.
.
.
EXHIBIT 13
FINANCIAL HIGHLIGHTS(a)
(In thousands, except per share
and employee data) 2002 2001 2000 1999 1998 1997
-------- -------- -------- -------- -------- --------
Total revenue $791,562 $693,995 $630,925 $545,989 $472,201 $460,661
Revenue without reimbursable
expenses 753,042 655,967 593,533 507,858 466,132 460,661
Operating income 193,232 119,508 90,053 83,270 77,899 67,896
Net income before change in
accounting principle(b) 114,243 50,334 43,822 42,197 42,315 35,045
EPS before change in accounting
principle, diluted(c) 1.01 0.58 0.52 0.52 0.52 0.44
Total assets 979,010 832,392 704,439 667,780 623,165 442,126
Debt 182,446 158,816 142,276 187,790 192,217 96,050
Total shareholders' equity 622,607 484,821 401,069 319,309 243,465 204,328
Employees (full-time equivalents) 4,400 4,200 4,200 4,000 3,800 3,900
Financial information excluding merger-related costs, unusual items, change in
accounting principle and gain (loss) on sale(d):
Operating income 200,616 148,370 119,002 83,157 72,850 60,067
Net income 118,792 83,138 64,402 42,179 39,380 30,672
EPS, diluted(c) 1.33 0.95 0.77 0.52 0.49 0.39
EBITDA 246,375 207,882 172,621 131,745 112,522 93,744
(a) All financial information has been restated to reflect the merger of
ChoicePoint and DBT Online, Inc. in 2000, which has been accounted for
as a pooling of interests, and the stock splits paid in the form of
stock dividends effective November 24, 1999, March 7, 2001 and June 6,
2002.
(b) In 2002, the Company recorded a goodwill impairment charge of $24.4
million, net of taxes in accordance with the adoption of FASB Statement
No. 142, "Goodwill and Other Intangible Assets."
(c) EPS for 1997 assumes pro forma diluted shares outstanding of 78.9
million due to the spin-off in August 1997.
(d) EBITDA represents earnings before interest, taxes, depreciation, and
amortization, excluding merger-related costs, unusual items, and gain
(loss) on sale of business. The Company has included EBITDA data and
financial information excluding merger-related costs, unusual items,
gain (loss) on sale, and change in accounting principle (which are not
measures of financial performance under accounting principles generally
accepted in the United States) because such data is used by certain
investors to analyze and compare companies on a basis of operating
performance, leverage and liquidity, and to determine a company's
ability to service debt. These measures are not presented as a
substitute for operating income, net income or cash flows from
operating activities.
BUSINESS DESCRIPTION
ChoicePoint provides information solutions to mitigate the risks that threaten
so many facets of our personal and business lives. Capitalizing on robust data
and unique databases - and technological expertise to analyze that data and add
intelligence to it - ChoicePoint is a leading provider of identification and
credential verification services to business, government, and individual
customers. By transforming data into Actionable Intelligence(R), ChoicePoint
helps those customers reduce risk and better manage business relationships.
ChoicePoint common stock trades on the New York Stock Exchange (NYSE) under the
symbol CPS.
ChoicePoint, headquartered in the Atlanta area, is organized into three business
segments: Insurance Services, Business & Government Services, and Marketing
Services. Insurance Services includes the Property & Casualty Personal Lines and
Property & Casualty Commercial Lines businesses. Business & Government Services
includes the WorkPlace Solutions, Public Records, and Nursery businesses.
Marketing Services includes the ChoicePoint Precision Marketing businesses.
CONTENTS
Letter to Shareholders 2
Critical Needs 6
Compelling Solutions 8
Q & A with Derek Smith
and Doug Curling 12
Financial Review 17
Shareholder Information 48
Board of Directors INSIDE BACK COVER
[CHOICEPOINT LOGO]
Management's Discussion and Analysis 18
Report of Management 26
Report of Independent Auditors 27
Report of Independent Public Accountants 28
Explanatory Note Regarding
Report of Independent Public Accountants 28
Consolidated Statements of Income 29
Consolidated Balance Sheets 30
Consolidated Statements of Shareholders' Equity 31
Consolidated Statements of Cash Flows 32
Notes to Consolidated Financial Statements 33
Shareholder Information 48
Board of Directors, Elected Officers and
Corporate Governance 49
ChoicePoint is committed to full disclosure of its accounting policies as well
as other administrative procedures within the Company. For instance, as of
December 31, 2002, the only off-balance sheet assets or liabilities are two
synthetic leases on the properties of the Company's corporate headquarters.
Similarly, ChoicePoint employees may direct their retirement funds to a variety
of investments vehicles, only one of which is ChoicePoint stock. Shareholders
who have any questions or concerns about corporate policies and disclosure are
urged to contact the Company's Investor Relations office.
CHOICEPOINT 2002 ANNUAL REPORT 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
ChoicePoint 2002 Annual Report
OVERVIEW
ChoicePoint Inc. (NYSE:CPS), a Georgia corporation ("ChoicePoint" or
the "Company"), is the leading provider of identification and credential
verification services for making smarter decisions in a world challenged
by the reality of risks. Serving the needs of business, government, non-
profit organizations and individuals, ChoicePoint works to create a safer
and more secure society through the responsible use of information
while ensuring the protection of personal privacy. For more information,
visit the Company's Web site at www.choicepoint.com.
ChoicePoint's businesses are focused on three primary markets -
Insurance Services, Business & Government Services and Marketing Services.
The Insurance Services group ("Insurance") provides information
products and services used in the underwriting and claims processes by property
and casualty insurers. Major offerings to the personal lines property and
casualty market include claims history data, motor vehicle records, police
records, credit information and modeling services. Additionally, ChoicePoint
provides customized policy rating and issuance software and property inspections
and audits to the commercial insurance market. Prior to the divestiture in
August 2001 (see Note 4 to the Consolidated Financial Statements), ChoicePoint
also provided laboratory testing services and related technology solutions to
the life and health insurance market.
The Business & Government Services group ("B&G") provides information
products and services to Fortune 1000 corporations, consumer finance companies,
asset-based lenders, legal and professional service providers, health care
service providers, non-profit organizations, small businesses, consumers and
federal, state and local government agencies. Major offerings include employment
background screenings and drug testing administration services, public record
searches, credential verification, due diligence information, Uniform Commercial
Code searches and filings, DNA identification services, authentication services,
and people and shareholder locator information searches.
The Marketing Services group ("Marketing Services") provides direct
marketing services to Fortune 1000 corporations, insurance companies and
financial institutions. Marketing Services offers a full complement of products
including data, print fulfillment, database and campaign management services, as
well as Web-based solutions.
RESULTS OF OPERATIONS
Revenue
(In thousands)
Year Ended December 31, 2002 2001 % Change 2000 % Change
-------- -------- -------- -------- --------
Revenue:
Insurance Services $332,521 $281,046 18% $235,737 19%
Business & Government Services 308,761 267,409 15% 233,270 15%
Marketing Services 105,833 76,461 38% 63,549 20%
Royalty 5,855 6,808 -14% 6,364 7%
-------- -------- --- -------- ---
Core Revenue 752,970 631,724 19% 538,920 17%
-------- -------- --- -------- ---
Divested and discontinued product lines 72 24,243 n/m 54,613 n/m
-------- -------- --- -------- ---
Revenue without reimbursable expenses 753,042 655,967 15% 593,533 11%
Reimbursable expenses per EITF 01-14 38,520 38,028 37,392
-------- -------- --- -------- ---
Total revenue $791,562 $693,995 14% $630,925 10%
======== ======== === ======== ===
The Company's revenue grew 14%, or $97.6 million, to $791.6 million in 2002 and
10%, or $63.1 million, to $694.0 million in 2001 from $630.9 million in 2000.
This revenue includes certain reimbursed out-of-pocket expenses in the Marketing
Services segment totaling $38.5 million in 2002, $38.0 million in 2001, and
$37.4 million in 2000. In accordance with Emerging Issues Task Force ("EITF")
No. 01-14 (see Note 3 to the Consolidated Financial Statements), the Company has
presented these reimbursable expenses on a gross basis as revenues and expenses.
As these expenses are fully reimbursed, without mark-up, by our clients and in a
majority of the cases prepaid by the customers, there is no impact on operating
income, net income, earnings per share ("EPS"), cash flows or the balance sheet;
therefore, we have excluded the impact of these reimbursable expenses from the
discussions below. We believe that core revenue is a more appropriate way to
measure the revenue growth of our Company; therefore, all of the following
revenue discussions are based on core revenue which excludes the impact of the
reimbursable expenses and divested and discontinued product lines.
CONSOLIDATED RESULTS
2002 vs. 2001
Core revenue, which excludes revenue from reimbursable expenses, our laboratory
services business sold in August 2001 and other discontinued product lines, grew
19%, or $121.2 million, from 2001 to 2002. Consolidated internal revenue growth,
which also excludes the effect of revenue from acquisitions, was 12% in 2002.
Revenue growth in 2002 was driven primarily from continued strong unit
performances in all of the Insurance products and services, contributions from
our homeland security initiatives in our B&G product lines and acquisitions in
our Marketing Services segment.
2001 vs. 2000
Core revenue grew 17%, or $92.8 million, from 2000 to 2001. Consolidated
internal revenue growth, which excludes the effect of revenue from purchased
acquisitions and divestitures, was 8% in 2001. Revenue growth in 2001 resulted
primarily from strong unit growth across our Insurance products and services and
acquisitions in our B&G and Marketing Services segments.
18 CHOICEPOINT 2002 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
ChoicePoint 2002 Annual Report
BUSINESS SEGMENT RESULTS
Insurance Services
2002 vs. 2001
In 2002, Insurance Services' revenue was $332.5 million, up 18%, or $51.5
million, from $281.0 million in 2001. This growth was driven by continued strong
unit performance in the personal lines business led by volume increases in
C.L.U.E.(R) Property, NCF(TM) (National Credit File) and C.L.U.E. Auto, and
strong demand for our commercial insurance products. During 2002, the Company
acquired L&S Report Service, Inc. and Accident Report Services, Inc., to further
enhance the Company's police records product line in our personal lines
business. Also, in August 2001, the Company sold its laboratory services
business. Excluding these transactions, internal revenue growth in Insurance
Services was 18% for 2002 over 2001.
2001 vs. 2000
Revenue from Insurance Services grew $45.3 million, or 19%, to $281.0 million
from $235.7 million in 2000, driven by strong unit performance, the introduction
of new personal lines products, and continued growth in our commercial
inspection and commercial software businesses. During 2001, the Company acquired
Insurity Solutions, Inc., a provider of Internet-based rating, underwriting, and
policy-servicing tools to complement its existing policy rating and issuance
software business, and disposed of a component of its laboratory services
business. Excluding these transactions, comparable internal revenue growth over
2000 was 17%.
Business & Government Services
2002 vs. 2001
Business & Government Services' revenue for 2002 increased $41.4 million, or
15%, to $308.8 million from $267.4 million in 2001. This growth was driven
primarily by our continued success in our homeland security initiatives
including providing analytical and data services to U.S. law enforcement and
background screening for transportation security agencies. Excluding homeland
security initiatives, revenue growth from share gains in the core business and
from new products such as National Criminal File, DEBTOR Discovery(SM) and
AutoTrack(R) International was offset by the continued soft hiring and
economic environments. During 2002, the Company acquired Resident Data, Inc., a
residential screening services provider to apartment management companies, and
Vital Chek Network, Inc. ("VitalChek"), a provider of proprietary technology and
data management services that facilitate the remote ordering of certified birth,
death, marriage and divorce certificates, to further expand its B&G product line
offerings. Comparable internal growth in B&G from 2001 to 2002 excluding these
acquisitions was 8%.
2001 vs. 2000
Revenue from Business & Government Services was $267.4 million in 2001, an
increase of $34.1 million, or 15%, from $233.3 million in 2000. This revenue
increase was primarily due to acquisitions made in 2001, tempered by general
economic conditions which impacted our base business. During 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; The Bode Technology Group, Inc., a premier
provider of DNA identification services; the pre-employment and drug testing
businesses of Pinkerton's, Inc., a unit of Securitas AB of Sweden; and certain
assets of National Medical Review Offices, Inc., a large provider of medical
review office services. There was no comparable internal revenue growth for
Business & Government Services excluding these acquisitions for 2001 compared to
2000.
Marketing Services
2002 vs. 2001
In 2002, core revenue increased $29.4 million, or 38%, to $105.8 million from
$76.5 million, primarily due to acquisitions. During 2002, the Company acquired
the insurance market on-line consumer credit reporting, marketing and pre-screen
list extract services business of Experian Information Solutions, Inc. and Total
eData Corporation, an e-mail database company which gives ChoicePoint an entry
into a new and growing market. Excluding these acquisitions, internal revenue
growth was 5% for 2002 over 2001.
2001 vs. 2000
Revenue from Marketing Services was $76.5 million in 2001, an increase of $12.9
million, or 20%, from $63.6 million in 2000. This increase was driven primarily
by the acquisition of Marketing Information & Technology, Inc., a provider of
large-scale marketing systems for Fortune 500 clients, in July 2001 and the
expansion of our telemarketing business, offset slightly by the impact of
general economic conditions on our direct mailing and database fulfillment
product lines. Excluding the acquisition, comparable internal revenue growth
over 2000 was 2%.
OTHER RESULTS
Royalty revenue from laser technology patents held by the Company decreased to
$5.9 million from $6.8 million in 2001 and $6.4 million in 2000. The remaining
patents underlying this revenue expire between November 2004 and May 2005 (see
Note 3 to the Consolidated Financial Statements).
Divested and discontinued product lines include the operating results
from the laboratory services business sold in August 2001, ChoicePoint Limited,
the Company's United Kingdom-based insurance division sold in January 2000, and
certain other product lines which were, primarily as a result of the merger with
DBT Online, Inc. ("DBT") in 2000 and the subsequent integration of the two
public records businesses, determined to be duplicative in nature or contrary to
ChoicePoint's strategic goals and, hence, discontinued (see Note 4 to the
Consolidated Financial Statements).
CHOICEPOINT 2002 ANNUAL REPORT 19
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
ChoicePoint 2002 Annual Report
OPERATING INCOME
(In thousands)
Pro forma
Year Ended December 31, 2002 2001(*) 2001 2000
--------- --------- --------- ---------
Operating income:
Insurance Services $ 155,391 $ 129,291 $ 127,745 $ 101,994
Business & Government Services 69,424 56,203 45,089 29,377
Marketing Services 32,866 26,391 22,185 19,285
Royalty 3,326 4,400 4,400 3,804
Reimbursable expenses -- -- -- --
Divested and discontinued product lines (206) (968) (1,771) 8,045
Corporate and shared expenses (60,185) (49,278) (49,278) (43,503)
--------- --------- --------- ---------
Operating income before merger-related costs,
unusual items, and loss on sale of business 200,616 166,039 148,370 119,002
Merger-related costs and unusual items (7,384) (18,009) (18,009) (28,949)
Loss on sale of business -- (10,853) (10,853) --
--------- --------- --------- ---------
Operating income $ 193,232 $ 137,177 $ 119,508 $ 90,053
--------- --------- --------- ---------
OPERATING MARGINS
Pro forma
Year Ended December 31, 2002 2001(*) 2001 2000
---- --------- ---- ----
Operating income as reported, as a percentage of total revenue 24.4% 19.8% 17.2% 14.3%
Operating income before merger-related costs,
unusual items, and loss on sale of business,
as a percentage of revenue without reimbursable expenses 26.6% 25.3% 22.6% 20.0%
(*) Pro forma 2001 represents operating income without goodwill
amortization as if Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets" had been adopted as of
January 1, 2001.
