $2.7 million,
or 1.9%, from $146.7 million in 1996 to $144.0 million in 1997, as growth in
laboratory services was offset by decreases in other lines, primarily due to the
sale of ChoicePoint's paramedical examination business in December 1997, which
represented $4.9 million of the decline.
Revenue from Business and Government Services increased $33.8 million,
or 64.3%, from $52.7 million in 1996 to $86.5 million in 1997. Revenue increased
in all business units within Business and Government Services with $23.7 million
coming from CDB Infotek. In August 1996, ChoicePoint acquired 70% of the
outstanding capital stock of CDB Infotek. That acquisition was accounted for as
a purchase, and the results of operations of CDB Infotek have been included in
ChoicePoint's consolidated statements of income from the date of acquisition.
The other business units within Business and Government Services posted revenue
gains of 23.8%.
Operating income before unusual items increased $4.7 million, or 9.8%,
from $47.6 million in 1996 to $52.3 million in 1997. Operating margins
(excluding the effects of unusual items) decreased from 13.0% in 1996 to 12.5%
in 1997. Operating margins before unusual items were impacted by $4.9 million of
other charges in the fourth quarter of 1997.
Included in the $4.9 million of other charges were $1.9 million of
expense related to new stock-based compensation plans, $1.0 million for a
contribution to the employees' profit sharing plan to offset the adverse effect
of transitioning from Equifax's defined benefit pension plan, $1.0 million to
establish a ChoicePoint charitable foundation, $860,000 for adjusting
receivables for a renegotiated customer contract and $100,000 to fund an
under-reserved compensation plan.
<PAGE> 5
21
Included in the $6.2 million charge of unusual items in 1997 were $1.8
million of charges related to expenses of the Spinoff and $4.4 million for
write-downs of certain assets in the Company's labor-intensive field businesses
and its commercial P&C software company.
Operating income after unusual items and other charges decreased $1.5
million, or 3.2%, from $47.6 million in 1996 to $46.1 million in 1997.
ChoicePoint recognized a pre-tax gain of $14.0 million on the sale of
its paramedical examination business to Pediatric Services of America, Inc.
during the fourth quarter of 1997. The Company sold this business in December
1997 for approximately $21.7 million in a combination of cash and stock. In
addition, the Company retained certain net assets, primarily accounts
receivable.
Income Taxes
Historically, the Company had been included in the consolidated federal
income tax return of Equifax. Prior to the Spinoff on August 7, 1997,
ChoicePoint's provision for income taxes reflected federal and state income
taxes calculated on ChoicePoint's separate income, but recognized the impact of
unitary tax regulations of certain states on ChoicePoint as a member of the
Equifax consolidated group.
ChoicePoint's overall effective tax rates were 43.3% in 1998, 45.9% in
1997, and 43.2% in 1996. The decrease in effective tax rates from 1997 to 1998
is primarily due to a reduction in the state income tax rate due to ChoicePoint
no longer being part of Equifax's consolidated group for unitary tax purposes.
The increase in effective tax rates from 1996 to 1997 is primarily the result of
foreign income being subject to tax and increased goodwill amortization not
deductible for income taxes. The increase is partially offset by a reduction in
the state income tax rate due to ChoicePoint no longer being part of Equifax's
consolidated group, as discussed above. If the provision for income taxes prior
to the Spinoff had been calculated for ChoicePoint as a separate taxable entity
for federal and state income tax purposes, the Company estimates that its
overall effective tax rate would have been 44.5% in 1997 and 40.8% in 1996.
Financial Conditions and Liquidity
Cash provided by operations increased from $55.4 million in 1997 to
$70.8 million in 1998. This increase was primarily attributable to the increase
in net income, as adjusted for depreciation and amortization, and decreased
marketable securities. During 1998, ChoicePoint used $168.1 million for
investing activities, including $138.6 million for acquisitions, $16.9 million
for other assets, of which $8.4 million related to software developed for
internal use with the remainder related primarily to purchased data files,
software and software developed for external use. In addition, $13.6 million was
used for additions to property and equipment, primarily system upgrades. In
1997, ChoicePoint used $25.4 million for investing activities, including $20.0
million for additions to property and equipment and $10.8 million for
acquisitions. Net cash provided by financing activities was $89.3 million in
1998, as the proceeds from a credit facility were used to pay for acquisitions
and purchase stock held by employee benefit trusts. In 1997, net cash used by
financing activities was $5.1 million, as proceeds from a credit facility were
used to pay Spinoff related costs.
The Company's short-term and long-term liquidity depends primarily upon
its level of net income, accounts receivable, accounts payable, accrued expenses
and long-term 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 is a revolving facility expandable to $300 million,
subject to approval of the lenders, and bears interest at variable rates.
Borrowings under the Credit Facility increased from $95.0 million at December
31, 1997 to $189.0 at December 31, 1998 due primarily to the acquisitions made
in 1998. The commitment termination date and final maturity of the Credit
Facility will occur in August 2002. ChoicePoint may use additional borrowings
under the Credit Facility to finance acquisitions and for general corporate cash
requirements. For a more complete description of the terms of the Credit
Facility, see Note 6 to the consolidated financial statements. The Company also
utilized lines of credit ("Lines of Credit") with two banks during 1998. As of
December 31, 1998, $5.1 million was outstanding on these Lines of Credit. In
addition, as of December 31, 1998, approximately $22.7 million of short-term
<PAGE> 6
ChoicePoint
notes payable for acquisitions were outstanding. In January 1999, these
short-term notes payable were paid and an additional $30.0 million was borrowed
under the Credit Facility.
Earnings before interest, taxes, depreciation and amortization
("EBITDA") increased $13.5 million, or 15.4%, from $87.8 million in 1997 to
$101.2 million in 1998. EBITDA is presented not as a substitute for income from
operations, net income or cash flows from operating activities. The Company has
included EBITDA data (which are not a measure of financial performance under
generally accepted accounting principles) because such data are 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.
Interest expense was $7.7 million in 1998 and $6.6 million in 1997.
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. After the Spinoff, interest expense also includes
interest on the revolving Credit Facility and Lines of Credit discussed above.
ChoicePoint has entered into six interest rate swap agreements to reduce the
impact of changes in interest rates on its floating rate long-term obligation.
See Note 6 to the consolidated financial statements.
The Company anticipates capital expenditures will be approximately
$10.0 million in 1999, which will be used primarily for system upgrades. In
addition, the Company anticipates additions to other assets, for capitalized
software development, purchased data files and software to be approximately $9.0
million in 1999.
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 has assessed its noninformation
technology systems, which includes 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 April 1997 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)
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)
<PAGE> 7
23
At a minimum, all material ChoicePoint applications have achieved level
three and several areas have reached level four.
The Costs to Address the Company's Year 2000 Issues
During 1998 and 1997, the Company incurred approximately $6.2 million
and $1.3 million, respectively, to modify existing computer systems and
applications to address the Year 2000 issue. The Company estimates 1999
expenditures of 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 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;
however, a separate test environment has been established for complete
integration testing. Until system integration testing is substantially in
process and the Company has begun receiving Year 2000 data from suppliers for
all applications, 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.
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, 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.
