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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 MARCH 31, 2001
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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 ________________
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 incorporation (I.R.S. Employer
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 April 30, 2001
----- -----------------------------
Common Stock, $.10 Par Value 62,113,655
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CHOICEPOINT INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2001
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
Consolidated Statements of Income --
Three Months Ended March 31, 2001 and 2000.................................................. 3
Consolidated Balance Sheets --
March 31, 2001 and December 31, 2000 ....................................................... 4
Consolidated Statement of Shareholders' Equity --
Three Months Ended March 31, 2001........................................................... 5
Consolidated Statements of Cash Flows --
Three Months Ended March 31, 2001 and 2000.................................................. 6
Notes to Consolidated Financial Statements....................................................... 7
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition............................................ 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ....................................................................... 16
Item 2. Changes in Securities and Use of Proceeds ............................................... 16
Item 3. Defaults Upon Senior Securities ......................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders...................................... 16
Item 5. Other Information........................................................................ 16
Item 6. Exhibits and Reports on Form 8-K......................................................... 16
Signatures....................................................................................... 17
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CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
March 31,
-------------------------------
(In thousands, except per share data) 2001 2000
--------- ---------
Revenue $ 155,681 $ 146,720
Costs and expenses:
Cost of services 91,280 90,201
Selling, general and administrative 30,956 32,219
Merger-related costs & unusual items 18,009 --
--------- ---------
Total costs and expenses 140,245 122,420
Operating income 15,436 24,300
Interest expense, net 2,555 2,977
--------- ---------
Income before income taxes 12,881 21,323
Provision for income taxes 5,668 8,722
--------- ---------
Net income $ 7,213 $ 12,601
========= =========
Earnings per share - basic (Notes 5 & 6) $ 0.12 $ 0.21
Weighted average shares - basic 61,208 59,487
Earnings per share - diluted (Notes 5 & 6) $ 0.11 $ 0.20
Weighted average shares - diluted 64,698 62,249
The accompanying notes are an integral part of these consolidated statements.
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CHOICEPOINT INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
(In thousands, except par values) 2001 2000
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,979 $ 44,909
Accounts receivable, net of allowance for doubtful accounts
of $5,084 in 2001 and $5,787 in 2000 129,449 109,709
Deferred income tax assets 7,553 7,788
Other current assets 16,764 15,923
---------- ----------
Total current assets 164,745 178,329
Property and equipment, net 66,046 68,792
Goodwill, net 395,081 370,232
Deferred income tax assets 12,277 10,244
Other 72,123 76,842
---------- ----------
Total Assets $ 710,272 $ 704,439
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt $ 3,635 $ 638
Accounts payable 28,856 31,123
Accrued salaries and bonuses 14,843 29,919
Other current liabilities 44,513 44,659
---------- ----------
Total current liabilities 91,847 106,339
Long-term debt, less current maturities 141,681 141,638
Postretirement benefit obligations 45,044 45,844
Other long-term liabilities 15,024 9,549
---------- ----------
Total liabilities 293,596 303,370
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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 - 62,066 in 2001 and 61,566 in 2000 6,207 6,157
Paid-in capital 270,029 258,796
Retained earnings 154,839 147,626
Accumulated other comprehensive loss (2,981) (92)
Stock held by employee benefit trusts, at cost, 701 shares in 2001
and 2000 (11,418) (11,418)
---------- ----------
Total shareholders' equity 416,676 401,069
---------- ----------
Total Liabilities and Shareholders' Equity $ 710,272 $ 704,439
========== ==========
The accompanying notes are an integral part of these
consolidated balance sheets.
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CHOICEPOINT INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Accumulated
Other Stock Held By
Comprehensive Common Paid-in Retained Comprehensive Employee
(in thousands) Income Stock Capital Earning Loss Benefit Trusts Total
------------- -------- -------- -------- ------------ --------------- --------
Balance, December 31, 2000 $ 6,157 $258,796 $147,626 $ (92) $(11,418) $401,069
Net Income $ 7,213 -- -- 7,213 -- -- 7,213
Translation adjustments (110) -- -- -- (110) -- (110)
Unrealized derivative losses on
cash flow hedges (net of taxes of
$1.8 million) (2,779) -- -- -- (2,779) -- (2,779)
-------
Comprehensive in come $ 4,324
=======
Restricted stock plans, net -- 422 -- -- -- 422
Stock options exercised 50 6,731 -- -- -- 6,781
Tax benefit of stock options exercised -- 4,080 -- -- -- 4,080
-------- -------- -------- -------- -------- --------
Balance, March 31, 2001 $ 6,207 $270,029 $154,839 $ (2,981) $(11,418) $416,676
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of this consolidated statement.
