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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 001-13069
CHOICEPOINT INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-2309650
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1000 Alderman Drive Alpharetta, Georgia 30005
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(Address of principal executive offices) (Zip Code)
(770) 752-6000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1998
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Common Stock, $.10 Par Value 14,645,203
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CHOICEPOINT INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
INDEX
Part I. FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements -
Consolidated Statements of Income-
Three Months Ended June 30, 1998 and 1997 and 3
Six Months Ended June 30, 1998 and 1997
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997 4
Consolidated Statement of Shareholders' Equity -
Six Months Ended June 30, 1998 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
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CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1998 1997
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Operating revenue............................... $106,702 $108,623 $201,252 $211,475
Costs and expenses:
Costs of services............................. 73,295 72,583 132,919 140,942
Selling, general, and administrative.......... 16,923 20,481 36,839 42,776
-------- -------- -------- -------
Total costs and expenses.................. 90,218 93,064 169,758 183,718
Operating income................................ 16,484 15,559 31,494 27,757
Interest expense................................ 1,825 1,622 3,470 3,241
-------- -------- -------- -------
Income before income taxes...................... 14,659 13,937 28,024 24,516
Provision for income taxes...................... 6,347 6,637 12,134 11,675
-------- -------- -------- -------
Net income...................................... $ 8,312 $ 7,300 $ 15,890 $12,841
======== ======== ======== =======
Earnings per share - basic (Note 5)............. $ .57 $ -- $ 1.09 $ --
======== ======== ======== =======
Weighted average shares - basic............... 14,611 -- 14,626 --
======== ======== ======== =======
Earnings per share - diluted (Note 5)........... $ .55 $ -- $ 1.05 $ --
======== ======== ======== =======
Weighted sverage shares - diluted............. 15,162 -- 15,129 --
======== ======== ======== =======
The accompanying notes are an integral part of these consolidated statements.
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CHOICEPOINT INC.
CONSOLIDATED BALANCE SHEETS
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JUNE 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PAR VALUES) 1998 1997
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(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ................................. $ 8,990 $ 26,858
Marketable securities ..................................... 9,000 9,000
Accounts receivable, net of allowance for doubtful accounts
of $3,261 at June 30, 1998 and $1,847 at
December 31,1997 ........................................ 92,190 90,266
Deferred income tax assets ................................ 9,099 10,503
Other current assets ...................................... 9,143 9,492
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Total current assets .................................. 128,422 146,119
Property and equipment, net ................................. 43,606 42,985
Goodwill, net ............................................... 160,991 127,731
Deferred income tax assets .................................. 18,714 15,406
Other ....................................................... 31,877 27,730
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Total Assets ................................................ $ 383,610 $ 359,971
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term debt and current maturities of long-term debt .. $ 12,112 $ 593
Accounts payable .......................................... 19,462 17,371
Accrued salaries and bonuses .............................. 10,364 15,664
Other current liabilities ................................. 44,307 43,610
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Total current liabilities ............................... 86,245 77,238
Long-term debt, less current maturities ..................... 99,427 95,457
Postretirement benefit obligations .......................... 54,275 53,834
Other long-term liabilities ................................. 3,517 5,697
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Total liabilities ....................................... 243,464 232,226
Shareholders' equity:
Preferred stock, $.01 par value; shares
authorized - 10,000; no shares issued or outstanding .... -- --
Common stock, $.10 par value; shares authorized -
100,000; shares issued and outstanding -
14,645 in 1998 and 14,641 in 1997 ........................ 1,465 1,464
Paid-in capital ........................................... 113,870 112,655
Retained earnings ......................................... 29,634 13,744
Foreign currency translation adjustments .................. (121) (118)
Stock held by employee benefit trusts, at cost,
93 shares in 1998 ........................................ (4,702) --
Total shareholders' equity ............................... 140,146 127,745
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Total Liabilities and Shareholders' Equity .................. $ 383,610 $ 359,971
========= =========
The accompanying notes are an integral part of these consolidated
balance sheets.
