1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
-----------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): November 5, 1998
CHOICEPOINT INC.
(Exact Name of Registrant as Specified in Charter)
GEORGIA 001-13069 58-2309650
(State of Incorporation) (Commission File Number) (IRS Employer
Identification No.)
1000 ALDERMAN DRIVE
ALPHARETTA, GEORGIA 30005
(Address of principal executive offices)
(770) 752-6000
(Registrant's telephone number, including area code)
ITEM 2 ACQUISITION OR DISPOSITION OF ASSETS
Effective November 5, 1998, ChoicePoint Inc., a Georgia corporation
("ChoicePoint"), through its wholly-owned subsidiary ChoicePoint Services Inc.,
a Georgia corporation, acquired all of the capital stock and equity interests of
Customer Development Corporation, an Illinois corporation ("CDC"), and its
affiliated companies for $86,000,000 in cash, plus transaction costs. The final
purchase price also is subject to a net worth adjustment based on the closing
date balance sheet of the acquired companies. CDC, based in Peoria, Illinois, is
a full-service database marketing company that designs and implements complex,
customized database marketing programs primarily for clients in the insurance,
consumer finance, publishing and banking industries. CDC and its affiliated
companies (as described below, the "CDC Companies"), which will operate as
subsidiaries of ChoicePoint, were acquired from Thomas C. Lund.
2
The companies affiliated with CDC and also acquired by ChoicePoint are:
Customer Database Technologies, Inc. (an Illinois corporation), which develops
software packages utilized for database management applications, National Credit
Audit Corporation (an Illinois corporation), which provides magazine subscriber
collection services, Optimum Graphics Printing, Inc. (an Illinois corporation),
which provides print and paper brokerage services, Financial Database Services
Company (an Illinois corporation), which provides database services for
information governed by the Fair Credit Reporting Act, and CDC Realty LLC (a
Delaware limited liability company), which owns the real estate utilized by CDC
and its affiliated companies.
ChoicePoint intends to continue to use the equipment and other physical
assets of the CDC Companies substantially in the manner in which they were
utilized prior to their acquisition. ChoicePoint funded the purchase of the CDC
Companies with funds drawn from ChoicePoint's revolving bank credit facility
with a group of banks including Wachovia Bank and SunTrust Bank, as co-agents.
ITEM 7 FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
See Financial Statements attached as Appendix A and Appendix B hereto.
(b) Pro Forma Financial Information.
See Financial Statements attached as Appendix C hereto.
(c) Exhibits.
2.1 Purchase Agreement, by and among ChoicePoint Services, Inc.,
Thomas C. Lund, The Lund 1997 GRAT A Irrevocable Trust, The Lund 1997 GRAT B
Irrevocable Trust, and Allen Road Investments, L.P.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
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APPENDIX A
HISTORICAL AUDITED COMBINED FINANCIAL STATEMENTS OF
CUSTOMER DEVELOPMENT CORPORATION AND AFFILIATED COMPANIES
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Customer Development Corporation
and its Affiliated Companies
Peoria, Illinois
In our opinion, the accompanying combined balance sheet and the related combined
statements of income and retained earnings and of cash flows present fairly, in
all material respects, the combined financial position of Customer Development
Corporation and its affiliated companies (the Companies) at December 31, 1997,
and the combined results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Companies' management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Peoria, Illinois
March 17, 1998
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CUSTOMER DEVELOPMENT CORPORATION
AND ITS AFFILIATED COMPANIES
COMBINED BALANCE SHEET
December 31,
ASSETS 1997
----
Current assets:
Cash and cash equivalents $ 656,911
Trade receivables, less allowance for doubtful accounts of $110,000 9,894,972
Other receivables 47,088
Notes receivable from stockholder and other related parties (Note 7) 1,155,656
Inventories (Note 2) 1,169,834
Prepaid expenses 511,730
-----------
Total current assets 13,436,191
Property, plant and equipment, net of accumulated depreciation (Notes 3 and 4) 8,992,484
Capitalized software, net of accumulated amortization of $281,588 (Note 1) 2,065,621
Other asset 858,922
-----------
$25,353,218
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,598,863
Accrued wages, salaries, and employee benefits 2,551,829
Customer prepayments and deposits 1,431,273
State taxes payable (Note 1) 166,262
Current portion of long-term debt and other obligations (Note 4) 132,960
-----------
Total current liabilities 6,881,187
Long-term debt and other obligations (Note 4) 12,912,687
Long term debt due to stockholder and other related parties (Note 4) 375,000
Deferred compensation (Note 7) 1,005,549
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock (Note 8) 16,000
Additional paid-in capital 30,000
Retained earnings 4,132,795
-----------
4,178,795
-----------
$25,353,218
===========
(See Notes to the combined Financial Statements)
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CUSTOMER DEVELOPMENT CORPORATION
AND ITS AFFILIATED COMPANIES
COMBINED STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1997
1997
----
Operating revenue (Note 1) $ 38,618,695
------------
Costs and expenses:
Cost of services (Note 1) 18,340,310