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CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
--------------------------------
(In thousands) 2001 2000
--------- ---------
Cash flows from operating activities:
Net income $ 7,213 $ 12,601
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,120 13,848
Merger-related costs and unusual items 18,009 --
Compensation recognized under employee stock plans 422 (869)
Stock issued for employee benefit plan -- 400
Tax benefit of stock options exercised 4,080 1,200
Changes in assets and liabilities,
excluding effects of acquisitions and divestiture:
Accounts receivable, net (17,515) (20,578)
Deferred income taxes 280 (754)
Other current assets (1,147) (2,842)
Current liabilities, excluding debt (27,066) (12,402)
Other long-term liabilities, excluding debt (10) (42)
--------- ---------
Net cash used by operating activities (1,614) (9,438)
Cash flows from investing activities:
Acquisitions, net of cash acquired (29,494) (79,433)
Cash proceeds from sale of businesses -- 1,500
Additions to short-term investments -- (14,934)
Additions to property and equipment, net (2,733) (4,976)
Additions to other assets, net (9,625) (4,006)
--------- ---------
Net cash used by investing activities (41,852) (101,849)
Cash flows from financing activities:
Proceeds from long-term debt -- 75,000
Payments on long-term debt -- (30,025)
Net short-term borrowings 2,865 7,571
Proceeds from exercise of stock options 6,781 2,272
--------- ---------
Net cash provided by financing activities 9,646 54,818
--------- ---------
Effect of foreign currency exchange rates on cash (110) --
--------- ---------
Net decrease in cash (33,930) (56,469)
Cash and cash equivalents, beginning of period 44,909 73,101
--------- ---------
Cash and cash equivalents, end of period $ 10,979 $ 16,632
========= =========
The accompanying notes are an integral part of these consolidated statements.
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CHOICEPOINT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
1. ORGANIZATION
ChoicePoint Inc., a Georgia corporation ("ChoicePoint" or the "Company"), is a
leading provider of identification and credential verification services for
making smarter decisions in today's fast-paced world. 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, claims 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, marketing services 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 information products
and services and direct marketing 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 screenings and drug testing administration services, public
record searches, credential verification, due diligence information,
Uniform Commercial Code searches and filings, database marketing
services and people and shareholder locator information searches.
2. BASIS OF PRESENTATION
ChoicePoint Inc. was established through the combination of the businesses that
comprised the Insurance Services Group of Equifax Inc. ("Equifax") within a
separate company and the subsequent spinoff on August 8, 1997 (the "Spinoff") of
the Company's outstanding stock by Equifax as a stock dividend to the
shareholders of Equifax.
On May 16, 2000, ChoicePoint completed a merger (the "Merger") with DBT Online,
Inc. ("DBT") by exchanging approximately 15.9 million shares (adjusted for stock
split - Note 6) 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
(pre-split). In addition, outstanding DBT stock options were converted at the
same exchange ratio into options to purchase approximately 2.7 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. There were no
material transactions between ChoicePoint and DBT prior to the Merger. No
material adjustments were required to conform the accounting policies of the two
companies.
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
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reflect all adjustments which are, in the opinion of management, necessary for a
fair statement of the financial position of ChoicePoint as of March 31, 2001 and
the results of operations and the cash flows for the three months ended March
31, 2001 and 2000. 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 accounting
principles generally accepted in the United States have been condensed or
omitted. These financial statements should be read in conjunction with the notes
to the financial statements included in ChoicePoint's Consolidated Financial
Statements for the year ended December 31, 2000 as filed with the Securities and
Exchange Commission in the Annual Report on Form 10-K (File No. 1-13069). The
current period's results are not necessarily indicative of results to be
expected for a full year.
