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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 JUNE 30, 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 July 31, 2001
----- ----------------------------
Common Stock, $.10 Par Value 62,647,587
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CHOICEPOINT INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2001
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Statements of Income (unaudited) -
Three Months Ended June 30, 2001 and 2000
and Six Months Ended June 30, 2001 and 2000 ............................. 3
Consolidated Balance Sheets
June 30, 2001 (unaudited) and December 31, 2000 ......................... 4
Consolidated Statement of Shareholders' Equity (unaudited)-
Six Months Ended June 30, 2001 .......................................... 5
Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended June 30, 2001 and 2000 ................................. 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 .................................................. 17
Item 2. Changes in Securities and Use of Proceeds .......................... 17
Item 3. Defaults Upon Senior Securities .................................... 17
Item 4. Submission of Matters to a Vote of Security Holders ................ 17
Item 5. Other Information................................................... 18
Item 6. Exhibits and Reports on Form 8-K ................................... 18
Signatures ................................................................. 19
Exhibit Index .............................................................. 20
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CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share data) 2001 2000 2001 2000
================================================================================================
Revenue $162,806 $ 148,486 $318,487 $295,206
Costs and expenses:
Cost of services 93,849 84,247 185,129 174,448
Selling, general and administrative 33,376 36,049 64,332 68,268
Merger-related costs & unusual items -- 28,949 18,009 28,949
-------- --------- -------- --------
Total costs and expenses 127,225 149,245 267,470 271,665
Operating income (loss) 35,581 (759) 51,017 23,541
Interest expense, net 2,544 3,228 5,099 6,205
-------- --------- -------- --------
Income (loss) before income taxes 33,037 (3,987) 45,918 17,336
Provision for income taxes 13,116 1,791 18,784 10,513
-------- --------- -------- --------
Net income (loss) $ 19,921 $ (5,778) $ 27,134 $ 6,823
======== ========= ======== ========
Earnings per share - basic (Notes 5 & 6) $ 0.32 $ (0.10) $ 0.44 $ 0.11
Weighted average shares - basic 61,540 59,631 61,375 59,559
Earnings per share - diluted (Notes 5 & 6) $ 0.31 $ (0.10) $ 0.42 $ 0.11
Weighted average shares - diluted 65,155 59,631 64,927 62,315
The accompanying notes are an integral part of these consolidated statements.
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CHOICEPOINT INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2001 December 31,
(In thousands, except par values) (Unaudited) 2000
============================================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 25,297 $ 44,909
Accounts receivable, net of allowance for doubtful accounts
of $4,919 in 2001 and $5,787 in 2000 129,613 109,709
Deferred income tax assets 8,374 7,788
Other current assets 15,068 15,923
--------- ---------
Total current assets 178,352 178,329
Property and equipment, net 68,977 68,792
Goodwill, net 412,581 370,232
Deferred income tax assets 17,721 10,244
Other 78,212 76,842
--------- ---------
Total Assets $ 755,843 $ 704,439
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt $ 639 $ 638
Accounts payable 29,618 31,123
Accrued salaries and bonuses 24,193 29,919
Other current liabilities 53,746 44,659
--------- ---------
Total current liabilities 108,196 106,339
Long-term debt, less current maturities 141,817 141,638
Postretirement benefit obligations 44,184 45,844
Other long-term liabilities 14,454 9,549
--------- ---------
Total liabilities 308,651 303,370
--------- ---------
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 - 62,450 in 2001 and 61,566 in 2000 6,245 6,157
Paid-in capital 280,996 258,796
Retained earnings 174,760 147,626
Accumulated other comprehensive loss (2,539) (92)
Stock held by employee benefit trusts, at cost, 723 shares in 2001
and 701 shares in 2000 (12,270) (11,418)
--------- ---------
Total shareholders' equity 447,192 401,069
--------- ---------
Total Liabilities and Shareholders' Equity $ 755,843 $ 704,439
========= =========
The accompanying notes are an integral part of these consolidated statements.
