<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------- --------
Commission File Number: 1-13069
CHOICEPOINT INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-2309650
----------------------------------------------- --------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1000 Alderman Drive, Alpharetta, Georgia 30005
----------------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
(770) 752-6000
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2000
----- ----------------------------
Common Stock, $.10 Par Value 40,294,653
<PAGE> 2
CHOICEPOINT INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income -
Three Months Ended June 30, 2000 and 1999 and
Six Months Ended June 30, 2000 and 1999 ............................................. 3
Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 ................................................. 4
Consolidated Statement of Shareholders' Equity -
Six Months Ended June 30, 2000 ...................................................... 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999 ............................................. 6
Notes to Consolidated Financial Statements ............................................... 7
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition .................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk ....................... 17
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................................ 18
Item 2. Changes in Securities and Use of Proceeds ........................................ 18
Item 3. Defaults Upon Senior Securities .................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders .............................. 18
Item 5. Other Information ................................................................ 19
Item 6. Exhibits and Reports on Form 8-K ................................................. 19
Signatures ............................................................................... 20
Exhibit Index ........................................................................... 21
</TABLE>
2
<PAGE> 3
CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share data) 2000 1999 2000 1999
------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating revenue $148,486 $127,219 $295,206 $244,785
Costs and expenses:
Cost of services 84,247 75,425 174,448 151,362
Selling, general and administrative 36,049 29,789 68,268 51,486
Merger-related costs & unusual items 28,949 817 28,949 2,400
-------- -------- -------- --------
Total costs and expenses 149,245 106,031 271,665 205,248
Operating income (loss) (759) 21,188 23,541 39,537
Gain on sale of businesses, net -- -- -- 2,513
Interest expense 3,228 2,453 6,205 4,566
-------- -------- -------- --------
Income (loss) before income taxes (3,987) 18,735 17,336 37,484
Provision for income taxes 1,791 7,876 10,513 15,720
-------- -------- -------- --------
Net income (loss) $ (5,778) $ 10,859 $ 6,823 $ 21,764
======== ======== ======== ========
Earnings (loss) per share - basic (Notes 5 & 6) $ (0.15) $ 0.28 $ 0.17 $ 0.56
Weighted average shares - basic 39,754 38,917 39,706 38,861
Earnings (loss) per share - diluted (Notes 5 & 6) $ (0.15) $ 0.27 $ 0.16 $ 0.54
Weighted average shares - diluted 39,754 40,772 41,543 40,435
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
3
<PAGE> 4
CHOICEPOINT INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands, except par values) 2000 1999
--------------------------------- --------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 42,055 $ 73,101
Accounts receivable, net of allowance for doubtful accounts
of $5,061 in 2000 and $4,670 in 1999 128,365 111,459
Short-term investments -- 16,500
Deferred income tax assets 9,157 8,595
Other current assets 11,559 13,508
--------- ---------
Total current assets 191,136 223,163
Property and equipment, net 74,111 73,983
Goodwill, net 350,294 284,123
Deferred income tax assets 17,057 13,582
Other 73,414 72,929
--------- ---------
Total Assets $ 706,012 $ 667,780
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt $ 581 $ 595
Accounts payable 32,556 34,738
Accrued salaries and bonuses 18,957 20,064
Other current liabilities 62,911 51,475
--------- ---------
Total current liabilities 115,005 106,872
Long-term debt, less current maturities 206,941 187,195
Postretirement benefit obligations 46,976 47,782
Other long-term liabilities 6,230 6,622
--------- ---------
Total liabilities 375,152 348,471
--------- ---------
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 - 40,284 in 2000 and 40,110 in 1999 4,028 4,011
Paid-in capital 227,687 223,388
Retained earnings 110,627 103,804
Cumulative other comprehensive income (64) (476)
Stock held by employee benefit trusts, at cost, 468 shares in 2000
and 1999 (11,418) (11,418)
--------- ---------
Total shareholders' equity 330,860 319,309
--------- ---------
Total Liabilities and Shareholders' Equity $ 706,012 $ 667,780
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
4
<PAGE> 5
CHOICEPOINT INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Cumulative
Other Stock Held
Comprehensive Common Paid-in Retained Comprehensive By Benefit
(In thousands) Income Stock Capital Earnings Income Trusts Total
------------- ------- ------- -------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 as
previously reported 2,954 $ 123,044 $ 88,552 $ (221) $(11,418) $ 202,911
DBT pooling of interests 1,057 100,344 15,252 (255) -- 116,398
------- --------- -------- ------- -------- ---------
Balance December 31, 1999 $ 4,011 $ 223,388 $ 103,804 $ (476) $(11,418) $ 319,309
Net Income $ 6,823 -- -- 6,823 -- -- 6,823
Change in unrealized net loss
on investments 255 -- -- -- 255 -- 255
Translation adjustments 157 -- -- -- 157 -- 157
-------
Comprehensive income $ 7,235
Restricted stock plans, net ======= (4) (580) -- -- -- (584)
Stock options exercised 21 4,879 -- -- -- 4,900
------- --------- --------- ------- -------- ---------
Balance, June 30, 2000 $ 4,028 $ 227,687 $ 110,627 $ (64) $(11,418) $ 330,860
======= ========= ========= ======= ======== =========
</TABLE>
The accompanying notes are an integral part of this
consolidated statement.
