1
EXHIBIT 13
[SELECTED PAGES FROM THE COMPANY'S 1997 ANNUAL REPORT TO SHAREHOLDERS]
FINANCIAL HIGHLIGHTS
ChoicePoint
(Thousands of Dollars) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------
Operating revenue $417,321 $366,481 $328,990 $284,566 $268,114
Operating income
before unusual
items and
restructuring
provision 52,286 47,611 41,078 16,577 3,376
Operating income 46,077 47,611 31,928 16,577 3,376
Net income 28,944 23,280 14,865 6,612 1,239
Total assets 359,971 301,824 200,779 193,820 106,938
Long-term debt, less
current maturities 95,457 1,051 -- 5 --
Total shareholders'
equity 127,745 196,327 104,641 98,028 13,961
EBITDA 87,753 66,265 45,249 26,610 10,503
Employees 3,700 4,600 4,400 4,600 4,700
[GRAPH] [GRAPH]
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Management's Discussion and Analysis of Financial
Condition and Results of Operations
ChoicePoint
Introduction
ChoicePoint is a leading provider of risk management and fraud prevention
information and related technology solutions to the insurance industry. The
Company also offers risk management and fraud prevention solutions to
organizations in other industries. ChoicePoint is organized into three service
groups: Property and Casualty Insurance Services, Life and Health Insurance
Services and Business and Government Services. The Company offers the following
products through these groups:
PROPERTY AND CASUALTY INSURANCE SERVICES (P&C)
Automated underwriting and claims information for home and auto insurers,
commercial inspections, worker's compensation audits of commercial properties
and customized application rating and issuance software development.
LIFE AND HEALTH INSURANCE SERVICES (L&H)
Underwriting and claims information for life and health insurers, including
medical records collection, laboratory services and investigative services.
BUSINESS AND GOVERNMENT SERVICES (B&G)
Pre-employment background searches, drug screenings, public records searches,
people locator services and Uniform Commercial Code (UCC) searches and filings.
RESULTS OF OPERATIONS
Revenue and operating income for the years ended December 31, 1997, 1996 and
1995 were as follows:
Year Ended December 31 1997 1996 1995
- -------------------------------------------------------------------
(In thousands)
P&C revenue $177,175 $156,698 $143,726
L&H revenue 153,563 157,071 148,765
B&G revenue 86,583 52,712 36,499
- -------------------------------------------------------------------
Operating revenue 417,321 366,481 328,990
Costs and expenses 365,035(1) 318,870 287,912
- -------------------------------------------------------------------
Operating income
before unusual
items and
restructuring
provision 52,286 47,611 41,078
Unusual items 6,209 -- --
Restructuring
provision -- -- 9,150
- -------------------------------------------------------------------
Operating income $ 46,077 $ 47,611 $ 31,928
===================================================================
(1) Includes $4,852,000 of other charges discussed below.
YEAR ENDED DECEMBER 31, 1997
-- COMPARED TO YEAR ENDED DECEMBER 31, 1996
Consolidated revenue increased $50.8 million, or 13.9%, from $366.5 million in
1996 to $417.3 million in 1997. Revenue improvements in two of the three
business groups were partially offset by revenue declines in Life and Health
Insurance Services. Revenue from Property and Casualty Insurance Services grew
$20.5 million, or 13.1%, from $156.7 million in 1996 to $177.2 million in 1997,
driven primarily by strong unit performance in automated underwriting product
lines. Revenue from Life and Health Insurance Services decreased $3.5 million,
or 2.2%, from $157.1 million in 1996 to $153.6 million in 1997, as growth in
laboratory services was offset by decreases in other lines, primarily due to the
sale of ChoicePoint's paramedical examination business in December 1997, which
represented $4.9 million of the decline. Revenue from Business and Government
Services increased $33.8 million, or 64.3%, from $52.7 million in 1996 to $86.5
million in 1997. Revenue increased in all business units within
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Business and Government Services with $23.7 million coming from CDB Infotek. In
August 1996, ChoicePoint acquired 70% of the outstanding capital stock of CDB
Infotek. That acquisition was accounted for as a purchase, and the results of
operations of CDB Infotek have been included in ChoicePoint's consolidated
statements of income from the date of acquisition. The other business units
within Business and Government Services posted revenue gains of 23.8%.
Operating income before unusual items increased $4.7 million, or 9.8%, from
$47.6 million in 1996 to $52.3 million in 1997. Operating margins (excluding the
effects of unusual items) decreased from 13.0% in 1996 to 12.5% in 1997.
Operating margins before unusual items were impacted by $4.9 million of other
charges in the fourth quarter of 1997. Included in the $4.9 million of other
charges were $1.9 million of expense related to new stock-based compensation
plans, $1.0 million for a contribution to the employees' profit sharing plan to
offset the adverse effect of transitioning from Equifax's defined benefit
pension plan, $1.0 million to establish a ChoicePoint charitable foundation,
$860,000 for adjusting receivables for a renegotiated customer contract and
$100,000 to fund an under-reserved compensation plan.
Included in the $6.2 million charge of unusual items were $1.8 million of
charges related to expenses of the Spinoff and $4.4 million for writedowns of
certain assets in the Company's labor-intensive field businesses and its
commercial P&C software company in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."
Operating income after unusual items and other charges decreased $1.5
million, or 3.2%, from $47.6 million in 1996 to $46.1 million in 1997.
ChoicePoint recognized a pretax gain of $14.0 million on the sale of its
paramedical examination business to Pediatric Services of America, Inc. during
the fourth quarter of 1997. The Company sold this business in December 1997 for
approximately $26.0 million in a combination of cash, stock and retained net
assets.
YEAR ENDED DECEMBER 31, 1996
-- COMPARED TO YEAR ENDED DECEMBER 31, 1995
Consolidated revenue increased $37.5 million, or 11.4%, from $329.0 million
in 1995 to $366.5 million in 1996. The increase was primarily attributable to
sales volume growth in all three service groups, as well as the second quarter
1996 acquisition of Professional Test Administrators, Inc. ("PTA") and the third
quarter 1996 acquisition of a 70% interest in CDB Infotek. These acquisitions
accounted for $11.5 million or 30.7% of the increase in consolidated revenue.
Since these acquisitions were accounted for as purchases, the results of
operations for the acquired companies have been included in the consolidated
statements of income from the dates of acquisition. Revenue from Property and
Casualty Insurance Services grew $13.0 million, or 9.0%, from $143.7 million in
1995 to $156.7 million in 1996, primarily due to sales volume growth in
automated underwriting product lines, offset by a decline in commercial
inspection revenue due to a reorganization of the commercial inspection group in
1996. Revenue from Life and Health Insurance Services increased $8.3 million, or
5.6%, from $148.8 million in 1995 to $157.1 million in 1996. This increase was
primarily the result of growth in laboratory service revenue, partially offset
by a decline in claims revenue, primarily due to increased competition. Revenue
from Business and Government Services increased $16.2 million, or 44.4%, from
$36.5 million in 1995 to $52.7 million in 1996. Revenue from pre-employment
reports increased $4.1 million, or 25.3% of the increase in Business and
Government Services revenue, with the remaining increase coming from the PTA and
CDB Infotek acquisitions.
During the fourth quarter of 1995, ChoicePoint recorded a $9.2 million
restructuring charge to reduce staffing levels and fixed expenses. Excluding the
effects of the restructuring charge, operating income increased $6.5 million, or
15.9%, from $41.1 million in 1995 to $47.6 million in 1996. Operating margins
(excluding the effects of the restructuring charge) increased from 12.5% in 1995
to 13.0% in 1996, primarily as
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a result of the strong revenue performance in automated underwriting and lab
services, partially offset by a decline in commercial inspection revenue and the
slightly dilutive effect of the CDB Infotek acquisition. Benefits from the 1995
restructuring and improved operating efficiencies also contributed to the
increase in operating income in 1996.