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CHOICEPOINT INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
| Stock
| Accumulated Held By
| Other Employee
Comprehensive | Common Paid-in Retained Comprehensive Benefit
(In thousands) Income | Stock Capital Earnings Loss Trusts Total
- ------------------------------------------------|--------------------------------------------------------------------------------
|
Balance, December 31, 2000 | $ 6,157 $ 258,796 $ 147,626 $ (92) $ (11,418) $ 401,069
Net Income $ 27,134 | -- -- 27,134 -- -- 27,134
Translation adjustments (11) | -- -- -- (11) -- (11)
Unrealized derivative losses on |
cash flow hedges (net of taxes of |
$1,600) (2,436) | -- -- -- (2,436) -- (2,436)
-------- |
Comprehensive income $ 24,687 |
======== |
Restricted stock plans, net | -- 852 -- -- -- 852
Stock purchased by employee |
benefit trusts | 2 (2) (852) (852)
Stock options exercised | 86 15,008 -- -- -- 15,094
Tax benefit of stock options |
exercised | -- 6,342 -- -- -- 6,342
| --------- --------- --------- -------- --------- ---------
Balance, June 30, 2001 | $ 6,245 $ 280,996 $ 174,760 $ (2,539) $ (12,270) $ 447,192
| ========= ========= ========= ======== ========= =========
The accompanying notes are an integral part of these consolidated statements.
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CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
(In thousands) 2001 2000
- ----------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 27,134 $ 6,823
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 28,604 26,779
Merger-related costs and unusual items 18,009 28,949
Compensation recognized under employee stock plans 852 78
Tax benefit of stock options exercised 6,342 2,500
Changes in assets and liabilities,
excluding effects of acquisitions and divestiture:
Accounts receivable, net (15,524) (12,879)
Deferred income taxes (6,320) (4,037)
Other current assets 659 2,034
Current liabilities, excluding debt (14,300) (22,942)
Other long-term liabilities, excluding debt (916) (1,198)
-------- --------
Net cash provided by operating activities 44,540 26,107
Cash flows from investing activities:
Acquisitions, net of cash acquired (51,209) (80,692)
Cash proceeds from sale of businesses -- 1,500
Additions to short-term investments -- 16,198
Additions to property and equipment, net (10,130) (8,692)
Additions to other assets, net (16,752) (10,062)
-------- --------
Net cash used by investing activities (78,091) (81,748)
Cash flows from financing activities:
Proceeds from long-term debt -- 75,000
Payments on long-term debt -- (55,254)
Net short-term borrowings (292) (14)
Purchases of stock held by employee benefit trust (852) --
Proceeds from exercise of stock options 15,094 4,900
-------- --------
Net cash provided by financing activities 13,950 24,632
-------- --------
Effect of foreign currency exchange rates on cash (11) (37)
-------- --------
Net decrease in cash and cash equivalents (19,612) (31,046)
Cash and cash equivalents, beginning of period 44,909 73,101
-------- --------
Cash and cash equivalents, end of period $ 25,297 $ 42,055
======== ========
The accompanying notes are an integral part of this consolidated statement.
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CHOICEPOINT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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
reflect all adjustments which are, in the opinion of management, necessary for a
fair statement of the
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financial position of ChoicePoint as of June 30, 2001 and the results of
operations for the three months and six months ended June 30, 2001 and 2000, and
the cash flows for the six months ended June 30, 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.