5
<PAGE> 6
CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
--------- ----------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,823 $ 21,764
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 26,779 23,843
Merger-related costs and unusual items 28,949 2,400
Gain on sale of businesses, net -- (2,513)
Compensation recognized under employee stock plans 1,573 1,610
Stock issued for employee benefit plan -- 142
Payment on employee stock plans (1,495) (3,378)
Changes in assets and liabilities, excluding effects of acquisitions and
divestiture:
Accounts receivable, net (12,879) (9,858)
Deferred income taxes (4,037) 57
Other current assets 2,034 1,396
Current liabilities, excluding debt (20,442) (12,119)
Other long-term liabilities, excluding debt (1,198) (980)
-------- --------
Net cash provided by operating activities 26,107 22,364
Cash flows from investing activities:
Acquisitions, net of cash acquired (80,692) (8,446)
Payment of notes payable for acquisitions -- (22,701)
Cash proceeds from sale of businesses 1,500 22,000
Proceeds from maturity of investments 16,198 966
Additions to property and equipment, net (8,692) (9,103)
Additions to other assets, net (10,062) (11,006)
-------- --------
Net cash used by investing activities (81,748) (28,290)
Cash flows from financing activities:
Proceeds from long-term debt 75,000 30,000
Payments on long-term debt (55,254) (20,735)
Net short-term borrowings (14) (4,696)
Purchases of stock held by employee benefit trusts -- (1,500)
Proceeds from exercise of stock options 4,900 3,023
-------- --------
Net cash provided by financing activities 24,632 6,092
-------- --------
Effect of foreign currency exchange rates on cash (37) (239)
-------- --------
Net decrease in cash (31,046) (73)
Cash and cash equivalents, beginning of period 73,101 40,207
-------- --------
Cash and cash equivalents, end of period $ 42,055 $ 40,134
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated statements.
6
<PAGE> 7
CHOICEPOINT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(UNAUDITED)
1. ORGANIZATION
ChoicePoint Inc., a Georgia corporation ("ChoicePoint" or the "Company"), is a
leading provider of decision making intelligence to businesses, individuals and
government agencies. ChoicePoint's businesses are focused on two primary markets
-- Insurance Services and Business & Government Services.
The Insurance Services group provides information products and services
used in the underwriting and marketing processes by property and casualty
and life insurers. Major offerings to the personal lines property and
casualty market include claims history data, motor vehicle records, credit
information, and modeling services. Additionally, ChoicePoint provides
customized policy rating and issuance software and property inspections and
audits to the commercial insurance market, and laboratory testing services
and related technology solutions to the life and health insurance market.
The Business & Government Services group provides direct marketing and
information products and services to Fortune 1000 corporations, consumer
finance companies, asset-based lenders, legal and professional service
providers, health care service providers and federal, state and local
government agencies. Major offerings include pre-employment background and
drug screenings, public record searches, credential verification, due
diligence information, uniform commercial code searches and filings,
database marketing services and people and shareholder locator searches.
2. BASIS OF PRESENTATION
On May 16, 2000, ChoicePoint completed a merger (the "Merger") with DBT Online,
Inc. ("DBT") by exchanging approximately 10.6 million shares of its common stock
for all of the common stock of DBT. Each share of DBT was exchanged for .525
shares of ChoicePoint common stock. In addition, outstanding DBT stock options
were converted at the same exchange ratio into options to purchase approximately
1.8 million shares of ChoicePoint common stock. DBT is a leading nationwide
provider of online public records data and other publicly-available information.
The Merger has been accounted for as a pooling of interests and accordingly all
prior period consolidated financial statements have been restated to include the
combined results of operations, financial position and cash flows of DBT.
The consolidated financial statements include the accounts of ChoicePoint and
its subsidiaries. All material transactions between entities included in the
consolidated financial statements have been eliminated. The consolidated
financial statements have been prepared on the historical cost basis, and
reflect all adjustments which are, in the opinion of management, necessary for a
fair statement of the financial position of ChoicePoint as of June 30, 2000 and
the results of operations for the three months and six months ended June 30,
2000 and 1999 and the cash flows for the six months ended June 30, 2000 and
1999. The adjustments have been of a normal recurring nature. Certain prior
period amounts have been reclassified to conform with the current period
presentation. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements should be
read in conjunction with the notes to the financial statements included in
ChoicePoint's and DBT's Consolidated Financial Statements for the year ended
December 31, 1999 as filed with the Securities and Exchange Commission in
7
<PAGE> 8
the Annual Reports on Form 10-K (File Nos. 1-13069 and 1-13333, respectively).
The current period's results are not necessarily indicative of results to be
expected for a full year.
The following information presents certain income statement data of ChoicePoint
and DBT for the periods preceding the merger:
<TABLE>
<CAPTION>
Three Months Ended
1999 1998 March 31, 2000
-------- -------- ------------------
(in Thousands) (unaudited)
<S> <C> <C> <C>
Net revenues
ChoicePoint $430,143 $406,475 $122,872
DBT 77,715 59,657 23,848
-------- -------- --------
$507,858 $466,132 $146,720
======== ======== ========
Net income
ChoicePoint $ 39,389 $ 35,419 $ 11,340
DBT 2,808 6,896 1,261
-------- -------- --------
$ 42,197 $ 42,315 $ 12,601
======== ======== ========
</TABLE>
There were no material transactions between ChoicePoint and DBT prior to the
Merger. Certain amounts of DBT have been reclassified to conform to the
reporting practices of ChoicePoint.