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CHOICEPOINT INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
FOREIGN STOCK
CURRENCY HELD BY
COMMON PAID-IN RETAINED TRANSLATION BENEFIT
(IN THOUSANDS) STOCK CAPITAL EARNINGS ADJUSTMENTS TRUSTS TOTAL
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Balance, December 31, 1997 ........ $1,464 $112,655 $13,744 $(118) $ -- $127,745
Net income ...................... -- -- 15,890 -- -- 15,890
Restricted stock plans, net ..... (1) 967 -- -- -- 966
Stock options exercised ......... 2 248 -- -- -- 250
Cost of shares repurchased ...... -- -- -- -- (4,702) (4,702)
Translation adjustments ......... -- -- -- (3) -- (3)
------ -------- ------- ----- ------- --------
Balance, June 30, 1998 ............ $1,465 $113,870 $29,634 $(121) $(4,702) $140,146
====== ======== ======= ===== ======= ========
The accompanying notes are an integral part of this
consolidated statement.
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CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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SIX MONTHS ENDED
JUNE 30,
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1998 1997
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(IN THOUSANDS)
Cash flows from operating activities:
Net income .................................................. $ 15,890 $ 12,841
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................. 14,281 13,407
Compensation recognized under employee stock plans ........ 1,116 --
Changes in assets and liabilities,
excluding effects of acquisitions:
Accounts receivable, net ................................ 242 (10,765)
Other current assets .................................... 414 (5,061)
Current liabilities, excluding debt ..................... (4,186) 5,821
Deferred income taxes ................................... (1,904) (1,991)
Other long-term liabilities, excluding debt ............. 503 (201)
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Net cash provided by operating activities ................... 26,356 14,051
-------- --------
Cash flows from investing activities:
Acquisitions, net of cash acquired .......................... (40,292) (1,659)
Additions to property and equipment ......................... (7,037) (12,237)
Additions to other assets, net .............................. (7,986) (2,491)
-------- --------
Net cash flows used by investing activities ................. (55,315) (16,387)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt ................................ 25,042 --
Payments on long-term debt .................................. (21,213) (487)
Net short-term borrowings ................................... 11,660 --
Net transactions with Equifax, Inc. ......................... -- 6,009
Purchases of stock held by employee benefit trusts .......... (4,702) --
Proceeds from exercise of stock options ..................... 250 --
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Net cash flows provided by financing activities ............. 11,037 5,522
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Effect of foreign currency exchange rates on cash ............. 54 (17)
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Net (decrease) increase in cash ............................... (17,868) 3,169
Cash and cash equivalents, beginning of period ................ 26,858 1,726
-------- --------
Cash and cash equivalents, end of period ...................... $ 8,990 $ 4,895
======== ========
The accompanying notes are an integral part of these
consolidated statements.
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CHOICEPOINT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
1. SPIN OFF AND BASIS OF PRESENTATION
ChoicePoint Inc., a Georgia corporation ("ChoicePoint" or the "Company"), 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 (the "Spinoff") of the Company's outstanding stock
by Equifax as a stock dividend to the shareholders of Equifax. In the Spinoff,
each shareholder of Equifax received one share of the Company's common stock,
par value $.10 per share (the "Common Stock"), for every 10 shares of Equifax
common stock owned. The effective time of the Spinoff was July 31, 1997, and
the Common Stock began regular trading on the New York Stock Exchange on August
8, 1997. References to ChoicePoint or the Company mean ChoicePoint Inc., its
subsidiaries and divisions after the Spinoff and the Insurance Services Group
of Equifax prior to the Spinoff.
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. This
information reflects all adjustments which are, in the opinion of management,
necessary for a fair statement of the financial position of ChoicePoint as of
June 30, 1998 and the results of operations for the three months and six months
ended June 30, 1998 and 1997 and cash flows for the six months ended June 30,
1998 and 1997. The adjustments have been of a normal recurring nature. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These financial statements should be read in conjunction
with the notes to the financial statements included in ChoicePoint's
Consolidated Financial Statements for the year ended December 31, 1997 as filed
with the Securities and Exchange Commission on Form 10-K (File No. 1-13069).
The current period's results are not necessarily indicative of results to be
expected for a full year.
2. NATURE OF OPERATIONS
ChoicePoint provides domestic insurance companies with automated and
traditional underwriting and claims information services to assist those
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.