IN 2002, THE COMPANY DISCONTINUED AMORTIZING GOODWILL AND RECORDED
A GOODWILL IMPAIRMENT OF $39.1 MILLION ($24.4 MILLION NET OF TAXES).
CONSOLIDATED RESULTS
2002 vs. 2001
Consolidated operating income was $193.2 million in 2002 compared to $137.2
million in 2001 excluding goodwill amortization as if SFAS No. 142 had been
adopted as of January 1, 2001. Operating income in 2002 includes a charge for
$7.4 million of unusual items including a write-down of minority investments in
start-up companies, asset impairments of technology initiatives, and costs
related to the closure of two facilities (see Note 10 to the Consolidated
Financial Statements). The improvement in margins, excluding unusual items, from
2001 (excluding goodwill amortization) to 2002 was primarily due to the strong
revenue performance discussed above, the introduction of higher margin products,
and our continued focus on improving cost efficiencies, offset slightly by
increased investment in new business initiatives and resources to support the
growth of the Company.
2001 vs. 2000
Consolidated operating income was $119.5 million in 2001 and $90.1 million in
2000 which includes goodwill amortization in both years, merger-related costs
and unusual items of $18.0 million in 2001 and $28.9 million in 2000 primarily
related to the merger with DBT and asset impairments (see Note 10 to the
Consolidated Financial Statements). The loss on sale of business of $10.9
million in 2001 relates to the sale of the Company's laboratory services
business in August 2001 (see Note 4 to the Consolidated Financial Statements).
The improvement in margins from 2000 to 2001 was primarily due to the strong
revenue performance discussed above, cost synergies realized in the integration
of the Company's acquisitions, and continued focus on improving cost
efficiencies.
BUSINESS SEGMENT RESULTS
Insurance Services
2002 vs. 2001
Insurance Services had 2002 operating income of $155.4 million, an increase of
$27.6 million or 22%, compared with $127.7 million in 2001 ($129.3 million
excluding goodwill amortization). This resulted in an operating margin of 46.7%
of revenue in 2002 compared to 45.5% of revenue in 2001 (46.0% of revenue
excluding goodwill amortization). The increase in operating income was primarily
due to the increase in revenue discussed above.
2001 vs. 2000
Insurance Services had 2001 operating income of $127.7 million, an increase of
$25.7 million, or 25%, from $102.0 million in 2000. This resulted in an
operating margin of 45.5% during 2001, compared with 43.3% in 2000, primarily as
a result of the revenue growth discussed above and continued focus on improving
cost efficiencies.
Business and Government Services
2002 vs. 2001
Business & Government Services had 2002 operating income of $69.4 million, an
increase of $24.3 million or 54%, compared with $45.1 million ($56.2 million
excluding goodwill amortization) in 2001. This resulted in an operating margin
of 22.5% of revenue in 2002, compared to 16.9% of revenue (21.0% of revenue
excluding goodwill amortization) in 2001. The margin increase from operating
income excluding goodwill amortization in 2001 is primarily due to revenue
contributions from our homeland security initiatives, the growth of higher
margin products such as National Criminal File, and our continued focus on cost
controls.
20 CHOICEPOINT 2002 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
ChoicePoint 2002 Annual Report
2001 vs. 2000
Business & Government Services had operating income of $45.1 million in 2001, an
increase of $15.7 million, or 53%, over the prior year, resulting in an
operating margin of 16.9% during 2001 compared with 12.6% in 2000. This
improvement was primarily the result of the cost synergies realized in the
integration of the Company's acquisitions, including the merger of DBT, and
aggressive cost control efforts.
Marketing Services
2002 vs. 2001
Marketing Services had 2002 operating income of $32.9 million, an increase of
$10.7 million or 48%, compared with $22.2 million ($26.4 million excluding
goodwill amortization) in 2001. This resulted in an operating margin of 31.1% of
core revenue in 2002, down from 34.5% of core revenue excluding goodwill
amortization in 2001 (29.0% of core revenue including goodwill amortization).
The margin decrease from operating income excluding goodwill amortization in
2001 is primarily due to a one-time project in 2001 that generated
higher-than-average margins throughout the year.
2001 vs. 2000
Marketing Services had 2001 operating income of $22.2 million, an increase of
$2.9 million, or 15%, over the prior year, resulting in an operating margin of
29.0% during 2001 compared with 30.3% in 2000. The slight decline in margin was
primarily a result of lower margins in the business unit acquired during its
integration into the Company's Marketing segment and due to the intangible
amortization from the acquisition.
Corporate and Shared Expenses
Corporate and shared expenses included in selling, general, and administrative
costs represent costs of support functions, research and development
initiatives, incentives, and profit sharing that benefit Insurance Services,
Business & Government Services, and Marketing Services. The increase to $60.2
million in 2002 from $49.3 million in 2001 and $43.5 million in 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. Corporate and shared expenses as a percentage of revenue without
reimbursable expenses were approximately 8% in 2002, 8% in 2001, and 7% in 2000.
Interest Expense, net
Interest expense, net decreased from $11.7 million in 2000 to $10.5 million in
2001 and $7.8 million in 2002. Lower interest rates and lower average
borrowings, due to increased earnings and working capital management and the
expiration of the interest rate swap with a notional amount of $125 million (see
Note 5 to the Consolidated Financial Statements) were responsible for the
decrease in interest expense. Interest expense in 2000 is also net of interest
income from short-term investments of $882,000. ChoicePoint has entered into
four interest rate swap agreements to reduce the impact of changes in its
benchmark interest rate (LIBOR) on its LIBOR-based payments on the synthetic
leases (see Note 5 to the Consolidated Financial Statements).
Income Taxes
In 2002, the provision for income taxes was $71.2 million before cumulative
effect of change in accounting principle compared to $58.7 million in 2001 and
$34.5 million in 2000. The increase in the tax provision is primarily a result
of increased earnings. The tax provision in 2001 includes tax expense of $10.5
million related to the sale of our laboratory services business. ChoicePoint's
overall effective tax rates were 38.6% in 2002 down from 39.7% (53.8% including
the effect of merger-related costs, unusual items, and loss on sale of
business) in 2001 due to the elimination of non-deductible goodwill
amortization. The 2001 tax provision was down from 40.0% (44.0% including the
effect of merger-related costs and unusual items) in 2000 due to implementation
of state and local tax planning initiatives.
FINANCIAL CONDITION AND LIQUIDITY AND MARKET RISK,
INCLUDING OFF-BALANCE SHEET ITEMS
The Company is exposed to market risk from changes in interest rates. The
information below summarizes the Company's market risk associated with its debt
obligations as of December 31, 2002. The information below should be read in
conjunction with Note 5 to the Consolidated Financial Statements.
The Company's sources of cash liquidity include cash and cash
equivalents, cash from operations, amounts available under credit facilities,
and other external sources of funds. The Company's short-term and long-term
liquidity depends primarily upon its level of net income, working capital
management (accounts receivable, accounts payable and accrued expenses), and
long-term debt. On May 10, 2002, ChoicePoint entered into a $325 million
unsecured revolving credit facility (the "Credit Facility") with a group of
banks that extends through a termination date of May 2005 and bears interest at
variable rates based on LIBOR plus an applicable margin. Total borrowings under
the Credit Facility were $95.0 million at December 31, 2002. Prior to May 10,
2002, the Company had a $250 million unsecured revolving credit facility (the
"Former Credit Facility") (see Note 5 to the Consolidated Financial Statements).
Total borrowings under the Former Credit Facility were $155.0 million at
December 31, 2001.
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, 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, may be extended in one-year terms, and has been extended to
July 2003. The Receivables Facility, which does not qualify for off-balance
sheet treatment under SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" due to certain contractual
removal-of-accounts provisions, has been recorded as an on-balance sheet
financing transaction. The Company believes the Receivables Facility provides a
low cost of financing and is an additional source of debt capital with
diversification from other alternatives. Net proceeds from the Receivables
Facility were $85.0 million at December 31, 2002 and were used to finance a
portion of the VitalChek acquisition (see Note 4 to the Consolidated Financial
Statements). There were no sales of accounts receivable during 2001.
CHOICEPOINT 2002 ANNUAL REPORT 21
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
ChoicePoint 2002 Annual Report
In addition, there was $2.4 million of other long-term debt and capital
leases outstanding at December 31, 2002 and $3.8 million outstanding at December
31, 2001. ChoicePoint may use additional borrowings under the Credit Facility
and Receivables Facility to finance acquisitions and for general corporate cash
requirements. The Company may desire to obtain additional long-term financing
for other uses of cash or for strategic reasons. The Company anticipates no
difficulty in obtaining long-term financing based on favorable experiences in
the debt market in the recent past. ChoicePoint may also utilize lines of credit
with two banks for overnight borrowings; however, no such borrowings were out-
standing at December 31, 2002 or 2001.
OFF-BALANCE SHEET ITEMS CONSIST OF TWO SYNTHETIC LEASES - ONE ON THE COMPANY'S
HEADQUARTERS BUILDING AND THE OTHER TO FINANCE THE CONSTRUCTION OF THE COMPANY'S
NEW DATA CENTER FACILITY.
Off-Balance Sheet Items
In 1997, the Company entered into a $25 million synthetic lease agreement for
the Company's headquarters building. Under the synthetic lease agreement, a
third-party lessor purchased the property, paid for the construction and leased
the building to the Company. In 2001, the Company entered into another synthetic
lease agreement for up to $52 million to finance the construction of its data
center facility that will be completed in mid 2003. Both leases expire in 2007,
at which time the Company has the following options for each lease: renew the
lease for an additional five years, purchase the building for the original cost
or remarket the property. If the Company elects to remarket the property,
ChoicePoint must guarantee the lessor 80% to 85% of the original cost.
The Company has accounted for the synthetic leases as operating leases
and has recorded rent expense. The Financial Accounting Standards Board ("FASB")
has recently issued Interpretation No. 46, "Consolidation of Variable Interest
Entities - an Interpretation of ARB No. 51" ("FIN 46") that might change current
generally accepted accounting principles in the United States of America related
to synthetic leases. The Company is currently evaluating the impact of this new
standard, which may require the Company to modify its synthetic leases to
maintain off-balance sheet treatment. If the Company had elected to purchase the
properties instead of entering into the synthetic leases or if the Company was
required to change its accounting for the synthetic leases based on a new
accounting principle, our assets and debt would have increased by $54.3 million
at December 31, 2002 and the Company would have recorded additional depreciation
expense related to the $25 million synthetic lease of approximately $800,000 for
the years ended December 31, 2002 and 2001. No depreciation would have been
recorded related to the amount drawn down under the $52 million synthetic lease
since the data center facility is still under construction. If the Company was
required to change its accounting for the synthetic leases, estimated
depreciation expense would be approximately $1.4 million in 2003 and $2.2
million annually for 2004 through 2007.
Derivatives
Derivative financial instruments at December 31, 2002 consist of four interest
rate swap agreements entered into to reduce the impact of changes in a benchmark
interest rate (LIBOR) on the Company's LIBOR-based payments on the Company's
synthetic leases. At December 31, 2002, the total notional amount under these
swap agreements was $67 million and they involve the receipt of a variable rate
and payment by ChoicePoint of fixed rates between 4.6% and 6.5%. Amounts
currently due to or from interest rate swap counterparties are recorded as
expense in the period in which they accrue. The Company does not enter into
derivative financial instruments for trading or speculative purposes. As of
December 31, 2002, the fair value of the outstanding interest rate swap
agreements was a liability of $4.8 million which has been recorded net of taxes
in accumulated other comprehensive loss in accordance with SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (see Notes 3 and
5 to the Consolidated Financial Statements).
The Company previously had a fifth interest rate swap agreement with a
notional amount of $125 million to limit the effect of changes in the benchmark
interest rate (LIBOR) on $125 million of the Company's borrowings. This interest
rate swap agreement expired in August 2002.
Contractual Obligations and the Related Future Payments
(In thousands)
Payments Due by Period
Total 2003 2004 2005 Thereafter
-------- -------- ------- -------- ----------
Debt $182,100 $ 85,130 $ 130 $ 95,140 $ 1,700
Capital lease obligations 346 257 74 15 --
Operating leases and other commitments 64,596 17,586 14,954 11,729 20,327
-------- -------- ------- -------- -------
Total contractual cash obligations $247,042 $102,973 $15,158 $106,884 $22,027
-------- -------- ------- -------- -------
22 CHOICEPOINT 2002 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
ChoicePoint 2002 Annual Report
We believe that our existing cash balance, available debt capacity, and
cash flows from operations will be sufficient to meet our working capital and
capital expenditure requirements for the next 12 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.
Based on the Company's overall interest rate exposure at December 31,
2002, a 1% change in interest rates would result in a change in annual pretax
interest expense of approximately $1.8 million based on the Company's current
level of borrowing. As noted above, as of December 31, 2002, $54.3 million is
outstanding under the synthetic lease agreements, the LIBOR-based payments of
which are hedged with the swap agreements. In addition, $95.0 million is
outstanding under the Credit Facility and $85.0 million is outstanding under the
Receivables Facility.
Cash and cash equivalents totaled $34.4 million as of December 31,
2002. Cash provided by operations increased from $110.2 million in 2000 to
$127.5 million in 2001 and $168.8 million in 2002. These increases were
primarily attributable to the increase in net income, as adjusted for
depreciation and amortization. In 2002, ChoicePoint continued to invest in
future growth and used $187.0 million for acquisitions, net of cash acquired,
$19.8 million for property and equipment, and $29.2 million for other asset
additions (primarily internally developed and externally purchased software).
During 2001, ChoicePoint used $154.3 million for acquisitions net of cash
acquired, $18.9 million for property and equipment, and $31.8 million for other
asset additions (primarily purchased data files and internally developed and
externally purchased software). During 2000, ChoicePoint invested $110.4 million
for acquisitions net of cash acquired, $14.5 million for property and equipment,
and $16.5 million for other asset additions (primarily purchased data files and
internally developed and externally purchased software). Cash provided by
financing activities of $47.9 million in 2002 was primarily generated through
borrowings under the Credit Facility and Receivables Facility to fund
acquisitions. Cash provided by the exercise of stock options of $26.6 million
and net borrowings of $14.0 million on long-term debt provided cash from
financing activities in 2001 compared to cash used by financing activities of
$14.6 million in 2000. The Company currently anticipates full-year capital
expenditures for 2003 to be in the range of $45 million to $50 million, which is
consistent with 2002 and will be used primarily for the continued development of
the new public records technology platform, new product development, system
upgrades, furniture and equipment for the new data center facility, purchased
data files and internally developed and externally purchased software.