During the second quarter of 2000, the Company recorded merger-related costs and
unusual items of $28.9 million. The categories of costs incurred and the accrued
balances at June 30, 2000 are summarized below:
<TABLE>
<CAPTION>
Remaining
2000 Accrual at 1999
(in Thousands) Expense June 30, 2000 Expense
--------- ------------- -------
<S> <C> <C> <C>
Transaction costs $11,579 $ 872 $ --
Personnel related costs 3,780 1,606 --
Other merger integration costs 3,629 2,742 817
Asset impairments 6,954 48 732
Non-merger severance 2,353 1,360 451
Other one-time charges 654 114 400
------- ------- -------
$28,949 $ 6,742 $ 2,400
======= ======= =======
</TABLE>
Transaction costs of approximately $11.6 million include investment banking,
legal and printing fees and other costs directly related to the Merger.
Personnel related costs of approximately $3.8 million consist of benefit
conversions, stay bonuses for services rendered through June 30, 2000 and
severance. Other integration costs primarily include the elimination of
duplicate data costs. 1999 other merger integration costs include merger-related
costs incurred by DBT in DBT's merger with I.R.S.C., Inc.
3. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
8
<PAGE> 9
4. REVENUE AND COSTS OF SERVICES PRESENTATION
Motor vehicle records registry revenue, the fee charged by states for motor
vehicle records which is passed on by ChoicePoint to its customers, is excluded
from revenue and is recorded as a reduction to cost of services in the
consolidated financial statements. Registry revenue was $84.6 million and $90.2
million for the three months ended June 30, 2000 and 1999, respectively, and
$174.6 million and $177.9 million for the six months ended June 30, 2000 and
1999, respectively.
ChoicePoint Direct Inc., f/k/a Customer Development Corporation, a business
acquired in the fourth quarter of 1998, passes on material, shipping and postage
charges to its customers. These charges are excluded from revenue and are
recorded as a reduction to cost of services in the consolidated financial
statements. Charges passed through to customers for the three months ended June
30, 2000 and 1999 were $9.0 million and $9.3 million, respectively, and were
$19.3 million and $19.2 million for the six months ended June 30, 2000 and 1999,
respectively.
5. EARNINGS PER SHARE
The income amount used in the numerator of the Company's earnings per share
calculations is the same for both basic and diluted earnings per share. The
average outstanding shares used in the denominator of the calculation for
diluted earnings per share includes the dilutive effect of stock options. The
diluted share base for the quarter ended June 30, 2000 excludes incremental
shares of 1.9 million related to employee stock options due to their
anti-dilutive effect as a result of the Company's reported net loss.
6. STOCK SPLIT
On November 24, 1999, ChoicePoint effected a two-for-one stock split in the form
of a stock dividend. Shareholders of record as of November 10, 1999 received one
additional share of common stock for each share they held on the record date.
Share and per share data for all periods presented have been adjusted to reflect
the split.
7. DEBT
In August 1997, ChoicePoint entered into a $250 million unsecured revolving
credit facility (the "Credit Facility") with a group of banks. The Credit
Facility bears interest at variable rates and is expandable to $300 million,
subject to approval of the lenders. The commitment termination date and final
maturity of the Credit Facility will occur in August 2002. In December 1999,
ChoicePoint entered into an additional $100 million unsecured revolving credit
facility ("Revolving Facility") with a group of banks. The Revolving Facility
has a termination date of one year, at which time the Company has the option to
convert the outstanding balance to a one-year term obligation. Total borrowings
under the two credit facilities were $204 million at June 30, 2000. In addition,
there was $3.5 million of other long-term debt outstanding at June 30, 2000.
There were no short-term borrowings at June 30, 2000.
8. STOCK OPTIONS
Consistent with prior years, the Company granted stock options to purchase
ChoicePoint common stock during the first quarter of the year. In 2000, these
stock options to purchase approximately 872,000 shares of ChoicePoint common
stock were granted at fair market value under the ChoicePoint Inc. 1997 Omnibus
Stock Incentive Plan. During the first quarter and prior to the Merger of
ChoicePoint and DBT, stock options to purchase approximately 16,500 shares of
DBT common stock were granted at fair market value under the DBT Online, Inc.
Amended and Restated Stock Option Plan. These options have subsequently been
converted to stock options to purchase 8,662 shares of ChoicePoint common stock.
9
<PAGE> 10
9. ACQUISITIONS
In addition to the DBT Merger discussed in Note 2, the Company acquired
Statewide Data Services, Inc. ("SDS"), a provider of direct marketing services
to the property and casualty insurance market, National Safety Alliance,
Incorporated ("NSA"), a third-party administrator of drug tests, and Practical
Computer Concepts, Inc. d/b/a Fraud Defense Network, a web-based, anti-fraud
business servicing the insurance claims industry during the first six months of
2000. The total purchase price of the acquisitions, which were accounted for as
purchases, and additional working capital settlements on prior acquisitions was
approximately $80.9 million, with approximately $78.5 million of that amount
allocated to goodwill. The Company has accrued $2.3 million for
transaction-related costs including lease terminations and personnel-related
costs. Subsequent to June 30, 2000, the Company paid approximately $16.5 million
to former shareholders of EquiSearch Services Inc. ("EquiSearch") to satisfy
earnout obligations under its acquisition agreement. This earnout was recorded
as additional goodwill and will be amortized over the remaining useful life of
the original EquiSearch goodwill.
