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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-13069
CHOICEPOINT INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-2309650
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Alderman Drive, Alpharetta, Georgia 30005
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(Address of principal executive offices) (Zip Code)
(770) 752-6000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
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 October 31, 2000
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Common Stock, $.10 Par Value 40,602,843
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CHOICEPOINT INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2000
INDEX
Part I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
Consolidated Statements of Income -
Three Months Ended September 30, 2000 and 1999 and
Nine Months Ended September 30, 2000 and 1999 ......................... 3
Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 .............................. 4
Consolidated Statement of Shareholders' Equity -
Nine Months Ended September 30, 2000 .................................. 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 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 .................................................. 18
Item 6. Exhibits and Reports on Form 8-K ................................... 18
Signatures ................................................................. 20
Exhibit Index ............................................................. 21
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CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands, except per share data) 2000 1999 2000 1999
- ------------------------------------------------------------------------------- -------------------------
Operating revenue $ 151,504 $ 129,685 $ 446,710 $ 374,470
Costs and expenses:
Cost of services 87,707 79,155 262,155 230,517
Selling, general and administrative 31,671 29,161 99,939 80,647
Merger-related costs & unusual items -- -- 28,949 2,400
--------- --------- --------- ---------
Total costs and expenses 119,378 108,316 391,043 313,564
Operating income 32,126 21,369 55,667 60,906
Gain on sale of businesses, net -- -- -- 2,513
Interest expense 2,938 2,550 9,143 7,116
--------- --------- --------- ---------
Income before income taxes 29,188 18,819 46,524 56,303
Provision for income taxes 11,675 8,540 22,188 24,260
--------- --------- --------- ---------
Net income $ 17,513 $ 10,279 $ 24,336 $ 32,043
========= ========= ========= =========
Earnings per share - basic (Notes 5 & 6) $ 0.44 $ 0.26 $ 0.61 $ 0.82
Weighted average shares - basic 39,960 39,006 39,791 38,910
Earnings per share - diluted (Notes 5 & 6) $ 0.42 $ 0.25 $ 0.58 $ 0.79
Weighted average shares - diluted 42,092 40,402 41,712 40,610
The accompanying notes are an integral part of these consolidated statements.
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CHOICEPOINT INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
(In thousands, except par values) 2000 1999
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ASSETS
Current assets:
Cash and cash equivalents $ 25,152 $ 73,101
Accounts receivable, net of allowance for doubtful accounts
of $5,289 in 2000 and $4,670 in 1999 128,375 111,459
Short-term investments -- 16,500
Deferred income tax assets 8,313 8,595
Other current assets 13,769 13,508
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Total current assets 175,609 223,163
Property and equipment, net 67,526 73,983
Goodwill, net 364,019 284,123
Deferred income tax assets 17,525 13,582
Other 76,004 72,929
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Total Assets $ 700,683 $ 667,780
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt $ 582 $ 595
Accounts payable 25,684 34,738
Accrued salaries and bonuses 21,884 20,902
Other current liabilities 59,085 50,637
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Total current liabilities 107,235 106,872
Long-term debt, less current maturities 181,827 187,195
Postretirement benefit obligations 46,976 47,782
Other long-term liabilities 6,876 6,622
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Total liabilities 342,914 348,471
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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 - 40,583 in 2000 and 40,110 in 1999 4,058 4,011
Paid-in capital 237,082 223,388
Retained earnings 128,140 103,804
Cumulative other comprehensive income (93) (476)
Stock held by employee benefit trusts, at cost, 468 shares in 2000
and 1999 (11,418) (11,418)
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Total shareholders' equity 357,769 319,309
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Total Liabilities and Shareholders' Equity $ 700,683 $ 667,780
========== ==========
The accompanying notes are an integral part
of these consolidated balance sheets.
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CHOICEPOINT INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Cumulative Other Stock Held
Comprehensive Common Paid-in Retained Comprehensive By Benefit
(In thousands) Income Stock Capital Earnings Income Trusts Total
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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 $ 24,336 -- -- 24,336 -- -- 24,336
Change in unrealized net loss
on investments 255 -- -- -- 255 -- 255
Translation adjustments 128 -- -- -- 128 -- 128
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Comprehensive income $ 24,719
=========
Restricted stock plans, net (4) (154) -- -- -- (158)
Stock options exercised 51 13,848 -- -- -- 13,899
--------- --------- --------- --------- --------- ---------
Balance, September 30, 2000 $ 4,058 $ 237,082 $ 128,140 $ (93) $ (11,418) $ 357,769
========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of this consolidated statement.