The Company recorded merger-related costs and unusual items of $18.0 million
during the first quarter of 2001 and $28.9 million in the second quarter of
2000. The categories of costs incurred and the accrued balances at June 30, 2001
are summarized below:
Remaining
Accrual at
(In thousands) June 30, 2001 2000
2001 Expense Expense
---------- ------- -------
Transaction costs $ -- $ -- $11,579
Personnel-related costs 596 1,832 3,780
Other merger integration costs 2,180 2,433 3,629
Asset impairments -- 12,693 6,954
Non-merger severance 548 982 2,353
Other one-time charges 94 69 654
------- ------- -------
$ 3,418 $18,009 $28,949
======= ======= =======
In the first quarter of 2001, the personnel-related costs of $1.8 million
consisted 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 consisted primarily of duplicate
data and lease exit costs. Asset impairments of $12.7 million primarily
reflected 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
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
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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. For the three months ended June 30, pass-through revenue
was $114.2 million in 2001 and $98.2 million in 2000 and for the six months
ended June 30, pass-through revenue was $223.4 million in 2001 and $202.4
million in 2000.
5. EARNINGS PER SHARE
The income amount used in the numerator of the Company's earnings per share
calculations is the same for both basic and diluted earnings per share. The
average outstanding shares used in the denominator of the calculation for
diluted earnings per share includes the dilutive effect of stock options. The
diluted share base for the quarter ended June 30, 2000 excludes 2.9 million
incremental shares related to employee stock options due to their antidilutive
effect as a result of the Company's reported net loss.
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 June 30, 2001. In addition, there
was $3.5 million of other long-term debt outstanding at June 30, 2001. There
were no short-term borrowings at June 30, 2001.
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. As
of June 30, 2001, the cumulative change in OCI related to these derivatives is
$2.4 million, net of taxes. For the three months and six months ended June 30,
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 six months 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.
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10. COMPREHENSIVE INCOME
Total comprehensive income for the three months and six months ended June 30,
2001 and 2000 was as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2001 2000 2001 2000
------- ------- -------- ------
Net income (loss) $19,921 $(5,778) $ 27,134 $6,823
Translation adjustments 99 (41) (11) 157
Change in unrealized net loss on
investments -- 285 -- 255
Unrealized derivative gain (loss) on
cash flow hedges (net of taxes) 343 -- (2,436) --
------- ------- -------- ------
Comprehensive income $20,363 $(5,534) $ 24,687 $7,235
======= ======= ======== ======
11. ACQUISITIONS
During the six months ended June 30, 2001, the Company acquired BTi Employee
Screening Services, Inc., a pre-employment background screening organization,
ABI Consulting, Inc., a third-party administrator of employee drug testing
programs, Insurity Solutions Inc., a provider of Internet-based rating,
underwriting and policy-servicing tools, The Bode Technology Group, Inc., a
premier provider of DNA identification services, and certain assets of National
Medical Review Offices, Inc., a large provider of Medical Review Office
services. The total purchase price of the acquisitions, which were accounted for
using the purchase method, was approximately $51.4 million, with approximately
$51.1 million of that amount allocated to goodwill. As of June 30, 2001,
ChoicePoint has accrued approximately $2.8 million for transaction-related costs
including lease terminations and personnel-related costs related to these
acquisitions.