Earnings before interest, taxes, depreciation, and amortization
("EBITDA") excluding merger-related costs, unusual items, and loss on sale of
business increased $38.5 million, or 19%, to $246.4 million in 2002 from $207.9
million in 2001 and $172.6 million in 2000. EBITDA as a percentage of revenue
without reimbursable expenses increased from 29.1% in 2000 to 31.7% in 2001 and
to a record 32.7% in 2002 due to ChoicePoint's strong operating performance and
ability to control costs in a tough economic environment. The Company has
included EBITDA data (which is not a measure of financial performance under
accounting principles generally accepted in the United States of America)
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(R) ("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 $13 million in 2002 and $10 million in 2001 due primarily to
strong operating results and capital management.
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.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 2002, ChoicePoint adopted new accounting rules for goodwill
and certain intangible assets. Among the requirements of the new rules is that
goodwill and certain intangible assets be assessed for impairment using fair
value measurement techniques. During the second quarter of 2002, the Company
completed its impairment review and recorded a $39.1 million non-cash pretax
charge ($24.4 million net of taxes) for the impairment of goodwill resulting
primarily from the EquiSearch Services, Inc. acquisition in 1998 and the
Internet business the Company acquired as part of the DBT merger in May 2000.
The charge is non-operational in nature and is reflected as a cumulative effect
of change in accounting principle in the accompanying consolidated financial
statements (see Note 3 to the Consolidated Financial Statements). In order to
enhance comparability, the Company compares current year results to the prior
year, exclusive of this charge.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" which requires companies to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred (see
Note 3 to the Consolidated Financial Statements). SFAS No. 143 is effective for
the Company beginning in 2003. We are currently evaluating the impact of this
statement on our Consolidated Financial Statements but do not expect that its
adoption will have a material impact on the Company's future consolidated
results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which requires costs associated
with exit or disposal activities to be recognized when the costs are incurred,
rather than at a date of commitment to an exit or disposal plan. The FASB bases
the accrual of an exit or disposal cost on the existence of a liability that
constitutes an "obligation" both legally and socially as defined under FASB
Statement of Concept No. 6. SFAS No. 146 is effective for disposal activities
initiated after December 31, 2002.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," ("FIN 45"). This interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guaranty, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are
effective for the Company as of December 31, 2002. The initial recognition and
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or
CHOICEPOINT 2002 ANNUAL REPORT 23
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
ChoicePoint 2002 Annual Report
modified after December 31, 2002. As of December 31, 2002, there is no impact of
this statement on our Consolidated Financial Statements.
In January 2003, the FASB issued FIN 46, which addresses consolidation
of business enterprises of variable interest entities ("VIE") and requires
companies with a controlling financial interest in a VIE to include the assets,
liabilities and results of activities of the VIE in the consolidated financial
statements of the company. FIN 46 is effective immediately for VIE's created
after January 31, 2003 and is effective for the quarter ending June 30, 2003 for
all VIE's that existed prior to January 31, 2003. The Company has accounted for
the synthetic leases as operating leases and has recorded rent expense. FIN 46
might change current generally accepted accounting principles in the United
States of America related to synthetic leases. The Company is currently
evaluating the impact of this new standard which may require the Company to
modify its synthetic leases to maintain off-balance sheet treatment.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which require the
Company to make estimates and assumptions which may be revised over time as new
information and regulations become available. The Company believes that of its
significant accounting policies (see Note 3 to the Consolidated Financial
Statements), the following may involve a higher degree of judgment and
complexity:
Purchase price allocation: Over its history, the Company's growth has
been partly driven by acquisitions. The application of the purchase method of
accounting requires companies to assign values to acquired assets and
liabilities, including intangible assets acquired based on their fair value. The
determination of fair value for acquired assets, particularly intangible assets,
requires a high degree of judgment, and estimates often involve significant
subjectivity due to the lack of transparent market data or listed market prices.
The Company generally uses internal cash flow models and other evaluations as
well as third-party appraisals in determining the fair value of assets acquired;
however, the use of different valuation models or assumptions could result in
different amounts of goodwill and other acquisition intangible assets and
different lives for amortizable intangible assets. As of December 31, 2002,
certain of the Company's 2002 purchase price allocations were based on
preliminary estimates which may be revised in 2003 as final third-party
appraisals are received or as estimates and assumptions are finalized (see Note
4 to the Consolidated Financial Statements). The Company does not anticipate
that these revisions would be significant to the financial statements taken as a
whole.
Impairment charges: On January 1, 2002, ChoicePoint adopted SFAS No.
142. ChoicePoint has assessed its goodwill and other indefinite life assets for
impairment during the year ended December 31, 2002, and is required to assess
these assets on at least an annual basis thereafter (see Notes 3 and 4 to the
Consolidated Financial Statements). In assessing the recoverability of these
intangible assets, the Company must make assumptions regarding the estimated
future cash flows to determine fair value of the respective assets. These
assumptions may change in the future due to economic conditions or in connection
with the sale or integration of the Company's business units, at which time,
ChoicePoint may be required to record impairment charges for these assets. Upon
completion of our analysis for goodwill impairment in the second quarter of 2002
in accordance with the adoption of SFAS No. 142, ChoicePoint recorded a non-cash
charge of $39.1 million ($24.4 million net of taxes) to reduce the carrying
value of its goodwill retroactive to January 1, 2002. In calculating the
goodwill impairment charge, the fair value of the impaired reporting units was
estimated using a discounted cash flow methodology. This impairment charge is
due to increased competition and pricing pressures and relates primarily to
goodwill recorded in the 1998 acquisition of EquiSearch Services, Inc. and good-
will related to the Internet business acquired as part of the DBT Merger in May
2000. The Company also completed its annual goodwill impairment review as of
October 31, 2002. No additional impairment charge was recorded as a result of
this review based on estimated future cash flows as compared to the current book
value of long-lived assets. If the Company had assumed a 10% reduction in its
estimated annual cash flows, it would have recorded additional impairment of
less than $2 million in the above analyses.
For the other acquisition intangible assets such as purchased software,
customer relationships and non-compete agreements, the Company is required to
assess them for impairment whenever indicators of impairment exist in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." During 2002, there were no indicators of impairment related to these
assets. The Company periodically reviews and reevaluates the assumptions used
for assessing the recoverability of its intangible assets and adjusts them as
necessary.
As discussed in Note 10 to the Consolidated Financial Statements, in
connection with selling and integrating certain business operations, the Company
has recorded asset impairment charges for data and software assets that will no
longer be used. Inherent in the assumptions used in impairment analyses are
certain significant management judgments and estimates. The Company periodically
reviews and reevaluates these assumptions and adjusts them as necessary.
Software developed for internal use: As discussed in Note 3 to the
Consolidated Financial Statements, the Company capitalizes certain direct costs
incurred in the development of internal use software. Amortization of such costs
as cost of sales is done on a straight-line basis generally over three to five
years. The Company evaluates the recoverability of capitalized costs
periodically or as changes in circumstance suggest a possible impairment may
exist in accordance with SFAS No. 144. Primarily in connection with the DBT
merger and integration of the Company's public records businesses, capitalized
software costs were written down by $3.0 million in 2002, $2.7 million in 2001,
and $2.1 million in 2000. Amortization of capitalized software costs amounted to
$10.1 million in 2002, $6.7 million in 2001, and $5.9 million in 2000.
Postretirement benefit obligations: In connection with developing the
Company's projected liabilities for postretirement benefits, management is
required to make estimates and assumptions which affect the reported amounts of
the liability as of the date of the financial statements and the amount of
expense recognized during the period. The liability is developed based on
currently available information, estimates of future trends and actuarial
assumptions provided by the Company's independent actuaries including a discount
rate of 6.75% and an initial health care cost trend rate of approximately 13%. A
0.25% decrease or increase in the discount rate (to 6.5% or 7.0%) would result
in a change in the liability of approximately $600,000. Actual results could
differ from these estimates. See Note 8 to the Consolidated Financial Statements
for a discussion of the impact of changes in health care cost trend rates.
24 CHOICEPOINT 2002 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS CONTINUED
ChoicePoint 2002 Annual Report
SUBSEQUENT EVENTS
In January 2003, ChoicePoint acquired two entities, National Data Retrieval,
Inc., one of the nation's leading providers of public records information for
bankruptcies, civil judgments, and federal and state tax liens based in
Alpharetta, Georgia, and The List Source, Inc. d/b/a Kramer Lead Marketing
Group, a marketing company servicing the life & health insurance and financial
services markets based in Dallas, Texas. The total purchase price of these
acquisitions was approximately $38 million and was paid in cash (see Note 14 to
the Consolidated Financial Statements).
In February 2003, the Company sold substantially all of the assets of
its CP Commercial Specialists ("CPCS") business to an affiliate of New Mountain
Capital, LLC for approximately $87 million in cash. This transaction is the
culmination of the transformation of ChoicePoint to a data-driven and
technology-oriented business. The sale resulted in a gain of approximately $33
million (net of taxes) which will be recorded in the first quarter of 2003 (see
Note 14 to the Consolidated Financial Statements).
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made by or on behalf of the Company,
including information in this Annual Report, 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, maintaining secure systems, ability to control costs, and 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 customer consolidations, ability to
continue our long-term business strategy including growth through acquisition,
ability to attract and retain qualified personnel, 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 ("SEC"), including the Company's Annual Report on Form 10-K.
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.
CHOICEPOINT 2002 ANNUAL REPORT 25
REPORT OF MANAGEMENT
ChoicePoint 2002 Annual Report
The management of ChoicePoint Inc. has the responsibility for preparing the
accompanying financial statements, and for their integrity and objectivity. The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States and, as such, include amounts based on
management's best estimates and judgments.
Management is further responsible for maintaining a system of internal
control and related policies and procedures designed to provide reasonable
assurance that assets are adequately safeguarded and that the accounting records
reflect transactions executed in accordance with management's authorization.
An independent assessment of the system of internal control is
performed by the Company's internal audit staff in order to confirm that the
system is adequate and operating effectively. The Company's independent public
accountants also consider certain elements of the internal control system in
order to determine their auditing procedures for purposes of expressing an
opinion on the financial statements.
The audit committee of the board of directors, consisting solely of
outside directors, meets periodically with financial management, internal audit,
and the independent public accountants to review internal accounting controls
and accounting, auditing, and financial reporting matters. The committee
recommends to the board of directors appointment of the independent auditors.
Both the internal auditors and the independent auditors have access to the audit
committee, with or without the presence of management.
/s/ Derek V. Smith /s/ Steven W. Surbaugh /s/ David E. Trine
-------------------- -------------------- ------------------------------
Derek V. Smith Steven W. Surbaugh David E. Trine
Chairman and Chief Financial Officer Treasurer and Corporate Controller
Chief Executive Officer
26 CHOICEPOINT 2002 ANNUAL REPORT
REPORT OF INDEPENDENT AUDITORS
ChoicePoint 2002 Annual Report
To the Board of Directors and Shareholders of ChoicePoint Inc.:
We have audited the consolidated balance sheet of ChoicePoint Inc. and
subsidiaries (the "Company") as of December 31, 2002, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audit. The consolidated financial statements
of ChoicePoint Inc. as of December 31, 2001, and for each of the two years in
the period ended December 31, 2001, before the revisions described in Notes 3,
7, and 11 to the consolidated financial statements, were audited by other
auditors who have ceased operations. Those auditors expressed an unqualified
opinion on those consolidated financial statements in their report dated
February 15, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 2002 consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of
December 31, 2002, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 3 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and other intangible
assets to conform to Statement of Financial Accounting Standards No. 142 in
2002.
As discussed above, the consolidated financial statements of
ChoicePoint Inc. as of December 31, 2001 and for each of the two years in the
period ended December 31, 2001 were audited by other auditors who have ceased
operations. These consolidated financial statements have been revised as
follows:
- - As described in Note 7, the Company effected a four-for-three stock
split in 2002. All share and per share data presented have been
retroactively adjusted to reflect the split.
- - As described in Note 3, the Company adopted the provisions of Emerging
Issues Task Force 01-14, Income Statement Characterization of
Reimbursements Received for "Out-of-Pocket" Expenses Incurred ("EITF
01-14") and therefore revised certain revenues and expenses to conform
to the presentation requirements of EITF 01-14.
- - As described in Note 11, the Company changed the composition of its
reportable segments in 2002, and the amounts in the 2001 and 2000
consolidated financial statements relating to reportable segments have
been revised to conform to the 2002 composition of reportable segments.
- - As described in Note 3, these consolidated financial statements have
been revised to include the disclosures required by Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets ("SFAS 142"), which was adopted by the Company as of January 1,
2002.
We audited the adjustments described in Notes 3, 7, and 11 that were
applied to revise the 2001 and 2000 consolidated financial statements. We also
audited the transitional SFAS 142 disclosures described in Note 3. In our
opinion, such adjustments and disclosures are appropriate and have been properly
applied. However, we were not engaged to audit, review, or apply any procedures
to the 2001 and 2000 consolidated financial statements of the Company other than
with respect to such adjustments and disclosures and, accordingly, we do not
express an opinion or any other form of assurance on the 2001 and 2000
consolidated financial statements taken as a whole.
/s/ Deloitte & Touche LLP
----------------------
Atlanta, Georgia
February 21, 2003
(February 28, 2003 as to Note 14)
CHOICEPOINT 2002 ANNUAL REPORT 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ChoicePoint 2002 Annual Report
To ChoicePoint Inc.:
We have audited the accompanying consolidated balance sheets of ChoicePoint Inc.
(a Georgia corporation) and subsidiaries as of December 31, 2001 and 2000 and
the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1999 consolidated financial statements of DBT
Online, Inc. and subsidiaries, a company acquired during 2000 in a transaction
accounted for as a pooling of interests as discussed in Note 2. Such statements
are included in the consolidated financial statements of ChoicePoint Inc. and
reflect revenue of 15% of the related consolidated total for the year ended
December 31, 1999. These statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for DBT Online, Inc. and subsidiaries, is based solely on the report of
the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ChoicePoint Inc. and
subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
Arthur Andersen LLP
Atlanta, Georgia
February 15, 2002
EXPLANATORY NOTE REGARDING REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
On March 21, 2002, ChoicePoint Inc. decided to no longer engage Arthur Andersen
LLP as its independent public accountants and engaged Deloitte & Touche LLP to
serve as its independent public accountants for the year ending December 31,
2002. More information regarding ChoicePoint Inc.'s change in independent public
accountants is contained in a current report on Form 8-K filed with the SEC on
March 22, 2002.
We could not obtain permission of Arthur Andersen LLP to the inclusion
in this Annual Report on Form 10-K of their Report of Independent Public
Accountants above. Accordingly, the report of Arthur Andersen LLP above is
merely reproduced from ChoicePoint Inc.'s Annual Report on Form 10-K for the
year ended December 31, 2001 (although the consolidated balance sheet as of
December 31, 2000 and the consolidated statements of income, shareholders'
equity, and cash flows for the year ended December 31, 1999 referred to in that
report are not included herein) and does not include the manual signature of
Arthur Andersen LLP.