<PAGE> 8
ChoicePoint
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands, except per share data)
Operating revenue $406,475 $417,321 $366,481
Costs and expenses:
Cost of services 268,108 280,765 252,118
Selling, general and administrative 73,201 84,270 66,752
Unusual items 3,758 6,209 --
- -------------------------------------------------------------------------------------------------
Total costs and expenses 345,067 371,244 318,870
- -------------------------------------------------------------------------------------------------
Operating income 61,408 46,077 47,611
Gain on sale of businesses, net 8,807 14,038 --
Interest expense 7,748 6,649 6,597
- -------------------------------------------------------------------------------------------------
Income before income taxes 62,467 53,466 41,014
Provision for income taxes 27,048 24,522 17,734
- -------------------------------------------------------------------------------------------------
Net income $ 35,419 $ 28,944 $ 23,280
=================================================================================================
Earnings per share - basic (Note 3) $ 2.44 $ -- $ --
=================================================================================================
Weighted average shares - basic 14,542 -- --
=================================================================================================
Earnings per share - diluted (Note 3) $ 2.36 $ -- $ --
=================================================================================================
Weighted average shares - diluted 15,006 -- --
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 9
25
ChoicePoint
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In thousands, except par values)
Assets
Current assets:
Cash and cash equivalents $ 18,883 $ 26,858
Marketable securities -- 9,000
Accounts receivable, net of allowance for doubtful accounts
of $3,286 in 1998 and $1,847 in 1997 103,191 90,266
Deferred income tax assets 8,372 10,503
Other current assets 13,160 9,492
- ------------------------------------------------------------------------------------------------------
Total current assets 143,606 146,119
Property and equipment, net 55,279 42,985
Goodwill, net 253,140 127,731
Deferred income tax assets 19,010 15,406
Other 63,164 27,730
- ------------------------------------------------------------------------------------------------------
Total Assets $ 534,199 $ 359,971
======================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Short-term debt and current maturities of long-term debt $ 5,623 $ 593
Notes payable for acquisitions 22,701 --
Accounts payable 24,645 17,371
Accrued salaries and bonuses 17,537 15,664
Other current liabilities 54,454 43,610
- ------------------------------------------------------------------------------------------------------
Total current liabilities 124,960 77,238
Long-term debt, less current maturities 191,697 95,457
Postretirement benefit obligations 53,251 53,834
Other long-term liabilities 4,719 5,697
- ------------------------------------------------------------------------------------------------------
Total liabilities 374,627 232,226
Commitments and Contingencies (Note 10)
Shareholders' equity:
Preferred stock, $.01 par value; 10,000 shares authorized, no
shares issued or outstanding -- --
Common stock, $.10 par value; shares authorized - 100,000;
issued and outstanding - 14,660 in 1998 and 14,641 in 1997 1,466 1,464
Paid-in capital 119,037 112,655
Retained earnings 49,163 13,744
Cumulative translation adjustments (176) (118)
Stock held by employee benefit trusts, at cost, 203 shares in 1998 (9,918) --
- ------------------------------------------------------------------------------------------------------
Total shareholders' equity 159,572 127,745
- ------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 534,199 $ 359,971
======================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE> 10
ChoicePoint
Consolidated Statements of
Shareholders' Equity
<TABLE>
<CAPTION>
Equifax Cumulative Stock Held
Comprehensive Equity Common Paid-in Retained Translation by Benefit
Income Investment Stock Capital Earnings Adjustments Trusts Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands)
Balance, December 31, 1995 $ 104,684 $ -- $ -- $ -- $ (43) $ -- $104,641
Net income $23,280 23,280 -- -- -- -- -- 23,280
Net transactions
with Equifax -- 68,450 -- -- -- -- -- 68,450
Translation adjustments (44) -- -- -- -- (44) -- (44)
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income 23,236 -- -- -- -- -- -- --
Balance December 31, 1996 196,414 -- -- -- (87) -- 196,327
Net income
(from January 1, 1997
through July 31, 1997) 15,200 15,200 -- -- -- -- -- 15,200
Intercompany transactions
with Equifax -- 1,609 -- -- -- -- -- 1,609
Repayment of Equifax
intercompany debt -- (72,602) -- -- -- -- -- (72,602)
Debt assumed from Equifax -- (29,000) -- -- -- -- -- (29,000)
Distribution of common
stock -- (111,621) 1,457 110,164 -- -- -- --
Restricted stock plans, net -- -- 6 1,642 -- -- -- 1,648
Stock options exercised -- -- 1 266 -- -- -- 267
Other -- -- -- 583 -- -- -- 583
Net income
(from August 1, 1997
to December 31, 1997) 13,744 -- -- -- 13,744 -- -- 13,744
Translation adjustments (31) -- -- -- -- (31) -- (31)
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income 28,913 -- -- -- -- -- -- --
Balance December 31, 1997 -- 1,464 112,655 13,744 (118) -- 127,745
Net income 35,419 -- -- -- 35,419 -- -- 35,419
Restricted stock plans, net -- -- (2) 2,550 -- -- -- 2,548
Stock options exercised -- -- 4 601 -- -- -- 605
Cost of shares repurchased -- -- -- -- -- -- (9,918) (9,918)
Other -- -- -- 3,231 -- -- -- 3,231
Translation adjustments (58) -- -- -- -- (58) -- (58)
- --------------------------------------------------------------------------------------------------------------------------
Comprehensive income $35,361 -- -- -- -- -- -- --
Balance, December 31, 1998 $ -- $1,466 $119,037 $49,163 $(176) $(9,918) $159,572
==========================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 11
27
ChoicePoint
Consolidated Statements
of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Cash flows from operating activities:
Net income $ 35,419 $ 28,944 $ 23,280
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 31,032 27,638 18,654
Provision for unusual items 3,758 6,209 --
Gain on sale of businesses, net (8,807) (14,038) --
Compensation recognized under employee stock plans 3,059 1,892 --
Changes in assets and liabilities,
excluding effects of acquisitions and divestitures:
Marketable securities and other current assets 10,864 (1,213) (1,582)
Accounts receivable, net 1,297 (11,483) (7,362)
Deferred income taxes (1,473) (6,883) 2,052
Current liabilities, excluding debt (5,003) 24,850 (60)
Other long-term liabilities, excluding debt 683 (496) 1,797
Net cash provided by operating activities 70,829 55,420 36,779
Cash flows from investing activities:
Acquisitions, net of cash acquired (138,630) (10,778) (69,654)
Cash proceeds from sale of businesses 1,000 11,707 --
Additions to property and equipment (13,625) (19,997) (18,098)
Additions to other assets, net (16,878) (6,351) (4,034)
Net cash used by investing activities (168,133) (25,419) (91,786)
Cash flows from financing activities:
Proceeds from long-term debt 115,042 112,000 --
Payments on long-term debt (21,551) (17,928) (315)
Net short-term borrowings 5,104 -- --
Payment of debt assumed in acquisition -- -- (11,778)
Payment of debt assumed from Equifax -- (29,000) --
Payment of Equifax intercompany debt -- (72,602) --
Net transactions with Equifax -- 1,609 68,159
Purchases of stock held by employee benefit trusts (9,918) -- --
Proceeds from exercise of stock options 605 267 --
Other -- 583 --
Net cash provided (used) by financing activities 89,282 (5,071) 56,066
Effect of foreign currency exchange rates on cash 47 202 22
Net (decrease) increase in cash (7,975) 25,132 1,081
Cash and cash equivalents, beginning of year 26,858 1,726 645
Cash and cash equivalents, end of year $ 18,883 $ 26,858 $ 1,726
==========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 12
ChoicePoint
Notes to Consolidated
Financial Statements
Note 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 in 1997 (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.
Prior to the Spinoff, the consolidated financial statements of
ChoicePoint include substantially all of the assets, liabilities, revenues, and
expenses of the business conducted through Equifax's Insurance Services Group.
All material transactions between entities included in the consolidated
financial statements have been eliminated. The consolidated financial statements
have been prepared on the historical cost basis, and present the Company's
financial position, results of operations and cash flows as derived from
Equifax's historical financial statements where applicable.
Note 2
NATURE OF OPERATIONS
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. Since its formation, ChoicePoint has been
organized into three service groups: Property and Casualty Insurance Services,
Life and Health Insurances Services and Business and Government Services. The
Company has offered the following products through these groups:
Property and Casualty Insurance Services
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
Underwriting and claims information for life and health insurers,
including medical records collection, laboratory services and investigative
services.