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3. USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
These estimates and assumptions affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements as well as reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
4. REVENUE AND COSTS OF SERVICES PRESENTATION
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 costs of services. ChoicePoint has elected to exclude these
customer reimbursed fees from revenue and reduce costs of services by a
corresponding amount. This change in accounting presentation does not impact
operating income. Registry revenue was $74,377,000 and $65,798,000 for the
three months ended June 30, 1998 and 1997, respectively, and $142,949,000 and
$129,720,000 for the six months ended June 30, 1998 and 1997, respectively.
5. EARNINGS PER SHARE
In February 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share",
which specifies the computation, presentation, and disclosure requirements for
earnings per share. ChoicePoint adopted SFAS No. 128 in the fourth quarter of
1997. Historical earnings per share for the three months ended June 30, 1997
and six months ended June 30, 1997 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 14 for pro
forma earnings per share for the three months ended March 31, 1997 and the
three months and six months ended June 30, 1997. Earnings per share - diluted
includes the dilutive effect of stock options.
6. TRANSACTIONS WITH EQUIFAX
Prior to the Spinoff, ChoicePoint was charged corporate costs by Equifax
through July 31, 1997. The amount of corporate costs included in the
accompanying consolidated statements of income were $0 and $2,551,000 for the
three months ended June 30, 1998 and 1997, respectively and $0 and $5,102,000
for the six months ended June 30, 1998 and 1997, respectively. These
allocations were based on an estimate of the proportion of corporate expenses
of Equifax 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 debt, in amounts of $0
and $1,547,000 for the three months ended June 30, 1998 and 1997, respectively,
and $0 and $3,094,000 for the six months ended June 30, 1998 and 1997,
respectively.
7. INCOME TAXES
Historically, the Company had 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.
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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 basis of assets and liabilities.
8. DEBT
In August 1997, ChoicePoint entered into a $250 million unsecured revolving
credit facility (the "Credit Facility") with a group of banks. The Credit
Facility bears interest at variable rates and is expandable to $300 million,
subject to approval of the lenders. The commitment termination date and final
maturity of the Credit Facility will occur in August 2002. Total borrowings
under the Credit Facility were $99.0 million at June 30, 1998.
Short-term debt at June 30, 1998 consists of $11.7 million from a line of credit
with a bank. There were no short-term borrowings during 1997.
9. STOCK OPTIONS
During the first quarter of 1998, stock options for approximately 587,000
shares of ChoicePoint common stock were granted at fair market value under the
ChoicePoint Inc. 1997 Omnibus Stock Incentive Plan.
10. ACQUISITIONS
During the second quarter of 1998, the Company acquired the assets of Attest
National Drug Testing, Inc., a drug testing information services company, and
Application Profiles, Inc., a full service pre-employment screening company.
During the first quarter of 1998, the Company accelerated its option to
purchase the remaining 27.4% interest in CDB Infotek, which is now a wholly
owned subsidiary of ChoicePoint. The total purchase price of all three
acquisitions was approximately $40.4 million. Approximately $36.1 million of
the total purchase price was allocated to goodwill. The acquisitions were
accounted for as purchases.
11. GRANTOR TRUSTS
ChoicePoint has established two grantor trusts totaling $10.0 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. During the
second quarter of 1998, funds from the grantor trusts totaling $4.7 million
were used to purchase 92,600 shares of ChoicePoint common stock, which are
reflected as stock held by employee benefit trusts, at cost, in the June 30,
1998 balance sheet. Approximately $5.3 million of cash remains in the grantor
trusts at June 30, 1998 and is included in cash and cash equivalents in the
accompanying balance sheets.
12. SOFTWARE DEVELOPMENT
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires
companies to capitalize certain direct costs, including external, payroll and
interest costs. The Company has historically capitalized significant costs of
software developed or obtained for internal use. For the six months ended June
30, 1998, approximately $3.0 million of costs of software developed for internal
use was capitalized.