28 CHOICEPOINT 2002 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF INCOME
ChoicePoint 2002 Annual Report
(In thousands, except per share data)
Year Ended December 31, 2002 2001 2000
-------- -------- --------
Revenue before reimbursable expenses $753,042 $655,967 $593,533
-------- -------- --------
Reimbursable expenses (Note 3) 38,520 38,028 37,392
-------- -------- --------
Total revenue 791,562 693,995 630,925
-------- -------- --------
Costs and expenses:
Cost of services 407,762 385,839 343,994
Reimbursable expenses 38,520 38,028 37,392
Selling, general, and administrative 144,664 121,758 130,537
Loss on sale of business - 10,853 -
Merger-related costs and unusual items 7,384 18,009 28,949
-------- -------- --------
Total costs and expenses 598,330 574,487 540,872
------- ------- -------
Operating income 193,232 119,508 90,053
Interest expense, net 7,772 10,487 11,743
-------- -------- --------
Income before income taxes and cumulative effect
of change in accounting principle 185,460 109,021 78,310
Provision for income taxes 71,217 58,687 34,488
-------- -------- --------
Income before cumulative effect of change in accounting principle 114,243 50,334 43,822
Cumulative effect of change in accounting principle, net of tax (Note 3) 24,416 - -
-------- -------- --------
Net income $ 89,827 $ 50,334 $ 43,822
======== ======== ========
Earnings per share (Notes 3 and 7)
Basic:
Before cumulative effect of change in accounting principle $ 1.36 $ 0.61 $ 0.55
Cumulative effect of change in accounting principle, net (0.29) -- --
-------- -------- --------
Net income $ 1.07 $ 0.61 $ 0.55
-------- -------- --------
Weighted average shares - basic 84,313 82,417 79,828
Diluted:
Before cumulative effect of change in accounting principle $ 1.28 $ 0.58 $ 0.52
Cumulative effect of change in accounting principle, net (0.27) -- --
-------- -------- --------
Net income $ 1.01 $ 0.58 $ 0.52
======== ======== ========
Weighted average shares - diluted 89,194 87,151 84,139
The accompanying notes are an integral part of these consolidated financial
statements.
CHOICEPOINT 2002 ANNUAL REPORT 29
CONSOLIDATED BALANCE SHEETS
ChoicePoint 2002 Annual Report
(In thousands, except par values)
December 31, 2002 2001
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 34,359 $ 53,033
Accounts receivable, net of allowance for doubtful accounts
of $4,978 in 2002 and $4,634 in 2001 143,610 128,307
Deferred income tax assets 6,557 7,266
Other current assets 20,809 24,064
-------- --------
Total current assets 205,335 212,670
Property and equipment, net 66,221 64,929
Goodwill 578,608 450,912
Other acquisition intangible assets, net 42,572 27,180
Deferred income tax assets 12,672 9,183
Other 73,602 67,518
-------- --------
Total assets $979,010 $832,392
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt $ 85,387 $156,426
Accounts payable 31,825 34,251
Accrued salaries and bonuses 37,801 33,697
Other current liabilities 47,683 60,315
-------- --------
Total current liabilities 202,696 284,689
Long-term debt, less current maturities 97,059 2,390
Postretirement benefit obligations 37,853 43,976
Other long-term liabilities 18,795 16,516
-------- --------
Total liabilities 356,403 347,571
-------- --------
Commitments and contingencies (Note 9)
Shareholders' equity:
Preferred stock, $0.01 par value; 10,000 shares authorized,
no shares issued or outstanding -- --
Common stock, $0.10 par value; shares authorized - 400,000;
issued - 86,555 in 2002 and 84,496 in 2001 8,655 8,450
Paid-in capital 345,426 297,612
Retained earnings 287,787 197,960
Cumulative other comprehensive loss (2,881) (3,635)
Treasury stock, at cost, 1,065 shares in 2002 and 1,042 shares in 2001 (16,380) (15,566)
-------- --------
Total shareholders' equity 622,607 484,821
-------- --------
Total liabilities and shareholders' equity $979,010 $832,392
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
SEE NOTES 5 AND 9 FOR DISCUSSION OF OFF-BALANCE SHEET ITEMS, AMOUNTS PLEDGED
UNDER THE RECEIVABLES FACILITY AND OTHER COMMITMENTS.
30 CHOICEPOINT 2002 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ChoicePoint 2002 Annual Report
Cumulative
Other
Comprehensive Common Paid-in Retained Comprehensive Treasury
(In thousands) Income Stock Capital Earnings Loss Stock Total
------------- ------ -------- -------- ------------- --------- --------
Balance, December 31, 1999 $8,023 $219,376 $103,804 $ (476) $ (11,418) $319,309
Net income $43,822 -- -- 43,822 -- -- 43,822
Change in unrealized
net loss on investments 255 -- -- -- 255 -- 255
Translation adjustments 129 -- -- -- 129 -- 129
-------
Comprehensive income $44,206
-------
Restricted stock plans, net (8) 275 -- -- -- 267
Stock options exercised 194 30,796 -- -- -- 30,990
Tax benefit of stock options exercised -- 6,297 -- -- -- 6,297
------ -------- -------- -------- --------- --------
Balance, December 31, 2000 8,209 256,744 147,626 (92) (11,418) 401,069
Net income $50,334 -- -- 50,334 -- -- 50,334
Change in fair value of derivatives,
net of deferred taxes of $2,400 (3,635) -- -- -- (3,635) -- (3,635)
Translation adjustments 92 -- -- -- 92 -- 92
-------
Comprehensive income $46,791
-------
Restricted stock plans, net 14 2,530 -- -- -- 2,544
Stock options exercised 222 26,377 -- -- -- 26,599
Common stock redeemed -- -- -- -- (2,176) (2,176)
Stock purchased by employee benefit trusts 5 (5) -- -- (1,972) (1,972)
Tax benefit of stock options exercised -- 11,966 -- -- -- 11,966
------ -------- -------- -------- --------- --------
Balance, December 31, 2001 8,450 297,612 197,960 (3,635) (15,566) 484,821
NET INCOME $89,827 -- -- 89,827 -- -- 89,827
CHANGE IN FAIR VALUE OF DERIVATIVES,
NET OF DEFERRED TAXES OF $503 754 -- -- -- 754 -- 754
-------
COMPREHENSIVE INCOME $90,581
-------
RESTRICTED STOCK PLANS, NET (9) 2,791 -- -- -- 2,782
STOCK OPTIONS EXERCISED 214 25,050 -- -- -- 25,264
COMMON STOCK REDEEMED -- -- -- -- (814) (814)
TAX BENEFIT OF STOCK OPTIONS EXERCISED -- 19,973 -- -- -- 19,973
------ -------- -------- -------- --------- --------
BALANCE, DECEMBER 31, 2002 $8,655 $345,426 $287,787 $ (2,881) $ (16,380) $622,607
====== ======== ======== ======== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
CHOICEPOINT 2002 ANNUAL REPORT 31
CONSOLIDATED STATEMENTS OF CASH FLOWS
ChoicePoint 2002 Annual Report
(In thousands)
Year Ended December 31, 2002 2001 2000
--------- --------- ---------
Cash flows from operating activities:
Net income $ 89,827 $ 50,334 $ 43,822
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of change in accounting principle, net of tax 24,416 -- --
Depreciation and amortization 45,759 59,512 53,619
Provision for merger-related costs and unusual items 7,384 18,009 28,949
Pretax loss on sale of business -- 10,853 --
Compensation recognized under employee stock plans, net 2,782 2,544 239
Tax benefit of stock options exercised 19,973 11,966 6,297
Changes in assets and liabilities, excluding effects
of acquisitions and divestitures:
Accounts receivable, net (10,761) (7,817) 7,009
Other current assets 3,346 (10,617) (5,276)
Deferred income taxes 10,120 6,023 4,145
Current liabilities, excluding debt (16,977) (11,772) (29,111)
Other long-term liabilities, excluding debt (7,119) (1,536) 513
--------- --------- ---------
Net cash provided by operating activities 168,750 127,499 110,206
--------- --------- ---------
Cash flows from investing activities:
Acquisitions, net of cash acquired (186,990) (154,259) (110,376)
Cash proceeds from sale of businesses 650 49,000 1,500
Proceeds from sales or maturities of short-term investments -- -- 16,198
Additions to property and equipment, net (19,796) (18,880) (14,509)
Additions to other assets, net (29,207) (31,797) (16,524)
--------- --------- ---------
Net cash used by investing activities (235,343) (155,936) (123,711)
--------- --------- ---------
Cash flows from financing activities:
Payments on Former Credit Facility (155,000) (74,000) (120,000)
Payments on Credit Facility (40,000) -- --
Borrowings under Former Credit Facility -- 90,000 75,000
Borrowings under Credit Facility 135,000 -- --
Borrowings under Receivables Facility 85,000 -- --
Payments on other debt, net (1,531) (1,982) (612)
Redemption of common stock (814) (2,176) --
Purchases of stock held by employee benefit trusts -- (1,972) --
Proceeds from exercise of stock options 25,264 26,599 30,990
--------- --------- ---------
Net cash provided (used) by financing activities 47,919 36,469 (14,622)
--------- --------- ---------
Effect of foreign currency exchange rates on cash -- 92 (65)
Net (decrease) increase in cash and cash equivalents (18,674) 8,124 (28,192)
Cash and cash equivalents, beginning of year 53,033 44,909 73,101
--------- --------- ---------
Cash and cash equivalents, end of year $ 34,359 $ 53,033 $ 44,909
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
32 CHOICEPOINT 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ChoicePoint 2002 Annual Report
1 NATURE OF OPERATIONS
ChoicePoint Inc. (NYSE:CPS), a Georgia corporation ("ChoicePoint" or the
"Company"), is the leading provider of identification and credential
verification services for making smarter decisions in a world challenged by the
reality of risks. Serving the needs of business, government, non-profit
organizations and individuals, ChoicePoint works to create a safer and more
secure society through the responsible use of information while ensuring the
protection of personal privacy. For more information, visit the Company's Web
site at www.choicepoint.com.
ChoicePoint's businesses are focused on three primary markets -
Insurance Services, Business & Government Services and Marketing Services.
The Insurance Services group provides information products and services
used in the underwriting and claims processes by property and casualty insurers.
Major offerings to the personal lines property and casualty market include
claims history data, motor vehicle records, police records, credit information
and modeling services. Additionally, ChoicePoint provides customized policy
rating and issuance software and property inspections and audits to the
commercial insurance market. Prior to the divestiture in August 2001 (Note 4),
ChoicePoint also provided laboratory testing services and related technology
solutions to the life and health insurance market.
The Business & Government Services group ("B&G") provides information
products and services to Fortune 1000 corporations, consumer finance companies,
asset-based lenders, legal and professional service providers, health care
service providers, non-profit organizations, small businesses, consumers and
federal, state, and local government agencies. Major offerings include
employment background screenings and drug testing administration services,
public record searches, credential verification, due diligence information,
Uniform Commercial Code searches and filings, DNA identification services,
authentication services and people and shareholder locator information searches.
The Marketing Services group provides direct marketing services to
Fortune 1000 corporations, insurance companies, and financial institutions.
Marketing Services offers a full complement of products, including data, print
fulfillment, teleservices, database and campaign management services, as well as
Web-based solutions.
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.
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.
On May 16, 2000, ChoicePoint completed a merger (the "Merger") with DBT
Online, Inc. ("DBT"), a leading nationwide provider of online public records
data and other publicly available information, by exchanging approximately 21.2
million shares (adjusted for stock splits - Note 7) of its common stock for all
of the common stock of DBT. Each share of DBT was exchanged for .525 shares
(pre-split) of ChoicePoint common stock. In addition, outstanding DBT stock
options were converted at the same exchange ratio into options to purchase
approximately 3.6 million shares of ChoicePoint common stock. 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 and financial position. 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.
3 SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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.
EARNINGS PER SHARE ("EPS") - Diluted EPS includes the dilutive effect of stock
options (Note 7).
RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform
with the current year presentation.
REVENUE AND EXPENSE RECOGNITION - ChoicePoint recognizes revenue when an
agreement exists, prices are determinable, services and products are delivered,
and collectibility is reasonably assured. Revenue for the majority of
information products and services is generally billed on a transactional basis
determined by customer usage with some fixed elements. Marketing Services
revenues are recognized when projects are completed and delivered and are billed
in accordance with contractual terms. Software revenues for our Insurance
Services segment are generated primarily by licensing software systems
(consisting of software and maintenance support) and providing professional
services. Perpetual software arrangements require significant customization and
are recognized under the percentage of completion method in accordance with
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" and SOP 81-1,
"Accounting for Performance of Construction Type and Certain Product-Type
Contracts," based on the terms and conditions in the contract. Changes in
estimates to complete and revisions in overall profit estimates are recognized
in the period in which they are determined. Multi-year software license
agreements are recognized ratably over the term of the agreement. Maintenance
and support agreements are marketed under annual or multi-year agreements and
are recognized ratably over the period covered by the agreements.
Software-related professional services are recognized as the service is
performed. Certain software revenues from our Marketing Services segment
represent hosting arrangements. The revenues and certain up-front costs related
to these hosting arrangements are recognized ratably over the term of the
agreement.
The Company records certain revenue on a net basis. Motor vehicle
records registry revenue (the fee charged by states for motor vehicle records)
and other fixed costs that are passed on by ChoicePoint to its customers
("pass-through expense") are excluded from revenue and recorded as a reduction
to cost of services in the consolidated financial statements. Pass-through
expense was $491.7 million in 2002, $423.2 million in 2001, and $358.2 million
in 2000.
CHOICEPOINT 2002 ANNUAL REPORT 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
ChoicePoint 2002 Annual Report
During 2002, the Company began applying the consensus reached in
Emerging Issues Task Force ("EITF") Issue No. 01-14, "Income Statement
Characterization of Reimbursements Received for `Out-of-Pocket' Expenses
Incurred," ("EITF 01-14") which requires the presentation of reimbursed
out-of-pocket expenses on a gross basis as revenues and expenses. As required,
the Company reclassified prior periods presented herein to comply with the
guidance in EITF 01-14. Accordingly, reimbursed materials, shipping and postage
charges in the Company's Marketing Services segment for 2002, 2001, and 2000
amounting to $38.5 million, $38.0 million, and $37.4 million, respectively, have
been reclassified and presented as revenues and expenses in the corresponding
Consolidated Statements of Income. The application of EITF 01-14 had no impact
on net income.
STOCK OPTIONS - As of December 31, 2002, the Company has stock-based employee
compensation plans (Note 7). The Company accounts for these stock option plans
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related Interpretations ("APB No. 25").
Accordingly, the Company does not recognize compensation cost in connection with
these plans, as all options granted under these plans had an exercise price
equal to the market value of ChoicePoint common stock on the date of grant. If
the Company had elected to apply the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123") to stock-based employee
compensation, net income and net income per share would have been reduced to the
pro forma amounts indicated in the following table (in thousands, except per
share information):
Year Ended December 31, 2002 2001 2000
- ----------------------- ------- ------- -------
Net income, as reported $89,827 $50,334 $43,822
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
stock option awards,
net of related tax effects 15,360 9,696 6,443
------- ------- -------
Pro forma net income $74,467 $40,638 $37,379
------- ------- -------
Earnings per share:
Basic - as reported $ 1.07 $ 0.61 $ 0.55
Basic - pro forma 0.88 0.50 0.47
Diluted - as reported $ 1.01 $ 0.58 $ 0.52
Diluted - pro forma 0.85 0.47 0.44
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes Option Pricing Model with the following assumptions:
Year Ended December 31, 2002 2001 2000
- ----------------------- ------ ------ ------
Dividend yield 0% 0% 0%
Expected volatility 33% 29% 32%
Risk-free interest rate 4.4% 4.6% 6.6%
Expected life in years 4.77 6.53 6.02
Weighted average fair value
of options granted $14.31 $11.61 $ 8.32
PROPERTY AND EQUIPMENT - Property and equipment at December 31, 2002 and 2001
consisted of the following (in thousands):
December 31, 2002 2001
- ------------ --------- ---------
Land, buildings, and improvements $ 30,824 $ 28,932
Data processing equipment and furniture 135,718 121,531
Less accumulated depreciation (100,321) (85,534)
--------- --------
$ 66,221 $ 64,929
========= ========
The cost of property and equipment is depreciated primarily on the
straight-line basis over estimated asset lives of 30 to 40 years for buildings;
useful lives, not to exceed lease terms, for leasehold improvements; three to
eight years for data processing equipment and eight to ten years for furniture.