Business and Government Services
Pre-employment background searches, drug screenings, public records
searches, people locator services, Uniform Commercial Code searches and filings,
and database marketing services.
Note 3
SIGNIFICANT ACCOUNTING POLICIES
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.
Revenue and Cost 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 $309,771,000 in 1998,
$257,989,000 in 1997 and $224,783,000 in 1996.
Customer Development Corporation (Note 4) passes on material, shipping
and postage charges to their 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 from the date of
acquisition until December 31, 1998 were $6,419,000.
Marketable Securities
Marketable securities at December 31,1997 consisted of 495,000 shares
of common stock of Pediatric Services of America, Inc. ("PSA") which were
received in connection with the sale of the Company's paramedical
<PAGE> 13
29
examination business. The common stock was purchased by PSA during 1998 (Note
4).
Property and Equipment
Property and equipment at December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
==================================================
December 31, 1998 1997
- --------------------------------------------------
<S> <C> <C>
(In thousands)
Land, buildings,
and improvements $ 21,561 $ 11,945
Data processing
equipment and
furniture 96,963 80,711
- --------------------------------------------------
118,524 92,656
Less: Accumulated
depreciation (63,245) (49,671)
- --------------------------------------------------
$ 55,279 $ 42,985
- --------------------------------------------------
==================================================
</TABLE>
The cost of property and equipment is depreciated primarily on the
straight-line basis over estimated asset lives of 30 to 40 years for buildings;
useful lives, not to exceed lease terms, for leasehold improvements; three to
five years for data processing equipment and eight to 20 years for furniture.
Depreciation expense was $14,498,000 in 1998, $12,403,000 in 1997, and
$9,302,000 in 1996.
Goodwill and Other Assets
Except for a strategic investment accounted for under the cost method,
the Company accounts for all acquisitions using the purchase method of
accounting. As a result, goodwill and other acquisition intangibles are recorded
at the time of purchase. Goodwill is amortized on a straight-line basis over 20
to 40 years. Amortization expense was $6,519,000 in 1998, $4,616,000 in 1997,
and $2,873,000 in 1996. As of December 31, 1998 and 1997, accumulated
amortization was $21,593,000 and $13,648,000, respectively.
Other assets at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
====================================================
December 31, 1998 1997
- ----------------------------------------------------
<S> <C> <C>
(In thousands)
Other acquisition
intangibles, net $21,304 $17,956
System development
and other deferred
costs, net 20,811 9,774
Note receivable and
warrants due to
divestiture (Note 4) 17,426 --
Investment in subsidiary 3,623 --
$63,164 $27,730
- ----------------------------------------------------
====================================================
</TABLE>
Other acquisition intangibles include software, data files, technology,
workforce and noncompete agreements and are being amortized on a straight-line
basis over five to ten years. Amortization expense for other acquisition
intangibles was $4,899,000 in 1998, $5,832,000 in 1997, and $3,127,000 in 1996.
As of December 31, 1998 and 1997, accumulated amortization was $17,899,000 and
$14,452,000, respectively.
System development and other deferred costs are being amortized on a
straight-line basis primarily over three to five years. Amortization expense for
system development and other deferred costs were $5,116,000 in 1998, $4,787,000
in 1997, and $3,352,000 in 1996. As of December 31, 1998 and 1997, accumulated
amortization was $20,174,000 and $15,511,000, respectively.
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 years ended December
31, 1998 and 1997, approximately $8,413,000 and $1,520,000, respectively, of
costs of software developed for internal use was capitalized.
Impairment of Goodwill and Long-lived Assets
The Company regularly evaluates whether events and circumstances have
occurred that indicate the carrying amount of goodwill or other long-lived
assets may warrant revision or may not be recoverable. When factors indicate
that goodwill or other assets should be evaluated for possible impairment, the
Company uses an estimate of the future undiscounted net cash flows of the
related business over the remaining life of the goodwill or other assets in
measuring whether the goodwill or other assets are recoverable. If the carrying
amount exceeds undiscounted cash flows, an impairment loss would be recognized
for the difference between the carrying amount and its estimated fair value.
Foreign Currency Translation
The assets and liabilities of foreign subsidiaries are translated at
the year-end rate of exchange and income statement items are translated at the
average rates prevailing during the year. The resulting translation adjustment
is recorded as a component of shareholders' equity. Foreign
<PAGE> 14
ChoicePoint
Notes to Consolidated
Financial Statements
currency transaction gains and losses, which are not material, are recorded in
the consolidated statements of income.
Consolidated Statements of Cash Flows
The Company considers cash equivalents to be short-term cash
investments with original maturities of three months or less.
Prior to the Spinoff, tax provisions were settled through the
intercompany account and Equifax made income tax payments on behalf of the
Company. The tax payments made subsequent to the Spinoff by ChoicePoint and the
tax payments made prior to the Spinoff by Equifax on behalf of ChoicePoint
(based on the income tax returns filed or to be filed) were approximately
$24,953,000 in 1998, $21,979,000 in 1997, and $14,842,000 in 1996.
Interest paid on long-term debt, excluding amounts charged by Equifax
prior to the Spin-off, totaled $5,960,000 in 1998, $2,314,000 in 1997, and
$147,000 in 1996.
In 1998, 1997 and 1996, the Company acquired various businesses that
were accounted for as purchases (Note 4). In conjunction with these
transactions, liabilities were assumed as follows:
<TABLE>
<CAPTION>
==============================================================
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
(In thousands)
Fair value of
assets acquired $162,154 $10,986 $97,204
Cash paid
for acquisitions 137,384 10,778 71,661
- --------------------------------------------------------------
Liabilities assumed $ 24,770 $ 208 $25,543
- --------------------------------------------------------------
==============================================================
</TABLE>
Included in the liabilities assumed above are $22,701,000 of short-term
notes payable for acquisitions which were paid in January 1999.
Financial Instruments
The Company's financial instruments recorded on the balance sheet
consist primarily of cash and cash equivalents, marketable securities, accounts
receivable, accounts payable and debt. The carrying amounts approximate their
fair values because of the short maturity of these instruments, or in the case
of debt, because it bears interest at current market rates. In addition, the
Company received a note receivable and warrants in conjunction with a 1998
divestiture which is discussed in detail in Note 4.
Off balance sheet derivative financial instruments at December 31, 1998
and 1997 consist of interest rate swap agreements (Note 6) entered into to limit
the effect of changes in interest rates on the Company's floating rate long-term
obligation. Amounts currently due to or from interest rate swap counterparties
are recorded in interest expense in the period in which they accrue. The Company
does not enter into financial instruments for trading or speculative purposes.
The fair value of the interest rate swap agreements, estimated by each bank
based upon its internal valuation models, were $(2,346,000) at December
31, 1998.
Earnings Per Share
Historical earnings per share for 1997 and 1996 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 12 for pro forma earnings per share for 1997. Earnings per share -
diluted includes the dilutive effect of stock options.
Reclassifications
Certain prior-year amounts have been reclassified to conform with the
current- year presentation.
New Pronouncements
The Company adopted the following new pronouncements in 1998:
Comprehensive Income - In 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Company has chosen to disclose comprehensive income,
which consists of net income and foreign currency translation adjustments, in
the Consolidated Statements of Shareholders' Equity. Prior years have been
restated to conform to the SFAS No. 130 requirements.
Segment Information - In 1998, the Company adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information." See Note
14 for disclosure.
Pensions and Other Postretirement Plans - In 1998, the Company adopted
SFAS No. 132, "Employers' Disclosures about Pensions and
<PAGE> 15
31
Other Postretirement Benefits." The provisions of SFAS No. 132 revise employers'
disclosures about pensions and other postretirement plans (Note 9) but does not
change the measurement or recognition of these plans.