10. DIVESTITURES
In January 2000, the Company completed the sale of ChoicePoint Limited, the
Company's United Kingdom-based insurance services division. There was no
material gain on the sale of the business.
In December 1998, the Company sold its life and health insurance field
underwriting services and insurance claims investigation services to PMSI
Services, Inc. ("PMSI") and recorded a gain on the sale. The proceeds from the
sale included $12.0 million in warrants and $9.9 million in a note receivable.
The warrants were discounted by $4.6 million at December 31, 1998. In March
1999, ChoicePoint received $22.0 million plus interest from PMSI for the
prepayment of the note receivable and the repurchase of the warrants. As a
result, ChoicePoint recognized an additional net pretax gain on the sale of $2.5
million. The net pretax gain includes the unamortized discount of $4.3 million
less transaction-related costs including lease termination, additional asset
write-offs and personnel-related costs of $1.8 million. In December 1998, the
net pretax gain was also net of transaction-related costs, including lease
termination and personnel-related costs of $5.9 million that were accrued at the
time of divestiture. As of June 30, 2000, approximately $6.3 million has been
charged against the total $7.7 million accrued transaction-related costs.
11. SEGMENT DISCLOSURES
ChoicePoint operates in two reportable segments: Insurance Services
("Insurance") and Business & Government Services ("B&G"). See Note 1 for a
description of each segment. Revenues and operating income for the three months
and six months ended June 30, 2000 and 1999 for the two segments and the
divested & discontinued lines were as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 2000 June 30, 1999
------------------------------------- --------------------------------------
Operating Operating
Income Income
(In Thousands) before Operating before
Acquisition Income Acquisition Operating
Revenue Amortization (Loss) Revenue Amortization Income
-------- ------------- --------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Insurance $ 72,904 $ 29,051 $ 27,872 $ 63,165 $ 24,633 $ 23,868
B&G 73,934 14,725 10,965 60,346 9,408 6,148
Royalty 1,648 1,017 1,017 1,496 818 818
Divested & Discontinued -- -- -- 2,212 863 863
Corporate -- (11,664) (11,664) -- (9,692) (9,692)
Merger costs and unusual
items (Note 2) -- (28,949) (28,949) -- (817) (817)
-------- -------- -------- -------- -------- --------
Total $148,486 $ 4,180 $ (759) $127,219 $ 25,213 $ 21,188
======== ======== ======== ======== ======== ========
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
------------------------------------- -------------------------------------
Operating Operating
Income Income
before Operating before
Acquisition Income Acquisition Operating
(In Thousands) Revenue Amortization (Loss) Revenue Amortization Income
-------- ------------- --------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Insurance $148,621 $ 57,124 $ 54,814 $123,848 $ 45,725 $ 44,195
B&G 143,394 23,581 15,891 112,788 15,663 9,191
Royalty 3,191 1,902 1,902 3,148 1,771 1,771
Divested & Discontinued -- -- -- 5,001 2,122 2,122
Corporate -- (20,117) (20,117) -- (15,342) (15,342)
Merger costs and unusual
items (Note 2) -- (28,949) (28,949) -- (2,400) (2,400)
-------- -------- -------- -------- -------- --------
Total $295,206 $ 33,541 $ 23,541 $244,785 $ 47,539 $ 39,537
======== ======== ======== ======== ======== ========
</TABLE>
Corporate expenses represent costs of support functions, e-commerce initiatives,
incentives and profit sharing that benefit both segments. Acquisition
amortization includes goodwill and other intangible amortization related to
acquisitions.
Revenue and operating income from divested and discontinued lines in 1999
consists primarily of the operating results of ChoicePoint Limited. ChoicePoint
Limited, the Company's United Kingdom-based services division, was sold in
January 2000 with no material gain on the sale of the business. In 1999,
ChoicePoint Limited's operating results were included in the Insurance Services
group.
Depreciation and amortization for the three months and six months ended June 30,
2000 and 1999 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(In Thousands) 2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Insurance $ 3,913 $ 3,716 $ 7,884 $ 7,353
B&G 7,916 6,855 16,674 13,802
Royalty 426 426 852 853
Divested & Discontinued -- 330 -- 697
Corporate 676 601 1,369 1,138
------- ------- ------- -------
Total $12,931 $11,928 $26,779 $23,843
======= ======= ======= =======
</TABLE>
ChoicePoint's balance sheets are generally managed on a consolidated basis and
therefore it is impractical to report assets by segment. Substantially all of
the Company's operations are located in the United States and no customer
represents more than 10% of total operating revenue.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION
ChoicePoint Inc., a Georgia corporation ("ChoicePoint" or the "Company"), is a
leading provider of decision making intelligence to businesses, individuals and
government agencies. ChoicePoint's businesses are focused on two primary markets
-- Insurance Services and Business & Government Services. See Note 1 to the
Consolidated Financial Statements for a description of each market.