Selling, general and administrative 10,696,008
------------
29,036,318
------------
Operating income 9,582,377
------------
Other income (expense):
Interest income 12,011
Interest expense (685,674)
Other, net 19,682
------------
(653,981)
------------
Income before state taxes 8,928,396
Provision for state taxes (Note 1) 156,410
------------
Net income 8,771,986
Retained earnings:
Beginning of year 3,324,909
Distributions to stockholder (7,425,000)
Distribution of capital (539,100)
------------
End of year $ 4,132,795
============
Profit per share of common stock (Note 11) $ 75.62
============
(See Notes to the combined Financial Statements)
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CUSTOMER DEVELOPMENT CORPORATION
AND ITS AFFILIATED COMPANIES
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
1997
----
Cash flows from operating activities:-
Net income $ 8,771,986
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 1,970,578
(Gain) on disposal of fixed assets (101,744)
Changes in operating assets and liabilities -
Receivables (4,036,998)
Inventories (83,610)
Prepaid expenses (88,686)
Accounts payable (1,399,804)
Accrued expenses (674,167)
Customer prepayments and deposits (261,097)
State taxes payable 27,642
Deferred compensation (263,411)
------------
Total adjustments (4,911,297)
------------
Net cash provided by operating activities 3,860,689
------------
Cash flows from investing activities:
Proceeds from the sale of property 130,000
Investment in other asset (271,303)
Additions to property, plant and equipment (3,748,163)
Payment received on related party notes receivable 572,572
Acceptance of related party notes receivable (2,055,619)
------------
Net used in investing activities (5,372,513)
------------
Cash flows from financing activities:
Distributions to stockholder (7,425,000)
Proceeds from issuance of long-term debt 10,200,000
Payments of debt (3,657,227)
------------
Net cash used in financing activities (882,227)
------------
Net decrease in cash and cash equivalents (2,394,051)
Cash and cash equivalents at beginning of year 3,050,962
------------
Cash and cash equivalents at end of year $ 656,911
============
Supplemental disclosures of cash flow information:
Cash paid during the year for -
Interest $ 787,842
State taxes, net of refunds 123,031
Supplemental schedule of noncash investing and financing activities:
Forgiveness of related party note receivable (Note 7) $ 539,100
(See Notes to the combined Financial Statements)
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CUSTOMER DEVELOPMENT CORPORATION
AND ITS AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND
SIGNIFICANT ACCOUNTING POLICIES:
Principles of combination
The combined financial statements include the financial position, results of
operations and cash flows of five companies (the Companies) which provide
separate and distinct services and are under common ownership and control. All
significant transactions between affiliated companies have been eliminated in
the combined financial statements.
Customer Development Corporation (CDC) provides database management and direct
mail marketing services to financial service organizations, insurance companies
and other commercial enterprises. National Credit Audit Corporation (NCAC)
provides subscription collection services to national magazine publishers.
Optimum Graphics Printing, Inc. (OGPI) provides print and paper brokerage
services. Customer Database Technologies, Inc. (CDT) develops general and
customer specific software packages utilized for database management
applications. CDC Realty Limited Liability Company (LLC) owns the facilities
used by CDC, CDT, NCAC and OGPI.
Cash equivalents
For purposes of the statement of cash flows, the Companies consider all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Operating revenue recognition and presentation
Operating revenue from database management and direct mail marketing services
are recognized over the periods in which services are provided. Operating
revenue directly related to the printing and mailing of program materials are
recognized when the process is complete. Operating revenue from subscription
collection services are recognized when subscriptions are remitted.
Material, shipping and postage charges are passed on by the Companies to their
customers. The Companies, have elected to exclude these customer reimbursed
charges from operating revenue and reduce Cost of services by a corresponding
amount. This presentation does not impact operating or net income. Charges
passed through to customers in 1997 were $41,167,000.
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Inventories
Inventories, consisting primarily of purchased paper stock, are stated at the
lower of cost or market. Cost is determined primarily by the first-in, first-out
(FIFO) method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is determined for financial reporting purposes using the
straight-line method over the estimated useful lives of the assets. The
estimated useful lives of the Companies' assets are: equipment - 5 years;
building improvements - 5 to 7 years, production facility remodels - 10 years;
and buildings - 31 1/2 to 39 years. When an asset becomes fully depreciated, its
cost is eliminated from both the asset and the accumulated depreciation
accounts.
Capitalized software costs
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". This SOP requires the deferral of
certain costs associated with internally-developed, internal-use software. The
Companies adopted the provisions of this SOP during their fiscal year ended
December 31, 1997.