INCOME TAXES
Historically, the Company had been included in the consolidated federal income
tax return of Equifax. Prior to the Spinoff on August 7, 1997, ChoicePoint's
provision for income taxes reflected federal and state income taxes calculated
on ChoicePoint's separate income, but recognized the impact of unitary tax
regulations of certain states on ChoicePoint as a member of the Equifax
consolidated group.
ChoicePoint's overall effective tax rates were 45.9% in 1997, 43.2% in
1996, and 43.0% in 1995. The increase in effective tax rates from 1996 to 1997
is primarily the result of foreign income being subject to tax and increased
goodwill amortization not deductible for income taxes. The increase is partially
offset by a reduction in the state income tax rate due to ChoicePoint no longer
being part of Equifax's consolidated group for unitary tax purposes. If the
provision for income taxes had been calculated for ChoicePoint as a separate
taxable entity for federal and state income tax purposes, the Company estimates
that its overall effective tax rate would have been 44.5% in 1997, 40.8% in 1996
and 40.9% in 1995.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operations increased from $36.8 million in 1996 to $55.4
million in 1997. This increase was primarily attributable to the increase in net
income, as adjusted for depreciation and amortization, and increased current
liabilities. During 1997, ChoicePoint used $25.4 million for investing
activities, including $20.0 million for additions to property and equipment and
$10.8 million for acquisitions. Building and leasehold improvements for the
expansion of the existing Osborn Laboratories, Inc. facility in Olathe, Kansas
represented approximately $4.6 million of the increase in property and equipment
with the remainder due primarily to system upgrades. In 1996, ChoicePoint used
$91.8 million for investing activities, including $69.7 million for
acquisitions. Net cash used by financing activities was $5.1 million in 1997, as
the proceeds from the Credit Facility were used to pay Spinoff-related costs,
discussed below.
The Company's short-term and long-term liquidity depends primarily upon its
level of net income, accounts receivable, accounts payable, accrued expenses and
long-term debt. In August 1997, ChoicePoint entered into a $250 million
unsecured revolving credit facility (the "Credit Facility") with a group of
banks. The Credit Facility is a revolving facility expandable to $300 million,
subject to approval of the lenders, and bears interest at variable rates. The
borrowings under the Credit Facility were used to repay the net intercompany
debt due to Equifax as of July 31, 1997, to repay $29.0 million of Equifax debt
assumed by ChoicePoint in connection with the Spinoff, and to fund $10.0 million
for two ChoicePoint grantor trusts formed to fund ChoicePoint benefit plans.
Initial borrowings under the Credit Facility were $112.0 million. During the
third and fourth quarters of 1997, the Company paid down $17.0 million of the
amount borrowed, reducing total debt under the revolver to $95.0 million at
December 31, 1997. In February 1998, the Company borrowed a net $15.0 million to
finance the acquisition of the remaining interest in CDB Infotek discussed
below. The commitment termination date and final maturity of the Credit Facility
will occur in August 2002. ChoicePoint may use additional borrowings under the
Credit Facility to finance acquisitions and for general corporate cash
requirements. For a more complete description of the terms of the Credit
Facility, see Note 6 to the consolidated financial statements.
EBITDA increased $21.5 million, or 32.4%, from $66.3 million in 1996 to
$87.8 million in 1997. Approximately $3.0 million, or 14.0%, of the increase
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was due to the gain on sale of the paramedical examination business less the
unusual items and other charges recorded in the fourth quarter of 1997. EBITDA
represents income before taxes, plus depreciation and amortization and interest
expense. EBITDA is presented not as a substitute for income from operations, net
income or cash flows from operating activities. The Company has included EBITDA
data (which are not a measure of financial performance under generally accepted
accounting principles) because such data are 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.
Interest expense was $6.7 million in 1997 and $6.6 million in 1996. Prior
to the Spinoff, ChoicePoint was charged corporate interest expense from Equifax
based on the relationship of its net assets to total Equifax net assets,
excluding corporate debt. After the Spinoff, interest expense also includes
interest on the revolving Credit Facility discussed above. In 1997 ChoicePoint
entered into four interest rate swap agreements to reduce the impact of changes
in interest rates on its floating rate long-term obligation. See Note 6 to the
consolidated financial statements.
The Company anticipates capital expenditures will be approximately $19.0
million in 1998, which will be used primarily for system upgrades.
The Company acquired an additional 2.6% interest in CDB Infotek from a
shareholder during the third quarter of 1997, bringing the Company's total
acquired interest in CDB Infotek to 72.6% at December 31, 1997. In February
1998, the Company accelerated its option to purchase the remaining 27.4% at a
mutually agreed-upon price of $24.1 million in cash.
YEAR 2000
ChoicePoint has assessed and continues to assess the impact of the Year 2000
issue on its reporting systems and operations. The Year 2000 issue exists
because many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. In order to
distinguish 21st century dates from 20th century dates, these date code fields
must be able to accept four digit entries. As a result, certain computer systems
and software programs used, and in some cases developed, by ChoicePoint may need
to be upgraded in order to address Year 2000 requirements.
To address this issue, ChoicePoint is either replacing systems with new
systems that are Year 2000 compliant, or modifying existing systems to be
compliant. During 1997, the Company incurred approximately $1.3 million to
modify existing computer systems and applications to address the Year 2000
issue, and estimates that approximately $2.1 million will be incurred in 1998
and $500,000 in 1999.
If the Company's remediation plan is not successful, there could be a
significant disruption of the Company's ability to transact business with its
major customers and suppliers.
FORWARD-LOOKING STATEMENTS
This report contains certain information that constitutes forward-looking
statements as that term is defined in the Private Securities Litigation Reform
Act of 1995. Those statements, to the extent they are not historical facts,
should be considered forward-looking and subject to various risks and
uncertainities. Such forward-looking statements are made based upon management's
assessments of various risks and uncertainities, as well as assumptions made in
accordance with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. The Company's actual results could differ
materially from the results anticipated in these forward-looking statements as a
result of such risks and uncertainities, including those identified in the
Company's Annual Report on Form 10-K for the fiscal year ending December 31,
1997 and the other filings made by the Company from time to time with the
Securities and Exchange Commission.
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Consolidated Statements of Income
ChoicePoint
(In thousands)
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Operating revenue $417,321 $366,481 $328,990
- --------------------------------------------------------------------------------
Costs and expenses:
Cost of services 280,765 252,118 221,045
Selling, general and administrative 84,270 66,752 66,867
Unusual items 6,209 -- --
Restructuring provision -- -- 9,150
- --------------------------------------------------------------------------------
Total costs and expenses 371,244 318,870 297,062
- --------------------------------------------------------------------------------
Operating income 46,077 47,611 31,928
Gain on sale of business unit 14,038 -- --
Interest expense 6,649 6,597 5,830
- --------------------------------------------------------------------------------
Income before income taxes 53,466 41,014 26,098
Provision for income taxes 24,522 17,734 11,233
- --------------------------------------------------------------------------------
Net income $ 28,944 $ 23,280 $ 14,865
================================================================================
The accompanying notes are an integral part of these consolidated statements.