On May 16, 2000, ChoicePoint completed a merger (the "Merger") with DBT Online,
Inc. ("DBT"). The Merger has been accounted for as a pooling of interests and
accordingly all prior period consolidated financial statements have been
restated to include the combined results of operations, financial position and
cash flows of DBT. See Note 2 to the Consolidated Financial Statements for a
description of the Merger.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Consolidated revenues from continuing operations increased $23.5 million, or
18.8%, to $148.5 million for the three months ended June 30, 2000 from $125
million for the three months ended June 30, 1999 primarily as a result of strong
revenue performance in the majority of all product lines and revenue from new
acquisitions. Comparable consolidated internal growth, excluding the effect of
revenue from acquisitions completed since the second quarter of 1999, was
approximately 12%. Consolidated operating income before merger-related costs and
unusual items increased $6.2 million, or 28.1%, to $28.2 million for the three
months ended June 30, 2000 from $22.0 million for the three months ended June
30, 1999. Operating margins (excluding the effects of merger-related costs and
unusual items) increased to 19.0% for the three months ended June 30, 2000 from
17.3% for the three months ended June 30, 1999.
Revenue from Insurance Services grew $9.7 million, or 15.4%, to $72.9 million
for the three months ended June 30, 2000 from $63.2 million for the three months
ended June 30, 1999, driven by strong unit performance in personal lines
products and the acquisition of Statewide Data Services, Inc. ("SDS") in January
2000, offset partially by a decline in laboratory testing volume. Comparable
internal revenue growth for Insurance Services, excluding the effect of revenue
from the SDS acquisition, was approximately 11%. Operating income increased $4.0
million, or 16.8%, to $27.9 million for the three months ended June 30, 2000
from $23.9 million for the three months ended June 30, 1999, primarily as a
result of revenue growth noted above. Acquisition amortization, which includes
goodwill and other intangible amortization related to acquisitions, increased to
$1.2 million for the three months ended June 30, 2000 from $765,000 for the
three months ended June 30, 1999 due to the acquisition of SDS. Operating
margins for Insurance Services increased to 38.2% for the three months ended
June 30, 2000 from 37.8% for the three months ended June 30, 1999. Excluding
acquisition amortization, the operating margin in Insurance Services for the
three months ended June 30, 2000 was 39.8% compared to 39.0% for the three
months ended June 30, 1999.
Revenue from Business & Government Services increased $13.6 million, or 22.5%,
to $73.9 million for the three months ended June 30, 2000 from $60.3 million for
the three months ended June 30, 1999. Comparable internal revenue growth for
Business & Government Services, excluding the effect of revenue from
acquisitions made since the second quarter of 1999, was approximately 13%,
driven by continued strong unit performance in the direct marketing and
workplace solutions businesses. Operating income increased $4.8 million to $11.0
million for the three months ended June 30, 2000 from $6.2 million for the three
months ended June 30, 1999. Acquisition amortization, which includes goodwill
and other intangible amortization related to acquisitions, increased to
approximately $3.8 million for the three months ended June 30, 2000 from $3.3
million for the three months ended June 30, 1999 primarily due to the
acquisitions of National Safety Alliance, Incorporated ("NSA") and KnowX.com and
Informed acquired by DBT from
12
<PAGE> 13
Information America, Inc. Operating margins for Business & Government Services
increased to 14.8% for the three months ended June 30, 2000 from 10.2% for the
three months ended June 30, 1999 primarily as a result of strong revenue growth
in workplace solutions and cost synergies realized in public records. Excluding
acquisition amortization, the operating margin in Business & Government Services
for the three months ended June 30, 2000 was 19.9% compared to 15.6% for the
three months ended June 30, 1999.
Divested and discontinued operations consists primarily of the operating results
from ChoicePoint Limited sold January 2000. See Note 10 to the Consolidated
Financial Statements.
Corporate expenses represent costs of support functions, e-commerce initiatives,
incentives and profit sharing that benefit both segments. The increase to $11.7
million for the three months ended June 30, 2000 from $9.7 million for the three
months ended June 30, 1999 is primarily due to research and development costs
for e-commerce initiatives, an increase in incentive and benefit plan expense
and the Company's corporate branding campaign.
During the second quarters of 2000 and 1999, the Company recorded $28.9 million
and $817,000 of merger-related costs and unusual items, respectively. See Note 2
to the Consolidated Financial Statements.
Consolidated operating income before merger-related costs and unusual items
increased $6.2 million from $22.0 million for the three months ended June 30,
1999 to $28.2 million for the three months ended June 30, 2000.
Consolidated operating income, after merger-related costs and unusual items of
$28.9 million, decreased $21.9 million from $21.2 million for the three months
ended June 30, 1999 to a loss of $759,000 for the three months ended June 30,
2000.
Interest expense was $3.2 million and $2.5 million for the three months ended
June 30, 2000 and 1999, respectively. Interest expense is net of $464,000 and
$460,000 of interest income from short-term investments for the three months
ended June 30, 2000 and 1999, respectively.