In accordance with SOP 98-1, internal labor and purchased software costs
associated with new software developments and significant upgrades or
enhancements to existing software which increase the utility of software are
capitalized. For the year ended December 31, 1997, the Companies capitalized
approximately $1,422,000 of these costs. Capitalized software costs are
amortized on the straight line basis over the estimated useful life which
approximates five years. Fully amortized software costs are removed from the
financial records. For the year ended December 31, 1997, the Companies recorded
approximately $183,000 of amortization of capitalized software costs.
Other asset
Other Asset consists of a receivable resulting from premiums paid by the
Companies for a split dollar life insurance policy held on one of the Companies'
stockholders. Upon the death of the stockholder, the Companies are entitled to
receive the total premiums paid into the policy from the proceeds of the death
benefit.
Use of estimates in the preparation
of financial statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and reported
amounts of operating revenue and expenses during the reporting period. Actual
results could differ from these estimates.
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The allowance for doubtful accounts and capitalized costs for internally
developed software require the use of significant estimates. The Companies
believe the techniques and assumptions used in establishing these amounts are
appropriate.
Fair values of financial instruments
Carrying amounts of cash, trade and other receivables, and accounts payable
approximate fair value because of the short maturity of these financial
instruments. Borrowings under the line of credit agreement are at a variable
interest rate tied to market rates and, accordingly, the fair value approximates
carrying value.
Income taxes and stockholders' distributions
CDC, NCAC, OGPI and CDT are tax option corporations under Subchapter S of the
Internal Revenue Code. LLC is a Limited Liability Company as defined by the
Internal Revenue Code. Pursuant to these elections, the earnings of the
Companies are reported for income tax purposes by the stockholders. Accordingly,
no federal income tax provision is reflected in the combined statement of
income.
The provision for taxes primarily represents Illinois Personal Property
Replacement Tax and both California and Massachusetts corporate income taxes.
Stockholder distributions are accrued when declared by the Board of Directors.
NOTE 2 - INVENTORIES:
The components of inventories at December 31, 1997 are as follows:
1997
----
Work in process $ 310,513
Materials and supplies 859,321
------------
$ 1,169,834
============
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment by major classification at December 31, 1997 are
as follows:
1997
----
Buildings $ 5,791,138
Building improvements 908,642
Equipment 7,642,552
Office furniture, fixtures and equipment 1,089,721
Vehicles 130,906
-----------
15,562,959
Less - Accumulated depreciation 6,997,077
-----------
8,565,882
Land 426,602
-----------
$ 8,992,484
===========
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NOTE 4 - DEBT AND OTHER OBLIGATIONS:
At December 31, 1997, long-term debt and other obligations are as follows:
1997
----
Borrowings pursuant to an unsecured revolving line of credit agreement with a
bank; interest rate varies at either the bank's prime lending rate or at a
LIBOR-based rate; line of credit was $9,000,000 at December 31, 1997; expires
November 2002
Borrowings at prime rate $ 921,147
Borrowings at LIBOR-based rate 6,278,853
Borrowings pursuant to an unsecured revolving line of credit agreement with a
bank; interest rate varies at either the bank's prime lending rate or at a
LIBOR-based rate; line of credit was $3,000,000 at December 31, 1997; expires in
November 2000; proceeds restricted to finance capital expenditures
Borrowings at LIBOR-based rate 3,000,000
Adjustable Rate Industrial Development Revenue Bonds, Series 1994; annual
principal payments ranging in progressive amounts from $95,000 in 1996 to
$225,000 in 2014; interest payable monthly based on the seven day municipal bond
interest rate; secured by a building and certain equipment 2,675,000
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1997
----
Note payable to stockholder; interest payable semi-annually and at maturity;
interest at 9%; principal payable at maturity in January 1999 $ 275,000
Note payable to related party; interest payable semi-annually and at maturity;
interest at 9%; principal payable at maturity in January 1999 19,000
Note payable to stockholder; interest payable semi-annually and at maturity;
interest at 9%; principal payable at maturity in January 1999 80,000
Note payable to related party; interest payable semi-annually and at maturity;
interest at 9%; principal payable at maturity in January 1999 1,000
Noncompetition agreement; payable in semimonthly instalments of $2,083 through
August 2002, including interest discounted at a rate of 14% 170,647
-----------
13,420,647
Less - Current portion 132,960
-----------
$13,287,687
===========
Annual maturities of bank and other long term debt (exclusive of the revolving
line of credit borrowings and other obligations) in the next five years are as
follows:
1998 $ 132,960
1999 517,149
2000 151,957
2001 162,501
2002 + 2,256,080
----------
$3,220,647
==========
The Companies have industrial revenue bonds and a revolving line of credit which
are maintained with a single bank. The bank requires the Companies to maintain
certain covenants related to fixed charge coverage, interest coverage, ratio of
debt to earnings and net worth. The Companies were in compliance with these
covenants at December 31, 1997.