During the first quarter of 2001 and fiscal year 2000, the Company recorded
merger-related costs and unusual items of $18.0 million and $28.9 million,
respectively. The categories of costs incurred and the accrued balances at March
31, 2001 are summarized below:
Remaining
Accrual at
March 31, 2001 2000
(In thousands) 2001 Expense Expense
---------- ------- -------
Transaction costs $ -- $ -- $11,579
Personnel-related costs 1,165 1,832 3,780
Other merger integration costs 2,828 2,433 3,629
Asset impairments -- 12,693 6,954
Non-merger severance 964 982 2,353
Other one-time charges 120 69 654
------- ------- -------
$ 5,077 $18,009 $28,949
======= ======= =======
In the first quarter of 2001, the personnel-related costs of $1.8 million
consist primarily of stay bonuses for services rendered through March 31, 2001
and severance and termination benefit costs primarily related to the integration
of the two public records platforms and related sales and marketing departments.
Other merger integration costs of $2.4 million consist primarily of duplicate
data and lease exit costs. Asset impairments of $12.7 million primarily reflect
the write-down of equipment and other long-lived assets deemed to be impaired
based on the integration plan for the two public records platforms which was
finalized in the first quarter of 2001. In the second quarter of 2000,
transaction costs of approximately $11.6 million included investment banking,
legal and printing fees and other costs directly related to the Merger.
Personnel-related costs of approximately $3.8 million consisted 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. Asset impairments of approximately $7.0 million represent
the write-down of goodwill and other long-lived assets.
3. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 EXPENSE RECOGNITION
ChoicePoint recognizes revenue when an agreement exists, prices are
determinable, service and products are delivered and collectibility is
reasonably assured. Revenues from software license and maintenance agreements
are recognized in accordance with Statement of Position 97-2, "Software Revenue
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Recognition." Motor vehicle records registry revenue (the fee charged by states
for motor vehicle records), material, shipping and postage charges in the
Company's direct marketing business and other costs that are passed on by
ChoicePoint to its customers ("pass-through revenue") are excluded from revenue
and recorded as a reduction to cost of services in the consolidated financial
statements. Pass-through revenue was $109.2 million and $104.2 million for the
three months ended March 31, 2001 and 2000, 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.
6. STOCK SPLIT
On March 7, 2001, ChoicePoint effected a three-for-two stock split in the form
of a stock dividend payable to shareholders of record as of February 16, 2001.
Unless otherwise stated, 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. Total borrowings
under the Credit Facility were $139 million at March 31, 2001. In addition,
there was $3.3 million of other long-term debt outstanding at March 31, 2001.
Short-term borrowings at March 31, 2001 include $3.0 million from a line of
credit with a bank.
8. DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, ChoicePoint adopted Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), and its corresponding amendments under SFAS No. 138. SFAS 133
requires the Company to measure all derivatives at fair value and to recognize
them in the Consolidated Balance Sheet as an asset or liability, depending on
ChoicePoint's rights or obligations under the applicable derivative contract.
ChoicePoint's derivative instruments include interest rate swap agreements which
have been designated as cash flow hedges and, as such, the effective portions of
changes in fair value are reported in other comprehensive income ("OCI") and are
subsequently reclassified into earnings when the hedged item affects earnings.
These interest rate swap agreements have been entered into to hedge the
variability of cash flows to be paid related to the Credit Facility and an
operating lease. Changes in the fair value of derivative instruments not
designated as hedging instruments and ineffective portions of hedges are
recognized in earnings in the current period. The adoption of SFAS 133 as of
January 1, 2001, resulted in a charge to OCI of $2.8 million, net of taxes. For
the three months ended March 31, 2001, the Company recorded the ineffectiveness
related to these cash flow hedges to net interest expense. These amounts were
not material.
9. STOCK OPTIONS
During the first quarter of 2001, stock options to purchase approximately 1.7
million shares of ChoicePoint common stock were granted under the ChoicePoint
Inc. 1997 Omnibus Stock Incentive Plan. Exercise prices of these options are
equal to the fair market value on the date of grant.