Note 4
ACQUISITIONS AND DIVESTITURES
Acquisitions
During 1998, 1997 and 1996, the Company acquired or made equity
investments in the following businesses:
<TABLE>
<CAPTION>
===================================================
Date Percentage
Business Acquired Ownership
- ---------------------------------------------------
<S> <C> <C>
DATEQ Information
Network, Inc. Dec. 1998 100.0%
EquiSearch Services, Inc. Nov. 1998 100.0
Tyler-McLennon, Inc. Nov. 1998 100.0
Customer Development
Corporation Oct. 1998 100.0
Informus Corporation Oct. 1998 100.0
Intertech Information
Management Inc. Sept. 1998 10.6
Application Profiles, Inc. June 1998 100.0
Attest National Drug
Testing, Inc. April 1998 100.0
CDB Infotek
(additional purchase) Mar. 1998 27.4
Drug Free, Inc. Nov. 1997 100.0
Medical Information
Network, LLC Oct. 1997 100.0
CDB Infotek
(additional purchase) Sept. 1997 2.6
Advanced HR Solutions, Inc. June 1997 100.0
CDB Infotek Aug. 1996 70.0
Professional Test
Administrators, Inc. April 1996 100.0
=================================================
</TABLE>
With the exception of Intertech, which was accounted for under the cost
method, the 1998 acquisitions were accounted for as purchases. The 1998
acquisitions had an aggregate purchase price of $162,154,000, with $133,312,000
allocated to goodwill, and $10,081,000 to other intangible assets (primarily
technology, workforce, software and noncompete agreements). Goodwill from the
1998 acquisitions is amortized on a straight-line basis over 25 to 30 years and
other intangible assets over five to ten years.
The following unaudited pro forma information has been prepared as if
the acquisitions had occurred on January 1, 1997. The information is based on
historical results of the separate companies and may not necessarily be
indicative of the results that could have been achieved or of results which may
occur in the future. The pro forma information includes the expense for
amortization of goodwill and other intangible assets and interest expense
resulting from these transactions. The pro forma information also includes $14.6
million ($8.6 million after tax) of one-time expenses recorded in 1998 by
Customer Development Corporation for Equity Participation Plans which were paid
as a result of the sale. The expense was recorded prior to the acquisition and
is not included in ChoicePoint's historical financial statements.
<TABLE>
<CAPTION>
=========================================================
Year Ended December 31, 1998 1997
- ---------------------------------------------------------
<S> <C> <C>
(In thousands, except per share data)
Revenue $455,437 $476,784
Net income 24,198 24,359
Earnings per share - basic 1.66 1.67
Earnings per share - diluted 1.61 1.64
========================================================
</TABLE>
The 1997 acquisitions were accounted for as purchases and had an
aggregate purchase price of $10,778,000, with $9,982,000 allocated to goodwill,
and $50,000 to other intangible assets (noncompete agreement).
The 1996 acquisitions were accounted for as purchases and had an
aggregate purchase price of $71,661,000, with $59,457,000 allocated to goodwill,
and $20,932,000 to other intangible assets (primarily data files and software).
Results of operations have been included in the consolidated statements
of income from the dates of acquisition for all acquisitions accounted for under
the purchase method.
Divestitures
In December 1998, the Company sold its life and health insurance field
underwriting services and insurance claim investigation services (collectively
the "field businesses") to PMSI Services, Inc. ("PMSI"). The field businesses
were sold for approximately $23,000,000 in a combination of cash - $1,000,000, a
note receivable - $10,000,000 and warrants - $12,000,000. In addition, the
Company retained certain net assets, primarily accounts receivable. The note
receivable is due and payable on September 1, 2004 and bears interest at 8.5%
through June 30, 1999 and 13.5% thereafter. The warrants are convertible into
PMSI stock. PMSI or its parent may purchase the warrants at any time for $12.0
million; however, repurchase is required at the maturity date of the
<PAGE> 16
ChoicePoint
Notes to Consolidated
Financial Statements
notes or whenever a capital event (as defined in the agreement) takes place by
PMSI or its parent company, Examination Management Services, Inc. In recording
the divestiture, ChoicePoint discounted the warrants by 8.5% over the term of
the note receivable. The note receivable and the warrants, less the discount of
$4,574,000, are recorded in other long-term assets at December 31, 1998. The
discount will be amortized over the term of the notes receivable and any
unamortized discount will be recognized as additional gain to the extent cash is
received prior to the stated maturity.
In December 1998, the Company recognized a pretax gain of $8,807,000 on
the sale of the field businesses and on the planned sale of its payroll
verification business. The pretax gain was net of transaction-related costs,
including lease termination and personnel-related costs of $5,925,000 that were
accrued at the time of the divestiture. ChoicePoint is also obligated to provide
transitional services to PMSI for a period of time in 1999. The amount related
to the planned sale of its payroll verification business that was netted against
the gain was $2,315,000.
In November 1998, the Company entered into a strategic partnership with
Experian Limited (U.K.) leading to the sale of ChoicePoint, Ltd., the Company's
United Kingdom-based insurance services division in December 1999.
In December 1997, the Company sold its paramedical examinations
business to PSA. The business unit was sold for approximately $21,707,000 in a
combination of cash - $11,707,000, and PSA stock - $10,000,000. In addition, the
Company retained certain net assets, primarily accounts receivable. In December
1997, the Company transferred approximately $1,000,000 of the PSA common stock
to ChoicePoint's newly established charitable foundation. During the third
quarter of 1998, PSA repurchased the PSA stock from ChoicePoint at the original
stock price under an agreement protecting ChoicePoint from a decrease in PSA's
stock price.
Note 5
TRANSACTIONS WITH EQUIFAX
Prior to the Spinoff, under Equifax's centralized cash management
system, short-term advances from Equifax and excess cash sent to Equifax were
reflected as intercompany debt and were included in Equifax's equity investment
account through July 31, 1997 (Note 8). As a result of the Spinoff, the net
intercompany debt at July 31, 1997, totaling $72,602,000, was repaid in the
third quarter of 1997. ChoicePoint was charged corporate costs through July 31,
1997. The amount of corporate costs included in the accompanying consolidated
statements of income were $0 in 1998, $5,952,000 in 1997, and $11,260,000 in
1996. These allocations were based on an estimate of the proportion of corporate
expenses related to ChoicePoint, utilizing such factors as revenues, number of
employees, number of transactions processed and other applicable factors. In the
opinion of management, the corporate charges have been made on a reasonable
basis and approximate all the incremental costs ChoicePoint would have incurred
had it been operating on a stand-alone basis. These amounts have been included
in selling, general, and administrative expenses. ChoicePoint was also charged
corporate interest expense through July 31, 1997 based on the relationship of
its net assets to total Equifax net assets, excluding corporate debt, in amounts
of $0 in 1998, $3,612,000 in 1997, and $6,215,000 in 1996. These amounts are
included in interest expense. In addition to the above, in 1998 and 1997
ChoicePoint paid approximately $5,319,000 and $5,500,000, respectively, to
Equifax for credit reports and transitional services. In 1996, ChoicePoint paid
approximately $2,475,000 to Equifax for credit reports.
Note 6
DEBT
Long-term debt at December 31, 1998 and 1997 was as following:
<TABLE>
<CAPTION>
=======================================================
December 31, 1998 1997
- -------------------------------------------------------
<S> <C> <C>
(In thousands)
Credit facility $ 189,000 $ 95,000
Other long-term debt 2,600 --
Capital leases 617 1,050
- -------------------------------------------------------
192,217 96,050
Less current maturities (520) (593)
- -------------------------------------------------------
$ 191,697 $ 95,457
- -------------------------------------------------------
=======================================================
</TABLE>
<PAGE> 17
33
In August 1997, ChoicePoint entered into a $250 million unsecured
revolving credit facility (the "Credit Facility") with a group of banks. The
Credit Facility is a revolving facility expandable to $300 million, subject to
approval of the lenders. The commitment termination date and final maturity of
the Credit Facility will occur in August 2002.