The majority of the long-term debt agreements are at various interest
rates tied to market rates and, accordingly, the Companies consider fair value
to be the same as the carrying value. Based upon the borrowing rates currently
available to the Companies for the other long-term debt agreements with similar
terms and average maturities, the carrying value of long-term debt approximates
fair value.
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NOTE 5 - COMMITMENTS AND CONTINGENCIES:
The Companies have leases for equipment, and office, production and warehouse
space in various locations, some of which contain renewal options for additional
periods. Rental expense in 1997 approximated $492,000. Minimum rental payments
to third parties required under all operating leases having noncancelable lease
terms in excess of one year are as follows:
1998 $ 455,373
1999 470,968
2000 119,737
2001 5,960
2002 --
----------
$1,052,038
==========
NOTE 6 - EMPLOYEE BENEFIT PLANS:
Substantially all employees may participate in the Companies' salary reduction
401(k) Plan. Participating employees may contribute from 2% to 12% of their
earnings. The Companies match 50% of the first 6% of earnings contributed by
each employee. Expense for the plan was approximately $361,000 in 1997.
NOTE 7 - RELATED PARTY TRANSACTIONS:
During 1997, the Companies executed two $500,000 interest bearing notes
receivable from two related parties. The notes, which are due on December 31,
1998, bear interest at the greater of (a) 7% or (b) the lowest interest rate
permitted under Section 7872 of the Internal Revenue Code (5.6% at December 31,
1997). Each note is secured by 6,000 shares of Series B common stock of CDC. The
combined principal balance of these notes totaled $1,000,000 at December 31,
1997.
During 1997, the Companies executed an interest bearing note receivable from a
stockholder. This note, which is due upon demand, bears interest at 7%. The
principal balance of this note totaled $141,060 at December 31, 1997.
In 1997, LLC accepted a receivable for $539,100 from a related party associated
with principal and interest payments made by LLC on behalf of the related party.
At December 31, 1997, LLC forgave the receivable through a distribution of
capital to the related party.
The Companies held a note receivable from an employee aggregating $14,596 at
December 31, 1997. This note is payable on demand and bears interest at the
prime lending rate plus one percentage point.
Interest income related to notes receivable from a stockholder and employees of
the Companies totaled approximately $8,000 in 1997.
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The Companies have entered into deferred compensation agreements with certain
key employees whereby the funding and eventual settlements vary upon the terms
of each of the agreements. Compensation expense is related to these agreements
is recorded in the period earned. Interest accrues monthly based upon the
interest rate of one-year U.S. Treasury Notes.
NOTE 8 - STOCKHOLDERS' EQUITY:
The individual components of the Companies' common stock at December 31, 1997
are as follows:
Issued/
Type of Authorized outstanding
common stock shares shares
------------ ------ ------
Voting--Series A (no par value) 100,000 10,000
Nonvoting--Series B (no par value) 100,000 90,000
Voting ($1.00 par value) 210,000 16,000
------- ------
Total 410,000 116,000
======= =======
NOTE 9 - EQUITY PARTICIPATION PLAN:
The Companies initiated an Equity Participation Plan (the Plan) effective
October 1, 1997. All full-time employees and officers of the Companies are
eligible to participate in the Plan. Participants are eligible to receive Plan
awards in the form of units. The Plan is administered by the Compensation
Committee (the Committee) of the Board of Directors which is composed of
officers and employees of the Companies. The Committee awards units to
participants based on various factors. Awarded units do not entitle the
participant to any stockholder rights. Units become earned if the participant is
employed by the Companies on the qualified disposition date (as defined in the
Plan document).
Approximately 7% of the net proceeds (as defined in the Plan document), less
certain predefined selling expenses, will be contributed to a Participant Trust
(the Trust) and/or directly to the Plan participants on the qualified
disposition date. As the likelihood of a qualified disposition was not probable,
as defined in Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies," no compensation expense was recorded for the year ended December
31, 1997.
Payment from the Trust
Participants will receive distributions from the Companies in proportion to the
number of earned units owned on the qualified disposition date equal to one-half
of their total distribution. Participants will also receive distributions from
the Trust in proportion to the number of earned units owned as follows: (1)
one-fourth of their total distribution on the first anniversary date of the
qualified disposition and (2) the remainder of distributions on the second
anniversary date of the qualified disposition. The participant forfeits any
future distributions if they resign or are terminated for cause after the
qualified disposition date. Forfeitures are reallocated to remaining plan
participants.
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Plan modification and termination
The Committee may modify the Plan terms at their discretion. In addition, the
stockholders of the Companies have the sole and exclusive rights to replace the
Plan with an employee stock option plan that would provide participants with
options to acquire shares of the Companies' common stock. The stockholders of
the Companies have not made this election as of March 17, 1998.