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Consolidated Balance Sheets
ChoicePoint
(In thousands, except par values)
December 31, 1997 1996
- ----------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 26,858 $ 1,726
Marketable securities 9,000 --
Accounts receivable, net of allowance for doubtful
accounts of $1,847 in 1997 and $1,578 in 1996 90,266 78,138
Deferred income tax assets 10,503 3,984
Other current assets 9,492 8,083
- ----------------------------------------------------------------------------------------
Total current assets 146,119 91,931
Property and equipment, net 42,985 35,407
Goodwill, net 127,731 123,997
Deferred income tax assets 15,406 15,042
Other 27,730 35,447
- ----------------------------------------------------------------------------------------
Total Assets $ 359,971 $ 301,824
========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 593 $ 927
Accounts payable 17,371 12,828
Accrued salaries and bonuses 15,664 11,594
Other current liabilities 43,610 19,616
- ----------------------------------------------------------------------------------------
Total current liabilities 77,238 44,965
Long-term debt, less current maturities 95,457 1,051
Postretirement benefit obligations 53,834 55,622
Other long-term liabilities 5,697 3,859
- ----------------------------------------------------------------------------------------
Total liabilities 232,226 105,497
Commitments and contingencies (Note 10)
Shareholders' equity:
Equifax equity investment -- 196,414
Preferred stock, $.01 par value; shares
authorized -- 10,000; no shares issued
or outstanding -- --
Common stock, $.10 par value; shares authorized --
100,000; issued and outstanding --
14,641 in 1997 and -0- in 1996 1,464 --
Paid-in capital 112,655 --
Retained earnings 13,744 --
Foreign currency translation adjustments (118) (87)
- ----------------------------------------------------------------------------------------
Total shareholders' equity 127,745 196,327
- ----------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 359,971 $ 301,824
========================================================================================
The accompanying notes are an integral part of these consolidated balance
sheets.
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Consolidated Statements of Shareholders' Equity
ChoicePoint
Foreign
Equifax Currency
Equity Common Paid-In Retained Translation
(In thousands) Investment Stock Capital Earnings Adjustments Total
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ 98,104 $ -- $ -- $ -- $ (76) $ 98,028
Net income 14,865 -- -- -- -- 14,865
Net transactions with Equifax (8,285) -- -- -- -- (8,285)
Translation adjustments -- -- -- -- 33 33
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 104,684 -- -- -- (43) 104,641
Net income 23,280 -- -- -- -- 23,280
Net transactions with Equifax 68,450 -- -- -- -- 68,450
Translation adjustments -- -- -- -- (44) (44)
- -------------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 196,414 -- -- -- (87) 196,327
Net income
(from January 1, 1997
through July 31, 1997) 15,200 -- -- -- -- 15,200
Intercompany transactions
with Equifax 1,609 -- -- -- -- 1,609
Repayment of Equifax
intercompany debt (72,602) -- -- -- -- (72,602)
Debt assumed from Equifax (29,000) -- -- -- -- (29,000)
Distribution of
common stock (111,621) 1,457 110,164 -- -- --
Restricted stock plans, net -- 6 1,642 -- -- 1,648
Stock options exercised -- 1 266 -- -- 267
Other -- -- 583 -- -- 583
Net income
(from August 1, 1997
to December 31, 1997) -- -- -- 13,744 -- 13,744
Translation adjustments -- -- -- -- (31) (31)
- -------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997 $ -- $1,464 $112,655 $13,744 $(118) $ 127,745
===================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
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Consolidated Statements of Cash Flows
ChoicePoint
(In thousands)
Year Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 28,944 $ 23,280 $ 14,865
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 27,638 18,654 13,321
Provision for unusual items 6,209 -- --
Restructuring provision, net of cash payments -- -- 6,944
Gain on sale of business unit (14,038) -- --
Provision for restricted stock plans 1,648 -- --
Changes in assets and liabilities,
excluding effects of acquisitions
and divestiture:
Marketable securities and other
current assets (1,213) (1,582) (486)
Accounts receivable, net (11,483) (7,362) (2,966)
Deferred income taxes (6,883) 2,052 (4,845)
Current liabilities, excluding debt 25,094 (60) (4,585)
Other long-term liabilities, excluding debt (496) 1,797 (2,008)
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 55,420 36,779 20,240
- ----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions, net of cash acquired (10,778) (69,654) (1,421)
Cash proceeds from sale of business unit 11,707 -- --
Additions to property and equipment (19,997) (18,098) (5,355)
Additions to other assets, net (6,351) (4,034) (5,232)
- ----------------------------------------------------------------------------------------------
Net cash used in investing activities (25,419) (91,786) (12,008)
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from long-term debt 112,000 -- --
Payment of debt assumed in acquisition -- (11,778) --
Payments on long-term debt (17,928) (315) (12)
Payment of debt assumed from Equifax (29,000) -- --
Payment of Equifax intercompany debt (72,602) -- --
Net transactions with Equifax 1,609 68,159 (9,875)
Proceeds from exercise of stock options 267 -- --
Other 583 -- --
- ----------------------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (5,071) 56,066 (9,887)
- ----------------------------------------------------------------------------------------------
Effect of foreign currency exchange rates on cash 202 22 23
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash 25,132 1,081 (1,632)
Cash and cash equivalents, beginning of year 1,726 645 2,277
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 26,858 $ 1,726 $ 645
==============================================================================================
The accompanying notes are an integral part of these consolidated statements.
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Notes to Consolidated Financial Statements
ChoicePoint
Note 1
Spinoff and Basis of Presentation
On August 7, 1997, Equifax Inc. ("Equifax") spun-off the business conducted
through its Insurance Services Group to Equifax shareholders (the "Spinoff").
This Spinoff was accomplished by forming ChoicePoint Inc. ("ChoicePoint" or the
"Company"), transferring the stock of the companies which comprised the
Insurance Services Group to ChoicePoint and then distributing all of the shares
of common stock of ChoicePoint to Equifax shareholders. Equifax shareholders of
record as of July 24, 1997 received one share of ChoicePoint common stock for
every 10 shares of Equifax common stock owned (except for certain grantor trusts
of Equifax, which did not receive ChoicePoint common stock pursuant to the
Spinoff). The effective date of the Spinoff was July 31, 1997.
The consolidated financial statements of ChoicePoint include substantially
all of the assets, liabilities, revenues and expenses of the business conducted
through Equifax's Insurance Services Group. All material transactions between
entities included in the consolidated financial statements have been eliminated.
The consolidated financial statements have been prepared on the historical cost
basis and present the Company's financial position, results of operations and
cash flows as derived from Equifax's historical financial statements where
applicable.
In conjunction with the separation of their businesses, ChoicePoint and
Equifax entered into various agreements that addressed the allocation of assets
and liabilities between them and that defined their relationship after the
separation, including a distribution agreement, an employee benefits agreement,
a transition support agreement, an intercompany information services agreement,
an intellectual property agreement, a tax sharing and indemnification agreement,
and real estate lease agreements.
Note 2
Nature of Operations
ChoicePoint operates in a single industry segment and provides
substantially all domestic insurance companies with automated and traditional
underwriting and claims information services to assist companies in assessing
the insurability of individuals and property and the validity of insurance
claims. ChoicePoint provides background investigations, furnishes access to
motor vehicle reports, maintains a database of claims histories and provides
claims verification and investigative services to both the property and casualty
and the life and health insurance markets. The Company also offers
pre-employment background investigations, pre-employment and regulatory
compliance drug testing services and public record information to other
corporate and government organizations. The Company's operations are
predominantly located in the United States.