12. 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 six months ended June 30, 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
June 30, 2001 June 30, 2000
----------------------------------------- -----------------------------------------
Operating Income Operating
before Operating Income before Operating
Acquisition Income Acquisition Income
(In thousands) Revenue Amortization (Loss) Revenue Amortization (Loss)
-------- ----------------- ---------- -------- ------------- ----------
Insurance $ 83,934 $ 35,484 $ 33,990 $ 72,904 $ 29,051 $ 27,872
B&G 77,065 18,677 14,329 71,026 13,878 10,118
Royalty 1,807 1,191 1,191 1,648 1,017 1,017
Divested & Discontinued -- -- -- 2,908 847 847
Corporate and Shared
Expenses -- (13,929) (13,929) -- (11,664) (11,664)
Merger-related Costs and
Unusual Items (Note 2) -- -- -- -- (28,949) (28,949)
-------- -------- -------- -------- -------- --------
Total $162,806 $ 41,423 $ 35,581 $148,486 $ 4,180 $ (759)
======== ======== ======== ======== ======== ========
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Six months ended Six months ended
June 30, 2001 June 30, 2000
----------------------------------------- -----------------------------------------
Operating Income Operating
before Operating Income before Operating
Acquisition Income Acquisition Income
(In thousands) Revenue Amortization (Loss) Revenue Amortization (Loss)
-------- -------- --------- -------- ------------- --------
Insurance $163,998 $ 67,372 $ 64,543 $148,621 $ 57,124 $ 54,814
B&G 151,025 35,439 27,013 137,167 21,466 13,983
Royalty 3,464 2,242 2,242 3,191 1,902 1,902
Divested & Discontinued -- -- -- 6,227 2,115 1,908
Corporate and Shared
Expenses -- (24,772) (24,772) -- (20,117) (20,117)
Merger-related Costs and
Unusual Items (Note 2) -- (18,009) (18,009) -- (28,949) (28,949)
-------- -------- -------- -------- -------- --------
Total $318,487 $ 62,272 $ 51,017 $295,206 $ 33,541 $ 23,541
======== ======== ======== ======== ======== ========
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 and six months ended June 30,
2001 and 2000 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2001 2000 2001 2000
------- ------- ------- -------
Insurance $ 4,219 $ 3,913 $ 8,325 $ 7,884
B&G 8,891 7,605 17,607 15,845
Royalty 425 426 850 852
Divested & Discontinued -- 311 -- 829
Corporate 949 676 1,822 1,369
------- ------- ------- -------
Total $14,484 $12,931 $28,604 $26,779
======= ======= ======= =======
Substantially all of the Company's operations are located in the United States
and no customer represents more than 10% of total operating revenue.
13. SUBSEQUENT EVENTS
In July 2001, the Company acquired the pre-employment and drug testing
businesses of Pinkerton Services Corporation, a unit of Securitas AB of Sweden,
and Marketing Information and Technology, Inc., a provider of large-scale direct
marketing systems for FORTUNE 500 clients for aggregate consideration of
approximately $106 million. These acquisitions will be accounted for using the
purchase method.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" effective July 1, 2001 and SFAS No. 142, "Goodwill and
Other Intangible Assets" effective for the Company on January 1, 2002. SFAS No.
141 prohibits pooling of interests accounting for acquisitions initiated after
June 30, 2001. SFAS No. 142 requires companies to cease amortizing goodwill that
existed at June 30, 2001 on December 31, 2001. Any goodwill resulting from
acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142
also broadens the criteria for recording intangible assets separate from
goodwill and establishes a new method of testing goodwill for impairment on an
annual basis or on an interim basis if an event occurs or circumstances change
that would reduce the fair value of a
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reporting unit below its carrying value. The provisions of SFAS No. 142 which
apply to goodwill and intangible assets acquired prior to June 30, 2001 will be
adopted by ChoicePoint on January 1, 2002. We expect the adoption of these
accounting standards will result in certain of our intangibles being subsumed
into goodwill and will result in the discontinuation of amortization of these
assets and goodwill; however, impairment reviews may result in future periodic
write-downs.
In July 2001, the Company and certain of its subsidiaries entered into an
agreement (the "Receivables Facility") with a financial institution whereby it
may sell on a continuous basis and, without recourse, an undivided interest in
all eligible trade accounts receivable subject to limitations. The Company will
maintain the balance in the designated pool of accounts receivable sold by
selling undivided interests in new receivables as existing receivables are
collected. The Receivables Facility permits the advance of up to $100 million on
the sale of accounts receivable.
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 stock split.