NOTE 10 - MARKET SEGMENTS AND CONCENTRATION OF CREDIT RISK:
The Companies' primary sources of operating revenue are financial service
organizations and insurance companies, which represented approximately 52% and
31% of total net sales in 1997, respectively. Operating revenue from one
financial service organization and one insurance company represented
approximately 24.3% and 21.9% of total operating revenue, respectively.
At December 31, 1997, receivables from companies concentrated in the financial
service industry were approximately $7,269,000 and receivables from companies
concentrated in the insurance industry were approximately $2,464,000.
NOTE 11 - PROFIT PER SHARE
Profit (A) $8,771,986
Determination of shares:
Weighted average common shares outstanding (B) 116,000
Potentially dilutive shares -
-------
Weighted averaged common shares outstanding - assuming
dilution (C) 116,000
-------
Profit per share of common stock (A/B) $ 75.62
Profit per share of common stock - assuming dilution (A/C) $ 75.62
NOTE 12 - EVENT (UNAUDITED) SUBSEQUENT TO THE DATE
OF THE INDEPENDENT ACCOUNTANTS' REPORT
On October 31, 1998, the stockholders of the Companies sold their stock to
ChoicePoint, Inc. (ChoicePoint) in a transaction that will be accounted for as a
sale of assets and liabilities as allowed for under Section 338(h)(10) of the
Internal Revenue Code. On the closing date, the Companies received approximately
$73 million in cash and were relieved of approximately $13 million in debt.
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In accordance with the acquisition agreement, certain assets and liabilities
were not included in the sale of the Companies to ChoicePoint. The following
assets and liabilities were not acquired by ChoicePoint:
Asset/(Liability) at
December 31, 1997
-----------------
Notes Receivable from stockholder and other
related parties $ 1,155,656
Property, Plant and Equipment 163,554
Other Assets 858,922
Long term debt due to stockholder on other
related parties (375,000)
Noncompetition agreement (170,647)
Deferred compensation (1,005,549)
The sale of the Companies to ChoicePoint represents a qualified disposition as
defined in the Equity Participation Plan document (Note 9) and, accordingly, the
Companies will recognize approximately $5.1 million compensation expense in
their 1998 fiscal year.
In October 1998, the Companies initiated four additional Equity Participation
Plans (the Plans). These Plans entitle certain key employees of the Companies to
receive approximately 13% of the net proceeds (as defined by the Plan
documents), less certain predefined selling expenses. The related compensation
expense of approximately $9.8 million will be recognized by the Companies in
their 1998 fiscal year.
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APPENDIX B
HISTORICAL UNAUDITED INTERIM COMBINED FINANCIAL STATEMENTS
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CUSTOMER DEVELOPMENT CORPORATION
AND ITS AFFILIATED COMPANIES
COMBINED STATEMENTS OF INCOME
(UNAUDITED)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
(IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
Operating revenue $27,419 $27,366
Costs and expenses:
Costs of services 15,288 13,558
Selling, general and administrative 7,730 7,951
------- -------
Total costs and expenses 23,018 21,509
Operating income 4,401 5,857
Interest expense 579 460
------- -------
Income before state taxes 3,822 5,397
Provision for state taxes 82 93
------- -------
Net income $ 3,740 $ 5,304
======= =======
The accompanying notes are an integral part of these combined statements.
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CUSTOMER DEVELOPMENT CORPORATION
AND ITS AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 1998 1997
- ------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 680 $ 657
Trade receivables, less allowance for doubtful accounts 8,780 9,895
Notes receivable from stockholder and other related parties 1,116 1,156
Inventories 1,455 1,170
Prepaid expenses and other current assets 470 559
------- -------
Total current assets 12,501 13,437
Property, plant and equipment, net of accumulated
depreciation 9,504 8,992
Capitalized software, net of accumulated amortization 2,204 2,066
Other assets 1,178 858
------- -------
Total assets $25,387 $25,353
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 3,577 $ 2,765
Accrued wages, salaries, and employee benefits 1,925 2,552
Customer prepayments and deposits 2,060 1,431
Current portion of long-term debt and other obligations 133 133
------- -------
Total current liabilities 7,695 6,881
Long-term debt and other obligations 10,692 12,913
Long-term debt due to stockholder and other related parties 375 375
Deferred compensation 1,005 1,005
------- -------
Total liabilities 19,767 21,174
Stockholders' equity:
Common stock 16 16
Additional paid-in capital 30 30
Retained earnings 5,574 4,133
------- -------
Total stockholders' equity 5,620 4,179
------- -------
Total liabilities and stockholders' equity $25,387 $25,353
======= =======
The accompanying notes are an integral part of these combined balance sheets.