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CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
2000 1999
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(In thousands)
Cash flows from operating activities:
Net income $ 24,336 $ 32,043
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 39,731 35,904
Merger-related costs and unusual items 28,949 2,400
Gain on sale of businesses, net -- (2,513)
Compensation recognized under employee stock plans 2,399 3,679
Stock issued for employee benefit plan -- 307
Payment on employee stock plans (1,495) (3,378)
Changes in assets and liabilities,
excluding effects of acquisitions and divestiture:
Accounts receivable, net (12,982) (5,347)
Deferred income taxes (3,661) 694
Other current assets (50) 494
Current liabilities, excluding debt (28,046) (14,572)
Other long-term liabilities, excluding debt (868) (1,904)
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Net cash provided by operating activities 48,313 47,807
Cash flows from investing activities:
Acquisitions, net of cash acquired (97,276) (40,231)
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 6,786
Additions to property and equipment, net (11,878) (16,629)
Additions to other assets, net (13,258) (15,061)
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Net cash used by investing activities (104,714) (65,836)
Cash flows from financing activities:
Proceeds from long-term debt 75,000 30,000
Payments on long-term debt (80,368) (30,744)
Net short-term borrowings (13) (5,308)
Purchases of stock held by employee benefit trusts -- (1,500)
Proceeds from exercise of stock options 13,899 5,416
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Net cash provided (used) by financing activities 8,518 (2,136)
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Effect of foreign currency exchange rates on cash (66) 33
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Net decrease in cash (47,949) (20,132)
Cash and cash equivalents, beginning of period 73,101 40,207
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Cash and cash equivalents, end of period $ 25,152 $ 20,075
========== ==========
The accompanying notes are an integral part of these consolidated statements.
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CHOICEPOINT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(UNAUDITED)
1. ORGANIZATION
ChoicePoint Inc., a Georgia corporation ("ChoicePoint" or the "Company"), is a
leading provider of decision making intelligence to businesses, government
agencies and individuals. 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 September 30,
2000 and the results of operations for the three months and nine months ended
September 30, 2000 and 1999 and the cash flows for the nine months ended
September 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
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Commission in 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.
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 September 30, 2000 are summarized below:
Remaining
(in Thousands) Accrual at
2000 September 30, 1999
Expense 2000 Expense
------- ------------- -------
Transaction costs $11,579 $ 213 $ --
Personnel-related costs 3,780 1,242 --
Other merger integration costs 3,629 2,031 817
Asset impairments 6,954 -- 732
Non-merger severance 2,353 922 451
Other one-time charges 654 108 400
------- ------ ------
$28,949 $4,516 $2,400
======= ====== ======
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 and stay bonuses for services rendered through June 30, 2000 and
severance. Other merger 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.
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 $83.3 million and $89.6
million for the three months ended September 30, 2000 and 1999, respectively,
and $257.9 million and $267.5 million for the nine months ended September 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
September 30, 2000 and 1999 were $10.0 million and $10.3 million, respectively,
and were $29.3 million and $29.5 million for the nine months ended September
30, 2000 and 1999, respectively.
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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.
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 $179 million at September 30, 2000. In
addition, there was $3.4 million of other long-term debt outstanding at
September 30, 2000. There were no short-term borrowings at September 30, 2000.
8. STOCK OPTIONS
Consistent with prior years, the Company granted stock options to purchase
ChoicePoint common stock during the first nine months of the year. In 2000,
these stock options to purchase approximately 1.0 million 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. 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 nine 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 $80.8 million, with approximately $78.5 million of that
amount allocated to goodwill. The Company accrued $4.1 million for
transaction-related costs including lease terminations and personnel-related
costs in connection with the acquisitions. As of September 30, 2000,
approximately $2.7 million has been charged against this accrual. In addition,
during the third quarter of 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.
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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 September 30, 2000, approximately $6.6 million
has been charged against the total $7.7 million accrued transaction-related
costs.