Revolving loans under the Credit Facility bear interest at the
following rates as applicable and selected by the Company from time to time: (1)
the lender's Base Rate, (2) LIBOR plus the applicable margin, (3) the lender's
Cost of Funds plus the applicable margin, and (4) the Competitive Bid Rate
offered by the syndicate lenders at their discretion. The applicable margins
range from .16% to .45% per annum based on ChoicePoint's leverage ratio. The
average interest rate based on the terms of the Credit Facility at December 31,
1998 and 1997 was 5.44% and 6.12%, respectively.
The Credit Facility contains covenants customary for facilities of this
type. Such covenants include limitations, in certain circumstances, on the
ability of the Company and its subsidiaries to (i) effect a change of control of
the Company, (ii) incur certain types of liens, and (iii) transfer or sell
assets. The Credit Facility also requires compliance with financial covenants,
including (i) maximum leverage and (ii) minimum fixed charge coverage.
ChoicePoint has entered into six interest rate swap agreements (the
"swap agreements") to reduce the impact of changes in interest rates on its
floating rate long-term obligation. The agreements have a combined notional
amount of $175 million and $85 million at December 31, 1998 and 1997,
respectively, and mature at various dates from 2000 to 2007. These 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. The Company is exposed to credit loss in the event
of nonperformance by the other parties to the interest rate swap agreements.
However, the Company does not anticipate nonperformance by the counterparties.
Scheduled maturities of long-term debt subsequent to December 31, 1998
are as follows: $520,000 in 1999, $270,000 in 2000, $159,000 in 2001,
$189,168,000 in 2002, and $2,100,000 thereafter.
Short-term borrowings at December 31, 1998 includes $5,103,000 from a
line of credit with a bank. The weighted average interest rate on short-term
borrowings was 6.0% at December 31, 1998. There were no short-term borrowings
during 1997.
Note 7
INCOME TAXES
Prior to the Spinoff, the Company was 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.
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 bases of assets and liabilities. The
provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 22,604 $ 18,997 $ 12,538
State 4,392 5,463 4,048
Foreign 1,743 1,277 444
- -------------------------------------------------------------------
28,739 25,737 17,030
- -------------------------------------------------------------------
Deferred:
Federal (1,731) (722) 878
State 326 (419) (169)
Foreign (286) (74) (5)
- -------------------------------------------------------------------
(1,691) (1,215) 704
- -------------------------------------------------------------------
Total $ 27,048 $ 24,522 $ 17,734
===================================================================
</TABLE>
<PAGE> 18
ChoicePoint
Notes to Consolidated
Financial Statements
The provision for income taxes is based upon income before income taxes
as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
United States $58,043 $49,917 $38,373
Foreign 4,424 3,549 2,641
- ----------------------------------------------------------------
$62,467 $53,466 $41,014
================================================================
</TABLE>
The provision for income taxes is reconciled with the federal statutory
rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
State and local taxes,
net of federal tax
benefit 4.9 6.1 6.2
Tax effect resulting
from foreign activities (.2) (.1) (1.8)
Goodwill amortization 2.4 2.7 2.1
Other 1.2 2.2 1.7
- ---------------------------------------------------------------
Overall effective rate 43.3% 45.9% 43.2%
===============================================================
</TABLE>
Components of the Company's deferred income tax assets and liabilities
at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
- -----------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred income tax assets:
Postretirement benefits $22,086 $22,342
Reserves and
accrued expenses 8,372 10,255
Employee compensation
programs 3,279 3,857
Other 3,080 2,133
- -----------------------------------------------------
36,817 38,587
- -----------------------------------------------------
Deferred income tax liabilities:
Purchased software,
data files, technology,
and other assets (3,391) (5,069)
Depreciation (1,494) (1,652)
Deferred expenses (3,358) (4,896)
Other (1,192) (1,061)
- -----------------------------------------------------
(9,435) (12,678)
- -----------------------------------------------------
Net deferred income
tax assets $27,382 $25,909
=====================================================
</TABLE>
Note 8
SHAREHOLDERS' EQUITY
Equifax Equity Investment
Prior to July 31, 1997, Equifax's equity investment included the
original investment in ChoicePoint, accumulated income of ChoicePoint, and the
net intercompany payable due to Equifax reflecting transactions described in
Note 5. The July 31, 1997 net intercompany debt balance of $72,602,000 was
repaid to Equifax in the third quarter of 1997. The $72,602,000 included actual
intercompany debt of $85,602,000 reduced by $13,000,000 for an employee benefit
obligation assumed by ChoicePoint (Note 9).
Stock Options
Equifax had certain Stock Option Plans (the "Plans") under which
incentive stock options and nonqualified stock options were granted to officers,
key employees and directors of Equifax. In connection with the separation of
ChoicePoint from Equifax, stock options under the Plans that were not exercised
prior to the date of the Spinoff were adjusted. Upon the Spinoff and except as
set forth below, ChoicePoint employees retained the vested Equifax stock options
granted under the various Equifax equity-based compensation plans. All unvested
stock options granted under the Equifax plans were canceled and replacement
options were granted under the ChoicePoint equity-based plan. Certain senior
officers of ChoicePoint were permitted to choose either to retain vested Equifax
stock options or receive replacement options under the ChoicePoint plan. All
Equifax options that were replaced with ChoicePoint options were at amounts and
at exercise prices that preserved the economic benefit of the Equifax stock
options at the Spinoff date. As a result, options for 713,152 of ChoicePoint
shares were issued to replace Equifax options. The options have exercise prices
ranging from $8.21 per share to $28.45 per share.
Prior to the Spinoff, The 1997 Omnibus Stock Incentive Plan (the
"Omnibus Plan") was approved for ChoicePoint. The Omnibus Plan authorizes grants
of stock options, stock appreciation rights, restricted stock, deferred shares,
performance shares and performance units for an aggregate of four million shares
of ChoicePoint Common Stock. The Omnibus
<PAGE> 19
35
Plan requires options to be granted at fair market value except the options
granted as replacement options under the prior Equifax equity-based plans. In
1997, options for 761,902 shares were granted at fair market value under the
Omnibus Plan with an option price of $38.75. During 1998, options for 625,750
shares were granted at fair market value under the Omnibus Plan of which 81,500
options were performance-based options.
A summary of changes in all outstanding options and the related
weighted average exercise price per share is as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
- ----------------------------------------------------------------------------------------------------
Shares Avg. Price Shares Avg. Price
<S> <C> <C> <C> <C>
Balance, beginning of year 1,458,415 $28.45 -- --
Granted:
Replacement options -- -- 713,152 $17.10
New options (at market price) 625,750 $44.05 761,902 $38.75
Canceled (199,406) $37.02 (5,835) $13.80
Exercised (36,673) $20.51 (10,804) $14.16
- ----------------------------------------------------------------------------------------------------
Balance, end of year 1,848,086 $33.28 1,458,415 $28.45
- ----------------------------------------------------------------------------------------------------
Exercisable at end of year 609,695 $22.71 326,384 $16.98
====================================================================================================
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------
Weighted Avg. Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Range of Exercise Prices Shares Life In Years Price Shares Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$08.21 - $22.60 481,670 5.66 $14.91 336,796 $13.68
$24.48 - $28.25 133,516 7.08 $26.36 111,262 $26.74
$38.75 - $38.75 662,300 8.76 $38.75 161,637 $38.75
$43.75 - $48.38 570,600 9.11 $44.06 -- --
1,848,086 7.94 $33.28 609,695 $22.71
==============================================================================================================
</TABLE>
Equifax also had a deferred bonus plan in the form of restricted stock
for certain key officers. As of the Spinoff, the ChoicePoint officers were
granted ChoicePoint restricted stock which preserved the economic benefit of the
Equifax plans. Approximately 151,000 shares of restricted stock were granted, of
which 90,000 shares are performance based. In addition, during 1998 and 1997,
approximately 549 and 59,000 restricted shares, respectively, were granted at
market price under the Omnibus Plan. The 1997 restricted shares vest in four
years based on continuous employment. The compensation cost charged against
income for restricted stock was $3,059,000 in 1998 and $1,892,000 in 1997.