13. COMPREHENSIVE INCOME
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive
Income", which requires companies to report all changes in equity during a
period, except those resulting from investment by owners and distribution to
owners, in an annual financial statement that is displayed with the same
prominence as other annual financial statements. Components of comprehensive
income include net income and foreign currency
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translation adjustments. Annual financial statements for prior periods will be
reclassified as required. The Company's total comprehensive income was as
follows:
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(IN THOUSANDS) 1998 1997 1998 1997
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Net income ........................................ $ 8,312 $ 7,300 $ 15,890 $ 12,841
Other comprehensive income, net of tax:
Foreign currency translation adjustment ......... (81) 17 (3) 16
-------- -------- -------- --------
Comprehensive income .............................. $ 8,231 $ 7,317 $ 15,887 $ 12,857
======== ======== ======== ========
14. PRO FORMA CONSOLIDATED FINANCIAL DATA
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.
1997
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SIX MONTHS
FIRST SECOND ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER JUNE 30
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Historical net income ................................. $ 5,541 $ 7,300 $ 12,841
Pro forma adjustments:
Reversal of interest expense from Equifax(a) ....... 928 928 1,856
Incremental interest expense (b) ................... (1,129) (1,129) (2,258)
-------- -------- --------
Pro forma net income .................................. $ 5,340 $ 7,099 $ 12,439
======== ======== ========
Pro forma earnings per share - basic .................. $ .37 $ .49 $ .85
======== ======== ========
Pro forma weighted average shares - basic (c) ......... 14,585 14,585 14,585
======== ======== ========
Pro forma earnings per share - diluted ................ $ .36 $ .48 $ .84
======== ======== ========
Pro forma weighted average shares - diluted (c) ....... 14,837 14,837 14,837
======== ======== ========
Following are the pro forma adjustments to the accompanying pro forma
consolidated net income:
a) To eliminate the $3.1 million ($1.9 million net of tax) corporate
interest expense for the six months ended June 30, 1997 charged to
ChoicePoint. Equifax charged interest expense through the effective
date of the Spinoff - July 31, 1997.
b) To record $2.0 million ($1.1 million net of tax) 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. 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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 UCC searches and filings
RESULTS OF OPERATIONS
Revenue and operating income for the three months and six months ended June 30,
1998 and 1997 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(IN THOUSANDS) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------
P&C revenue .................. $ 60,271 $ 48,366 $111,683 $ 93,899
L&H revenue .................. 20,277 37,902 40,396 74,931
B&G revenue .................. 26,154 22,355 49,173 42,645
-------- -------- -------- --------
Operating revenue ............ 106,702 108,623 201,252 211,475
Costs and expenses ........... 90,218 93,064 169,758 183,718
-------- -------- -------- --------
Operating income ............. $ 16,484 $ 15,559 $ 31,494 $ 27,757
======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Consolidated revenue decreased $1.9 million, or 1.8%, from $108.6 million for
the three months ended June 30, 1997 to $106.7 million for the three months
ended June 30, 1998, primarily due to the sale of ChoicePoint's paramedical
examination business in December 1997. Excluding the effect of that sale,
consolidated revenues increased $14.0 million, or 15.1%, from $92.7 million for
the three months ended June 30, 1997 to $106.7 million for the three months
ended June 30, 1998.
Revenue from Property and Casualty Insurance Services grew $11.9 million, or
24.6%, from $48.4 million for the three months ended June 30, 1997 to $60.3
million for the three months ended June 30, 1998, due to continued strong unit
performance in technology intensive personal lines products and the
installation of a
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new generation of commercial worker's compensation software at a large insurance
customer. This software installation resulted in a contract progress payment of
$8.2 million. These two areas of revenue growth were partially offset by revenue
unit declines in the field related property businesses - partly because of
$500,000 of non-comparable one-time revenues in the second quarter of 1997 but
also because of general softening of demand for some of these labor intensive
services.
Revenue from Life and Health Insurance Services decreased $17.6 million, or
46.5%, from $37.9 million for the three months ended June 30, 1997 to $20.3
million for the three months ended June 30, 1998, due primarily to the sale of
the paramedical examination business noted above. Excluding the effect of the
sale, revenue from Life and Health Insurance Services decreased $1.7 million,
or 7.7%, from $22.0 million for the three months ended June 30, 1997 to $20.3
million for the three months ended June 30, 1998, due primarily to unit decline
in traditional field-based life and health inspection products and laboratory
services. The unit decline in laboratory services was due primarily to the loss
of a customer in the fourth quarter of 1997.