10. ACQUISITIONS
During the first quarter of 2001, the Company acquired BTi Employee Screening
Services, Inc., an experienced pre-employment background screening organization,
ABI Consulting, Inc., a third-party
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administrator of employee drug testing programs, and Insurity Solutions Inc., a
provider of Internet-based rating, underwriting and policy-servicing tools. The
total purchase price of the acquisitions, which were accounted for using the
purchase method, was approximately $29.6 million, with approximately $29.1
million of that amount allocated to goodwill. The Company has accrued
approximately $1.0 million for transaction-related costs including lease
terminations and personnel-related costs related to these acquisitions.
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
ended March 31, 2001 and 2000 for the two segments, laser technology patents
held by the Company ("Royalty") and the divested and discontinued lines were as
follows:
Three months ended Three months ended
-------------------------------------------- -------------------------------------------
March 31, 2001 March 31, 2000
-------------------------------------------- -------------------------------------------
Operating Operating
Income before Operating Income before
Acquisition Income Acquisition Income
(In thousands) Revenue Amortization (Loss) Revenue Amortization (Loss)
--------- ------------ --------- --------- ------------ ---------
Insurance $ 80,064 $ 31,888 $ 30,553 $ 75,717 $ 28,073 $ 26,942
B&G 73,960 16,762 12,684 66,141 7,588 3,865
Royalty 1,657 1,051 1,051 1,543 885 885
Divested & Discontinued -- -- -- 3,319 1,268 1,061
Corporate and Shared Expenses
-- (10,843) (10,843) -- (8,453) (8,453)
Merger-related Costs and
Unusual Items (Note 2) -- (18,009) (18,009) -- --
--------- --------- --------- --------- --------- ---------
Total $ 155,681 $ 20,849 $ 15,436 $ 146,720 $ 29,361 $ 24,300
========= ========= ========= ========= ========= =========
As a result of the Merger and integration of the two public records businesses,
the Company has discontinued certain product lines which were duplicative in
nature or contrary to ChoicePoint's strategic goals.
Corporate and shared expenses represent costs of support functions, research and
development initiatives, incentives and profit sharing that benefit both
segments. Acquisition amortization includes goodwill and other intangible
amortization related to acquisitions.
Depreciation and amortization for the three months ended March 31, 2001 and 2000
were as follows:
Three Months Ended
March 31,
-------------------------------
(In thousands) 2001 2000
--------- ---------
Insurance $ 4,106 $ 3,971
B&G 8,716 8,240
Royalty 425 426
Divested & Discontinued -- 518
Corporate 873 693
--------- ---------
Total $ 14,120 $ 13,848
========= =========
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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12. SUBSEQUENT EVENTS
The Company acquired National Medical Review Offices, Inc., a large provider of
Medical Review Office services in California, and The Bode Technology Group,
Inc., a premier provider of DNA identification services, in April 2001. These
acquisitions will be accounted for using the purchase method.
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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 identification and credential verification services for
making smarter decisions in today's fast-paced world. 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.
On March 7, 2001, ChoicePoint effected a three-for-two stock split in the form
of a stock dividend payable to shareholders of record as of February 16, 2001.
Unless otherwise stated share and per share data for all periods presented have
been adjusted to reflect the split.
RESULTS OF OPERATIONS
REVENUE
The Company's total revenue for the three months ended March 31 increased 6%, or
$9.0 million, to $155.7 million in 2001 from $146.7 million in 2000. Revenue
from continuing operations, which excludes discontinued and divested product
lines, for the three months ended March 31 grew approximately 9%, or $12.3
million, to $155.7 million in 2001 from $143.4 million in 2000. Consolidated
internal revenue growth, which excludes the effect of revenue from purchased
acquisitions and divestitures, was approximately 6% for the three months ended
March 31, 2001. Our revenue growth resulted primarily from continued strong unit
performances in Insurance Services' personal lines and the commercial insurance
businesses and Business & Government Services' workplace solutions and public
records businesses and was offset partially by the decline in laboratory testing
volume as a result of the continuing effect of TripleX legislation on the life
insurance market. Triple-X is an insurance regulation dealing with reserve
requirements for guaranteed premium term life insurance policies and was passed
by most states as of January 1, 2000. This legislation drove laboratory services
volume significantly higher in the first quarter of 2000. Excluding the effect
of laboratory services, internal revenue growth was 12% for the period.