GOODWILL - Except for the DBT Merger accounted for as a pooling of interests,
the Company accounts for all acquisitions using the purchase method of
accounting. As a result, goodwill and other acquisition intangibles are recorded
at the time of purchase based on internal evaluations and independent
third-party appraisals. Goodwill for acquisitions prior to July 1, 2001 was
amortized on a straight-line basis over ten to 40 years. Accumulated
amortization was $56.7 million as of December 31, 2001.
BEGINNING IN 2002, THE COMPANY IS NO LONGER AMORTIZING GOODWILL. THE COMPANY
RECORDED A GOODWILL IMPAIRMENT OF $39.1 MILLION IN 2002 AND FUTURE ANNUAL
IMPAIRMENT REVIEWS MAY RESULT IN PERIODIC WRITEDOWNS OF GOODWILL.
In June 2001, the Financial Accounting Standards Board ("FASB") 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. 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 impairment whereby goodwill
impairment is deemed to exist if the net book value of a reporting unit exceeds
its estimated fair value. As a result of the adoption of these accounting
standards, certain intangibles were subsumed into goodwill and amortization of
these assets and goodwill was discontinued effective January 1, 2002. Upon
completion of our analysis for goodwill impairment in the second quarter of 2002
in accordance with the adoption of SFAS No. 142, ChoicePoint recorded a non-cash
charge of $39.1 million ($24.4 million net of taxes) to reduce the carrying
value of its goodwill retroactive to January 1, 2002. Such charge is reflected
as a cumulative effect of change in accounting principle in the accompanying
Consolidated Statements of Income. In calculating the goodwill impairment
charge, the fair value of the impaired reporting units was estimated using a
discounted cash flow methodology. This impairment charge is due to increased
competition and pricing pressures and relates primarily to the 1998 acquisition
of EquiSearch Services, Inc. and the Internet business acquired as part of the
DBT Merger in May 2000. The Company also completed its annual goodwill
impairment review as of October 31, 2002. No additional impairment charge was
recorded as a result of this review.
34 CHOICEPOINT 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
ChoicePoint 2002 Annual Report
A summary of the change in goodwill during the year ended December 31, 2002, by
business segment, is as follows:
Net Goodwill at Acquisitions NET GOODWILL AT
(In thousands) December 31, 2001 & Adjustments Impairments DECEMBER 31, 2002
- -------------- ----------------- ------------- ----------- -----------------
Insurance $ 35,220 $ 10,439 $ -- $ 45,659
B&G 264,788 124,985 (35,009) 354,764
Marketing 150,904 31,388 (4,107) 178,185
----------------- ------------- ----------- -----------------
Total $450,912 $166,812 $(39,116) $578,608
================= ============= =========== =================
The 2001 and 2000 results on a historical basis do not reflect the provisions of
SFAS No. 142. Had ChoicePoint adopted SFAS No. 142 on January 1, 2000, the
historical net income and basic and diluted EPS would have changed to the
adjusted amounts indicated below for the years ended December 31:
(In thousands, except per share data) 2002 2001 2000
- ------------------------------------- --------- -------- --------
Income before cumulative effect of change in accounting principle $ 114,243 $ 50,334 $ 43,822
Goodwill amortization, net of taxes -- 13,242 13,195
--------- -------- --------
Adjusted net income $ 114,243 $ 63,576 $ 57,017
--------- -------- --------
Basic EPS before change in accounting principle $ 1.36 $ 0.61 $ 0.55
Goodwill amortization -- 0.16 0.16
--------- -------- --------
Adjusted basic EPS $ 1.36 $ 0.77 $ 0.71
--------- -------- --------
Diluted EPS before change in accounting principle $ 1.28 $ 0.58 $ 0.52
Goodwill amortization -- 0.15 0.16
--------- -------- --------
Adjusted diluted EPS $ 1.28 $ 0.73 $ 0.68
--------- -------- --------
OTHER ACQUISITION INTANGIBLE ASSETS - Other acquisition intangibles, excluding
trademarks/tradenames totaling $3.3 million included in other intangible assets
below, are being amortized on a straight-line basis over three to ten years.
Other acquisition intangibles in 2001 included workforce which was subsumed into
goodwill in 2002 in accordance with SFAS No. 142. Amortization expense was $6.1
million for 2002 and $5.3 million for 2001. Estimated amortization expense for
the next five years is $7.6 million for 2003, $7.2 million for 2004, $6.6
million for 2005, $5.4 million for 2006 and $4.4 million for 2007. Other
Acquisition Intangible Assets subject to amortization at December 31, 2002 and
2001 consisted of the following:
2002 2001
ACCUMULATED Accumulated
(In thousands) Gross AMORTIZATION Net Gross Amortization Net
- -------------- ------- ------------ ------- ------- ------------ -------
Customer relationships $23,353 $ (3,404) $19,949 $16,272 $ (663) $15,609
Purchased data files 14,815 (14,066) 749 14,815 (13,197) 1,618
Internally developed software 14,232 (9,264) 4,968 11,532 (8,355) 3,177
Non-compete agreements 11,767 (2,828) 8,939 3,310 (2,586) 724
Other intangible assets 11,300 (3,333) 7,967 8,500 (3,034) 5,466
Workforce -- -- -- 1,050 (464) 586
------- -------- ------- ------- -------- -------
$75,467 $(32,895) $42,572 $55,479 $(28,299) $27,180
OTHER ASSETS - Other assets at December 31, 2002 and 2001 consisted of the
following (in thousands):
December 31, 2002 2001
- ------------ ------- -------
System development and other deferred costs, net $70,504 $60,403
Royalty patents, net 3,098 4,745
Other -- 2,370
------- -------
$73,602 $67,518
======= =======
CHOICEPOINT 2002 ANNUAL REPORT 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
ChoicePoint 2002 Annual Report
For the years ended December 31, costs of software developed for
internal use of approximately $19.3 million in 2002, $24.9 million in 2001, and
$9.8 million in 2000 were capitalized and are included in system development and
other deferred costs. The amounts capitalized include certain direct costs,
including independent contractor and payroll costs in accordance with SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." System development and other deferred costs are being amortized
on a straight-line basis primarily over three to five years. Accumulated
amortization was $47.9 million as of December 31, 2002 and $39.4 million as of
December 31, 2001.
The Company owns a 62.5% interest in laser patent revenue relating to
certain patents involving laser technology which expire between November 2004
and May 2005. Upon the expiration of the applicable patent, the Company loses
its right to exclude others from exploiting the inventions claimed therein, and
accordingly, the obligation of third parties to make royalty payments will
cease.
The Company regularly evaluates whether events and circumstances have
occurred that indicate the carrying amount of other long-lived assets may
warrant revision or may not be recoverable. When factors indicate that other
assets should be evaluated for possible impairment, the Company uses an estimate
of the future undiscounted net cash flows of the related business over the
remaining life of the other assets in measuring whether those assets are
recoverable. If the carrying amount exceeds undiscounted cash flows, an
impairment loss would be recognized for the difference between the carrying
amount and its estimated fair value on a discounted cash flow methodology. For
the years ended December 31, 2002 and 2001, approximately $5.4 million and $12.7
million of other long-lived assets were written down to fair value and
recognized as unusual items, respectively (Note 10).
DEPRECIATION AND AMORTIZATION EXPENSE - Depreciation and amortization expense
for 2002, 2001, and 2000 consisted of the following (in thousands):
Year Ended December 31, 2002 2001 2000
- ----------------------- ------- ------- -------
Property and equipment $20,104 $23,297 $21,582
Goodwill -- 17,516 15,709
Other acquisition intangibles 6,133 5,413 4,477
Royalty patents 1,695 1,695 1,695
System development and other
deferred costs 17,827 11,591 10,156
------- ------- -------
$45,759 $59,512 $53,619
======= ======= =======
CONSOLIDATED STATEMENTS OF CASH FLOWS - The Company considers short-term cash
investments with original maturities of three months or less to be cash
equivalents.
The tax payments made by ChoicePoint were approximately $43.7 million
in 2002, $46.6 million in 2001, and $25.4 million in 2000. Interest paid on
long-term debt totaled $8.5 million in 2002, $10.0 million in 2001, and $12.7
million in 2000. In June 2000, the Company sold its remaining investments in
state and municipal bonds that were classified as short-term investments
available for sale as of December 31, 1999. In 2002, the Company obtained
$468,000 in investments in corporate bond mutual funds in connection with its
acquisition of Vital Chek Network, Inc. These investments are included in other
current assets as of December 31, 2002.
In 2002, 2001, and 2000, the Company acquired various businesses that
were accounted for as purchases (Note 4). In conjunction with these
transactions, liabilities were assumed as follows (in thousands):
Year Ended December 31, 2002 2001 2000
- ----------------------- -------- -------- --------
Fair value of assets acquired $201,058 $181,570 $119,667
Cash paid for acquisitions 192,582 157,348 110,613
-------- -------- --------
Liabilities assumed $ 8,476 $ 24,222 $ 9,054
======== ======== ========
FINANCIAL INSTRUMENTS AND DERIVATIVES - The Company's financial instruments
recorded on the balance sheet consist primarily of cash and cash equivalents,
accounts receivable, marketable securities, accounts payable, and debt. The
carrying amounts approximate their fair values because of the short maturity of
these instruments or, in the case of debt, because it bears interest at current
market rates.
Derivative financial instruments at December 31, 2002 and 2001 consist
of interest rate swap agreements (Note 5) entered into to limit the effect of
changes in LIBOR (a benchmark interest rate) on the Company's LIBOR-based
payments, including the synthetic leases and Credit Facility. Amounts currently
due to or from interest rate swap counterparties are recorded in expense in the
period in which they accrue. The Company measures all derivatives at fair value
and recognizes 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 only derivative instruments are swap agreements (Note 5)
which have been designated as cash flow hedges to hedge the variability in
expected future interest payments on a portion of the Company's LIBOR-based
payments and, as such, the effective portions of changes in fair value are
reported in cumulative other comprehensive loss and are subsequently
reclassified into earnings when the hedged item affects earnings. The Company
formally documents all relationships between hedging instruments and hedged
items, as well as its risk management objectives and strategies for undertaking
various hedge transactions. The Company assesses, on an ongoing basis, whether
the derivatives that are used in hedging transactions are highly effective in
offsetting changes in fair value or cash flows of hedged items. Should it be
determined that a derivative is not highly effective as a hedge, the Company
will discontinue hedge accounting treatment. The Company does not enter into
derivative financial instruments for trading or speculative purposes. The fair
value of the interest rate swap agreements, obtained from a counterparty based
on its internal valuation models, was a liability of $4.8 million as of December
31, 2002 and a liability of $6.1 million at December 31, 2001.
36 CHOICEPOINT 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
ChoicePoint 2002 Annual Report
OTHER NEW ACCOUNTING PRONOUNCEMENTS - In July 2001, the FASB issued SFAS No.
143, "Accounting for Asset Retirement Obligations" which requires companies to
record the fair value of a liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially recorded, the
cost is capitalized by increasing the carrying amount of the related long-lived
asset. On an interim and annual basis, the liability is adjusted to its present
value and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, a gain or loss may be incurred
based on the remaining balance. SFAS No. 143 is effective for the Company
beginning in 2003. We are currently evaluating the impact of this statement
on our Consolidated Financial Statements but do not expect its adoption will
have a material impact on the Company's future consolidated results of
operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which requires costs associated
with exit or disposal activities to be recognized when the costs are incurred,
rather than at a date of commitment to an exit or disposal plan. The FASB bases
the accrual of an exit or disposal cost on the existence of a liability that
constitutes an "obligation" both legally and socially as defined under FASB
Statement of Concept No. 6. SFAS No. 146 is effective for disposal activities
initiated after December 31, 2002.
In November 2002, the FASB issued interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," ("FIN 45"). This interpretation
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guaranty, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are
effective for the Company as of December 31, 2002. The initial recognition and
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. As of December 31, 2002,
there is no impact of this statement on our Consolidated Financial Statements.
In January 2003, the FASB issued FIN 46, which addresses consolidation
of business enterprises of variable interest entities ("VIE") and requires
companies with a controlling financial interest in a VIE to include the assets,
liabilities and results of activities of the VIE in the consolidated financial
statements of the company. FIN 46 is effective immediately for VIE's created
after January 31, 2003 and is effective for the quarter ending June 30, 2003 for
all VIE's that existed prior to January 31, 2003. The Company has accounted for
the synthetic leases as operating leases and has recorded rent expense. FIN 46
might change current generally accepted accounting principles in the United
States of America related to synthetic leases. The Company is currently
evaluating the impact of this new standard which may require the Company to
modify its synthetic leases to maintain off-balance sheet treatment.
4 ACQUISITIONS AND DIVESTITURES
ACQUISITIONS - During 2002, 2001, and 2000, the Company acquired 100% of the
following businesses:
Date
Business Acquired
- -------- -------------
Accident Report Services, Inc. December 2002
Vital Chek Network, Inc. December 2002
Resident Data, Inc. October 2002
L&S Report Service, Inc. July 2002
Total eData Corporation April 2002
Experian Information Solutions, Inc. (marketing
and list extraction and reporting businesses) January 2002
Marketing Information & Technology, Inc. July 2001
Pinkerton's, Inc. (pre-employment and
drug testing businesses) July 2001
The Bode Technology Group, Inc. April 2001
National Medical Review Offices, Inc. April 2001
Insurity Solutions, Inc. March 2001
BTi Employee Screening Services, Inc. February 2001
ABI Consulting, Inc. February 2001
Drug Free Consortium, Inc. December 2000
Cat Data Group, LLC November 2000
VIS'N Service Corporation November 2000
RRS Police Records Management, Inc. October 2000
Practical Computer Concepts, Inc.,
d/b/a Fraud Defense Network March 2000
NSA Resources, Inc. February 2000
Statewide Data Services, Inc. January 2000
The acquisitions above were accounted for as purchases, and the
results of operations from these acquisitions are included in ChoicePoint's
consolidated results from the date acquired. In addition, the Company merged
with DBT (Note 2) in 2000 and accounted for the Merger as a pooling of
interests.
THE DETERMINATION OF FAIR VALUE OF ASSETS ACQUIRED REQUIRES A HIGH DEGREE OF
JUDGMENT AND THE USE OF ESTIMATES. THE COMPANY GENERALLY USES INTERNAL CASH FLOW
MODELS, OTHER EVALUATIONS, AND THIRD-PARTY APPRAISALS IN DETERMINING FAIR
VALUES.