Revenue from Business and Government Services increased $3.8 million, or 17.0%,
from $22.4 million for the three months ended June 30, 1997 to $26.2 million
for the three months ended June 30, 1998. Revenue increased in the majority of
product lines within this market, with incremental revenue from acquisitions
made since the second quarter of 1997 contributing $2.0 million of the
increase.
Operating income increased $925,000, or 5.9%, from $15.6 million for the three
months ended June 30, 1997 to $16.5 million for the three months ended June 30,
1998, primarily as a result of strong revenue performance in property and
casualty personal lines products. Operating margins increased from 14.3% for
the three months ended June 30, 1997 to 15.4% for the three months ended June
30, 1998. Excluding the 1998 second quarter revenue effect of the $8.2 million
software development progress payment discussed above, for which no profit was
recognized, the operating margin was 16.7% for the three months ended June 30,
1998.
Net income increased $1.0 million, or 13.9%, from $7.3 million for the three
months ended June 30, 1997 to $8.3 million for the three months ended June 30,
1998 as a result of the increase in operating income and favorable tax rates
discussed below.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Consolidated revenue decreased $10.2 million, or 4.8%, from $211.5 million in
the first six months of 1997 to $201.3 million in the first six months of 1998,
primarily due to the sale of ChoicePoint's paramedical examination business in
December 1997. Excluding the effect of that sale, consolidated revenues
increased $21.3 million, or 11.9%, from $179.9 million in the first six months
of 1997 to $201.3 million in the first six months of 1998.
Revenue from Property and Casualty Insurance Services grew $17.8 million, or
18.9%, from $93.9 million in the first six months of 1997 to $111.7 million in
the first six months of 1998, primarily due to continued strong unit
performance in personal lines products and the $8.2 million progress payment
noted above, partially offset by unit declines in the field related property
businesses.
Revenue from Life and Health Insurance Services decreased $34.5 million, or
46.1%, from $74.9 million in the first six months of 1997 to $40.4 million in
the first six months of 1998, due primarily to the sale of the paramedical
examination business noted above. Excluding the effect of the sale, revenue
from Life and Health Insurance Services decreased $3.0 million, or 6.8%, from
$43.4 million for the six months ended June 30, 1997 to $40.4 million for the
six months ended June 30, 1998, due primarily to unit decline in life and
health inspection reports and laboratory services.
Revenue from Business and Government Services increased $6.5 million, or 15.3%,
from $42.6 million in the first six months of 1997 to $49.2 million in the
first six months of 1998. Incremental revenue from acquisitions made since the
first quarter of 1997 contributed $2.9 million of the increase.
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Operating income increased $3.7 million, or 13.5%, from $27.8 million in the
first six months of 1997 to $31.5 million in the first six months of 1998,
primarily as a result of strong revenue performance in property and casualty
personal lines products. Operating margins increased from 13.1% for the first
six months of 1997 to 15.6% for the first six months of 1998. Excluding the
1998 second quarter revenue effect of the $8.2 million software development
progress payment discussed above, for which no profit was recognized, the
operating margin was 16.3% for the first six months of 1998.
Net income increased $3.1 million, or 23.7%, from $12.8 million in the first
six months of 1997 to $15.9 million in the first six months of 1998 as a result
of the strong operating performance and favorable tax rates discussed below.
INCOME TAXES
The effective income tax rate decreased from 47.6% in the first six months of
1997 to 43.3% in the first six months of 1998 due primarily to a reduction in
state income taxes. Prior to the Spinoff, 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. As
a result, ChoicePoint's overall state income taxes in the first six months of
1998 are lower since the Company is no longer part of Equifax's consolidated
group for unitary tax purposes.