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CUSTOMER DEVELOPMENT CORPORATION
AND ITS AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------
(IN THOUSANDS) 1998 1997
- ------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 3,740 $ 5,304
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,947 1,501
Changes in assets and liabilities:
Trade receivables, net 1,115 (5,217)
Inventories (285) (492)
Prepaid expenses and other current assets 89 (375)
Other assets (320) 38
Current and other long-term liabilities, excluding debt 814 (730)
-------- -------
Net cash provided by operating activities 7,100 29
Cash flows from investing activities:
Additions to property, plant and equipment and
capitalized software (2,597) (3,458)
Payment on notes receivable from stockholder, net 40 192
-------- -------
Net cash flows used in investing activities (2,557) (3,266)
Cash flows from financing activities:
Proceeds from long-term debt 57,779 6,969
Payments on long-term debt (60,000) (3,000)
Distributions to stockholders (2,299) (3,689)
-------- -------
Net cash flows (used in) provided by financing activities (4,520) 280
Net increase (decrease) in cash 23 (2,957)
Cash and cash equivalents, beginning of period 657 3,051
-------- -------
Cash and cash equivalents, end of period $ 680 $ 94
======== =======
The accompanying notes are an integral part of these combined statements.
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CUSTOMER DEVELOPMENT CORPORATION
AND ITS AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The combined financial statements include the financial position, results of
operations and cash flows of Customer Development Corporation and its five
affiliates ("CDC") which provide separate and distinct services and are under
common ownership and control. All significant transactions between affiliated
companies have been eliminated in the combined financial statements.
Customer Development Corporation provides database management and direct mail
marketing services to financial service organizations, insurance companies and
other commercial enterprises. National Credit Audit Corporation provides
subscription collection services to national magazine publishers. Optimum
Graphics Printing, Inc. provides print and paper brokerage services. Financial
Database Services Company provides database services for information governed
by the Fair Credit Reporting Act. Customer Database Technologies, Inc. develops
general and customer specific software packages utilized for database
management applications. CDC Realty Limited Liability Company owns the
facilities used by the other companies.
The information reflects all adjustments which are, in the opinion of
management, necessary for a fair statement of the financial position of CDC of
September 30, 1998 and the results of operations and cash flows for the nine
months ended September 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 the CDC's Combined Financial Statements for the year
ended December 31, 1997 in Appendix A of the Current Report on Form 8-K hereto.
The current period's results are not necessarily indicative of results to be
expected for a full year.
2. SUBSEQUENT EVENTS
Sale of the Companies
Effective November 5, 1998, the stockholders of CDC sold their stock to
ChoicePoint, Inc. ("ChoicePoint") for approximately $86 million in cash plus
transaction costs. The final purchase price also is subject to a net worth
adjustment based on the closing date balance sheet of CDC. The transaction was
accounted for as a sale of assets and liabilities as allowed for under Section
338 (h) (10) of the Internal Revenue Code.
Equity Participation Plan
CDC initiated an Equity Participation Plan (the "Plan") effective October 1,
1997. Participants in the Plan were eligible to receive Plan awards in the form
of units which became earned if the participant was employed by CDC on the
qualified disposition date (as defined in the Plan documents).
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Approximately 7% of the net proceeds (as defined in the Plan document), less
certain predefined selling expenses, were to be contributed to a participant
trust and/or directly to the Plan participants on the qualified disposition
date. Since a qualified disposition was not probable at the time, as defined in
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies", no compensation expense was recorded for the year ended
December 31, 1997 or for the nine months ended September 30, 1998.
The sale of CDC to ChoicePoint represented a qualified disposition as defined
in the Plan and, accordingly, CDC recognized $5.1 million compensation expense
in October 1998 prior to the sale. In addition, CDC initiated four new Equity
Participation Plans ("New Plans") in October 1998 prior to the sale. These New
Plans entitled certain key employees of CDC to receive approximately 13% of the
net proceeds (as defined by the New Plan documents), less certain predefined
selling expenses. The related compensation expense of approximately $9.8
million was also recognized by CDC in October 1998 prior to the sale.
As a result, the one time pre tax compensation expenses of $5.1 million and
$9.8 million have not been included in the accompanying Combined Statements of
Income.
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APPENDIX C
PRO FORMA CONSOLIDATED FINANCIAL DATA
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PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated statement of income for the nine
months ended September 30, 1998 and the year ended December 31, 1997 and the
unaudited pro forma consolidated balance sheet as of September 30, 1998 present
the consolidated results of operations and consolidated financial position of
ChoicePoint assuming that the acquisition of Customer Development Corporation
and its affiliates ("CDC") had been completed as of the beginning of 1997 and as
of September 30, 1998, respectively. In the opinion of management, they include
all material adjustments necessary to reflect, on a pro forma basis, the impact
of material transactions contemplated by the acquisition on ChoicePoint's
historical financial information. The adjustments are described in Note 2 of the
Notes to the Pro Forma Consolidated Financial Data (Unaudited) and are set forth
in the "Pro Forma Adjustments" columns.