Note 3
Significant Accounting Policies
-- USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements as well as reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
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-- REVENUE AND COSTS OF SERVICES PRESENTATION
Historically, motor vehicle records registry revenue, the fee charged by
states for motor vehicle records which is passed on by ChoicePoint to its
customers, had been reflected in Equifax's consolidated statements of income as
operating revenue and cost of services. ChoicePoint has elected to exclude these
customer reimbursed fees from revenue and reduce cost of services by a
corresponding amount. This change in accounting presentation does not impact
operating or net income. Registry revenue was $257,989,000 in 1997, $224,783,000
in 1996 and $191,645,000 in 1995.
-- MARKETABLE SECURITIES
In connection with the sale of its paramedical examination business (Note
4), the Company received 495,000 shares of common stock in Pediatric Services of
America, Inc ("PSA"). The common stock is classified as available-for-sale under
the terms of Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and
accordingly, any unrealized holding gains and losses, net of taxes, are excluded
from income and recognized as a separate component of shareholders' equity until
realized. At December 31, 1997, the carrying amount of the common stock
approximates its fair market value.
-- PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 consisted of the
following:
(In thousands)
Year Ended December 31, 1997 1996
- -------------------------------------------------------
Land, buildings,
and improvements $ 11,945 $ 10,824
Data processing
equipment and furniture 80,711 66,019
- -------------------------------------------------------
92,656 76,843
Less: Accumulated
depreciation (49,671) (41,436)
- -------------------------------------------------------
$ 42,985 $ 35,407
=======================================================
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
five years for data processing equipment and eight to 20 years for furniture.
-- GOODWILL AND OTHER ASSETS
Goodwill is amortized on a straight-line basis over 20 to 40 years.
Amortization expense associated with Goodwill was $4,616,000 in 1997, $2,873,000
in 1996 and $2,013,000 in 1995. As of December 31, 1997 and 1996, accumulated
amortization was $13,648,000 and $9,032,000, respectively.
Other assets at December 31, 1997 and 1996 consisted of the following:
(In thousands)
Year Ended December 31, 1997 1996
- --------------------------------------------------------
Purchased software, data files
and technology, net $14,311 $20,361
System development and
other deferred costs, net 13,419 15,086
- --------------------------------------------------------
$27,730 $35,447
========================================================
Purchased software, data files, and technology are being amortized on a
straight-line basis over five to ten years. Amortization expense for other
assets was $10,619,000 in 1997, $6,479,000 in 1996 and $3,810,000 in 1995. As of
December 31, 1997 and 1996, accumulated amortization was $29,963,000 and
$17,719,000, respectively.
The Company regularly evaluates whether events and circumstances have
occurred that indicate the carrying amount of goodwill or other assets may
warrant revision or may not be recoverable. When factors indicate that goodwill
or 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 goodwill or other assets in measuring whether the
goodwill or other assets are recoverable.
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Notes to Consolidated Financial Statements
ChoicePoint
-- FOREIGN CURRENCY TRANSLATION
The assets and liabilities of foreign subsidiaries are translated at the
year-end rate of exchange, and income statement items are translated at the
average rates prevailing during the year. The resulting translation adjustment
is recorded as a component of shareholders' equity. Foreign currency transaction
gains and losses, which are not material, are recorded in the consolidated
statements of income.
-- CONSOLIDATED STATEMENTS OF CASH FLOWS
The Company considers cash equivalents to be short-term investments with
original maturities of three months or less.
Prior to the Spinoff, tax provisions were settled through the intercompany
account and Equifax made income tax payments on behalf of the Company. The tax
payments made subsequent to the Spinoff by ChoicePoint and the tax payments made
prior to the Spinoff by Equifax on behalf of ChoicePoint (based on the income
tax returns filed or to be filed) were approximately $21,979,000 in 1997,
$14,842,000 in 1996 and $8,723,000 in 1995.
Interest paid on long-term debt, excluding amounts charged by Equifax,
totaled $2,314,000 in 1997, $147,000 in 1996 and $200,000 in 1995.
In 1997, 1996 and 1995, 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, 1997 1996 1995
- -------------------------------------------------------------
Fair value of
assets acquired $10,986 $97,204 $1,438
Cash paid for
acquisitions 10,778 71,661 1,421
- -------------------------------------------------------------
Liabilities assumed $ 208 $25,543 $ 17
=============================================================
In December 1997, the Company sold its paramedical examination business for
$26,000,000 (Note 4). The $26,000,000 in proceeds consisted of $11,707,000 in
cash, $10,000,000 in stock and $4,293,000 of retained net assets (primarily
accounts receivable, less accrued liabilities).
-- FINANCIAL INSTRUMENTS
The Company's financial instruments recorded on the balance sheet consist
of cash and cash equivalents, marketable securities, accounts receivable,
accounts payable and long-term debt. The carrying amounts of cash and cash
equivalents, accounts receivable, and accounts payable approximate their fair
values because of the short maturity of these instruments. The carrying amount
of marketable securities approximates fair value due to the minimum price
guarantee contained in the asset purchase agreement between the Company and PSA
(Note 4). The carrying amount of long-term debt approximates fair value because
the Company's long-term debt bears interest at current market rates.
Off-balance sheet derivative financial instruments at December 31, 1997
consist of interest rate swap agreements (Note 6) entered into to limit the
effect of changes in interest rates on the Company's floating rate long-term
obligation. Amounts currently due to or from interest rate swap counterparties
are recorded in interest expense in the period in which they accrue. The Company
does not enter into financial instruments for trading or speculative purposes.
The fair value of the interest rate swap agreements, estimated by each bank
based upon its internal valuation models, were $(2,045,000) at December 31,
1997.
-- EARNINGS PER SHARE
Historical earnings per share ("EPS") are not presented since the companies
that comprise ChoicePoint were majority-owned subsidiaries of Equifax or one of
its affiliates and were recapitalized as part of the Spinoff.
See Note 13 for pro forma earnings per share.
-- RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
28
13
Note 4
Acquisitions and Divestiture
-- ACQUISITIONS
During 1997, 1996 and 1995, the Company acquired or made equity investments
in the following businesses:
Date Percentage
Business Acquired Ownership
- ----------------------------------------------------------
Drug Free, Inc. November 1997 100.0%
Medical Information
Network, LLC October 1997 100.0
CDB Infotek
(additional purchase) September 1997 2.6
Advanced HR Solutions, Inc. June 1997 100.0
CDB Infotek August 1996 70.0
Professional Test
Administrators, Inc. April 1996 100.0
Vallance and Associates, Inc. February 1995 100.0
The 1997 acquisitions were accounted for as purchases and had an aggregate
purchase price of $10,778,000, with $9,982,000 allocated to goodwill and $50,000
to other intangible assets (non-compete agreement). Their results of operations
have been included in the consolidated statements of income from the dates of
acquisition and were not material. The Company acquired an additional 2.6%
interest in CDB Infotek from a shareholder during the third quarter of 1997,
bringing the Company's total acquired interest in CDB Infotek to 72.6% at
December 31, 1997. In February 1998, the Company accelerated its option to
purchase the remaining 27.4% at a mutually agreed-upon price of $24,135,000
cash.
The 1996 acquisitions were accounted for as purchases and had an aggregate
purchase price of $71,661,000, with $59,457,000 allocated to goodwill and
$20,932,000 to other intangible assets (primarily purchased data files and
software). Their results of operations have been included in the consolidated
statements of income from the dates of acquisition.
The following unaudited pro forma information has been prepared as if the
1996 acquisition of CDB Infotek had occured on January 1, 1995. The information
is based on historical results of the separate companies and may not necessarily
be indicative of the results that could have been achieved or of results which
may occur in the future. The pro forma information includes the expense for
amortization of goodwill and other intangible assets resulting from this
transaction.