RESULTS OF OPERATIONS
REVENUE
The Company's total revenue for the second quarter of 2001 was $162.8 million,
an increase of 10% over the second quarter of 2000. For the first six months of
2001, revenue was $318.5 million, an increase of 8% over the first six months of
2000. Consolidated internal revenue growth, which excludes the effect of revenue
from purchased acquisitions and divestitures, was approximately 6% for the
second quarter of 2001 and 6% for the six months ended June 30, 2001. Our
revenue growth was driven primarily from continued strong unit performances in
all of the Insurance Services' product lines, except Osborn Laboratories, and
Business & Government Services' workplace solutions and public records
businesses.
SEGMENT REVENUE
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.
In the second quarter of 2001, Insurance Services revenue was $83.9 million, up
15%, or $11.0 million, from $72.9 million in 2000. For the first six months of
2001, Insurance Services revenue grew 10%, or $15.4 million, to $164.0 million
from $148.6 million in the prior year. This growth was driven by strong unit
performance in personal lines products, our field-based commercial property
inspection, modeling and
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marketing, and customized rating and issuance software businesses. This growth
was partially offset by a decline in laboratory services due to tough economic
conditions in the life and health insurance market and 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.
As the laboratory services' business continues to struggle amidst tough economic
conditions in the life and health insurance market, 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 third
quarter of 2001.
During the six months ended June 30, 2001, the Company acquired Insurity
Solutions Inc. and, after June 30, 2000, the Company acquired RRS Police Records
Management, Inc. and the assets of VIS'N Service Corporation. Excluding
acquisitions, internal revenue growth in Insurance Services was 12% from the
three months ended June 30, 2000 to the three months ended June 30, 2001.
Excluding the effect of laboratory services, internal revenue growth in
Insurance Services for the second quarter was 15%.
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 second quarter increased $6.1
million, or 8%, to $77.1 million from $71.0 million in the second quarter of
2000. For the six months ended June 30, 2001, Business & Government Services'
revenue was $151.0 million up 10%, or $13.8 million, from $137.2 million in the
prior year. This growth was driven primarily by the integration of recent
acquisitions in workplace solutions, offset by slower growth in public records
and direct marketing due to economic conditions. During the first six months of
2001, the Company acquired BTi Employee Screening Services, Inc., ABI
Consulting, Inc., The Bode Technology Group, Inc., and certain assets of
National Medical Review Offices, Inc., and after June 30, 2000, acquired certain
assets of Cat Data Group, LLC and Drug Free Consortium, Inc. Excluding
acquisitions, internal revenue growth for Business & Government Services was 1%
for the second quarter of 2001.
Second quarter royalty revenue from laser technology patents held by the Company
increased slightly to $1.8 million in 2001 from $1.6 million in 2000. For the
six months ended June 30, royalty revenue was $3.5 million in 2001 compared with
$3.2 million in 2000. The remaining patents underlying this revenue expire
between November 2004 and May 2005.
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, hence, discontinued.
MERGER-RELATED COSTS AND UNUSUAL ITEMS
Merger-related costs and unusual items of $18.0 million in the first quarter of
2001 and $28.9 million in the second quarter of 2000 primarily related to the
Merger in May 2000 and related integration of the Company's two public records
businesses in connection with this Merger, the plan for which was finalized in
the first quarter of 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 was $35.6 million or 21.9% as a percent of
revenue in the second quarter of 2001, up from an operating loss of $.8 million
in the second quarter of the prior year. Excluding merger-related costs and
unusual items in the second quarter of 2000, operating income was $28.2 million
or 19.0%
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of revenue. For the first six months of 2001, operating income was $51.0
million, up from $23.5 million for the first six months of 2000. Excluding
merger-related costs and unusual items, for the first six months of 2001
operating income was $69.0 million or 21.7% as a percent of revenue, up from
$52.5 million or 17.8% of revenue in the prior year. The improvement in
operating 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. Acquisition
amortization, which includes goodwill and other intangible amortization related
to acquisitions, was $5.8 million in the second quarter of 2001 and $4.9 million
for the second quarter of the prior year. For the first six months of 2001,
acquisition amortization was $11.3 million, an increase of $1.3 million over the
prior year due to acquisitions in the second half of 2000 and the first half of
2001.