CHOICEPOINT 2002 ANNUAL REPORT 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
ChoicePoint 2002 Annual Report
On December 2, 2002, ChoicePoint acquired 100 percent of the
outstanding common stock of Vital Chek Network, Inc. and Vital Chek of Canada,
Inc. (collectively, "VitalChek"). The results of VitalChek's operations have
been included in the consolidated financial statements since that date.
VitalChek has been assigned to the B&G segment. VitalChek is a provider of
proprietary technology and data management services that facilitate the remote
ordering of certified birth, death, marriage, and divorce certificates, and is
based in Nashville, Tennessee. As a result of the acquisition, ChoicePoint
extends its current product and services offerings that help verify a person's
identity to include the birth certificates that often begin the process.
The purchase price was $120.0 million in an initial cash payment with
additional earnouts over the next three years if VitalChek exceeds certain
financial targets. The following table summarizes the estimated fair values of
assets acquired and liabilities assumed at the date of acquisition. ChoicePoint
is in the process of obtaining independent third-party valuations of certain
intangible assets; thus, the allocation of the purchase price may be revised
(in thousands):
Current assets $ 4,231
Property, plant and equipment, net 1,176
Goodwill 105,184
Other acquisition intangible assets 12,300
Other assets 765
--------
Total assets acquired 123,656
Current liabilities 3,045
Other long-term liabilities 611
--------
Total liabilities assumed 3,656
--------
Net assets acquired $120,000
========
The goodwill listed above is fully deductible for tax purposes. Of the
$12.3 million of acquired intangible assets, $8.7 million was assigned to
non-compete agreements which will have a useful life of seven years, $1.6
million was assigned to software which will have a useful life of three years
and $2.0 million was assigned to trademarks/tradenames that will have an
indefinite life.
The Company's unaudited pro forma combined historical results as of
December 31, as if VitalChek had been acquired at the beginning of 2002 and
2001, respectively, are estimated to be:
(In thousands, except per share information) 2002 2001
-------- --------
Revenue $813,435 $711,363
Income before cumulative effect
of change in accounting principle 113,620 44,996
Net income 89,204 44,996
EPS, diluted $ 1.00 $ 0.52
Also in 2002, the Company acquired the insurance market on-line
consumer credit reporting, marketing and pre-screen list extract services of
Experian Information Solutions, Inc., based in Chicago, Illinois; Total eData
Corporation, an e-mail database company based in Little Rock, Arkansas;
Resident Data, Inc., a residential screening services provider to apartment
management companies based in Richardson, Texas; and two police reports
providers to the P&C insurance industry, L&S Report Service, Inc., based in
Phoenix, Arizona, and Accident Report Services, Inc., based in Oklahoma City,
Oklahoma.
Excluding VitalChek, 2002 acquisitions had an aggregate purchase
price of $72.6 million which was paid in cash, $59.8 million was allocated to
goodwill, of which $30.9 million is expected to be fully deductible for tax
purposes, and $9.9 million to other acquisition intangible assets as follows
based on preliminary allocations:
Weighted Average
(In thousands) Amount Amortization Period
------ -------------------
Internally developed software $1,500 3 years
Trademark/tradename 1,300 Indefinite life asset
Customer relationships 7,081 5 years
------
$9,881
======
In 2001, the Company acquired Marketing Information & Technology,
Inc., a provider of large-scale marketing systems for Fortune 500 clients,
based in the Boston, Massachusetts area; the pre-employment and drug testing
businesses of Pinkerton's, Inc., a unit of Securitas AB of Sweden, based in
Charlotte, North Carolina; The Bode Technology Group, Inc., a premier provider
of DNA identification services, based in Springfield, Virginia; certain assets
of National Medical Review Offices, Inc., a large provider of medical review
office services, based in Los Angeles, California; Insurity Solutions, Inc., a
provider of Internet-based rating, underwriting, and policy-servicing tools
based in Cumming, Georgia; BTi Employee Screening Services, Inc., a pre-
employment background screening organization based in Dallas, Texas; and ABI
Consulting, Inc., a third-party administrator of employee drug testing
programs, based in Murray, Utah.
The 2001 acquisitions had an aggregate purchase price of $157.3
million, which was paid primarily in cash, $138.1 million was allocated to
goodwill, of which $99.0 million is expected to be fully deductible for tax
purposes, and $18.4 million to intangible assets, which are being amortized
over three to ten years (primarily customer relationships, data files, and
software). Goodwill from the 2001 acquisitions prior to July 1, 2001 of $52.4
million was amortized on a straight-line basis over 25 to 30 years through
December 31, 2001 and other intangible assets are amortized over three to five
years. Goodwill from acquisitions after June 2001 of $85.7 million was not
amortized in accordance with SFAS No. 142. Goodwill of $4.2 million was
allocated to Insurance Services, $94.1 million to Business & Government
Services and $39.8 million to Marketing Services.
38 CHOICEPOINT 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
ChoicePoint 2002 Annual Report
The 2000 acquisitions had an aggregate purchase price of $110.6
million, with $106.5 million allocated to goodwill and $3.3 million to
intangible assets (primarily data files and software). Goodwill from the 2000
acquisitions was amortized on a straight-line basis over ten to 30 years through
December 31, 2001 and other intangible assets are amortized over three to five
years.
The allocation of purchase price to the assets and liabilities of
certain acquisitions is preliminary and subject to change based on the
resolutions of pre-acquisition contingencies. The remaining accrual of $3.6
million as of December 31, 2002 for transaction costs related to the above
acquisitions, will primarily be used for future payments under lease
terminations and related office closure expenses. Certain of these acquisitions
are subject to contingent payment agreements based on revenue and operating
profit goals over the next two to three years. The Company will record goodwill
related to these contingent payment agreements as goals are met and payments are
reasonably estimable and probable.
The pro forma effect of 2002, 2001 and 2000 purchased acquisitions,
other than VitalChek, is not material to the consolidated financial statements.
DIVESTITURES - In August 2001, the Company sold its laboratory services
business for approximately $49 million and retained certain assets. The results
of this business historically had been included in the Insurance Services
business segment. Operating segment results have been restated for all periods
to reflect the sale of this line of business (see Note 11). Consolidated
operating income for the year ended December 31, 2001 includes a $10.9 million
pretax loss on the sale, which includes transaction-related costs of $6.9
million, including severance and retention commitments for approximately 170
employees. Net income for the year ended December 31, 2001 includes a $21.4
million (including tax expense of $10.5 million) after-tax loss on the sale of
this line of business.
In November 1998, the Company entered into a strategic partnership with
Experian Limited (U.K.) leading to the sale of ChoicePoint Limited, the
Company's United Kingdom-based insurance services division. The sale was
completed in January 2000 with no material gain on the sale of the business. In
connection with the strategic partnership with Experian Limited, ChoicePoint has
recognized earnings of $2.1 million in 2002, $1.9 million in 2001, and $450,000
in 2000.
5 DEBT AND OTHER FINANCING
Long-term debt at December 31, 2002 and 2001 was as follows:
(In thousands)
December 31, 2002 2001
--------- ---------
Credit Facility $ 95,000 $ --
Former Credit Facility -- 155,000
Receivables Facility 85,000 --
Other long-term debt 2,100 2,225
Capital leases 346 1,591
--------- ---------
182,446 158,816
Less current maturities (85,387) (156,426)
--------- ---------
$ 97,059 $ 2,390
========= =========
On May 10, 2002, ChoicePoint entered into a $325 million unsecured
revolving credit facility (the "Credit Facility") with a group of banks that
extends through a termination date of May 2005 and bears interest at variable
rates based on LIBOR plus an applicable margin. The applicable margins range
from .475% to 1.2% per annum based on ChoicePoint's leverage ratio. The average
interest rate based on the terms of the Credit Facility at December 31, 2002
was 2.0%. Prior to May 10, 2002, the Company had a $250 million unsecured
revolving credit facility (the "Former Credit Facility") with a group of banks.
The average interest rate based on the terms of the Former Credit Facility, and
adjusted for an interest rate swap agreement discussed below, at December 31,
2001 was 5.6%.
The Credit Facility contains covenants customary for facilities of this
type. Such covenants include limitations, in certain circumstances, on the
ability of the Company and its subsidiaries to (i) effect a change of control of
the Company, (ii) incur certain types of liens, and (iii) transfer or sell
assets. The Credit Facility also requires compliance with financial covenants,
including (i) maximum leverage and (ii) minimum fixed charge coverage.
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, 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, may be extended in one-year terms and has been extended to
July 2003. The Receivables Facility, which does not qualify for off-balance
sheet treatment under SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" due to certain contractual
removal-of-accounts provisions, has been recorded as an on-balance sheet
financing transaction. The Company believes the Receivables Facility provides a
low cost of financing and is an additional source of debt capital with
diversification from other alternatives. Net proceeds from the Receivables
Facility were $85.0 million at December 31, 2002 and were used to finance a
portion of the VitalChek acquisition (see Note 4). There were no sales of
accounts receivable during 2001.
In 1997, the Company entered into a $25 million synthetic lease
agreement for the Company's headquarters building. Under the synthetic lease
agreement, a third-party lessor purchased the property, paid for the
construction and leased the building to the Company. In 2001, the Company
entered into another synthetic lease agreement for up to $52 million to finance
the construction of its new data center facility, which is anticipated to be
completed during the first half of 2003. Both leases expire in 2007, at which
time the Company has the following options for each lease: renew the lease for
an additional five years, purchase the building for the original cost or
remarket the property. If the Company elects to remarket the properties,
ChoicePoint must guarantee the lessor 80% to 85% of the original cost.
The Company has accounted for the synthetic leases as operating leases
and has recorded rent expense. The Financial Accounting Standards Board has
recently issued a new standard that might change current generally accepted
accounting principles in the United States of America related to synthetic
leases. The Company is currently evaluating the impact of this new standard
which may require the Company to
CHOICEPOINT 2002 ANNUAL REPORT 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
ChoicePoint 2002 Annual Report
modify its synthetic leases to maintain off-balance sheet treatment. If the
Company had elected to purchase the properties instead of entering into the
synthetic leases or if the Company was required to change its accounting for
the synthetic leases based on a new accounting principle, total assets and
debt would have increased by $54.3 million at December 31, 2002 and $25.0
million at December 31, 2001 and the Company would have recorded additional
depreciation expense of approximately $800,000 related to the $25 million
synthetic lease for the years ended December 31, 2002 and 2001. No depreciation
would have been recorded related to the amount drawn under the $52 million
synthetic lease since the data center facility is still under construction.
At December 31, 2002, ChoicePoint had four interest rate swap
agreements (the "Swap Agreements") outstanding that reduce the impact of
changes in the benchmark interest rate (LIBOR) on its LIBOR-based payments on
the synthetic leases. One interest rate swap agreement has a notional amount
of $25 million and matures in August 2007. The other three interest rate swap
agreements are forward starting swaps which have a total notional amount of $42
million, become effective May 2003 and mature in August 2007. These Swap
Agreements involve the receipt of a variable rate and payment by ChoicePoint of
fixed rates between 4.6% and 6.5%. ChoicePoint has designated all of these swaps
as hedges of the variability in expected future interest payments on $67
million of borrowings. The Company had a fifth interest rate swap agreement to
reduce the impact of changes in the benchmark interest rate (LIBOR) on $125
million of borrowings which expired in August 2002. The Company is exposed to
credit loss in the event of non-performance by the other parties to the Swap
Agreements. However, the Company does not anticipate nonperformance by the
counterparties.
Scheduled maturities of long-term debt subsequent to December 31, 2002
are as follows: $85.4 million in 2003, $204,000 in 2004, $95.2 million in 2005,
$145,000 in 2006, $155,000 in 2007 and $1.4 million thereafter.
6 INCOME TAXES
The Company records deferred income taxes using enacted tax laws and rates for
the years in which the taxes are expected to be paid. Deferred income tax
assets and liabilities are recorded based on the differences between the
financial reporting and income tax bases of assets and liabilities. The
provision for income taxes consists of the following:
(In thousands)
Year Ended December 31, 2002 2001 2000
-------- ------- -------
Current:
Federal $ 55,306 $51,304 $26,642
State 5,791 3,827 3,508
Foreign -- 256 193
-------- ------- -------
61,097 55,387 30,343
-------- ------- -------
Deferred:
Federal (4,744) 1,979 2,606
State 164 1,313 1,475
Foreign -- 8 64
-------- ------- -------
(4,580) 3,300 4,145
-------- ------- -------
Total $ 56,517 $58,687 $34,488
======== ======= =======
The provision for income taxes is based upon income before income taxes, as
follows:
(In thousands)
Year Ended December 31, 2002 2001 2000
-------- -------- -------
United States $146,344 $108,429 $77,744
Foreign -- 592 566
-------- -------- -------
$146,344 $109,021 $78,310
======== ======== =======
The provision for income taxes is reconciled with the federal
statutory rate, as follows:
Year Ended December 31, 2002 2001 2000
---- ---- ----
Federal statutory rate 35.0% 35.0% 35.0%
State and local taxes,
net of federal tax benefit 2.6 2.5 3.4
Tax effect resulting
from foreign activities -- 0.1 --
Goodwill amortization -- 1.7 2.8
Merger-related costs
and unusual items -- 14.1 4.0
Other 1.0 0.4 (1.2)
---- ---- ----
Overall effective rate 38.6% 53.8% 44.0%
==== ==== ====
Components of the Company's deferred income tax assets and liabilities at
December 31, 2002 and 2001 are as follows:
(In thousands)
December 31, 2002 2001
-------- --------
Deferred income tax assets:
Postretirement benefits $ 15,682 $ 18,004
Reserves and accrued expenses 7,515 7,266
Employee compensation programs 7,179 8,934
Goodwill impairment 14,700 --
Other 6,773 2,709
-------- --------
51,849 36,913
-------- --------
Deferred income tax liabilities:
Purchased software, data files, technology,
and other assets (14,000) (5,752)
Depreciation (3,576) (1,708)
Deferred expenses (9,820) (8,204)
Other (5,224) (4,800)
-------- --------
(32,620) (20,464)
-------- --------
Net deferred income tax assets $ 19,229 $ 16,449
======== ========
40 CHOICEPOINT 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
ChoicePoint 2002 Annual Report
7 SHAREHOLDERS' EQUITY
STOCK SPLIT - On June 6, 2002, ChoicePoint effected a four-for-three stock
split in the form of a stock dividend for shareholders of record as of May 16,
2002. On March 7, 2001, ChoicePoint effected a three-for-two stock split in
the form of a stock dividend for shareholders of record as of February 16,
2001. Share and per share data for all periods presented have been adjusted to
reflect the splits.
Effective October 3, 2002, shareholders of the Company approved an
amendment to the Articles of Incorporation to increase the authorized common
stock of the Company from 100 million to 400 million shares.