(In thousands)
Year Ended December 31, 1996 1995
- ---------------------------------------------------
Revenue $389,262 $361,010
Net income 20,904 12,765
The 1995 acquisition was accounted for as a purchase and had an aggregate
purchase price of $1,421,000, with $1,222,000 allocated to goodwill and $216,000
to other intangible assets (noncompete agreement). The results of operations
have been included in the consolidated statements of income from the date of
acquisition and were not material.
-- DIVESTITURE
In December 1997, the Company sold its paramedical examinations business to
PSA. The business unit was sold for $26,000,000 in a combination of cash -
$11,707,000, stock - $10,000,000, and net retained assets - $4,293,000. The
$10,000,000 represents the value of PSA common stock received using an average
stock price determined prior to closing. The asset purchase agreement protects
ChoicePoint from a decrease in PSA's stock price if the shares are sold in the
marketplace within one year for less than the average share price. In December
1997, the Company transferred approximately $1,000,000 of the PSA common stock
to ChoicePoint's newly established charitable foundation.
29
14
Notes to Consolidated Financial Statements
ChoicePoint
Note 5
Transactions with Equifax
Prior to the Spinoff, under Equifax's centralized cash management system,
short-term advances from Equifax and excess cash sent to Equifax were reflected
as intercompany debt and were included in Equifax's equity investment account
through July 31, 1997 (Note 8). As a result of the Spinoff, the net intercompany
debt at July 31, 1997, totaling $72,602,000, was repaid in the third quarter of
1997. ChoicePoint was charged corporate costs through July 31, 1997. The amount
of corporate costs included in the accompanying consolidated statements of
income were $5,952,000 in 1997, $11,260,000 in 1996 and $11,833,000 in 1995.
These allocations were based on an estimate of the proportion of corporate
expenses related to ChoicePoint, utilizing such factors as revenues, number of
employees, number of transactions processed and other applicable factors. In the
opinion of management, the corporate charges have been made on a reasonable
basis and approximate all the incremental costs ChoicePoint would have incurred
had it been operating on a stand-alone basis. These amounts have been included
in selling, general, and administrative expenses. ChoicePoint was also charged
corporate interest expense through July 31, 1997 based on the relationship of
its net assets to total Equifax net assets, excluding corporate debt, in amounts
of $3,612,000 in 1997, $6,215,000 in 1996 and $5,401,000 in 1995. These amounts
are included in interest expense. In addition to the above, ChoicePoint paid
approximately $4,336,000 to Equifax in 1997 for credit reports and transitional
services. In 1996 and 1995, ChoicePoint paid approximately $2,475,000 and
$2,491,000, respectively, to Equifax for credit reports.
Note 6
Long-Term Debt
Long-term debt at December 31, 1997 and 1996 was as follows:
(In thousands)
Year Ended December 31, 1997 1996
- ----------------------------------------------------
Credit facility $ 95,000 $ --
Capital leases 1,050 1,978
- ----------------------------------------------------
96,050 1,978
Less current maturities (593) (927)
- ----------------------------------------------------
$ 95,457 $ 1,051
- ----------------------------------------------------
In August 1997, ChoicePoint entered into a $250 million unsecured revolving
credit facility (the "Credit Facility") with a group of banks. The Credit
Facility is a revolving facility expandable to $300 million, subject to approval
of the lenders. Borrowings under the Credit Facility are guaranteed by all
material subsidiaries of ChoicePoint Inc. as defined in the Credit Facility. The
Credit Facility was used to repay the net intercompany debt due to Equifax as of
July 31, 1997, to repay $29.0 million of Equifax debt assumed by ChoicePoint,
and to fund $10.0 million for two ChoicePoint grantor trusts (Note 8). Initial
borrowings under the Credit Facility were $112.0 million. During the third and
fourth quarters of 1997, the Company paid down $17.0 million of the amount
borrowed, reducing total debt under the revolver to $95.0 million. The
commitment termination date and final maturity of the Credit Facility will occur
in August 2002.
Revolving loans under the Credit Facility bear interest at the following
rates as applicable and selected by the Company from time to time: (1) the
lender's base rate, (2) LIBOR plus the applicable margin, (3) the lender's cost
of funds plus the applicable margin and (4) the competitive bid rate offered by
the syndicate lenders at their discretion. The applicable margins range from
.16% to .45% per annum based on ChoicePoint's leverage ratio. Any amount not
paid when due shall bear interest at the applicable
30
15
rate plus 2%. At the end of the applicable interest period for LIBOR or bid rate
loans, interest shall accrue at the base rate plus 2%. The Company also pays
customary annual facility fees based upon its leverage ratio. The average
interest rate at December 31, 1997 was 6.12%.
The Credit Facility contains covenants customary for facilities of this
type. Such covenants include among other things, 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.
ChoicePoint has entered into four interest rate swap agreements to reduce
the impact of changes in interest rates on its floating rate long-term
obligation. The agreements became effective in August 1997. One of the four
agreements has a notional principal amount of $25.0 million and matures in
August 2007. The agreement effectively changes the Company's interest rate
exposure to a fixed rate of 6.535% plus a credit spread. The other three
agreements have notional principal amounts totaling $60.0 million and mature in
August 2004; however, the other parties have one-time options to terminate the
swap agreements in April 2002. The three agreements effectively change the
Company's interest rate exposure to a weighted average fixed rate exposure of
6.240% plus a credit spread. The Company is exposed to credit loss in the event
of nonperformance by the other parties to the interest rate swap agreements.
However, the Company does not anticipate nonperformance by the counterparties.
Scheduled maturities of long-term debt during the five years subsequent to
December 31, 1997 are as follows: $593,000 in 1998, $372,000 in 1999, $85,000 in
2000, $0 in 2001 and $95,000,000 in 2002.
There were no short-term borrowings during 1997 and 1996.
Note 7
Income Taxes
Historically, the Company has been included in the consolidated federal
income tax return of Equifax. ChoicePoint's provision for income taxes in the
accompanying consolidated statements of income reflects federal and state income
taxes calculated on ChoicePoint's separate income, but recognizes the impact of
unitary tax regulations of certain states on ChoicePoint as a member of the
Equifax consolidated group through July 31, 1997, the effective date of the
Spinoff.
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, 1997 1996 1995
- --------------------------------------------------------------------
Current:
Federal $ 18,997 $ 12,538 $ 10,890
State 5,463 4,048 2,431
Foreign 1,277 444 186
- --------------------------------------------------------------------
25,737 17,030 13,507
- --------------------------------------------------------------------
Deferred:
Federal (722) 878 (2,863)
State (419) (169) 589
Foreign (74) (5) --
- --------------------------------------------------------------------
(1,215) 704 (2,274)
- --------------------------------------------------------------------
Total $ 24,522 $ 17,734 $ 11,233
====================================================================
31
16
Notes to Consolidated Financial Statements
ChoicePoint
The provision for income taxes is based upon income before income taxes as
follows:
(In thousands)
Year Ended December 31, 1997 1996 1995
- --------------------------------------------------------------
United States $49,917 $38,373 $25,394
Foreign 3,549 2,641 704
- --------------------------------------------------------------
$53,466 $41,014 $26,098
==============================================================
The provision for income taxes is reconciled with the federal statutory
rate as follows:
(In thousands)
Year Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
State and local
taxes, net of
federal tax benefit 6.1 6.2 7.5
Tax effect resulting
from foreign activities (.1) (1.8) (.4)
Goodwill amortization 2.7 2.1 2.2
Other 2.2 1.7 (1.3)
- ------------------------------------------------------------------
Overall effective rate 45.9% 43.2% 43.0%
==================================================================
Components of the Company's deferred income tax assets and liabilities at
December 31, 1997 and 1996 are as follows:
(In thousands)
Year Ended December 31, 1997 1996
- --------------------------------------------------------------
Deferred income tax assets:
Postretirement benefits $ 22,342 $ 22,804
Reserves and accrued expenses 10,255 3,870
Employee compensation programs 3,857 2,374
Other 2,133 1,318
- --------------------------------------------------------------
38,587 30,366
- --------------------------------------------------------------
Deferred income tax liabilities:
Purchased software, data
files, technology, and
other assets (5,069) (7,824)
Depreciation (1,652) (1,653)
Deferred expenses (4,896) (1,667)
Other (1,061) (196)
- --------------------------------------------------------------
(12,678) (11,340)
- --------------------------------------------------------------
Net deferred income
tax assets $ 25,909 $ 19,026
==============================================================
Accumulated undistributed retained earnings of the Canadian subsidiary are
not considered material at December 31, 1997.