SEGMENT OPERATING INCOME
Insurance Services had second quarter 2001 operating income of $34.0 million,
resulting in an operating margin of 40.5%, compared with 38.2% in the second
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, second quarter operating margins were 42.3% in 2001
and 39.8% in 2000.
Business & Government Services had second quarter 2001 operating income of $14.3
million, resulting in an operating margin of 18.6% compared with 14.2% in the
second 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,
second quarter operating margins were 24.2% in 2001 and 19.5% in 2000.
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. Corporate and shared
expenses were $13.9 million for the second quarter of 2001, up from $11.7
million in 2000. For the six months ended June 30, corporate and shared expenses
were $24.8 million in 2001, up from $20.1 million in 2000. The increase in
corporate and shared expenses 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.
INTEREST EXPENSE, NET
Interest expense, net was $2.5 million for the second quarter of 2001, down from
$3.2 million for the second quarter of 2000. For the six months ended June 30,
2001, interest expense, net was $5.1 million, a decrease of $1.1 million from
the first six months of 2000 due to lower debt levels and interest rates.
Interest expense for 2000 is net of interest income from short-term investments
of $464,000 for the second quarter and $882,000 for the first six months.
INCOME TAXES
ChoicePoint's overall effective tax rate was 39.7% for the second quarter of
2001, down from 40.7%, excluding merger-related costs and unusual items, for the
three months ended June 30, 2000. For the first six months of 2001, our
effective tax rate was 40.9% compared with 60.6% for the first six months of the
prior year. Excluding merger-related costs and unusual items, our effective tax
rate for the six months ended June 30, 2001 was 39.7%, down from 40.8% for the
same period of 2000. The decrease in effective tax rates excluding
merger-related costs and unusual items from 2000 to 2001 is primarily due to
implementation of state and local tax planning initiatives.
FINANCIAL CONDITION AND LIQUIDITY
Cash and cash equivalents totaled $25.3 million as of June 30, 2001. Cash
provided by operations was $44.5 million for the first six months of 2001
compared to $26.1 million for the first six months of 2000. The increase in cash
provided by operations was primarily attributable to increased revenue and a
reduction in Days Sales Outstanding as compared to June 30, 2000. During the
first six months of 2001, ChoicePoint continued to invest in future growth. Cash
used by investing activities was $78.1 million, consisting of $51.2 million for
acquisitions, $10.1 million for property and equipment and $16.8 million for
other asset
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additions, primarily software developed for internal use, purchased data files
and software, and software developed for external use. In the first six months
of 2000, cash used by investing activities was $81.7 million, including $80.7
million for acquisitions, $8.7 million for additions to property and equipment
and $10.1 million for additions to other assets, offset by additions to
short-term investments of $16.2 million. The Company anticipates full-year
capital expenditures in the range of $50 million to $55 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 $14.0 million in the first six months of 2001 consisted of $15.1
million of proceeds from the exercise of stock options offset by purchases of
stock held by our employee benefit trust of $1.0 million. Cash provided by
financing activities of $24.6 million in the first six months of 2000 included
$19.7 million of net proceeds from long-term debt and $4.9 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 million unsecured revolving credit facility (the
"Credit Facility") with a group of banks (See Note 7 to the Consolidated
Financial Statements) which expires in August 2002. Borrowings under the Credit
Facility were $139 million at June 30, 2001 and December 31, 2000. In connection
with the acquisitions discussed in Note 13 to the Consolidated Financial