The unaudited Pro Forma Consolidated Financial Data of ChoicePoint should be
read in conjunction with the Consolidated Financial Statements and related notes
for the year ended December 31, 1997 as filed with the Securities and Exchange
Commission on Form 10-K (File no. 1-13069). The information presented below is
not necessarily indicative of the financial condition or results of operations
that ChoicePoint would have reported had the acquisition been in effect during
the periods presented, or which may be reported in the future.
CHOICEPOINT INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1998
CHOICEPOINT CDC PRO FORMA
(IN THOUSANDS, EXCEPT PER SHARE DATA) HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
- ----------------------------------------------------------------------------------------------------------------------
Operating revenue................................... $303,139 $27,419 $ -- $330,558
Costs and expenses:
Costs of services................................ 200,823 15,288 2,360 (2a) 218,471
Selling, general, and administrative............. 54,580 7,730 -- 62,310
-------- ------- ------- --------
Total costs and expenses................... 255,403 23,018 2,360 280,781
Operating income.................................... 47,736 4,401 (2,360) 49,777
Interest expense.................................... 5,271 579 (472)(2b) 9,248
3,870 (2c)
-------- ------- ------- --------
Income before income taxes.......................... 42,465 3,822 (5,758) 40,529
Provision (benefit) for income taxes................ 18,387 82 (876)(2d) 17,593
-------- ------- ------- --------
Net income.......................................... $ 24,078 $ 3,740 $(4,882) $ 22,936
======== ======= ======= ========
Earnings per share-basic (2i)....................... $ 1.65 $ 1.57
======== ========
Weighted average shares-basic (2i).................. 14,575 14,575
======== ========
Earnings per share-diluted (2i)..................... $ 1.60 $ 1.53
======== ========
Weighted average shares-diluted (2i)................ 15,029 15,029
======== ========
See Notes to the Pro Forma Consolidated Financial Data.
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CHOICEPOINT INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
CHOICEPOINT CDC PRO FORMA
(IN THOUSANDS, EXCEPT PER SHARE DATA) HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
- -------------------------------------------------------------------------------------------------------------
Operating revenue ............................... $417,321 $38,619 $ -- $455,940
Costs and expenses:
Costs of services ............................ 280,765 18,340 3,147 (2a) 302,252
Selling, general, and administrative ......... 84,270 10,665 -- 94,935
Unusual items ................................ 6,209 -- -- 6,209
-------- ------- ------- --------
Total costs and expenses .................. 371,244 29,005 3,147 403,396
Operating income ................................ 46,077 9,614 (3,147) 52,544
Gain on sale of business unit.................... 14,038 -- -- 14,038
Interest expense ................................ 6,649 686 (543)(2b) 11,952
5,160 (2c)
-------- ------- ------- --------
Income before income taxes ...................... 53,466 8,928 (7,764) 54,630
Provision for income taxes ...................... 24,522 156 321 (2d) 24,999
-------- ------- ------- --------
Net income ...................................... $ 28,944 $ 8,772 $(8,085) $ 29,631
======== ======= ======= ========
Pro forma net income (2j) ....................... $ 28,520 $ 8,772 $(8,085) $ 29,207
======== ======= ======= ========
Pro forma earnings per share-basic (2j) ......... $ 1.95 $ 2.00
======== ========
Pro forma weighted average shares-basic (2j)..... 14,595 14,595
======== ========
Pro forma earnings per share-diluted (2j) ....... $ 1.92 $ 1.96
======== ========
Pro forma weighted average shares-diluted (2j)... 14,891 14,891
======== ========
See Notes to the Pro Forma Consolidated Financial Data.
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CHOICEPOINT INC.