Net income decreased $16.6 million from $10.8 million for the three months ended
June 30, 1999 to a loss of $5.8 million for the three months ended June 30, 2000
as a result of the merger-related costs and unusual items. Excluding the
merger-related costs and unusual items, net income would have been approximately
$14.8 million and $11.4 million for the three months ended June 30, 2000 and
1999, respectively. The effective tax rate, excluding merger-related costs and
unusual items, decreased from 41.9% for the three months ended June 30, 1999 to
40.7% for the three months ended June 30, 2000 as a result of lower state income
taxes.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Consolidated revenues from continuing operations increased $55.4 million, or
23.1%, to $295.2 million for the six months ended June 30, 2000 from $239.8
million for the six months ended June 30, 1999 primarily as a result of strong
revenue performance in the majority of all product lines and revenue from new
acquisitions. Comparable consolidated internal growth, excluding the effect of
revenue from acquisitions completed since the first quarter of 1999, was
approximately 15%. Consolidated operating income before merger-related costs and
unusual items increased $10.6 million, or 25.2%, to $52.5 million for the six
months ended June 30, 2000 from $41.9 million for the six months ended June 30,
1999. Operating margins (excluding the effects of merger-related costs and
unusual items) increased to 17.8% for the six months ended June 30, 2000 from
17.1% for the six months ended June 30, 1999.
Revenue from Insurance Services grew $24.8 million, or 20%, to $148.6 million
for the six months ended June 30, 2000 from $123.8 million for the six months
ended June 30, 1999, driven primarily by strong unit performance in personal
lines products, growth in commercial software sales and the acquisition of SDS
in January 2000. Comparable internal revenue growth for Insurance Services,
excluding the effect of revenue from the SDS acquisition, was approximately 15%.
Operating income increased $10.6 million, or 24.0%, to $54.8 million for the six
months ended June 30, 2000 from $44.2 million for the six months ended June 30,
13
<PAGE> 14
1999, primarily as a result of revenue growth noted above. Acquisition
amortization, which includes goodwill and other intangible amortization related
to acquisitions, increased to $2.3 million for the six months ended June 30,
2000 from $1.5 million for the six months ended June 30, 1999 due to the
acquisition of SDS. Operating margins for Insurance Services increased to 36.9%
for the six months ended June 30, 2000 from 35.7% for the six months ended June
30, 1999. Excluding acquisition amortization, the operating margin in Insurance
Services for the six months ended June 30, 2000 was 38.4% compared to 36.9% for
the six months ended June 30, 1999.
Revenue from Business & Government Services increased $30.6 million, or 27.1%,
to $143.4 million for the six months ended June 30, 2000 from $112.8 million for
the six months ended June 30, 1999. Comparable internal revenue growth for
Business & Government Services, excluding the effect of revenue from
acquisitions made since the first quarter of 1999, was approximately 15% over
prior year driven by strong growth in the direct marketing business and new
workplace solutions customers. Operating income increased $6.7 million to $15.9
million for the six months ended June 30, 2000 from $9.2 million for the six
months ended June 30, 1999. Acquisition amortization, which includes goodwill
and other intangible amortization related to acquisitions, increased to
approximately $7.7 million for the six months ended June 30, 2000 from $6.5
million for the six months ended June 30, 1999 primarily due to the acquisitions
of NSA, KnowX.com and Informed. Operating margins for Business & Government
Services increased to 11.1% for the six months ended June 30, 2000 from 8.1% for
the six months ended June 30, 1999 primarily as a result of strong revenue
growth in workplace solutions and cost synergies realized in public records.
Excluding acquisition amortization, the operating margin in Business &
Government Services for the six months ended June 30, 2000 was 16.4% compared to
13.9% for the six months ended June 30, 1999.
Divested & discontinued operations consists primarily of the operating results
from ChoicePoint Limited sold January 2000. See Note 10 to the Consolidated
Financial Statements.
Corporate expenses represent costs of support functions, e-commerce initiatives,
incentives and profit sharing that benefit both segments. The increase to $20.1
million for the six months ended June 30, 2000 from $15.3 million for the six
months ended June 30, 1999 is primarily research and development costs for
e-commerce initiatives, an increase in incentive and benefit plan expense and
the Company's corporate branding campaign.
During the second quarters of 2000 and 1999, the Company recorded $28.9 million
and $2.4 million of merger-related costs and unusual items, respectively. See
Note 2 to the Consolidated Financial Statements.
Consolidated operating income before merger-related costs and unusual items
increased $10.6 million from $41.9 million for the six months ended June 30,
1999 to $52.5 million for the six months ended June 30, 2000.
Consolidated operating income, after merger-related costs and unusual items of
$28.9 million, decreased $16.0 million from $39.5 million for the six months
ended June 30, 1999 to $23.5 million for the six months ended June 30, 2000.
In the first quarter of 1999, an additional gain on the December 1998 sale of
certain field businesses of $2.5 million was recorded in connection with the
prepayment of a note receivable and the repurchase of warrants issued by PMSI
Services, Inc. in the transaction. See Note 10 to the Consolidated Financial
Statements.
Interest expense was $6.2 million and $4.6 million for the six months ended June
30, 2000 and 1999, respectively. Interest expense for 2000 is net of $882,000 of
interest income from short-term investments for 2000. Interest expense for 1999
is net of $431,000 of interest income from the PMSI Services, Inc. note
receivable and warrants prior to the prepayment and repurchase made in March
1999 and $903,000 of interest income from short-term investments.