STOCK OPTIONS - Prior to the Spinoff, the ChoicePoint Inc. 1997 Omnibus Stock
Incentive Plan (the "Omnibus Plan") was approved for ChoicePoint and ratified by
the shareholders in 1999. The Omnibus Plan authorizes grants of stock options,
stock appreciation rights, restricted stock, deferred shares, performance
shares, and performance units for an aggregate of 20 million shares of
ChoicePoint common stock. The Omnibus Plan requires options be granted at the
fair market value of the underlying stock at the date of grant, except the
options granted as replacement options under the prior Equifax equity-based
plans, with a maximum term of ten years. In connection with the Merger (Note
2), outstanding stock options under the stock option plan maintained by DBT
were assumed by the Company. Stock option transactions summarized below
include amounts for the Omnibus Plan and the DBT plan using the Merger exchange
rate of .525 (pre-split) for each DBT option. In 2002, options for 2.9 million
shares were granted at fair market value under the Omnibus Plan with a weighted
average option price of $40.04.
A summary of changes in all outstanding options and the related weighted
average exercise price per share is as follows (shares in thousands):
December 31, 2002 2001 2000
----------------------- ---------------------- -----------------------
SHARES AVG. PRICE Shares Avg. Price Shares Avg. Price
------ ---------- ------ ---------- ------ ----------
Balance, beginning of year 11,840 $15.31 11,986 $12.56 13,141 $12.53
Granted 2,946 40.04 2,554 26.39 2,083 19.30
Canceled/forfeited (327) 32.49 (580) 19.64 (1,252) 16.40
Exercised (2,199) 11.67 (2,120) 11.89 (1,986) 17.78
------ ------ ------ ------ ------ ------
Balance, end of year 12,260 $21.44 11,840 $15.31 11,986 $12.56
------ ------ ------ ------ ------ ------
Exercisable at end of year 7,285 $13.82 6,699 $11.20 6,321 $10.73
====== ====== ====== ====== ====== ======
The following table summarizes information about stock options
outstanding at December 31, 2002 (shares in thousands):
Options Outstanding Options Exercisable
----------------------------------------------------- --------------------------------
Weighted Average Weighted Weighted
Remaining Contractual Average Average
Range of Exercise Prices Shares Life in Years Exercise Price Shares Exercise Price
- ------------------------ ------ --------------------- -------------- ------ --------------
$ 0.001-$13.340 3,631 4.2 $ 8.45 3,631 $ 8.45
$13.341-$17.788 1,834 5.8 14.06 1,721 14.06
$17.789-$22.235 1,522 6.6 19.14 769 19.20
$22.236-$26.682 2,009 7.9 25.98 872 25.97
$26.683-$35.576 491 7.1 29.02 292 28.62
$35.577-$40.630 1,830 9.0 38.73 - -
$40.631-$44.470 943 9.3 42.38 - -
CHOICEPOINT 2002 ANNUAL REPORT 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
ChoicePoint 2002 Annual Report
On a periodic basis, certain key officers and directors of ChoicePoint
are granted restricted stock under the Omnibus Plan. As of December 31, 2002,
115,000 restricted shares were outstanding. The compensation cost charged
against income for restricted stock plans was $5.9 million in 2002, $5.9
million in 2001, and $4.0 million in 2000.
The Company applies APB No. 25 and related interpretations in
accounting for its stock option plans. Accordingly, the Company does not
recognize compensation cost in connection with its stock option plans. See Note
3 for the pro forma effect if the Company had elected to recognize compensation
cost for these plans based on the fair value at grant date as prescribed by
SFAS No. 123.
SHAREHOLDER RIGHTS PLAN - On October 29, 1997, the Company's board of directors
adopted a Shareholder Rights Plan (the "Rights Plan"). The Rights Plan contains
provisions to protect the Company's shareholders in the event of an unsolicited
offer to acquire the Company, including offers that do not treat all
shareholders equally, the acquisition in the open market of shares constituting
control without offering fair value to all shareholders, and other coercive,
unfair, or inadequate takeover bids and practices that could impair the ability
of the ChoicePoint board of directors to fully represent shareholders'
interests. Pursuant to the Rights Plan, the ChoicePoint board of directors
declared a dividend of one Share Purchase Right (a "Right") for each
outstanding share of the Company's common stock as of November 14, 1997. The
Rights will be represented by, and trade together with, the Company's common
stock. The Rights will separate upon passage of time in certain events includ-
ing the acquisition of 15% or more of the Company's common stock by a person or
group of affiliated or associated persons ("Associated Persons"). The Rights
will not become exercisable unless certain triggering events occur. Among the
triggering events will be the acquisition of 20% or more of the Company's
common stock by Associated Persons. Unless previously redeemed by the
ChoicePoint board of directors, upon the occurrence of one of the specified
triggering events, each Right that is not held by the 20% or more shareholder
will entitle its holder to purchase one share of common stock or, under certain
circumstances, additional shares of common stock at a discounted price. The
Rights will cause substantial dilution to a person or group that attempts to
acquire ChoicePoint on terms not approved by the ChoicePoint board of
directors. Thus, the Rights are intended to encourage persons who may seek to
acquire control of ChoicePoint to initiate such an acquisition through
negotiation with the board of directors.
GRANTOR TRUSTS - ChoicePoint has established two grantor trusts totaling $16.5
million. The funds in the grantor trusts are used to purchase ChoicePoint
common stock in the open market as previously approved by the board of
directors for distribution under its various compensation and benefit plans.
Funds from the grantor trusts totaling $13.4 million have been used to purchase
989,000 shares of ChoicePoint common stock, which are reflected as treasury
stock, at cost, in the December 31, 2002 balance sheet. Cash remaining in the
grantor trusts of approximately $3.1 million at December 31, 2002 and $1.1
million at December 31, 2001 are included in cash and cash equivalents in the
accompanying consolidated balance sheets.
TREASURY STOCK - In addition to the common stock held in the Grantor Trusts, in
accordance with the terms of the awards, ChoicePoint redeemed 24,000 shares of
common stock in 2002 and 53,000 shares in 2001 at market price in consideration
of the minimum tax obligations for restricted stock vestings at a total cost of
$814,000 in 2002 and $2.2 million in 2001.
8 EMPLOYEE BENEFITS
401(K) PROFIT SHARING PLAN - ChoicePoint adopted a 401(k) profit sharing plan,
under which eligible Company employees may contribute up to 25% of their
compensation. ChoicePoint intends to make matching contributions in the form
of ChoicePoint common stock equal to a minimum of 25% of employee contributions
up to the first 6% of an employee's contributions. The match made on eligible
employee contributions was 64% for 2002 and 55% in both 2001 and 2000. Employee
contributions will be invested in one of the available investment funds, as
selected by the employee. Matching contributions will be invested in the
ChoicePoint stock fund. ChoicePoint may make additional contributions based on
achievement of targeted performance levels. DBT had a 401(k) plan which was
frozen effective December 31, 2000. All eligible DBT employees were able to
contribute to the ChoicePoint 401(k) plan effective January 1, 2001. The
expense for the 401(k) profit sharing plans was $4.8 million in 2002, $4.8
million in 2001, and $4.4 million in 2000.
EMPLOYEES MAY DIRECT THEIR RETIREMENT FUNDS TO A VARIETY OF INVESTMENTS, ONLY
ONE OF WHICH IS CHOICEPOINT STOCK. MATCHING CONTRIBUTIONS ARE MADE IN
CHOICEPOINT STOCK.
As a result of the Spinoff, ChoicePoint agreed to contribute to a
defined contribution plan for certain ChoicePoint employees. The additional
benefits are intended to offset the adverse impact of transitioning out of a
defined benefit pension plan and represent the present value of the estimated
future contributions. The expense recognized and amounts contributed to the
401(k) profit sharing plan to offset the adverse impact of transitioning out of
the defined benefit plan was $1.7 million in 2002, 2001, and 2000.
DEFERRED COMPENSATION PLAN - ChoicePoint offers deferred compensation plans
to directors and certain officers of the Company. Under these plans, amounts
earned by an officer or director may be deferred and credited with gains and
losses based upon four different investment alternatives, including ChoicePoint
common stock. The corresponding deferred compensation liability is recorded at
the current fair value of the individual's investment elections and any changes
are recorded as expense in the period incurred. As of December 31, 2002 and
2001, related to these plans, the Company has recorded a liability of $17.3
million and $10.6 million, respectively.
POSTRETIREMENT BENEFITS - As a result of the Spinoff, the Company agreed to
provide certain retiree health care and life insurance benefits for a defined
group of eligible employees. No additional members have been added to this
group since the Spinoff. Health care and life insurance benefits are provided
through a trust. The Company accrues the cost of providing postretirement
benefits for medical and life insurance coverage over the active service period
of each employee.
42 CHOICEPOINT 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
ChoicePoint 2002 Annual Report
The following table presents a reconciliation of the changes in the plan's
benefit obligations and fair value of assets at December 31, 2002 and 2001:
(In thousands)
December 31, 2002 2001
-------- --------
Change in benefit obligation:
Obligation at beginning of year $ 32,737 $ 36,737
Service cost 158 394
Interest cost 2,338 2,831
Actuarial loss (gain) 4,187 (4,351)
Benefit payments (6,244) (2,874)
-------- --------
Obligation at end of year 33,176 32,737
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year -- --
Employer contributions 6,244 2,874
Benefit payments (6,244) (2,874)
-------- --------
Fair value of plan assets at end of year -- --
-------- --------
Funded status:
Funded status at end of year and
net amount recognized (33,176) (32,737)
Unrecognized prior service cost (2,719) (3,785)
Unrecognized gain (5,107) (10,342)
-------- --------
Net amount recognized (41,002) (46,864)
Less current portion (3,600) (2,888)
-------- --------
Accrued benefit cost $(37,402) $(43,976)
======== ========
The current portion is included in other current liabilities in the
accompanying consolidated balance sheets.
Net periodic postretirement benefit expense (income) includes the
following components:
(In thousands)
Year Ended December 31, 2002 2001 2000
------- ------- -------
Service cost $ 158 $ 394 $ 343
Interest cost on accumulated
benefit obligation 2,338 2,831 3,217
Amortization of prior service cost (1,066) (1,847) (2,385)
Amortization of losses (1,047) (371) --
Curtailment gain -- (712) --
------- ------- -------
Net periodic postretirement
benefit expense $ 383 $ 295 $ 1,175
======= ======= =======
In 2001, the Company recognized a curtailment gain due to the sale of
the laboratory services business (Note 4).
The following are weighted average assumptions used in the computation
of postretirement benefit expense and the related obligation:
Year Ended December 31, 2002 2001 2000
----- ---- ----
Discount rate used to determine
accumulated postretirement
benefit obligation at December 31 6.75% 7.50% 8.00%
Initial health care cost trend rate 13.38% 9.27% 8.50%
Ultimate health care cost trend rate 5.50% 5.00% 6.00%
Year ultimate health care cost
trend rate reached 2012 2007 2005
----- ---- ----
If the health care cost trend rate were increased 1% for all future
years, the accumulated postretirement benefit obligation as of December 31, 2002
would have increased 1.7%. The effect of such a change on the aggregate of
service and interest cost for 2002 would have been an increase of 3.3%. If the
health care cost trend rate were decreased 1% for all future years, the
accumulated postretirement benefit obligation as of December 31, 2002 would
have decreased 1.7%. The effect of such a change on the aggregate of service
and interest cost for 2002 would have been a decrease of 2.1%.
The Company continues to evaluate ways in which it can better manage
these benefits and control its costs. Any changes in the plan, revisions to
assumptions or changes in the Medicare program that affect the amount of
expected future benefits may have a significant effect on the amount of the
reported obligation and future annual expense.
In connection with the VitalChek acquisition, as of December 31, 2002
the Company has a defined benefit pension plan which covers substantially all of
the permanent employees of VitalChek. Benefits are based on the employee's years
of service and compensation. This plan is funded in conformity with the funding
requirements of applicable government regulations. For the period from
acquisition to December 31, 2002, the net periodic pension cost associated with
this plan was approximately $20,000. As of December 31, 2002, the fair value of
funded assets was approximately $565,000 and the unfunded accrued pension
benefit cost was approximately $450,000. The Company terminated this plan
effective January 31, 2003.
9 COMMITMENTS AND CONTINGENCIES
LEASES - The Company's operating leases involve principally office space and
office equipment. Rental expense relating to these leases was $19.2 million in
2002, $19.4 million in 2001, and $15.9 million in 2000. Included in the
operating leases are two synthetic lease agreements (Note 5). The Company has
accounted for these synthetic leases as operating leases and has recorded rent
expense. If the Company had elected to purchase the property instead of
entering into the synthetic leases, assets and debt would have increased by
$54.3 million at December 31, 2002 and the Company would have recorded
additional depreciation expense of $833,000 in 2002.
Future minimum payment obligations for noncancelable operating leases
exceeding one year, net of subleases and assuming the utilization of the full
notional amount under the synthetic leases, are as follows as of December 31,
2002:
(In thousands)
Year Amount
-------
2003 $17,586
2004 14,954
2005 11,729
2006 8,279
2007 4,694
Thereafter 7,354
-------
$64,596
=======
CHOICEPOINT 2002 ANNUAL REPORT 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
ChoicePoint 2002 Annual Report
CHANGE IN CONTROL PROVISIONS IN EMPLOYMENT AGREEMENTS - The Company has entered
into employment agreements with certain officers to provide severance pay and
benefits in the event of a "change in control" of ChoicePoint. At December 31,
2002, the maximum contingent liability under the agreements or plans was
approximately $59.4 million. In addition, the Company's restricted stock and
stock option plans provide that all outstanding grants under the Omnibus Plan
shall become fully vested in the event of a change in control.
LITIGATION - A limited number of lawsuits seeking damages are brought against
the Company each year. The Company provides for estimated legal fees and
settlements relating to pending lawsuits. In the opinion of management, the
ultimate resolution of these matters will not have a materially adverse effect
on the Company's financial position, liquidity, or results of operations.
10 MERGER COSTS AND UNUSUAL ITEMS
The Company recorded merger-related costs and unusual items of $7.4 million in
2002, $18.0 million in 2001, and $28.9 million in 2000. The categories of costs
incurred and the accrued balances at December 31, 2002 are summarized below:
REMAINING ACCRUAL AT 2002 2001 2000
(In thousands) DECEMBER 31, 2002 EXPENSE EXPENSE EXPENSE
-------------------- ------- ------- -------
Transaction costs $ -- $ -- $ -- $11,579
Personnel-related costs -- -- 1,832 3,780
Other merger integration costs -- -- 2,433 3,629
Write down of minority investments -- 2,370 -- --
Asset impairments -- 2,985 12,693 6,954
Nonmerger severance 149 609 982 2,353
Other one-time charges 625 1,420 69 654
------ ------- ------- -------
$ 774 $ 7,384 $18,009 $28,949
====== ======= ======= =======
During the second quarter of 2002, the Company recorded an unusual
item charge of $7.4 million. This charge included a write-down of minority
investments in start-up companies of $2.4 million, asset impairments of
technology initiatives of $3.0 million, $0.6 million in severance and
termination benefits, and $1.4 million of expenses primarily related to the
closure of two facilities and remaining obligations. 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 data contract 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 plan exit costs and stay bonuses
for services rendered through June 30, 2000 and severance. Other merger
integration costs primarily include the elimination of duplicative data
contracts. Asset impairments of approximately $7.0 million represent the
write-down of goodwill and other long-lived assets, including internally
developed software.