Note 8
Shareholders' Equity
-- EQUIFAX EQUITY INVESTMENT
Prior to July 31, 1997, Equifax's equity investment included the original
investment in ChoicePoint, accumulated income of ChoicePoint and the net
intercompany payable due to Equifax reflecting transactions described in Note 5.
The July 31, 1997 net intercompany debt balance that was repaid to Equifax in
the third quarter of 1997 was $72,602,000. The $72,602,000 included actual
intercompany debt of $85,602,000 reduced by $13,000,000 for an employee benefit
obligation assumed by ChoicePoint (Note 9). As of December 31, 1996, the net
intercompany payable due to Equifax included in Equifax equity investment in the
accompanying balance sheet was $83,993,000.
-- STOCK OPTIONS
Equifax had certain stock option plans (the "Plans") under which incentive
stock options and nonqualified stock options were granted to officers, key
employees and directors of Equifax. In connection with the separation of
ChoicePoint from Equifax, stock options under the Plans that were not exercised
prior to the date of the Spinoff were adjusted. Upon the Spinoff and except as
set forth below, ChoicePoint employees retained their vested options to purchase
Equifax common stock under the plans. Although they forfeited their unvested
Equifax stock options, they received replacement options to purchase ChoicePoint
common stock. Certain senior officers of ChoicePoint were permitted to choose
either to retain vested Equifax stock options or have their vested Equifax stock
options replaced with ChoicePoint stock options. All Equifax options that were
replaced with ChoicePoint options were at amounts and at exercise prices that
preserved the economic
32
17
benefit of the Equifax stock options at the Spinoff date. As a result, options
for 713,152 shares of ChoicePoint common stock were issued to replace Equifax
options. The options have exercise prices ranging from $8.21 per share to $28.45
per share.
Prior to the Spinoff, the ChoicePoint Inc. 1997 Omnibus Stock Incentive
Plan (the "Omnibus Plan") was adopted by ChoicePoint. The Omnibus Plan
authorizes grants of stock options, stock appreciation rights, restricted stock,
deferred shares, performance shares and performance units for an aggregate of
four million shares of ChoicePoint common stock. With the exception of the
Equifax stock options that were replaced with ChoicePoint stock options, the
Omnibus Plan requires options to be granted at no less than fair value. In the
fourth quarter of 1997, options for 761,902 shares were granted under the
Omnibus Plan with an option price of $38.75.
A summary of changes in all outstanding options and the related weighted
average exercise price per share is as follows (shares in thousands):
(In thousands) Avg.
Year Ended December 31, 1997 Shares Price
- ---------------------------------------------------------
Balance, beginning of year -- --
Granted:
Replacement options 713,152 $17.10
New options
(at market price) 761,902 $38.75
Canceled (5,835) $13.80
Exercised (10,804) $14.16
- ---------------------------------------------------------
Balance, end of year 1,458,415 $28.45
=========================================================
Exercisable at end of year 326,384 $16.98
=========================================================
The following table summarizes information about stock options outstanding
at December 31, 1997 (shares in thousands):
Options Outstanding Options Exercisable
---------------------------------------------------- ---------------------------
Weighted Average
Remaining Contractual Weighted Average Weighted Average
Range of Exercise Prices Shares Life in Years Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------------
$ 8.21-$14.47 377,576 6.08 $12.67 196,586 $11.40
$18.83-$26.36 274,431 8.08 $21.58 85,292 $23.99
$28.25-$28.45 44,506 8.08 $28.25 44,506 $28.25
$38.75 761,902 9.76 $38.75 -- --
- --------------------------------------------------------------------------------------------------------------------
1,458,415 8.44 $28.45 326,384 $16.98
The weighted-average grant-date fair value per share of options granted in
1997 is $13.49.
The fair value of each option granted in 1997 is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: dividend yield, 0%; expected volatility, 30%; risk-free interest
rate, 5.8%; and expected life in years, 4.5.
-- Restricted Stock
Equifax had performance share plans for certain key officers that provided
for distribution of common stock at the end of three-year measurement periods.
Equifax also had a deferred bonus plan in the form of restricted stock for
certain key officers. As of the Spinoff, the ChoicePoint officers that were
participants in the Equifax plans were granted ChoicePoint restricted stock that
preserved the economic benefit of the Equifax plans. Approximately 151,000
shares of ChoicePoint restricted stock were granted under the Omnibus Plan to
replace the awards previously granted under the Equifax Plans, of which 90,000
shares are performance-based. In addition, in the fourth quarter of 1997,
approximately 59,000 restricted shares were granted at market price under the
Omnibus Plan. Those shares vest in four years based on continuous employment.
The compensation cost that was charged against income for restricted stock was
$1,892,000 in 1997.
33
18
Notes to Consolidated Financial Statements
ChoicePoint
-- PRO FORMA INFORMATION
During 1997 the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." In accordance with the provisions of SFAS No. 123, the Company
has elected to apply APB Opinion 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. 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, net income and net income per share
would have been reduced to the pro forma amounts indicated in the table below
(in thousands, except per share amounts):
1997 1996 1995
----------------------------------------------------------------------------
SFAS 123 SFAS 123 SFAS 123
Reported Pro forma Reported Pro forma Reported Pro forma
- ------------------------------------------------------------------------------------------------------------------------------
Net income $28,944 $27,832 $23,280 $22,547 $14,865 $13,679
Pro forma net income (Note 13) 28,520 27,408 -- -- -- --
Pro forma net income per share - basic 1.95 1.88 -- -- -- --
Pro forma net income per share -- diluted 1.92 1.84 -- -- -- --
Pro forma income for 1995 and 1996 noted above is based on the fair value
of Equifax options held by ChoicePoint employees.
-- 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 represent shareholders' interests fully. 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 traded
together with, the Company's common stock. The Rights will not be immediately
exercisable and 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 a person or group of affiliated or 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 $10.0 million. The
funds in the grantor trusts may be 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. The $10.0 million
is included in cash and cash equivalents in the December 31, 1997 accompanying
balance sheet.
34
19
Note 9
Employee Benefits
-- UNITED STATES RETIREMENT INCOME PLAN
Historically, the Company has participated in the Equifax United States
Retirement Income Plan (the "Plan"). The Plan was a non-contributory defined
benefit qualified retirement plan that covered most salaried employees. Under
the Plan, retirement benefits were primarily a function of years of service and
the level of compensation during the final three years of employment. Total
pension expense allocated to ChoicePoint through the effective date of the
Spinoff and included in the Company's financial results was $411,000 in 1997,
$3,310,000 in 1996 and $3,356,000 in 1995. The expenses for the Plan, other than
service costs (which are allocated directly), were allocated to the companies
comprising the Insurance Services Group based on the relative projected benefit
obligations for Insurance Services Group employees compared with the obligations
for all participants. In the opinion of management, the expenses were allocated
on a reasonable basis and were actuarially allocated to approximate the expense
ChoicePoint would have incurred had it been operating on a stand-alone basis.