MERGER-RELATED COSTS AND UNUSUAL ITEMS
Merger-related costs and unusual items of $18.0 million in the first quarter of
2001 primarily relate to the integration of the Company's two public records
businesses in connection with the Merger, the plan for which was finalized in
the first quarter of 2001. First quarter 2001 merger-related costs and unusual
items include asset impairments, stay bonuses, severance and termination
benefits, and duplicate data and lease exit costs (See Note 2 to the
Consolidated Financial Statements).
OPERATING INCOME
The Company's operating income for the three months ended March 31 was $15.4
million in 2001 and $24.3 million in 2000. Excluding merger-related costs and
unusual items, operating income increased $9.1 million, or 38%, to $33.4 million
for the period ended March 31, 2001 from $24.3 million for the three months
ended March 31, 2000. Acquisition amortization, which includes goodwill and
other intangible amortization related to acquisitions, was $5.4 million and $5.1
million for the three months ended March 31, 2001 and 2000, respectively.
Operating margins, excluding the effects of merger-related costs and unusual
items, were 21.5% and 16.6% for the three months ended March 31, 2001 and 2000,
respectively. The improvement in first quarter margins from 2000 to 2001 was
primarily as a result of cost synergies realized in the integration of DBT into
the Company's public records business and our continued focus on improving cost
efficiencies.
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INTEREST EXPENSE, NET
Interest expense, net was $2.6 million and $3.0 million for the three months
ended March 31, 2001 and 2000, respectively. Interest expense for the first
quarter of 2000 is net of interest income from short-term investments of
$418,000.
INCOME TAXES
ChoicePoint's overall effective tax rates were 39.7% (44.0% including the effect
of merger-related costs and unusual items) and 40.9% for the three months ended
March 31, 2001 and 2000, respectively. The decrease in effective tax rates
excluding merger-related costs and unusual items from first quarter 2000 to 2001
is primarily due to implementation of state and local tax planning initiatives.
BUSINESS UNITS
INSURANCE SERVICES
Insurance Services' major offerings include claims history data, motor vehicle
records, credit information and marketing and modeling services to the personal
lines property and casualty market; 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.
Insurance Services revenue for the three months ended March 31 grew 6%, or $4.4
million, to $80.1 million in 2001 from $75.7 million in 2000, driven by strong
unit performance in personal lines products and our field-based commercial
property inspection business. This growth was partially offset by a decline in
laboratory services due to the continuing effect of Triple-X legislation on the
life insurance market which was effective January 1, 2000. Triple-X is an
insurance regulation dealing with reserve requirements for guaranteed premium
term life insurance policies and was passed by most states as of January 1,
2000. This legislation drove laboratory services volume significantly higher in
the first quarter of 2000.
During the three months ended March 31, 2001, the Company acquired Insurity
Solutions Inc. and, after March 31, 2000, the Company acquired VIS'N Service
Corporation and RRS Police Records Management, Inc. Excluding acquisitions,
internal revenue growth in Insurance Services was 4% from the three months ended
March 31, 2000 to the three months ended March 31, 2001. Excluding the effect of
laboratory services, internal revenue growth in Insurance Services was 14%.
As the laboratory services business continues to struggle amidst tough economic
conditions in the life and health insurance market and the anniversary of
TripleX legislation, the Company has retained an investment banker to help us
identify strategic alternatives for this business. We have identified several
acceptable alternatives and are presently reviewing specific proposals. We
anticipate a conclusion to this process during the second quarter of 2001.
Insurance Services had first quarter 2001 operating income of $30.6 million,
resulting in an operating margin of 38.2%, compared with 35.6% in the first
quarter of 2000. The margin increase is primarily a result of the revenue growth
discussed above and continued focus on improving cost efficiencies. Excluding
acquisition amortization, operating margins were 39.8% and 37.1% for the three
months ended March 31, 2001 and 2000, respectively.
BUSINESS & GOVERNMENT SERVICES
Business & Government Services' major offerings include pre-employment
background screenings and drug testing administration services, public record
searches, credential verification, due diligence information, uniform commercial
code searches and filings, database marketing services and people and
shareholder locator information services.