INHERENT IN THE ACCRUAL OF EXIT COSTS AND ASSUMPTIONS USED IN IMPAIRMENT
ANALYSES ARE CERTAIN MANAGEMENT JUDGMENTS AND ESTIMATES. THE COMPANY
PERIODICALLY REVIEWS AND REEVALUATES THESE ASSUMPTIONS AND ADJUSTS THEM AND THE
RELATED ACCRUALS AS NECESSARY.
44 CHOICEPOINT 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
ChoicePoint 2002 Annual Report
11 SEGMENT DISCLOSURES
During 2002, ChoicePoint reorganized its product lines into three reportable
segments: Insurance Services ("Insurance"), Business & Government Services
("B&G") and Marketing Services ("Marketing") because of a change in managerial
and operational reporting responsibilities and due to recent acquisitions
within the Marketing Services business unit. Historical information in the
following tables has been reclassified to conform with the current presentation.
See Note 1 for a description of each service group. The accounting policies of
the segments are the same as those described in Note 3. Substantially all of
the Company's operations are located in the United States, and no one customer
represents more than 10% of total operating revenue.
DECEMBER 31, 2002 December 31, 2001 December 31, 2000
--------------------- ----------------------------------- -----------------------------------
Unaudited Unaudited
Pro forma Pro forma
OPERATING Operating Operating Operating Operating
(In thousands) REVENUE INCOME Revenue Income(b) Income Revenue Income(b) Income
-------- --------- -------- ---------- --------- -------- ---------- ---------
Insurance $332,521 $ 155,391 $281,046 $ 129,291 $ 127,745 $235,737 $ 103,097 $ 101,994
B&G 308,761 69,424 267,409 56,203 45,089 233,270 38,747 29,377
Marketing core revenue 105,833 32,866 76,461 26,391 22,185 63,549 23,460 19,285
Reimbursable expenses 38,520 -- 38,028 -- -- 37,392 -- --
-------- --------- -------- --------- --------- -------- --------- ---------
Marketing 144,353 32,866 114,489 26,391 22,185 100,941 23,460 19,285
-------- --------- -------- --------- --------- -------- --------- ---------
Royalty (Note 3) 5,855 3,326 6,808 4,400 4,400 6,364 3,804 3,804
Divested and discontinued 72 (206) 24,243 (968) (1,771) 54,613 9,250 8,045
Corporate and shared(a) -- (60,185) -- (49,278) (49,278) -- (43,503) (43,503)
Merger-related costs and
unusual items (Note 10) -- (7,384) -- (18,009) (18,009) -- (28,949) (28,949)
Loss on sale of business -- -- -- (10,853) (10,853) -- -- --
-------- --------- -------- --------- --------- -------- --------- ---------
Total $791,562 $ 193,232 $693,995 $ 137,177 $ 119,508 $630,925 $ 105,906 $ 90,053
======== ========= ======== ========= ========= ======== ========= =========
(In thousands) Divested & Unallocated
December 31, Insurance B&G Marketing Royalty Discontinued & Other(c) Total
--------- -------- --------- ------- ------------ ----------- --------
2002
Assets $180,475 $519,129 $217,203 $5,709 $ -- $56,494 $979,010
Depreciation & amortization 9,584 21,634 8,682 1,697 -- 4,162 45,759
======== ======== ======== ====== ======= ======= ========
2001
Assets(d) 156,673 393,186 190,621 5,902 1,860 84,150 832,392
Depreciation & amortization 9,933 30,798 10,189 1,700 3,078 3,814 59,512
======== ======== ======== ====== ======= ======= ========
2000
Assets(d) 144,739 284,866 144,165 7,586 68,570 54,513 704,439
Depreciation & amortization 9,092 26,215 7,854 1,703 5,979 2,776 53,619
======== ======== ======== ====== ======= ======= ========
(a) Corporate and shared expenses represent costs of support functions,
research and development initiatives, incentives, and profit sharing
that benefit all segments.
(b) Unaudited pro forma operating income represents operating results as
if the discontinuation of goodwill amortization was effective January
1, 2000.
(c) Unallocated and Other includes certain corporate items and
eliminations that are not allocated to the segments.
(d) Where not specifically identifiable, assets have been allocated to
segments based on management estimates.
CHOICEPOINT 2002 ANNUAL REPORT 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
ChoicePoint 2002 Annual Report
12 RELATED PARTY TRANSACTIONS
Three directors and shareholders of ChoicePoint are directors of The Home
Depot, Inc. During 2002, the Company performed services for The Home Depot,
Inc. through the Business & Government Services segment totaling approximately
$14.1 million ($10.0 million net of pass-through expenses). These services were
the result of arm's length negotiations in the ordinary course of business.
One director and shareholder is a director of FleetBoston Financial
Corporation. In 2002, ChoicePoint entered into the Credit Facility with a total
commitment of $325 million, in which Fleet National Bank, a subsidiary of
FleetBoston Financial Corporation, participates in the amount of $25 million.
As of December 31, 2002, $95.0 million is outstanding under the Credit
Facility, of which ChoicePoint is liable to Fleet National Bank for $7.3
million. Total interest paid to Fleet National Bank in 2002 related to this
transaction was $135,000. ChoicePoint also has a synthetic lease with a total
commitment of up to $52 million, in which Fleet National Bank participates in
the amount of $15 million. As of December 31, 2002, $29.3 million was
outstanding under the synthetic lease, of which ChoicePoint is liable to Fleet
National Bank for $8.5 million. No interest was paid to Fleet National Bank
in 2002 related to this transaction. In addition, during 2002, the Company
provided public record information services for FleetBoston Financial
Corporation totaling approximately $30,000. The Credit Facility, synthetic
lease and services performed were the results of arm's length negotiations
conducted in the ordinary course of business.
13 QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
Following is a summary of the unaudited interim results of operations for each
quarter in the years ended December 31, 2002 and 2001:
(In thousands, except per share data) First Second Third Fourth
Year Ended December 31, 2002 Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- --------
Revenue before reimbursable expenses $173,657 $187,834 $194,713 $196,838 $753,042
Reimbursable expenses 10,019 9,923 10,098 8,480 38,520
-------- -------- -------- -------- --------
Total revenue 183,676 197,757 204,811 205,318 791,562
Operating income, excluding unusual items 46,789 48,899 52,767 52,161 200,616
Operating income 46,789 41,515 52,767 52,161 193,232
Income before change in accounting principle 27,414 24,113 31,262 31,454 114,243
Net income 2,998 24,113 31,262 31,454 89,827
EPS before change in accounting principle, basic 0.33 0.29 0.38 0.37 1.36
EPS before change in accounting, diluted 0.31 0.27 0.35 0.35 1.28
Year Ended December 31, 2001
Revenue before reimbursable expenses $155,681 $162,806 $172,851 $164,629 $655,967
Reimbursable expenses 8,950 8,139 10,816 10,123 38,028
-------- -------- -------- -------- --------
Total revenue 164,631 170,945 183,667 174,752 693,995
Operating income, excluding merger costs,
unusual items, and loss on sale of business 33,445 35,581 38,415 40,929 148,370
Operating income 15,436 35,581 27,562 40,929 119,508
Net income 7,213 19,921 12 23,188 50,334
Earnings per share, basic 0.09 0.24 0.00 0.28 0.61
Earnings per share, diluted 0.08 0.23 0.00 0.26 0.58
46 CHOICEPOINT 2002 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
ChoicePoint 2002 Annual Report
The unaudited quarterly financial information reflects all adjustments
that are, in the opinion of management, necessary for a fair presentation of
the results for the interim periods presented. As discussed in Note 3, the
Company began presenting reimbursed out-of-pocket expenses on a gross basis as
revenues and expenses during the second quarter of 2002. Accordingly, all
amounts presented prior to the adoption of EITF 01-14 have been reclassified.
There was no impact to operating income, net income or EPS.
Operating income decreased in the second quarter of 2002 and the first
quarter of 2001 due to $7.4 million and $18.0 million of charges for
merger-related costs and unusual items (Note 10) and the loss on sale of
business in the third quarter of 2001 of $10.9 million (Note 4). The net effect
of these items on net income (loss) was $4.5 million or $0.05 per share in the
second quarter of 2002, $11.4 million or $0.14 per share in first quarter 2001,
and $21.4 million or $0.24 per share in third quarter 2001.
14 SUBSEQUENT EVENTS
In January 2003, ChoicePoint acquired two entities, National Data Retrieval,
Inc., one of the nation's leading providers of public records information for
bankruptcies, civil judgments, and federal and state tax liens based in
Alpharetta, Georgia, and The List Source, Inc. d/b/a Kramer Lead Marketing
Group, a marketing company servicing the life & health insurance and financial
services markets based in Dallas, Texas. The total purchase price of these
acquisitions was approximately $38 million and was paid in cash. The Company is
currently in the process of allocating the purchase price, but preliminarily
estimates that approximately $30 million will be allocated to goodwill, which
will be deductible for tax purposes. This preliminary estimate is subject to
change based on the resolutions of pre-acquisition contingencies.
In February 2003, the Company sold substantially all of the assets of
its CP Commercial Specialists ("CPCS") business to an affiliate of New Mountain
Capital, LLC for approximately $87 million in cash. This transaction is the
culmination of the transformation of ChoicePoint to a data-driven and
technology-oriented business. The sale resulted in a gain of approximately $33
million (net of taxes) which will be recorded in the first quarter of 2003. The
major classes of assets and liabilities of CPCS which were included in the
Consolidated Balance Sheet as of December 31, 2002 are as follows:
(In thousands) 2002
-------
Assets:
Accounts receivable, net $ 6,715
Property and equipment 1,254
Goodwill 10,829
-------
Liabilities:
Accrued salaries and wages 2,244
-------
The unaudited pro forma financial results as if CPCS had been sold as
of January 1, 2002 are as follows (in thousands, except per share amounts):
2002
2002 UNAUDITED
Consolidated Results AS REPORTED PRO FORMA
----------- ---------
Total revenue $791,562 $729,323
Operating income 193,232 182,480
Operating income excluding
unusual items 200,616 189,864
Income before cumulative effect
of change in accounting principle 114,243 108,520
EPS before cumulative effect
of change in accounting principle,
diluted $ 1.28 $ 1.22
2002
2002 UNAUDITED
Insurance Segment AS REPORTED PRO FORMA
----------- ---------
Total revenue $332,521 $270,282
Operating income 155,391 144,639
CHOICEPOINT 2002 ANNUAL REPORT 47
SHAREHOLDER INFORMATION
ChoicePoint 2002 Annual Report
INFORMATION ABOUT CHOICEPOINT
ChoicePoint Inc., a publicly traded company headquartered in the Atlanta suburb
of Alpharetta, GA, is the leading provider of identification and credential
verification services for making smarter decisions in a world challenged by the
reality of risks. Serving the needs of business, government, non-profit
organizations and individuals. As of March 1, 2003, ChoicePoint employs more
than 3,500 people at locations from coast to coast in the United States.
CORPORATE HEADQUARTERS
ChoicePoint Inc.
1000 Alderman Drive
Alpharetta, GA 30005
770-752-6000
www.choicepoint.com
ANNUAL MEETING
The Annual Meeting of Shareholders will be held on April 29, 2003 at
ChoicePoint's headquarters, 1000 Alderman Drive, Alpharetta, GA 30005.
Shareholders are encouraged to attend the meeting, which will begin at 11:00 am
local time. Alpharetta is a suburb of Atlanta.
MARKET INFORMATION
ChoicePoint common stock trades on the world's largest financial market, the
New York Stock Exchange (NYSE), under the symbol "CPS." Shareholders will find
volume and pricing information in leading financial publications as well as the
Investor Relations section of ChoicePoint's Web site (www.choicepoint.com).
As of March 1, 2003, there were 86.7 million common shares outstanding and
ChoicePoint common stock was held by 4,038 shareholders of record.
QUARTERLY STOCK PERFORMANCE
ChoicePoint common stock first traded on August 8, 1997 at a price -- adjusted
for a two-for-one stock split effective November 24, 1999, a three-for-two
split effective March 7, 2001, and a four-for-three split effective June 6,
2002 -- of $8.94. Shown below, on that adjusted basis, are high and low sale
prices for each quarter of 2001 and 2002.
High Low
------ ------
Q1 2001 $32.12 $22.16
Q2 2001 31.99 24.13
Q3 2001 32.72 27.11
Q4 2001 38.99 28.13
Q1 2002 $44.21 $35.55
Q2 2002 48.15 40.50
Q3 2002 47.56 32.00
Q4 2002 40.30 29.75
------ ------
EMPLOYMENT INFORMATION
ChoicePoint's successful strategy for growth, coupled with the increased need
for identification and credential verification services in today's society, has
created rewarding career opportunities at the equal opportunity employer. To
learn more about those opportunities visit our corporate website or contact us
at:
Human Resources
ChoicePoint Inc.
1000 Alderman Drive
Alpharetta, GA 30005
INVESTOR INFORMATION
The Investor Relations section of ChoicePoint's corporate Web site
(www.choicepoint.com) contains a wealth of valuable information, ranging from
financial news releases and filings to archived (audio) copies of investor
conference calls.
For additional information, or to obtain copies of the Form 10-K for the year
ended December 31, 2002 (which will be provided free of charge with a copy of
the financial statements and schedules), Form 10-Q, or other materials, please
contact:
John Mongelli
Vice President, Investor Relations
Email: investors@choicepoint.com
Phone: 770-752-6171
ChoicePoint Inc.
1000 Alderman Drive
Alpharetta, GA 30005
Financial reports can also be obtained from ChoicePoint's Web site.
CONFERENCE CALLS
ChoicePoint conducts quarterly conference calls to discuss financial performance
and other issues of importance to investors. To learn about scheduled calls,
hear archived copies of previous calls, and to listen in to live Webcasts,
visit the Web site at www.choicepoint.com.
ANALYST COVERAGE
A number of leading Sell Side financial analysts and investment advisory
services produce investment research on ChoicePoint. For an up-to-date list,
see the Investor Relations section of the ChoicePoint Web site,
www.choicepoint.com.
DIVIDEND POLICY
ChoicePoint has not paid any dividends since it became a public company, and it
does not anticipate paying any in the near future.
INDEPENDENT PUBLIC ACCOUNTANTS
Deloitte & Touche LLP
Atlanta, GA
TRANSFER AGENT AND REGISTRAR
Shareholders with questions concerning the transfer of shares, lost
certificates, changes of address, or other issues should contact ChoicePoint's
transfer agent and registrar:
SunTrust Bank, Inc.
P.O. Box 4625
Atlanta, GA 30302
800-568-3476
TRADEMARKS
ChoicePoint, the ChoicePoint logo, Actionable Intelligence, Esteem, KnowX,
VitalChek, AutoTrack, C.L.U.E., Commercial Intellisys, AutoTrackXP, and
ChoicePointLink are registered trademarks; ScreenNow, Smarter Decisions. Safer
World., ChoicePoint Attract,NCF, Current Carrier, MarketView, EAFS and
ChoicePoint DirectLink are trademarks; and Signal IVS, DEBTOR Discovery, VIN
Services and VolunteerSelect are service marks of ChoicePoint Asset Company.
(C) 2003 ChoicePoint Asset Company. All rights reserved.
48 CHOICEPOINT 2002 ANNUAL REPORT