ChoicePoint has not adopted a defined benefit plan for its employees;
however, it has adopted a 401(k) profit sharing plan, as described below, prior
to the Spinoff.
-- RETIREMENT SAVINGS PLAN
Equifax's retirement savings plan provided for annual contributions at the
discretion of the Board of Directors for the benefit of eligible employees,
including ChoicePoint employees, in the form of cash or shares of the Company's
common stock. The Company's portion of expense for this plan through the
effective date of the Spinoff was $1,037,000 in 1997, $1,632,000 in 1996 and
$1,600,000 in 1995 and is included in the Company's financial results. The
expense for the retirement savings plan was a direct function of the
contributions made by the participants employed by the Insurance Services Group.
In the opinion of management, the expenses were allocated on a reasonable basis
and approximated all the expenses ChoicePoint would have incurred had it been
operating on a stand-alone basis.
-- 401(K) PROFIT SHARING PLAN
ChoicePoint has adopted a 401(k) profit sharing plan under which eligible
Company employees may contribute up to 16% of their compensation. ChoicePoint
intends to make minimum matching contributions in the form of ChoicePoint common
stock equal to 25% of employee contributions up to the first 6% of an employee's
contributions. Employee contributions will be invested in one of the available
investment funds, including a ChoicePoint stock fund. Matching contributions
will be invested in the ChoicePoint stock fund. ChoicePoint may make additional
contributions based on achievement of targeted performance levels. The expense
for the 401(k) profit sharing plan was $905,000 in 1997.
As a result of the Spinoff, ChoicePoint assumed an obligation 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. In exchange for this obligation, Equifax made a capital
contribution to ChoicePoint in the amount of $13,000,000 and ChoicePoint's
intercompany liability to Equifax was reduced accordingly. ChoicePoint
anticipates incurring an expense estimated at $2,010,000 for 1998 to fund the
contributions for employees. In 1997, $1,000,000 was included in the Company's
financial results and will be contributed to the 401(k) profit sharing plan to
offset the adverse impact of transitioning out of the defined benefit plan.
-- POSTRETIREMENT BENEFITS
The Company provides certain healthcare and life insurance benefits for
eligible retired employees. Healthcare benefits are provided through a trust,
while life insurance benefits are provided through an insurance company. The
Company accrues
35
20
Notes to Consolidated Financial Statements
ChoicePoint
the cost of providing postretirement benefits for medical and life insurance
coverage over the active service period of each employee.
The following table presents a reconciliation of the plan's funded status
at December 31, 1997 and 1996:
(In thousands)
Year Ended December 31, 1997 1996
- ---------------------------------------------------------
Accumulated postretirement
benefit obligation:
Retirees $ 48,042 $ 47,599
Fully eligible active
plan participants 4,288 3,605
Other active participants 3,861 4,826
- ---------------------------------------------------------
56,191 56,030
Plan assets at fair value -- --
- ---------------------------------------------------------
Accumulated benefit
obligation in excess
of plan assets (56,191) (56,030)
Unrecognized prior service
credit due to plan
amendments (6,150) (8,457)
Unrecognized net losses 4,907 5,865
- ---------------------------------------------------------
(57,434) (58,622)
Less: Current portion (3,600) (3,000)
- ---------------------------------------------------------
Accrued postretirement
benefit obligation $(53,834) $(55,622)
=========================================================
The current portion is included in other current liabilities in the
accompanying balance sheets.
Net periodic postretirement benefit expense includes the following
components:
(In thousands)
Year Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------
Service cost $ 907 $ 823 $ 935
Interest cost on
accumulated benefit
obligation 4,008 3,667 4,499
Amortization of prior
service credit (2,308) (2,652) (2,318)
Amortization of losses 28 118 --
- -----------------------------------------------------------------
Net periodic
postretirement
benefit expense $ 2,635 $ 1,956 $ 3,116
=================================================================
Assumptions used in the computation of postretirement benefit expense and
the related obligation are as follows:
Year Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------
Discount rate used to
determine accumulated
postretirement
benefit obligation
at December 31 7.25% 7.50% 7.25%
Initial healthcare
cost trend rate 9.5% 10.50% 11.00%
Ultimate healthcare
cost trend rate 6.00% 6.00% 6.00%
Year ultimate healthcare
cost trend rate reached 2005 2005 2005
If the healthcare cost trend rate was increased 1% for all future years,
the accumulated postretirement benefit obligation as of December 31, 1997 would
have increased 12.1%. The effect of such a change on the aggregate of service
and interest cost for 1997 would have been an increase of 8.7%.
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.
Note 10
Commitments and Contingencies
-- LEASES
The Company's operating leases involve principally office space and office
equipment. Rental expense relating to these leases was $14,769,000 in 1997,
$13,353,000 in 1996 and $10,655,000 in 1995.
36
21
Future minimum payment obligations for noncancelable operating leases
exceeding one year are as follows as of December 31, 1997:
(In thousands) Amount
- -------------------------------------------------------
1998 $10,964
1999 8,443
2000 6,581
2001 4,031
2002 2,271
Thereafter 5,823
- -------------------------------------------------------
$38,113
=======================================================
-- LEASE AGREEMENT
In August 1997, the Company entered into a $22.0 million operating lease
agreement for an office facility in Alpharetta, Georgia. Under the agreement,
the lessor purchased the property from a third party and leased the facility to
the Company. The initial term of the lease is ten years, at which time the
Company has the following three options: to renew for an additional five years,
to purchase at original cost or to remarket the property.
-- DATA PROCESSING SERVICES AGREEMENT
In April 1993, the Company began outsourcing a portion of its computer data
processing operations and related functions to Integrated Systems Solutions
Corporation ("ISSC"), a subsidiary of IBM. In 1995, a new five-year outsourcing
agreement was reached with ISSC. Under the terms of the agreement, the Company
will pay ISSC an estimated $3.5 million a year over the five-year term of the
agreement, although this amount could be more or less depending upon various
factors such as the inflation rate, the introduction of significant new
technologies or changes in the Company's data processing needs as a result of
acquisitions or divestitures. Under certain circumstances (e.g., a change in
control of the Company), the Company may cancel the ISSC agreement; however, the
agreement provides that the Company must pay a significant penalty in the event
of such a cancellation.
-- CHANGE IN CONTROL PROVISIONS IN EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain executive
officers which will provide certain severance pay and benefits in the event of a
"change in control" of ChoicePoint, such change in control includes the
acquisition of more than 50% of ChoicePoint's outstanding common stock by an
entity or a concerted group of entities. The severance payment is a derivative
of annual compensation multiplied by a factor not to exceed three plus payments
for other benefits. At December 31, 1997, the maximum contingent liability under
the employment agreements or plans was approximately $27.2 million. In addition,
the Company's restricted stock and stock option plans provide that all shares
designated for future distribution will become fully vested.
-- 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 pending matters will not have a materially adverse effect on
the Company's financial position, liquidity or results of operations. The
accrued liability for litigation at December 31, 1997 and 1996 was $4,002,000
and $3,749,000, respectively, and is included in other current liabilities in
the accompanying balance sheets.