FINANCIAL CONDITION AND LIQUIDITY
Cash provided by operations increased from $14.1 million in the first six
months of 1997 to $26.4 million in the first six months of 1998. This increase
was primarily attributable to the increase in net income, as adjusted for
depreciation and amortization, and due to a decrease in accounts receivable,
adjusted for the effects of acquisitions. During the first six months of 1998,
ChoicePoint used $55.3 million for investing activities, primarily in the
acquisitions of Attest National Drug Testing, Inc. ("Attest"), Application
Profiles, Inc. ("Application Profiles"), and the remaining 27.4% interest in
CDB Infotek. Additions to property and equipment of $7.0 million in the first
six months of 1998 were primarily for system upgrades. During the first six
months of 1997, additions to property and equipment accounted for $12.2 million
of the $16.4 million of net cash flows used for investing activities. Building
and leasehold improvements for an office facility in Alpharetta, Georgia and
the expansion of the existing Osborn Laboratories, Inc. facility in Olathe,
Kansas represented approximately $5.3 million of the $12.2 million additions in
the first six months of 1997. The Company anticipates additional capital
expenditures of approximately $11.0 million in 1998, which will be used
primarily for system upgrades. Net cash provided by financing activities was
$11.1 million in the first six months of 1998, as the proceeds from a credit
facility and two lines of credit were used to fund the acquisitions, as
discussed below. Net cash provided by financing activities was $5.5 million in
the first six months of 1997, which was reflected in an increase in the
intercompany debt due to Equifax that was repaid in connection with the
Spinoff.
EBITDA increased $4.6 million, or 11.2%, from $41.2 million for the six months
ended June 30, 1997 to $45.8 million for the six months ended June 30, 1998.
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 is not a measure of financial performance under
generally accepted accounting principles) because such data is used by certain
investors to analyze and compare companies on the basis of operating
performance, leverage and liquidity, and to determine a company's ability to
service debt.
The Company's short-term and long-term liquidity depends primarily upon its
level of net income, accounts receivable, accounts payable and accrued
expenses. In order to meet its working capital needs after the Spinoff,
ChoicePoint entered into a five-year $250 million revolving credit facility
("Credit Facility") with a group of banks in August 1997. The Credit Facility
bears interest at variable rates and is expandable to $300 million, subject to
approval of the lenders. During the first six months of 1998, ChoicePoint used
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borrowings under the Credit Facility and cash from operations to purchase the
remaining 27.4% interest in CDB Infotek, Attest and Application Profiles. Total
debt outstanding under the Credit Facility was $99.0 million at June 30, 1998
and $95.0 million at December 31, 1997. The Company also utilized lines of
credit ("Lines of Credit") with two banks in the first six months of 1998. As
of June 30, 1998, $11.7 million was outstanding on this Line of Credit.
ChoicePoint may use additional borrowings under the Credit Facility and Line of
Credit to finance acquisitions and general corporate cash requirements.
Interest expense was $1.8 million and $1.6 million for the three months ended
June 30, 1998 and 1997, respectively, and $3.5 million and $3.2 million for the
six months ended June 30, 1998 and 1997, respectively. Prior to the Spinoff on
August 7, 1997, ChoicePoint was charged corporate interest expense from Equifax
based on the relationship of its net assets to total Equifax net assets,
excluding corporate debt.
No cash dividends have been paid. The Company does not anticipate paying any
cash dividends on its common stock in the near future.
YEAR 2000
The Term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000
is approached and reached. 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.
The Company's State of Readiness - ChoicePoint has assessed and continues to
assess the impact of the Year 2000 on its reporting system and operations. As a
result, certain computer systems and software programs used, and in some cases
developed, by ChoicePoint have been or will need to be upgraded in order to
address Year 2000 requirements. The Company is also assessing its
non-information technology systems. However, it anticipates these systems to
have less of a risk impact on the Company's operations.
ChoicePoint also receives data and inquiries from vendors and customers.
Current remediation efforts are in place to accept data in both 2-digit and
4-digit formats within several ChoicePoint applications.
The Costs to Address the Company's Year 2000 Issues - During 1997 and the first
six months of 1998, the Company incurred approximately $1.3 million and $1.5
million, respectively, to modify existing computer systems and applications to
address the Year 2000 issue and estimates that an additional $4.0 million will
be incurred in 1998 and $2.5 million in 1999. The cost estimates have increased
since the first quarter due to the Company engaging third party consultants to
assist in the Year 2000 effort. The Company has and will continue to fund the
costs of Year 2000 implementation from cash flows.
The Risks of the Company's Year 2000 Issues - The Company has not begun the
systems integration testing phase of its Year 2000 initiative. Until system
integration testing is substantially in process, the Company cannot fully
estimate the risks of its Year 2000 issue. If the Company's remediation plan is
not successful, there would be a significant disruption of the Company's
ability to transact business with its major customers and suppliers and it
could have a material adverse effect on the Company's financial position and
results of operations.