Pro Forma Information
During 1997 the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation." In accordance with the provisions of SFAS No. 123,
the Company has elected to apply APB Opinion No. 25 and related interpretations
in accounting for its stock option plans. Accordingly, the Company does not
recognize compensation cost in connection with its stock option plans. If the
Company had elected to recognize compensation cost for these plans based on the
fair value at grant date as prescribed by SFAS No. 123, net income and net
income per share would have been reduced to the pro forma amounts indicated in
the following table:
<PAGE> 20
ChoicePoint
Notes to Consolidated
Financial Statements
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
SFAS 123 SFAS 123 SFAS 123
Reported Pro forma Reported Pro forma Reported Pro forma
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 35,419 $ 30,901 $ 28,944 $ 27,832 $ 23,280 $22,547
Pro forma net income (Note 12) -- -- 28,520 27,408 -- --
Earnings per share - basic 2.44 2.12 -- -- -- --
Earnings per share - diluted 2.36 2.06 -- -- -- --
Pro forma earnings per share -
basic -- -- 1.95 1.88 -- --
Pro forma earnings per share -
diluted -- -- 1.92 1.84 -- --
</TABLE>
The weighted average grant date fair value per share of options granted
in 1998 and 1997 was $16.96 and $13.49, respectively.
The fair value of each option granted in 1998 is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
assumptions: dividend yield, 0%; expected volatility, 32%; risk-free interest
rate, 5.6%; and expected life in years, 5.3.
Pro forma income for 1996 noted above is based on the fair value of
Equifax options held by ChoicePoint employees.
Shareholder Rights Plan
On October 29, 1997, the Company's Board of Directors adopted a
Shareholder Rights Plan (the "Rights Plan"). The Rights Plan contains provisions
to protect the Company's shareholders in the event of an unsolicited offer to
acquire the Company, including offers that do not treat all shareholders
equally, the acquisition in the open market of shares constituting control
without offering fair value to all shareholders, and other coercive, unfair or
inadequate takeover bids and practices that could impair the ability of the
ChoicePoint Board of Directors to represent shareholders' interests fully.
Pursuant to the Rights Plan, the ChoicePoint Board of Directors declared a
dividend of one Share Purchase Right (a "Right") for each outstanding share of
the Company's Common Stock as of November 14, 1997. The Rights will be
represented by, and trade together with, the Company's Common Stock. The Rights
will not be immediately exercisable and will not become exercisable unless
certain triggering events occur. Among the triggering events will be the
acquisition of 20% or more of the Company's Common Stock by a person or group of
affiliated or associated persons. Unless previously redeemed by the ChoicePoint
Board of Directors, upon the occurrence of one of the specified triggering
events, each Right that is not held by the 20% or more shareholder will entitle
its holder to purchase one share of common stock or, under certain
circumstances, additional shares of common stock at a discounted price. The
Rights will cause substantial dilution to a person or group that attempts to
acquire ChoicePoint on terms not approved by the ChoicePoint Board of Directors.
Thus, the Rights are intended to encourage persons who may seek to acquire
control of ChoicePoint to initiate such an acquisition through negotiation with
the Board of Directors.
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 1998, funds from the grantor trusts totaling $9,918,000
were used to purchase 202,600 shares of ChoicePoint common stock, which are
reflected as stock held by employee benefit trusts, at cost, in the December 31,
1998 balance sheet. Approximately $558,000 of cash remains in the grantor trusts
at December 31, 1998 and is included in cash and cash equivalents in the
accompanying consolidated balance sheets. At December 31, 1997, the grantor
trusts contained $10,000,000 of cash which was included in cash and cash
equivalents in the accompanying consolidated balance sheets.
<PAGE> 21
37
Note 9
EMPLOYEE BENEFITS
Equifax Plans
Historically, the Company had participated in the Equifax United States
Retirement Income Plan, a non-contributory defined benefit qualified retirement
plan and in Equifax's retirement savings plan, a plan that provided for annual
contributions at the discretion of the Board of Directors. Total expense
allocated to ChoicePoint for these plans through the Spinoff and included in the
Company's financial results was $0 in 1998, $1,448,000 in 1997 and $4,942,000 in
1996. ChoicePoint has not adopted a defined benefit plan for its employees;
however, it adopted a profit sharing plan, as described below, prior to the
Spinoff.
401(k) Profit Sharing Plan
ChoicePoint has adopted a 401(k) profit sharing plan, under which
eligible Company employees may contribute up to 16% of their compensation.
ChoicePoint intends to make minimum matching contributions in the form of
ChoicePoint Common Stock equal to 25% of employee contributions up to the first
6% of an employee's contributions. The match made on eligible employee
contributions for 1998 and 1997 was 55% in each year. Employee contributions
will be invested in one of the available investment funds, including a
ChoicePoint stock fund. Matching contributions will be invested in the
ChoicePoint stock fund. ChoicePoint may make additional contributions based on
achievement of targeted performance levels. The expense for the 401(k) profit
sharing plan was $3,050,000 in 1998 and $1,905,000 in 1997.
As a result of the Spinoff, ChoicePoint assumed an obligation to
contribute to a defined contribution plan for certain ChoicePoint employees. The
additional benefits are intended to offset the adverse impact of transitioning
out of a defined benefit pension plan and represent the present value of the
estimated future contributions. In exchange for this obligation, Equifax made a
capital contribution to ChoicePoint in the amount of $13,000,000 and
ChoicePoint's intercompany liability to Equifax was reduced accordingly. In 1998
and 1997, $1,950,000 and $0, respectively, was included in the Company's
financial results and contributed to the 401(k) profit sharing plan to offset
the adverse impact of transitioning out of the defined benefit plan.
Postretirement Benefits
The Company provides certain health care and life insurance benefits
for eligible retired employees. Health care benefits are provided through a
trust, while life insurance benefits are provided through an insurance company.
The Company accrues the cost of providing postretirement benefits for medical
and life insurance coverage over the active service period of each employee.
The following table presents a reconciliation of the changes in the
plan's benefit obligations and fair value of assets at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
December 31, 1998 1997
- ----------------------------------------------------------
(In thousands)
<S> <C> <C>
Change in benefit obligation:
Obligation at
beginning of year $ 56,191 $ 55,893
Service cost 807 454
Interest cost 3,886 2,004
Actuarial gain (2,867) (366)
Benefit payments (5,188) (1,794)
- ----------------------------------------------------------
Obligation at end of year 52,829 56,191
- ----------------------------------------------------------
Change in plan assets:
Fair value of plan assets
at beginning of year 0 0
Employer contributions 5,188 1,794
Benefit payments (5,188) (1,794)
- ----------------------------------------------------------
Fair value of plan assets
at end of year 0 0
- ----------------------------------------------------------
Funded status:
Funded status at end
of year and net
amount recognized (52,829) (56,191)
Unrecognized prior
service cost (12,958) (6,150)
Unrecognized loss 8,936 4,907
- ----------------------------------------------------------
Net amount recognized (56,851) (57,434)
Less current portion (3,600) (3,600)
- ----------------------------------------------------------
Accrued benefit cost $(53,251) $(53,834)
==========================================================
</TABLE>
The current portion is included in other current liabilities in the
accompanying consolidated balance sheets. The benefit obligation at beginning of
year for 1997 noted above is as of July 1, 1997.