Note 11
Unusual Items
Unusual items of $6,209,000 in 1997 include approximately $1,804,000 of
charges related to Spinoff expenses and approximately $4,405,000 for write-downs
of certain assets in the Company's labor-intensive field business and its
commercial P&C software company in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of."
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Notes to Consolidated Financial Statements
ChoicePoint
Note 12
Restructuring
In the fourth quarter of 1995, the Company initiated a restructuring
program designed to streamline operations by reducing staffing levels and
consolidating facilities. Staffing levels were reduced by approximately 750
employees. The total cost of this program was $9,150,000. Components of the
restructuring provision and utilization through December 31, 1997 are as
follows:
Severance and
Termination Lease
(In thousands) Benefits Costs Total
- -------------------------------------------------------------
Original provision $ 7,470 $ 1,680 $ 9,150
Utilized in 1995 (1,291) (915) (2,206)
- -------------------------------------------------------------
Balance,
December 31, 1995 6,179 765 6,944
Utilized in 1996 (4,973) (765) (5,738)
- -------------------------------------------------------------
Balance,
December 31, 1996 1,206 -- 1,206
Utilized in 1997 (758) -- (758)
- -------------------------------------------------------------
Balance,
December 31, 1997 $ 448 $ -- $ 448
=============================================================
The reserve balance is included in other current liabilities in the
accompanying balance sheets.
Note 13
Pro Forma Consolidated Financial Data (Unaudited)
The following unaudited pro forma consolidated net income and pro forma
earnings per share present the consolidated results of operations of ChoicePoint
assuming that the Spinoff had been completed as of the beginning of 1997.
Historical earnings per share are not presented since the companies that
comprise ChoicePoint were majority-owned subsidiaries of Equifax or one of its
affiliates and were recapitalized as part of the Spinoff.
The information presented below is not necessarily indicative of the
results of operations that ChoicePoint would have reported if it had operated as
an independent company.
(In thousands, except per share amounts) 1997
- --------------------------------------------------------------
Historical net income $ 28,944
Pro forma adjustments -- net of taxes:
Reversal of interest expense from Equifax(a) 2,165
Incremental interest expense(b) (2,589)
- --------------------------------------------------------------
Pro forma net income $ 28,520
==============================================================
Pro forma weighted average shares -- basic(c) 14,595
==============================================================
Pro forma earnings per share -- basic $ 1.95
==============================================================
Pro forma weighted average shares -- diluted(c) 14,891
==============================================================
Pro forma earnings per share -- diluted $ 1.92
==============================================================
Following are the pro forma adjustments to the accompanying pro forma
consolidated net income:
(a) To eliminate the $3.6 million ($2.2 million net of tax) corporate
interest expense for the year ended December 31, 1997 charged to ChoicePoint.
Equifax charged interest expense through the effective date of the Spinoff --
July 31, 1997.
(b) To record $4.3 million ($2.6 million net of tax) for the year ended
December 31, 1997 of interest expense on borrowings to fund the repayment of net
intercompany debt owed to Equifax, the repayment of $29.0 million of Equifax
debt assumed by ChoicePoint, and interest on borrowings to fund $10.0 million
for two ChoicePoint grantor trusts. The interest expense also includes interest
for borrowings for the CDB Infotek acquisition. An interest rate of 6.5% is
assumed on the borrowings.
(c) Pro forma weighted average shares outstanding prior to the Spinoff is
based on the number of ChoicePoint shares issued and outstanding, including
restricted stock, on the date of the Spinoff (August 7, 1997). The pro forma
weighted average shares -- diluted also include the dilutive effect of stock
options.
38
23
Note 14
Quarterly Financial Summary (Unaudited)
Following is a summary of the unaudited interim results of operations for
each quarter in the years ended December 31, 1997 and 1996:
First Second Third Fourth
(In thousands) Quarter Quarter Quarter Quarter Total
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
REVENUE $102,852 $108,623 $106,489 $99,357 $417,321
OPERATING INCOME 12,198 15,559 15,810 2,510 46,077
NET INCOME 5,541 7,300 7,778 8,325 28,944
Year ended December 31, 1996
Revenue $84,140 $89,986 $94,354 $98,001 $366,481
Operating income 9,006 12,545 13,744 12,316 47,611
Net income 4,218 6,207 6,888 5,967 23,280
Operating income decreased in the fourth quarter of 1997 due to $6,209,000
of charges for unusual items (Note 11) and $4,852,000 of other charges. Included
in the $4,852,000 of other charges were $1,892,000 of expense related to new
restricted stock plans (Note 8), $1,000,000 for a contribution to the Company's
profit sharing plan to offset the adverse effect of transitioning from Equifax's
defined benefit pension plan (Note 9), $1,000,000 to establish a ChoicePoint
charitable foundation (Note 4), $860,000 for adjusting receivables for a
renegotiated customer contract and $100,000 to fund an under-reserved
compensation plan.
The gain on the sale of a business unit (Note 4), largely offset by the
unusual items and other charges discussed above, positively impacted net income
in the fourth quarter of 1997.
Operating income decreased in the fourth quarter of 1996 due primarily to
the dilutive effect of the amortization of intangibles related to the CDB
Infotek acquisition in August 1996.
Report of Independent Auditors
To the Shareholders of ChoicePoint Inc.:
We have audited the accompanying consolidated balance sheets of ChoicePoint Inc.
(a Georgia corporation) and subsidiaries (as defined in Note 1) as of December
31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. 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 conducted our audits in accordance with generally accepted auditing
standards. 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ChoicePoint Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
February 20, 1998
39
24
Shareholder Information
ChoicePoint
TO FIND OUT MORE
For more information about ChoicePoint, our products and services, employment
opportunities, and current events at the Company, visit our web site at:
http://www.choicepointinc.com or call us at: 770-752-6000
INVESTOR INFORMATION
To obtain copies of the Company's Form 10-K, Form 10-Q or quarterly earnings
releases, please contact:
Kelly McLoughlin
Director, Investor Relations
ChoicePoint Inc.
1000 Alderman Drive
Alpharetta, Georgia 30005
or call 770-752-4050
Financial reports can also be accessed on our web site at
http://www.choicepointinc.com
MARKET INFORMATION
ChoicePoint shares began regular trading on the New York Stock Exchange on
August 8, 1997 under the symbol CPS. As of March 1, 1998, the approximate number
of shareholders of record was 6,163 for common stock. No cash dividends have
been paid. The Company does not anticipate paying any cash dividends on its
common stock in the near future.
STOCK ACTIVITY
ChoicePoint opened trading on August 8, 1997 at $35.75. High and low sale prices
for each quarter since trading began follow:
1997 High Low
- ----------------------------------------------------------
Third quarter* 38.625 30.750
Fourth quarter 48.125 35.000
- ----------------------------------------------------------
*Includes third quarter since the Spinoff.
ANNUAL MEETING
The Annual Meeting of Shareholders of ChoicePoint Inc. will be held April 29,
1998 at 3:30 p.m. at the Company's headquarters at 1000 Alderman Drive,
Alpharetta, Georgia
INDEPENDENT AUDITORS
Arthur Andersen LLP
Atlanta, Georgia
TRANSFER AGENT AND REGISTRAR
SunTrust Bank, Atlanta
P.O. Box 4625
Atlanta, Georgia 30302
TRADEMARKS AND SERVICE MARKS
C.L.U.E. and Life 2000 are registered trademarks of ChoicePoint Inc.
Life Plus and TeleChoice are service marks of ChoicePoint Inc.
ChoicePoint, the logo, the domain name and the tag line are trademarks of
ChoicePoint Inc.
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