Statements, in July 2001, the Company borrowed an additional $90 million under
its Credit Facility. ChoicePoint may use additional borrowings under the Credit
Facility to finance acquisitions and for general corporate cash requirements. In
addition, there was $3.5 million of other long-term debt outstanding at June 30,
2001. ChoicePoint may also utilize lines of credit with two banks for overnight
borrowings. As of June 30, 2001, there were no amounts 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 $8.9 million in the
second quarter of 2001, or 22% from the second quarter of 2000, to $50.1
million. For the first six months ended June 30, EBITDA increased $18.4 million,
or 23%, to $97.6 million in 2001. EBITDA margins increased from 27.7% for the
second quarter of 2000 to 30.8% for the second 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 $2.8
million in the second quarter of 2001 and $7.5 million for the six months ended
June 30, 2001 due primarily to strong operating results. EVA for the quarter
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 PRONOUNCEMENTS
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
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exclude, among other things, contracts for normal purchases and sales (See Note
8 to the Consolidated Financial Statements). Effective January 1, 2001,
ChoicePoint adopted SFAS No. 133. The adoption of SFAS No. 133 as of January 1,
2001, resulted in a charge to Other Comprehensive Income of $2.8 million, net of
taxes. For the three months and six months ended June 30, 2001, the Company
recorded the ineffectiveness related to these cash flow hedges to net interest
expense. These amounts were not material.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" effective July 1, 2001 and SFAS No. 142, "Goodwill and
Other Intangible Assets" effective for the Company on January 1, 2002. SFAS No.
141 prohibits pooling of interests accounting for acquisitions initiated after
June 30, 2001. SFAS No. 142 requires companies to cease amortizing goodwill that
existed at June 30, 2001 on December 31, 2001. Any goodwill resulting from
acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142
also broadens the criteria for recording intangible assets separate from
goodwill and establishes a new method of testing goodwill for impairment on an
annual basis or on an interim basis if an event occurs or circumstances change
that would reduce the fair value of a reporting unit below its carrying value.
The provisions of SFAS No. 142 which apply to goodwill and intangible assets
acquired prior to June 30, 2001 will be adopted by ChoicePoint on January 1,
2002. We expect the adoption of these accounting standards will result in
certain of our intangibles being subsumed into goodwill and will result in the
discontinuation of amortization of these assets and goodwill; however,
impairment reviews may result in future periodic write-downs.
SUBSEQUENT EVENTS
In July 2001, the Company acquired the pre-employment and drug testing
businesses of Pinkerton Services Corporation, a unit of Securitas AB of Sweden,
and Marketing Information and Technology, Inc., a provider of large-scale direct
marketing systems for FORTUNE 500 clients for aggregate consideration of
approximately $106 million. These acquisitions will be accounted for using the
purchase method.
In July 2001, the Company and certain of its subsidiaries entered into an
agreement (the "Receivables Facility") with a financial institution whereby it
may sell on a continuous basis and, without recourse, an undivided interest in
all eligible trade accounts receivable subject to limitations. The Company will
maintain the balance in the designated pool of accounts receivable sold by
selling undivided interests in new receivables as existing receivables are
collected. The Receivables Facility permits the advance of up to $100 million on
the sale of accounts receivable.
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.
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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 June 30, 2001. The information below should be read in
conjunction with Note 7 to the Consolidated Financial Statements.