Net income decreased $14.9 million from $21.7 million for the six months ended
June 30, 1999 to $6.8 million for the six months ended June 30, 2000 as a result
of the merger-related costs and unusual items. Excluding the merger-related
costs and unusual items, net income would have been approximately $27.4
14
<PAGE> 15
million and $21.7 million for the six months ended June 30, 2000 and 1999,
respectively. The effective tax rate, excluding merger-related costs and unusual
items, decreased from 41.8% for the six months ended June 30, 1999 to 40.8% for
the six months ended June 30, 2000 as a result of lower state income taxes.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operations was $26.1 million in the first six months of 2000 as
net income and depreciation and amortization were offset by reductions in
current liabilities and increases in accounts receivable. During the first six
months of 1999, cash provided by operations was $22.4 million. During the first
six months of 2000, ChoicePoint used $81.7 million for investing activities,
including $80.7 million for acquisitions net of cash received and $18.8 million
for additions to property and equipment and other assets. Additions to property
and equipment were primarily system upgrades while additions to other assets
were primarily software, purchased data files, and software developed for
internal use. During the first six months of 1999, ChoicePoint used $28.3
million for investing activities, including $8.4 million for acquisitions, $9.1
million for additions to property and equipment and $11.0 million for additions
to other assets. During the first six months of 2000, net cash provided by
financing activities was $24.6 million, as the proceeds from a $100 million
unsecured revolving credit facility entered into in December 1999 with a group
of banks ("Revolving Facility") were used to fund the SDS and NSA acquisitions.
Net cash provided by financing activities was $6.1 million in the first six
months of 1999, as the $9.3 million net increase in long-term debt was used to
pay down $4.7 million in short-term borrowings.
Earnings before interest, taxes, depreciation and amortization ("EBITDA"),
excluding merger-related costs and unusual items, increased $13.5 million, or
20.5%, from $65.8 million for the six months ended June 30, 1999 to $79.3
million for the six months ended June 30, 2000. EBITDA is not presented as a
substitute for income from operations, net income or cash flows from operating
activities. The Company has included EBITDA data (which is not a measure of
financial performance under generally accepted accounting principles) because
such data is used by certain investors to analyze and compare companies on the
basis of operating performance, leverage and liquidity, and to determine a
company's ability to service debt.
The Company's short-term and long-term liquidity depends primarily upon its
level of net income, accounts receivable, accounts payable and accrued expenses.
In order to meet its working capital needs, ChoicePoint entered into a $250
million unsecured revolving credit facility (the "Credit Facility") with a group
of banks in August 1997. The Credit Facility bears interest at variable rates
and is expandable to $300 million, subject to approval of the lenders. The
Revolving Facility has a termination date of one year, at which time the Company
has the option to convert the outstanding balance to a one-year term obligation.
Total debt outstanding under the two credit facilities was $204 million at June
30, 2000 and $184 million at December 31, 1999. ChoicePoint may use additional
borrowings under these facilities to finance acquisitions and general corporate
cash requirements. ChoicePoint may also utilize lines of credit with two banks
for overnight borrowings. At June 30, 2000, there were no short-term borrowings
outstanding under a line of credit with a bank.
The Company uses cash generated to invest in growing the business and to fund
acquisitions and operations. Therefore, no cash dividends have been paid and the
Company does not anticipate paying any cash dividends on its common stock in the
near future.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In 1999, FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 133 is effective for the
Company's fiscal year ending December 31, 2001. Management does not expect SFAS
No. 133 to have a significant impact on the Company's consolidated financial
statements.
15
<PAGE> 16
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. Forward-looking statements include information concerning the
possible or assumed future results of operations of ChoicePoint, as well as
statements preceded by or that include words such as "believes," "expects,"
"anticipates," "intends," "plans," "estimates" or similar expressions. Other
statements, to the extent they are not historical facts, should also be
considered forward-looking. These statements are 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 important factors, including risks and uncertainties. Risks and
uncertainties include those identified in the ChoicePoint's and DBT's Annual
Reports on Form 10-K for the fiscal year ending December 31, 1999 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.
16
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. The
information below summarizes the Company's market risk associated with its debt
obligations as of June 30, 2000. The information below should be read in
conjunction with Note 7 of the "Notes to Consolidated Financial Statements".
As of June 30, 2000, $204 million was outstanding under two credit facilities.
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 June 30, 2000 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 6.0% plus a credit spread.