The Company's Contingency Plans - The Company will be developing contingency
plans in the event there is a disruption in operations resulting from a Year
2000 related event. Because the Company has not begun system integration
testing, and accordingly has not fully assessed its risks from potential Year
2000 failures, the Company has not yet developed detailed plans specific to
Year 2000 events.
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NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income
statement, and requires that a company must formally document, designate, and
assess the effectiveness of the transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance.
The Company has not yet quantified the impact of adopting SFAS No. 133 on it's
financial statements and has not determined the timing of or method of it's
adoption of the Statement. The adoption of SFAS No. 133 is not expected to have
a material impact on earnings or other comprehensive income. However, changes
in the Company's derivative instruments and hedging activities could increase
volatility in earnings and other comprehensive income.
FORWARD-LOOKING STATEMENTS
This report may contain certain information that constitutes forward-looking
statements as that term is defined in the Private Securities Litigation Reform
Act of 1995. Those statements, to the extent they are not historical facts,
should be considered forward-looking and subject to various risks and
uncertainties. Such forward-looking statements are made based upon management's
assessments of various risks and uncertainties, 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 uncertainties, 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. The Company undertakes no obligation to
publicly release any revisions to any forward-looking statement contained
herein to reflect events or circumstances occurring after the date hereof or to
reflect the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ChoicePoint is involved in litigation from time to time in the ordinary course
of its business. The Company does not believe that the outcome of any pending
or threatened litigation will have a material adverse effect on the financial
position or results of operations of ChoicePoint. However, as is inherent in
legal proceedings where issues may be decided by finders of fact, there is a
risk that unpredictable decisions adverse to the Company could be reached.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 29, 1998 the Company held its regular Annual Meeting of Shareholders.
The following matters were submitted to a vote of security holders:
(a) Votes cast for or withheld regarding the re-election of three
Directors for terms expiring in 2001:
FOR WITHHELD
Daniel W. McGlaughlin 12,459,534 147,585
C. B. Rogers, Jr. 12,457,763 149,356
Derek V. Smith 12,456,431 150,688
Directors whose terms of office continue after the meeting
are as follows:
Terms Expiring in 1999 Terms Expiring in 2000
Tinsley H. Irvin James M. Denny
Ron D. Barbaro Julia B. North
Charles I. Story
(b) Ratification of the appointment of Arthur Andersen LLP as
independent auditors of the Company for the fiscal year ending
December 31, 1998:
FOR AGAINST ABSTAIN
12,535,848 35,084 36,187
ITEM 5. OTHER INFORMATION
Shareholder Proposals
Proposals by shareholders intended to be presented at the 1999 Annual Meeting
must be forwarded in writing and received at the principal executive office of
the Company no later than November 18, 1998, directed to the attention of the
Secretary, for consideration for inclusion in the Company's proxy statement for
the Annual Meeting of Shareholders to be held in 1999. Moreover, with regard to
any proposal by a
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shareholder not seeking to have such proposal included in the proxy statement
but seeking to have such proposal considered at the 1999 Annual Meeting, if such
shareholder fails to notify the Company in the manner set forth above of such
proposal no later than February 1, 1999, then the persons appointed as proxies
may exercise their discretionary voting authority if the proposal is considered
at the 1999 Annual Meeting notwithstanding that shareholders have not been
advised of the proposal in the proxy statement for the 1999 Annual Meeting. Any
proposals submitted by shareholders must comply in all respects with the rules
and regulations of the Securities and Exchange Commission and the provisions of
the Company's Articles of Incorporation, Bylaws and of Georgia law.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.01 Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
Registrant did not file any reports on Form 8-K during the quarter for
which this report was filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHOICEPOINT INC.
-----------------------------------------
(Registrant)
August 13, 1998 /s/ Derek V. Smith
- ------------------------ -----------------------------------------
Date D.V. Smith, President and
Chief Executive Officer
August 13, 1998 /s/ Doug C. Curling
- ------------------------ -----------------------------------------
Date D. C. Curling, Executive Vice President,
Chief Financial Officer and Treasurer
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EXHIBIT INDEX
Exhibit Description of Exhibit
- ------- ----------------------
27.01 Financial Data Schedule (for SEC use only).
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