11. SEGMENT DISCLOSURES
ChoicePoint operates primarily 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 nine months ended September 30, 2000 and 1999 for the two segments and the
divested and discontinued lines were as follows:
Three months ended Three months ended
September 30, 2000 September 30, 1999
------------------------------------------ -----------------------------------------
Operating Operating
Income before Operating Income before Operating
(In Thousands) Acquisition Income Acquisition Income
Revenue Amortization (Loss) Revenue Amortization (Loss)
--------- ------------- --------- ------- ------------- ---------
Insurance $ 73,942 $ 29,872 $ 28,678 $ 65,223 $25,733 $24,968
B&G 75,958 17,953 14,075 60,814 7,008 3,615
Royalty 1,604 953 953 1,533 841 841
Divested & Discontinued -- -- -- 2,115 528 528
Corporate -- (11,580) (11,580) -- (8,583) (8,583)
--------- -------- -------- --------- ------- -------
Total $ 151,504 $ 37,198 $ 32,126 $ 129,685 $25,527 $21,369
========= ======== ======== ========= ======= =======
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
------------------------------------------ -----------------------------------------
Operating Operating
Income before Operating Income before Operating
(In Thousands) Acquisition Income Acquisition Income
Revenue Amortization (Loss) Revenue Amortization (Loss)
--------- -------------- --------- ------- ------------- ---------
Insurance $ 222,563 $ 86,996 $ 83,492 $ 189,071 $71,458 $69,163
B&G 219,352 41,534 29,966 173,602 22,671 12,806
Royalty 4,795 2,855 2,855 4,681 2,612 2,612
Divested & Discontinued -- -- -- 7,116 2,650 2,650
Corporate -- (31,697) (31,697) -- (23,925) (23,925)
Merger costs and unusual
items (Note 2) -- (28,949) (28,949) -- (2,400) (2,400)
--------- -------- -------- --------- ------- -------
Total $ 446,710 $ 70,739 $ 55,667 $ 374,470 $73,066 $60,906
========= ======== ======== ========= ======= =======
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.
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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 nine months ended
September 30, 2000 and 1999 were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(In Thousands) 2000 1999 2000 1999
------- ------- ------- -------
Insurance $ 4,020 $ 3,332 $11,904 $10,685
B&G 7,790 7,387 24,464 21,189
Royalty 426 427 1,278 1,280
Divested & Discontinued -- 289 -- 986
Corporate 716 626 2,085 1,764
------- ------- ------- -------
Total $12,952 $12,061 $39,731 $35,904
======= ======= ======= =======
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION
ChoicePoint Inc., a Georgia corporation ("ChoicePoint" or the "Company"), is a
leading provider of decision making intelligence to businesses, government
agencies and individuals. 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 SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
Consolidated revenues from continuing operations increased $23.9 million, or
18.8%, to $151.5 million for the three months ended September 30, 2000 from
$126.7 million for the three months ended September 30, 1999 as a result of
strong revenue performance in the majority of the 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 13%. Consolidated operating income increased $10.7 million,
or 50.3%, to $32.1 million for the three months ended September 30, 2000 from
$21.4 million for the three months ended September 30, 1999. Operating margins
increased to 21.2% for the three months ended September 30, 2000 from 16.5% for
the three months ended September 30, 1999.
Revenue from Insurance Services grew $8.7 million, or 13.4%, to $73.9 million
for the three months ended September 30, 2000 from $65.2 million for the three
months ended September 30, 1999, driven by continued strong unit performance in
personal lines products such as credit and point of sales reports and solid
growth in our commercial software business from the sale of Windows(TM)-based
products. This increase was offset partially by a decline in laboratory testing
volume at Osborn Laboratories(R) ("Osborn") as a result of the continuing
effect of Triple X legislation on the life insurance market which was effective
January 1, 2000. Comparable internal revenue growth for Insurance Services,
excluding the effect of revenue from the SDS acquisition and the decline at
Osborn, was approximately 14%. Including Osborn, the internal growth rate was
approximately 9%. Operating income increased $3.7 million, or 14.9%, to $28.7
million for the three months ended September 30, 2000 from $25.0 million for
the three months ended September 30, 1999, primarily as a result of the 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 September 30, 2000 from $765,000 for the three months
ended September 30, 1999 due to the acquisition of SDS. Operating margins for
Insurance Services increased to 38.8% for the three months ended September 30,
2000 from 38.3% for the three months ended September 30, 1999. Excluding
acquisition amortization, the operating margin in Insurance Services for the
three months ended September 30, 2000 was 40.4% compared to 39.5% for the three
months ended September 30, 1999.