Business & Government Services' revenue for the three months ended March 31,
2001 increased $7.8 million, or 12%, to $73.9 million from $66.1 million in the
first quarter of 2000, primarily due to strong
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volume growth in workplace solutions and public records. During the first
quarter of 2001, the Company acquired BTi Employee Screening Services, Inc. and
ABI Consulting, Inc. and, after March 31, 2000, acquired Cat Data Group, LLC and
Drug Free Consortium, Inc. Excluding acquisitions, internal revenue growth for
Business & Government Services was 10%.
Business & Government Services had first quarter 2001 operating income of $12.7
million, resulting in an operating margin of 17.1% compared with 5.8% in the
first quarter of 2000. The margin increase is primarily a result of the revenue
growth discussed above and cost synergies realized in the integration of DBT
into the Company's public records business. Excluding acquisition amortization,
operating margins were 22.7% and 11.5% for the three months ended March 31, 2001
and 2000, respectively.
ROYALTY
First quarter royalty revenue from laser technology patents held by the Company
increased slightly to $1.7 million in 2001 from $1.5 million in 2000. The
remaining patents underlying this revenue expire between November 2004 and May
2005.
DIVESTED AND DISCONTINUED PRODUCT LINES
Divested and discontinued product lines include the operating results from
certain product lines which were, as a result of the Merger and integration of
the two public records businesses, determined to be duplicative in nature or
contrary to ChoicePoint's strategic goals and discontinued.
CORPORATE AND SHARED EXPENSES
Corporate and shared expenses represent costs of support functions, research and
development initiatives, incentives and profit sharing that benefit both
Insurance Services and Business & Government Services. The increase to $10.8
million for the period ended March 31, 2001 from $8.5 million for the period
ended March 31, 2000 is primarily due to the increase in compensation expense
recognized under employee stock plans and incentives and additional resources to
support the growth of the Company.
FINANCIAL CONDITION AND LIQUIDITY
Cash used by operations was $1.6 million for the three months ended March 31,
2001 compared to $9.4 million for the three months ended March 31, 2000. This
decrease in cash used was primarily attributable to decreased accounts
receivable and a reduction in Days Sales Outstanding as compared to March 31,
2000. During the first quarter of 2001, ChoicePoint continued to invest in
future growth. Cash used by investing activities was $41.9 million, consisting
of $29.5 million for acquisitions, $2.7 million for property and equipment and
$9.6 million for other asset additions, primarily software developed for
internal use, purchased data files, software and software developed for external
use. In the first quarter of 2000, cash used by investing activities was $101.8
million, including $79.4 million for acquisitions, $4.0 million for additions to
other assets and $5.0 million for additions to property and equipment. The
Company anticipates full year capital expenditures in the range of $40 million
to $50 million for 2001, which will be used primarily for the development of a
new public records technology platform, system upgrades and other assets,
including capitalized software development, purchased data files and software.
Cash provided by financing activities of $9.6 million in the first quarter of
2001 consisted of $6.8 million of proceeds from the exercise of stock options
and $2.8 million of net short-term borrowings. Cash provided by financing
activities of $54.8 million in the first quarter of 2000 included $45.0 million
of net proceeds from long-term debt, $7.5 million of net short-term borrowings
and $2.3 million of proceeds from the exercise of stock options.
The Company's short-term and long-term liquidity depends primarily upon its
level of net income and working capital management (accounts receivable,
accounts payable and accrued expenses) and long-term debt. In August 1997,
ChoicePoint entered into a $250.0 million unsecured revolving credit facility
(the "Credit Facility") with a group of banks (See Note 7 to the Consolidated
Financial Statements). Borrowings under the Credit Facility were $139 million at
March 31, 2001 and December 31, 2000. ChoicePoint may use additional borrowings
under the Credit Facility to finance acquisitions and for general
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corporate cash requirements. In addition, there was $3.3 million of other
long-term debt outstanding at March 31, 2001. ChoicePoint may also utilize lines
of credit with two banks for overnight borrowings. As of March 31, 2001, $3.0
million was outstanding under a line of credit.