<PAGE> 22
ChoicePoint
Notes to Consolidated
Financial Statements
Net periodic postretirement benefit expense includes the following
components:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost $ 807 $ 907 $ 823
Interest cost on
accumulated
benefit obligation 3,886 4,008 3,667
Amortization of prior
service credit (1,879) (2,308) (2,652)
Amortization of losses 0 28 118
- ---------------------------------------------------------------
Net periodic post-
retirement benefit
expense $ 2,814 $ 2,635 $ 1,956
===============================================================
</TABLE>
The following are weighted average assumptions used in the computation
of postretirement benefit expense and the related obligation:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Discount rate used
to determine
accumulated
postretirement
benefit obligation
at December 31 6.75% 7.25% 7.50%
Initial health care
cost trend rate 9.5% 10.0% 10.50
Ultimate health care
cost trend rate 6.00% 6.00% 6.00%
Year ultimate health
care cost trend
rate reached 2005 2005 2005
</TABLE>
If the health care cost trend rate were increased 1% for all future
years, the accumulated postretirement benefit obligation as of December 31, 1998
would have increased 10.4%. The effect of such a change on the aggregate of
service and interest cost for 1998 would have been an increase of 9.9%. If the
health care cost trend rate were decreased 1% for all future years, the
accumulated postretirement benefit obligation as of December 31, 1998 would have
decreased 8.2%. The effect of such a change on the aggregate of service and
interest cost for 1998 would have been a decrease of 7.6%.
The Company continues to evaluate ways in which it can better manage
these benefits and control its costs. Any changes in the plan, revisions to
assumptions, or changes in the Medicare program that affect the amount of
expected future benefits may have a significant effect on the amount of the
reported obligation and future annual expense.
Note 10
COMMITMENTS AND CONTINGENCIES
Leases
The Company's operating leases involve principally office space and
office equipment. Rental expense relating to these leases was $12,757,000 in
1998, $14,769,000 in 1997, and $13,353,000 in 1996.
Future minimum payment obligations for noncancelable operating leases
exceeding one year are as follows as of December 31, 1998:
<TABLE>
<CAPTION>
Year Amount
- ----------------------------
(In thousands)
<S> <C>
1999 $ 9,567
2000 7,986
2001 5,606
2002 4,391
2003 3,615
Thereafter 6,392
- ----------------------------
$37,557
============================
</TABLE>
Lease Agreement
The Company has entered into a $24.0 million operating lease agreement
for an office facility in Alpharetta, Georgia. Under the agreement, the lessor
purchased the property from a third party and leased the facility to the
Company. The initial term of the lease is ten years at which time the Company
has the following three options: to renew for an additional five years, to
purchase at original cost, or to remarket the property.
Data Processing Services Agreement
In April 1993, the Company began outsourcing a portion of its computer
data processing operations and related functions to IBM Global Services("IBM").
In 1995 a new five-year outsourcing agreement was reached with IBM. Under the
terms of the agreement, the Company will pay IBM an estimated $3.5 million a
year over the five-year term of the agreement, although this amount could be
more or less depending upon various factors such as the inflation rate, the
<PAGE> 23
39
introduction of significant new technologies or changes in the Company's data
processing needs as a result of acquisitions or divestitures. Under certain
circumstances (e.g., a change in control of the Company), the Company may cancel
the IBM agreement; however, the agreement provides that the Company must pay a
significant penalty in the event of such a cancellation.
Change in Control Provisions in Employment Agreements
The Company has entered into employment agreements with certain
executive officers which provide certain severance pay and benefits in the event
of a "change in control" of ChoicePoint. Such events are consistent with these
described in the Omnibus Plan. The severance payment is a derivative of annual
compensation multiplied by a factor not to exceed three plus payments for other
benefits. At December 31, 1998, the maximum contingent liability under the
agreements or plans was approximately $26,164,000. In addition, the Company's
restricted stock and stock option plans provide that all outstanding grants
under the Omnibus Plan shall become fully vested.
Litigation
A limited number of lawsuits seeking damages are brought against the
Company each year. The Company provides for estimated legal fees and settlements
relating to pending lawsuits. In the opinion of management, the ultimate
resolution of these matters will not have a materially adverse effect on the
Company's financial position, liquidity or results of operations. The accrued
liability for litigation at December 31, 1998 and 1997 was $2,779,000 and
$4,002,000 respectively, and is included in other current liabilities in the
accompanying consolidated balance sheets.
Note 11
UNUSUAL ITEMS
Unusual items of $3,758,000 in 1998 include $2,042,000 for the
write-down of a noncompete agreement and $1,716,000 for the write-down of
certain software and database assets and severance expenses. Unusual items of
$6,209,000 in 1997 include approximately $1,840,000 of charges related to
Spinoff expenses and approximately $4,405,000 for write-downs of certain assets
in the Company's labor intensive field business and its commercial P&C software
company.
Note 12
PRO FORMA CONSOLIDATED FINANCIAL DATA
(UNAUDITED)
The following unaudited pro forma consolidated net income and pro forma
earnings per share present the consolidated results of operations of ChoicePoint
assuming that the Spinoff had been completed as of the beginning of 1997.
Historical earnings per share are not presented since the companies that
comprise ChoicePoint were majority owned subsidiaries of Equifax or one of its
affiliates, and were recapitalized as part of the Spinoff.
The information presented below is not necessarily indicative of the
results that could have been achieved by ChoicePoint as an independent company
or of results which may occur in the future.
<TABLE>
<CAPTION>
(In thousands, except per share data) 1997
- ------------------------------------------------------
<S> <C>
Historical net income $28,944
Pro forma adjustments - net of taxes:
Reversal of interest
expense from Equifax (a) 2,165
Incremental interest expense (b) (2,589)
Pro forma net income $28,520
- ------------------------------------------------------
Pro forma weighted average
shares - basic (c) 14,595
- ------------------------------------------------------
Pro forma earnings per share - basic $ 1.95
- ------------------------------------------------------
Pro forma weighted average
shares - diluted (c) 14,891
- ------------------------------------------------------
Pro forma earnings per share - diluted $ 1.92
======================================================
</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 year ended December 31, 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) for the year ended
December 31, 1997 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
<PAGE> 24
ChoicePoint
Notes to Consolidated
Financial Statements
grantor trusts. The interest expense also includes interest for
borrowings for the CDB Infotek acquisition. An interest rate of 6.5% is
assumed on the borrowings.
c) Pro forma weighted average shares outstanding prior to the Spinoff is
based on the number of ChoicePoint shares issued and outstanding,
including restricted stock, on the date of the Spinoff (August 7,
1997).
The pro forma weighted average shares - diluted also include the
dilutive effect of stock options.
Note 13
QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
Following is a summary of the unaudited interim results of operations
for each quarter in the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- --------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
Revenue $ 94,550 $106,702 $101,887 $103,336 $406,475
Operating income 15,010 16,484 16,242 13,672 61,408
Net income 7,578 8,312 8,188 11,341 35,419
Earnings per share - diluted .50 .55 .55 .76 2.36
Year Ended December 31, 1997
Revenue $102,852 $108,623 $106,489 $ 99,357 $417,321
Operating income 12,198 15,559 15,810 2,510 46,077
Net income 5,541 7,300 7,778 8,325 28,944
Pro forma net income 5,340 7,099 7,756 8,325 28,520
Pro forma earnings per share - diluted .36 .48 .52 .56 1.92
</TABLE>
Operating income decreased in the fourth quarter of 1998 due to
$3,758,000 of charges for unusual items (Note 11). The gain on the sale of a
business unit (Note 4), largely offset by the unusual items discussed above,
positively impacted net income in the fourth quarter of 1998. The net effect of
these two items on fourth quarter net income was $2,979,000 or $.20 per share.