Revenue from Business & Government Services increased $15.2 million, or 24.9%,
to $76.0 million for the three months ended September 30, 2000 from $60.8
million for the three months ended September 30, 1999. Comparable internal
revenue growth for Business & Government Services, excluding the effect of
revenue from acquisitions made since the third quarter of 1999, was
approximately 17%, driven by continued strong unit performance in public
records, workplace solutions and direct marketing. Operating income increased
$10.5 million to $14.1 million for the three months ended September 30, 2000
from $3.6 million for the three months ended September 30, 1999 primarily due
to strong revenue growth in public records and workplace solutions and cost
synergies realized in integrating the Company's two public
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records businesses. Acquisition amortization, which includes goodwill and other
intangible amortization related to acquisitions, increased to approximately $3.9
million for the three months ended September 30, 2000 from $3.4 million for the
three months ended September 30, 1999 primarily due to the acquisitions of
National Safety Alliance, Incorporated ("NSA") and KnowX.com and Informed
acquired by DBT from Information America, Inc. and the EquiSearch Services Inc.
("EquiSearch") accelerated earnout (see Note 9). Operating margins for Business
& Government Services increased to 18.5% for the three months ended September
30, 2000 from 5.9% for the three months ended September 30, 1999 primarily as a
result of strong revenue growth in public records and workplace solutions and
cost synergies realized in public records. Excluding acquisition amortization,
the operating margin in Business & Government Services for the three months
ended September 30, 2000 was 23.6% compared to 11.5% for the three months ended
September 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 development
initiatives, incentives and profit sharing that benefit both segments. The
increase to $11.6 million for the three months ended September 30, 2000 from
$8.6 million for the three months ended September 30, 1999 is primarily due to
research and development costs for e-commerce initiatives and an increase in
incentive and benefit plan expense commensurate with the Company's strong
operating results.
Consolidated operating income increased $10.7 million from $21.4 million for
the three months ended September 30, 1999 to $32.1 million for the three months
ended September 30, 2000.
Interest expense was $2.9 million and $2.6 million for the three months ended
September 30, 2000 and 1999, respectively. Interest expense is net of $419,000
of interest income from short-term investments for the three months ended
September 30, 1999.
Net income increased $7.2 million from $10.3 million for the three months ended
September 30, 1999 to $17.5 million for the three months ended September 30,
2000. The effective tax rate decreased from 45.4% for the three months ended
September 30, 1999 to 40.0% for the three months ended September 30, 2000
primarily as a result of lower state income taxes.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Consolidated revenues from continuing operations increased $79.4 million, or
21.6%, to $446.7 million for the nine months ended September 30, 2000 from
$367.3 million for the nine months ended September 30, 1999 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 14%. Consolidated operating income before merger-related
costs and unusual items increased $21.3 million, or 33.7%, to $84.6 million for
the nine months ended September 30, 2000 from $63.3 million for the nine months
ended September 30, 1999. Operating margins (excluding the effects of
merger-related costs and unusual items) increased to 18.9% for the nine months
ended September 30, 2000 from 16.9% for the nine months ended September 30,
1999.
Revenue from Insurance Services grew $33.5 million, or 17.7%, to $222.6 million
for the nine months ended September 30, 2000 from $189.1 million for the nine
months ended September 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
and Osborn, was approximately 15%. Internal growth for Insurance Services with
Osborn was approximately 13%. Operating income increased $14.3 million, or
20.7%, to $83.5 million for the nine months ended September 30, 2000 from $69.2
million for the nine months ended September 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 $3.5
million for the nine months ended September 30, 2000 from $2.3 million for the
nine
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months ended September 30, 1999 due to the acquisition of SDS. Operating margins
for Insurance Services increased to 37.5% for the nine months ended September
30, 2000 from 36.6% for the nine months ended September 30, 1999. Excluding
acquisition amortization, the operating margin in Insurance Services for the
nine months ended September 30, 2000 was 39.1% compared to 37.8% for the nine
months ended September 30, 1999.
Revenue from Business & Government Services increased $45.8 million, or 26.4%,
to $219.4 million for the nine months ended September 30, 2000 from $173.6
million for the nine months ended September 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 16% over the prior year driven by strong growth in the direct
marketing business and new workplace solutions customers. Operating income
increased $17.2 million to $30.0 million for the nine months ended September
30, 2000 from $12.8 million for the nine months ended September 30, 1999.
Acquisition amortization, which includes goodwill and other intangible
amortization related to acquisitions, increased to approximately $11.6 million
for the nine months ended September 30, 2000 from $9.9 million for the nine
months ended September 30, 1999 primarily due to the acquisitions of NSA,
KnowX.com and Informed and the accelerated earnout for EquiSearch. Operating
margins for Business & Government Services increased to 13.7% for the nine
months ended September 30, 2000 from 7.4% for the nine months ended September
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
nine months ended September 30, 2000 was 18.9% compared to 13.1% for the nine
months ended September 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 development
initiatives, incentives and profit sharing that benefit both segments. The
increase to $31.7 million for the nine months ended September 30, 2000 from
$23.9 million for the nine months ended September 30, 1999 is primarily due to
research and development costs for e-commerce initiatives and an increase in
incentive and benefit plan expense commensurate with strong operating results
and the Company's corporate branding campaign.