We believe that our existing cash balance and cash flow from operations will be
sufficient to meet our working capital and capital expenditure requirements for
the next twelve months. However, any material variance of our operating results
from our projections or the investments in or acquisitions of businesses,
products or technologies could require us to obtain additional equity or debt
financing.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
excluding merger-related costs and unusual items increased $9.4 million in the
first quarter of 2001, or 25% from the first quarter of 2000, to $47.6 million.
EBITDA margins increased from 26.0% for the first quarter of 2000 to 30.6% for
the first quarter of 2001 due to ChoicePoint's strong operating performance. 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. EBITDA is not presented as a substitute for income from
operations, net income or cash flows from operating activities.
Economic Value Added ("EVA") measures the value created in excess of the cost of
capital used to run the business. The Company uses EVA as a performance measure
to make operational, capital and compensation decisions. EVA increased $4.7
million in the first quarter of 2001 due primarily to strong operating results.
EVA includes a charge for "pooling goodwill" related to the Merger of
approximately $8.1 million.
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 2000, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 138 that amends the accounting
and reporting of derivatives under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS No. 133") to exclude, among other
things, contracts for normal purchases and sales. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires the Company to measure all derivatives at fair value and
to recognize them in the Consolidated Balance Sheet as an asset or liability,
depending on ChoicePoint's rights or obligations under the applicable derivative
contract. The accounting for changes in the fair value of a derivative depends
on the intended use of the derivative and the resulting designation. Effective
January 1, 2001, ChoicePoint adopted SFAS No. 133. ChoicePoint's derivative
instruments include interest rate swap agreements which have been designated as
cash flow hedges and, as such, the effective portions of changes in fair value
are reported in other comprehensive income ("OCI") and are subsequently
reclassified into earnings when the hedged item affects earnings. These interest
rate swap agreements have been entered into to hedge the variability of cash
flows to be paid related to recognized liabilities. Changes in the fair value of
derivative instruments not designated as hedging instruments and ineffective
portions of hedges are recognized in earnings in the current period. The
adoption of SFAS 133 as of January 1, 2001, resulted in a charge to OCI of $2.8
million, net of taxes. For the three months ended March 31, 2001, the Company
recorded the ineffectiveness related to these cash flow hedges to net interest
expense. These amounts were not material.
SUBSEQUENT EVENTS
The Company acquired National Medical Review Offices, Inc., a large provider of
Medical Review Office services in California, and The Bode Technology Group,
Inc., a premier provider of DNA identification services, in April 2001. These
acquisitions will be accounted for using the purchase method.
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FORWARD-LOOKING STATEMENTS
Certain written and oral statements made by or on behalf of the Company may
constitute "forward-looking statements" as defined under the Private Securities
Litigation Reform Act of 1995. Words or phrases such as "should result," "are
expected to," "we anticipate," "we estimate," "we project," or similar
expressions 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 competition and the uncertainty of economic
conditions in general. Additional information concerning these risks and
uncertainties is contained in the Company's filings with the Securities and
Exchange Commission, including the Company's Annual Report on Form 10-K for the
year ended December 31, 2000. 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 the date of this report.
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 March 31, 2001. The information below should be read in
conjunction with Note 7 to the Consolidated Financial Statements.
As of March 31, 2001, $139 million was outstanding under the Credit Facility.
The Company has also entered into an interest rate swap agreement (the "Swap
Agreement") to reduce the impact of changes in interest rates on its Credit
Facility. The Swap Agreement has a notional amount of $125 million at March 31,
2001 and matures in August 2002. The Swap Agreement involves the exchange of
variable rate for fixed rate payments and effectively changes the Company's
interest rate exposure to a weighted average fixed rate of approximately 6.3%.
Based on the Company's overall interest rate exposure at March 31, 2001, 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
On March 7, 2001, ChoicePoint effected a three-for-two stock split in the form
of a stock dividend payable to shareholders of record as of February 16, 2001.
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
Not Applicable.
(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)
May 11, 2001 /s/ Derek V. Smith
- ------------------------- -----------------------------------------------
Date Derek V. Smith, Chairman and
Chief Executive Officer
May 11, 2001 /s/ Michael S. Wood
- ------------------------- -----------------------------------------------
Date Michael S. Wood, Chief Financial Officer
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