Operating income decreased in the fourth quarter of 1997 due to
$6,209,000 of charges for unusual items (Note 11) and $4,852,000 of other
charges. Included in the $4,852,000 of other charges were $1,892,000 of expense
related to new restricted stock plans (Note 8), $1,000,000 for a contribution to
the Company's profit sharing plan to offset the adverse effect of transitioning
from Equifax's defined benefit pension plan, $1,000,000 to establish a
ChoicePoint charitable foundation (Note 4), $860,000 for adjusting receivables
for a re-negotiated customer contract and $100,000 to fund an under-reserved
compensation plan. The gain on the sale of a business unit (Note 4), largely
offset by the unusual items and other charges discussed above, positively
impacted net income in the fourth quarter of 1997.
<PAGE> 25
41
Note 14
SEGMENT DISCLOSURES
ChoicePoint operates in a single reportable segment primarily in the
risk management industry. However, since its formation, the Company has received
revenues from three service groups: Property and Casualty Insurance Services
("P&C"), Life and Health Insurance Services ("L&H"), and Business and Government
Services ("B&G"). See Note 2 for a description of each service group.
ChoicePoint's production facilities and balance sheets are generally managed on
a consolidated basis and therefore, impacted all three service groups. As a
result, operating profits and assets were not allocated to the three service
groups. Revenue for the years ended December 31, 1998, 1997 and 1996 for the
three service groups were as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
(In thousands)
- --------------------------------------------------------------------
<S> <C> <C> <C>
P&C revenue $218,413 $186,759 $167,073
L&H revenue 79,730 143,979 146,696
B&G revenue 108,332 86,583 52,712
- --------------------------------------------------------------------
Operating revenue $406,475 $417,321 $366,481
====================================================================
</TABLE>
Substantially all of the Company's operations are located in the United
States and no customer represents more than 10% of total operating revenue.
<PAGE> 26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of ChoicePoint Inc.:
We have audited the accompanying consolidated balance sheets of ChoicePoint
Inc. (a Georgia corporation) and subsidiaries (as defined in Note 1) as of
December 31, 1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ChoicePoint Inc. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Arthur Anderson LLP
Atlanta, Georgia
February 19, 1999
<PAGE> 27
ChoicePoint
Directors and Officers
<TABLE>
<CAPTION>
Directors Executive Officers
<S> <C>
C.B. Rogers Jr. Derek V. Smith
Chairman of the Board of Directors President and Chief Executive Officer
of the Company
Dan H. Rocco
Derek V. Smith Executive Vice President
President and Chief Executive Officer
of the Company Doug C. Curling
Executive Vice President,
Ron D. Barbaro Chief Financial Officer and Treasurer
Chairman and Chief Executive Officer
of Ontario Casino Corporation and David T. Lee
Ontario Lottery Corporation Senior Vice President
James M. Denny J. Michael de Janes
Managing Director of William Blair Capital General Counsel and Corporate Secretary
Partners L.L.C.
Operating Officers
Tinsley H. Irvin and Key Management
Retired Chairman and Chief Executive Officer
of Alexander & Alexander Services, Inc. Tom Brierley
Moses Brown
Ned C. Lautenbach Dave Cook
Partner of Clayton, Dubilier & Rice Sharyn Doanes
Dan Filo
Julia B. North Jeffrey Glazer
President and Chief Executive Officer of Paul Goldstein
VSI Enterprises, Inc. Joe Houlton
Ken Kavanaugh
Charles I. Story Tom Klebeck
President and Chief Executive Officer Charlotte Lee
of INROADS, Inc. Don McGuffey
Kelly McLoughlin
Jeff McWey
Mike Milligan
Jim Mussatto
Gail Peterson
Jeff Piefke
Michael Prentice
Tim Prunk
Sally Sullivan
David Trine
Jim Zimbardi
</TABLE>
<PAGE> 28
43
ChoicePoint
Shareholder Information
General Information
For more information about ChoicePoint, our products and services, employment
opportunities, and current events at the Company, call us at 770-752-6000 or
visit our web site at: http://www.choicepointinc.com
Investor Information
To obtain copies of the Company's Form 10-K, Form 10-Q or quarterly earnings
releases, please contact:
Kelly McLoughlin
Investor Relations
ChoicePoint Inc.
1000 Alderman Drive
Alpharetta, Georgia 30005
or call 770-752-4050
Financial reports can also be accessed on our web site at
http://www.choicepointinc.com
Market Information
ChoicePoint shares began regular trading on the New York Stock Exchange on
August 8, 1997 under the symbol CPS. As of March 1, 1999, the approximate
number of shareholders of record was 5,486. No cash dividends have been paid.
The Company does not anticipate paying any cash dividends on its common stock
in the near future.
Quarterly Activity
<TABLE>
1998 High Low
- -----------------------------------------------------------------
<S> <C> <C>
First quarter 56.50 41.75
Second quarter 58.75 47.31
Third quarter 50.50 37.38
Fourth quarter 64.50 41.00
- -----------------------------------------------------------------
1997 High Low
- -----------------------------------------------------------------
Third quarter* 38.63 30.75
Fourth quarter 48.13 35.00
- -----------------------------------------------------------------
*Includes 3rd quarter since the Spinoff
</TABLE>
Annual Meeting
The Annual Meeting of Shareholders of ChoicePoint Inc. will be held May 4, 1999
at 10:30 a.m. at the Company's headquarters at 1000 Alderman Drive, Alpharetta,
Georgia.
Independent Public Accountants
Arthur Andersen LLP
Atlanta, Georgia
Transfer Agent and Registrar
SunTrust Bank, Atlanta
P.O. Box 4625
Atlanta, Georgia 30302
Trademarks and Service Marks
SchoolCheck, ChoicePoint, the logo, the domain name and the tag line are
trademarks of ChoicePoint Inc.
<PAGE> 1
EXHIBIT 21
Subsidiaries of ChoicePoint Inc.
<TABLE>
<CAPTION>
Name State or Country of Incorporation
---- ---------------------------------
<S> <C>
ChoicePoint Services Inc. Georgia
PRC Corporation Georgia
Professional Test Administrators, Inc. Illinois
Intellisys, Inc. Georgia
CDB Infotek California
Innovative Data Services, Inc. Delaware
Application Profiles Inc. Georgia
ChoicePoint Business and Government Services Inc. Georgia
Osborn Group Inc. Delaware
Mid-American Technologies, Inc. Kansas
Applied BioConcepts Inc. Kansas
Osborn Laboratories (Canada) Inc. Canada
ChoicePoint Limited United Kingdom
Customer Development Corporation Illinois
National Credit Audit Corporation Illinois
Optimum Graphics Printing, Inc. Illinois
Financial Database Services Company Illinois
Customer Database Technologies, Inc. Illinois
CDC Realty LLC Delaware
EquiSearch Services Inc. Georgia
DATEQ Information Network, Inc. Georgia
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent accountants, we hereby consent to the incorporation of our
reports incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statement File No. 333-32453.
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 18,883
<SECURITIES> 0
<RECEIVABLES> 106,477
<ALLOWANCES> 3,286
<INVENTORY> 0
<CURRENT-ASSETS> 143,606
<PP&E> 118,524
<DEPRECIATION> 63,245
<TOTAL-ASSETS> 534,199
<CURRENT-LIABILITIES> 124,960
<BONDS> 0
0
0
<COMMON> 1,466
<OTHER-SE> 158,106
<TOTAL-LIABILITY-AND-EQUITY> 534,199
<SALES> 406,475
<TOTAL-REVENUES> 406,475
<CGS> 268,108
<TOTAL-COSTS> 268,108
<OTHER-EXPENSES> 76,959
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,748
<INCOME-PRETAX> 62,467
<INCOME-TAX> 27,048
<INCOME-CONTINUING> 35,419
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,419
<EPS-PRIMARY> 2.44
<EPS-DILUTED> 2.36
</TABLE>