During the first nine months 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 $21.3 million from $63.3 million for the nine months ended September
30, 1999 to $84.6 million for the nine months ended September 30, 2000.
Consolidated operating income, after merger-related costs and unusual items of
$28.9 million, decreased $5.2 million from $60.9 million for the nine months
ended September 30, 1999 to $55.7 million for the nine months ended September
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 $9.1 million and $7.1 million for the nine months ended
September 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 $1.3 million of interest income from short-term investments.
Net income decreased $7.7 million from $32.0 million for the nine months ended
September 30, 1999 to $24.3 million for the nine months ended September 30,
2000 as a result of the merger-related costs and
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unusual items. Excluding merger-related costs, unusual items and gain on sale of
businesses, net income would have been approximately $44.9 million and $32.0
million for the nine months ended September 30, 2000 and 1999, respectively. The
effective tax rate, excluding merger-related costs,unusual items and gain on
sales of businesses, decreased from 43.0% for the nine months ended September
30, 1999 to 40.5% for the nine months ended September 30, 2000 primarily as a
result of lower state income taxes.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operations was $48.3 million in the first nine 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 nine
months of 1999, cash provided by operations was $47.8 million. During the first
nine months of 2000, ChoicePoint used $104.7 million for investing activities,
including $97.3 million for acquisitions net of cash received and $25.1 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 nine months of 1999, ChoicePoint used $65.8
million for investing activities, including $40.2 million for acquisitions,
$31.7 million for additions to property and equipment and other assets offset
by proceeds from the maturity of investments of $6.8 million. During the first
nine months of 2000, net cash provided by financing activities was $8.5
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 used by
financing activities was $2.1 million in the first nine months of 1999.
Earnings before interest, taxes, depreciation and amortization ("EBITDA"),
excluding merger-related costs and unusual items, increased $25.1 million, or
25.3%, from $99.2 million for the nine months ended September 30, 1999 to
$124.3 million for the nine months ended September 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 $179
million at September 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 September
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
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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.
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 which are
intended to identify forward-looking statements. These statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those expressed in any forward-looking statements. These risks
and uncertainties include, but are not limited to, the following important
factors: demand for the Company's services; product development; maintaining
acceptable margins; ability to control costs; the impact of federal, state and
local regulatory requirements on the Company's business, specifically the
public records market and privacy matters affecting the Company; the impact of
competitors; and the uncertainty of economic conditions in general. Additional
information concerning risks and uncertainties is contained in the Company's
filings with the Securities and Exchange Commission, including ChoicePoint's
and DBT's Annual Reports on Form 10-K for the fiscal year ended December 31,
1999. Readers are cautioned not to place undue reliance on forward-looking
statements since the statements speak only as of the date that they are made,
and the Company undertakes no obligation to publicly update these statements
based on events that may occur after this date.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. The
information below summarizes the Company's market risk associated with its debt
obligations as of September 30, 2000. The information below should be read in
conjunction with Note 7 of the "Notes to Consolidated Financial Statements".
As of September 30, 2000, $179 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 September 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 6.3% plus a credit spread.
Based on the Company's overall interest rate exposure at September 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ChoicePoint is involved in litigation from time to time in the ordinary course
of its business. The Company does not believe that the outcome of any pending
or threatened litigation will have a material adverse effect on the financial
position or results of operations of ChoicePoint. However, as is inherent in
legal proceedings where issues may be decided by finders of fact, there is a
risk that unpredictable decisions adverse to the Company could be reached.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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 (incorporated by reference
to Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000).
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).
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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).
27 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
Registrant did not file any reports on Form 8-K during the quarter for
which this report was filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHOICEPOINT INC.
---------------------------------
(Registrant)
November 3, 2000 /s/ Derek V. Smith
- ------------------------------------ ---------------------------------
Date Derek V. Smith, Chairman and
Chief Executive Officer
November 3, 2000 /s/ Michael S. Wood
- ------------------------------------ -----------------------------------
Date Michael S. Wood, Chief Financial
Officer
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EXHIBIT INDEX
Exhibit Description of Exhibit
- ------- ----------------------
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 (incorporated by reference to Exhibit
3.2 of the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000).
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).
27 Financial Data Schedule (for SEC use only).
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