Based on the Company's overall interest rate exposure at June 30, 2000, a
near-term change in interest rates would not materially affect the consolidated
financial position, results of operations or cash flows of the Company.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ChoicePoint is involved in litigation from time to time in the ordinary course
of its business. The Company does not believe that the outcome of any pending or
threatened litigation will have a material adverse effect on the financial
position or results of operations of ChoicePoint. However, as is inherent in
legal proceedings where issues may be decided by finders of fact, there is a
risk that unpredictable decisions adverse to the Company could be reached.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 16, 2000 the Company held its regular Annual Meeting of Shareholders. The
following matters were submitted to a vote of security holders:
(a) Approval of the merger agreement among ChoicePoint Inc., DBT
Online, Inc. and ChoicePoint Acquisition Corporation:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN BROKER NON-VOTE
<S> <C> <C> <C>
20,418,047 616,688 140,886 2,620,574
</TABLE>
(b) Votes cast for or withheld regarding the re-election of two
Directors for terms expiring in 2003:
<TABLE>
<CAPTION>
FOR WITHHELD
<S> <C> <C>
James M. Denny 23,464,781 331,414
Charles I. Story 23,530,979 265,216
</TABLE>
Directors whose terms of office continue after the meeting are as
follows:
<TABLE>
<CAPTION>
Terms expiring in 2001 Terms expiring in 2002 Terms expiring in 2003
<S> <C> <C>
C.B. Rogers, Jr. Ron D. Barbaro James M. Denny
Derek V. Smith Charles G. Betty Charles I. Story
Frank Borman Bernard Marcus Kenneth G. Langone
Douglas C. Curling
</TABLE>
(c) Ratification of the appointment of Arthur Andersen LLP as
independent public accountants of the Company for the fiscal year
ending December 31, 2000:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C>
23,663,132 66,614 66,449
</TABLE>
18
<PAGE> 19
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
2.1 Purchase Agreement, by and among ChoicePoint Inc., ChoicePoint
Acquisition Corporation and DBT Online, Inc. (incorporated by
reference to Exhibit 2.1 of the Company's Current Report on Form
8-K, filed February 15, 2000).
3.1 Articles of Incorporation of the Company, as amended (incorporated
by reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-1, as amended, File No. 333-30297).
3.2 Bylaws of the Company, as amended
4.1 Rights Agreement, dated as of October 29, 1997, by and between
ChoicePoint Inc. and SunTrust Bank, Atlanta (incorporated by
reference to Exhibit 4.2 of the Company's Form 8-A, filed November
5, 1997).
4.2 Amendment No. 1 to the Rights Agreement, dated as of June 21,
1999, between ChoicePoint Inc. and SunTrust Bank, Atlanta
(incorporated by reference to Exhibit 4.2 of the Company's Current
Report on Form 8-A, filed August 17, 1999).
4.3 Amendment No. 2 to the Rights Agreement between ChoicePoint Inc.
and SunTrust Bank, Atlanta dated February 14, 2000 (incorporated
by reference to Exhibit 4.1 of the Company's Current Report on
Form 8-K, filed February 15, 2000).
4.4 Form of Common Stock certificate (incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form S-1,
as amended, File No.
333-30297).
10.1 Amendment 2000-1 to the DBT Online, Inc. Amended and Restated
Stock Option Plan (filed as Exhibit 4.2 of the Company's
Registration Statement on Form S-8, File No. 333-37498).
10.2 Employment Agreement, dated April 1, 1997, by and between DBT
Online, Inc. and Frank Borman.
27 Financial Data Schedule (for SEC use only).
</TABLE>
(b) Reports on Form 8-K
A report on Form 8-K, filed May 19, 2000, announced the completion of the
Company's acquisition of DBT Online, Inc. through the merger of ChoicePoint
Acquisition Corporation with and into DBT Online, Inc. pursuant to the
merger agreement by and among ChoicePoint Inc., ChoicePoint Acquisition
Corporation and DBT Online, Inc.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHOICEPOINT INC.
(Registrant)
August 4 , 2000 /s/ Derek V. Smith
--------------------------- ----------------------------------------
Date Derek V. Smith, Chairman and
Chief Executive Officer
August 4, 2000 /s/ Michael S. Wood
--------------------------- ----------------------------------------
Date Michael S. Wood, Chief Financial Officer
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description of Exhibit
------- ----------------------
<S> <C>
2.1 Purchase Agreement, by and among ChoicePoint Inc., ChoicePoint
Acquisition Corporation and DBT Online, Inc. (incorporated by
reference to Exhibit 2.1 of the Company's Current Report on Form
8-K, filed February 15, 2000).
3.1 Articles of Incorporation of the Company, as amended (incorporated
by reference to Exhibit 3.1 of the Company's Registration
Statement on Form S-1, as amended, File No. 333-30297).
3.2 Bylaws of the Company, as amended
4.1 Rights Agreement, dated as of October 29, 1997, by and between
ChoicePoint Inc. and SunTrust Bank, Atlanta (incorporated by
reference to Exhibit 4.2 of the Company's Form 8-A, filed November
5, 1997).
4.2 Amendment No. 1 to the Rights Agreement, dated as of June 21,
1999, between ChoicePoint Inc. and SunTrust Bank, Atlanta
(incorporated by reference to Exhibit 4.2 of the Company's Current
Report on Form 8-A, filed August 17, 1999).
4.3 Amendment No. 2 to the Rights Agreement between ChoicePoint Inc.
and SunTrust Bank, Atlanta dated February 14, 2000 (incorporated
by reference to Exhibit 4.1 of the Company's Current Report on
Form 8-K, filed February 15, 2000).
4.4 Form of Common Stock certificate (incorporated by reference to
Exhibit 4.1 of the Company's Registration Statement on Form S-1,
as amended, File No. 333-30297).
10.1 Amendment 2000-1 to the DBT Online, Inc. Amended and Restated
Stock Option Plan (filed as Exhibit 4.2 of the Company's
Registration Statement on Form S-8, File No. 333-37498).
10.2 Employment Agreement, dated April 1, 1997, by and between DBT
Online, Inc. and Frank Borman.
27 Financial Data Schedule (for SEC use only).
</TABLE>
21