As of June 30, 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 had a notional amount of $125 million at June 30,
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 June 30, 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. As noted
above, as of July 2001, $229 million is outstanding under the Credit Facility,
of which $125 million is hedged with interest rate swaps. A one percent change
in interest rates would result in a $1.0 million change in annual interest
expense.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ChoicePoint is involved in litigation from time to time in the ordinary course
of its business. The Company does not believe that the outcome of any pending or
threatened litigation will have a material adverse effect on the financial
position or results of operations of ChoicePoint. However, as is inherent in
legal proceedings where issues may be decided by finders of fact, there is a
risk that unpredictable decisions adverse to the Company could be reached.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 2, 2001 the Company held its regular Annual Meeting of Shareholders. The
following matters were submitted to a vote of security holders:
(a) Votes cast for or withheld regarding the re-election of two Directors
for terms expiring in 2003:
FOR WITHHELD
Douglas C. Curling 52,413,668 337,545
Kenneth G. Langone 52,407,687 343,526
Votes cast for or withheld regarding the re-election of one Director
for a term expiring in 2004:
FOR WITHHELD
Derek V. Smith 46,629,299 6,121,914
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Votes cast for or withheld regarding the election of two Directors for
terms expiring in 2004:
FOR WITHHELD
Thomas M. Coughlin 52,382,258 368,955
Bonnie G. Hill 52,394,882 356,331
Directors whose terms of office continue after the meeting are as
follows:
Terms expiring in 2002 Terms expiring in 2003 Terms expiring in 2004
Ron D. Barbaro Douglas C. Curling Thomas M. Coughlin
Charles G. Betty James M. Denny Bonnie G. Hill
Bernard Marcus Charles I. Story Derek V. Smith
Kenneth G. Langone
(b) Votes cast to amend the ChoicePoint Inc. 1997 Omnibus Stock Incentive
Plan to increase the number of shares of common stock that may be
issued under the plan from 12 million to 15 million:
FOR AGAINST ABSTAIN
32,090,803 20,509,120 151,290
(c) Ratification of the appointment of Arthur Andersen LLP as independent
public accountants of the Company for the fiscal year ending December
31, 2001:
FOR AGAINST ABSTAIN
52,493,613 123,902 133,698
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Loan Agreement, dated as of July 2, 2001, among ChoicePoint Financial
Inc., as Borrower, ChoicePoint Inc., as Initial Servicer, Three Pillars
Funding Corporation, as Lender, and SunTrust Equitable Securities
Corporation, as Administrator.
10.2 Receivables Sale and Contribution Agreement, dated as of July 2, 2001,
among ChoicePoint Services Inc., PRC Corporation, ChoicePoint Business
and Government Services Inc., ChoicePoint Direct Inc., Statewide Data
Services, Inc., I.R.S.C., Inc., ChoicePoint Public Records Inc., Patlex
Corporation, National Safety Alliance, Incorporated, BTi Employee
Screening Services, Inc. and each other subsidiary of ChoicePoint Inc.
that hereafter becomes a party hereto, as Originators, and ChoicePoint
Capital Inc., as Buyer.
10.3 Receivables Sale Agreement, dated as of July 2, 2001, among ChoicePoint
Capital Inc., as Seller, and ChoicePoint Financial Inc., as Purchaser.
(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)
August 10, 2001 /s/ Derek V. Smith
- -------------------- -------------------------------------------
Date Derek V. Smith, Chairman and
Chief Executive Officer
August 10, 2001 /s/ Michael S. Wood
- -------------------- -------------------------------------------
Date Michael S. Wood, Chief Financial Officer
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EXHIBIT INDEX
Exhibit Description of Exhibit
- ------- ----------------------
10.1 Loan Agreement, dated as of July 2, 2001, among ChoicePoint Financial
Inc., as Borrower, ChoicePoint Inc., as Initial Servicer, Three Pillars
Funding Corporation, as Lender, and SunTrust Equitable Securities
Corporation, as Administrator.
10.2 Receivables Sale and Contribution Agreement, dated as of July 2, 2001,
among ChoicePoint Services Inc., PRC Corporation, ChoicePoint Business
and Government Services Inc., ChoicePoint Direct Inc., Statewide Data
Services, Inc., I.R.S.C., Inc., ChoicePoint Public Records Inc., Patlex
Corporation, National Safety Alliance, Incorporated, BTi Employee
Screening Services, Inc. and each other subsidiary of ChoicePoint Inc.
that hereafter becomes a party hereto, as Originators, and ChoicePoint
Capital Inc., as Buyer.
10.3 Receivables Sale Agreement, dated as of July 2, 2001, among ChoicePoint
Capital Inc., as Seller, and ChoicePoint Financial Inc., as Purchaser.
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