PRO FORMA CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
AS OF SEPTEMBER 30, 1998
CHOICEPOINT CDC PRO FORMA
(IN THOUSANDS, EXCEPT PAR VALUES) HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 8,469 $ 680 $ 1,449 (2k) $ 10,598
Accounts receivable, net ......................................... 100,904 8,780 -- 109,684
Deferred income tax assets ....................................... 9,611 -- -- 9,611
Other current assets ............................................. 10,413 3,041 (1,116)(2k) 12,338
--------- ------- ------- ---------
Total current assets ......................................... 129,397 12,501 333 142,231
Property and equipment, net ........................................ 42,184 11,708 (160)(2k) 53,732
Goodwill, net ...................................................... 159,522 -- 65,805 (2e) 225,327
Deferred income tax assets ......................................... 19,473 -- -- 19,473
Other .............................................................. 39,067 1,178 9,050 (2e) 48,117
(1,178)(2k)
--------- ------- ------- ---------
Total Assets ....................................................... $ 389,643 $25,387 $73,850 $ 488,880
========= ======= ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt and current maturities of long-term debt ......... $ 11,021 $ 133 (28)(2f) $ 11,126
Accounts payable ................................................. 21,362 1,904 -- 23,266
Accrued salaries and bonuses ..................................... 13,588 1,925 -- 15,513
Other current liabilities ........................................ 42,426 3,733 3,000 (2g) 49,159
--------- ------- ------- ---------
Total current liabilities ...................................... 88,397 7,695 2,972 99,064
Long-term debt, less current maturities ............................ 99,322 11,067 86,000 (2c) 187,892
(8,497)(2f)
Postretirement benefit obligations ................................. 54,442 -- -- 54,442
Other long-term liabilities ........................................ 3,935 1,005 (1,005)(2k) 3,935
--------- ------- ------- ---------
Total liabilities .............................................. 246,096 19,767 79,470 345,333
Shareholders' equity:
Preferred stock .................................................. -- -- -- --
Common stock ..................................................... 1,465 16 (16)(2h) 1,465
Paid-in capital .................................................. 114,456 30 (30)(2h) 114,456
Retained earnings ................................................ 37,822 5,574 (5,574)(2h) 37,822
Foreign currency translation adjustments ......................... (86) -- -- (86)
Stock held by employee benefit trusts, at cost ................... (10,110) -- -- (10,110)
--------- ------- ------- ---------
Total shareholders' equity ..................................... 143,547 5,620 (5,620) 143,547
--------- ------- ------- ---------
Total Liabilities and Shareholders' Equity ......................... $ 389,643 $25,387 $73,850 $ 488,880
========= ======= ======= =========
See Notes to the Pro Forma Consolidated Financial Data.
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NOTES TO THE PRO FORMA CONSOLIDATED FINANCIAL DATA
(UNAUDITED)
NOTE 1. The accompanying unaudited Pro Forma Consolidated Financial Data
reflects all adjustments that, in the opinion of management, are necessary to
present fairly the pro forma financial position and pro forma results of
operations. This information should be read in conjunction with the Consolidated
Financial Statements and related notes for the year ended December 31, 1997 as
filed with the Securities and Exchange Commission on Form 10-K (File no.
1-13069).
NOTE 2. Following are the pro forma adjustments to the accompanying pro forma
consolidated financial data:
(a) To record amortization of intangible assets. The acquisition of CDC was
accounted for by the purchase method of accounting. Under purchase
accounting, the total purchase price was allocated to the tangible and
intangible assets and liabilities of CDC based on their respective
estimated fair values as of the closing date based upon valuations and
other studies and are being amortized over their estimated useful lives
as follows (dollars in thousands):
Goodwill $65,805 30 years
Technology 8,000 10 years
Workforce 1,000 7 years
Non-compete 50 5 years
(b) To reverse CDC's interest expense related to debt paid off at the
closing.
(c) To record additional borrowings under ChoicePoint's Credit Facility to
fund the cost of the acquisition and related expenses and the
associated increase in interest expense. Borrowings under ChoicePoint's
credit facility to fund the acquisition and related costs totaled $86.0
million and bear interest at a variable rate. An interest rate of 6.0%
is assumed on the borrowings. A 1% change in the annual interest rate
would impact pro forma interest expense by $645,000 for the nine months
ended September 30, 1998 and $860,000 for the year ended December 31,
1997.
(d) To record the estimated income tax provision (benefit) related to the
pro forma interest and amortization expense adjustments and to record
an income tax provision on CDC's operating results as if they were part
of the ChoicePoint consolidated group. Historically, CDC and its
affiliates have either been tax option corporations under Subchapter S
of the Internal Revenue Code or a Limited Liability Company as defined
by the Internal Revenue Code. Pursuant to these elections, CDC's
historical earnings were reported by the stockholder and no federal
income tax provision was recorded.
(e) To reflect allocation of purchase price to goodwill and other
intangible assets.
(f) To eliminate CDC's debt paid off at closing.
(g) To accrue transaction related costs
(h) To eliminate CDC's shareholders' equity.
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(i) Earnings per share information for the nine months ended September 30,
1998 is based on the actual weighted average shares - basic and actual
weighted average shares - diluted of ChoicePoint as of September 30,
1998.
(j) Earnings per share information for the year ended December 31, 1997 is
based on pro forma net income assuming that ChoicePoint's spinoff from
Equifax Inc. had been completed as of the beginning of January 1, 1997.
The pro forma basic and diluted weighted average shares assumes that
the number of ChoicePoint shares issued and outstanding, including
restricted stock, as of the date of spinoff, August 8, 1997, had been
outstanding from January 1, 1997. The pro forma weighted average shares
- diluted also include the dilutive effect of stock options.
(k) To record the net cash received on certain assets sold and liabilities
paid off as a result of the sale and to eliminate those assets and
liabilities from the balance sheet.
NOTE 3. CDC initiated an Equity Participation Plan (the "Plan") effective
October 1, 1997. Participants in the Plan were eligible to receive Plan awards
in the form of units which became earned if the participant was employed by CDC
on the qualified disposition date (as defined in the Plan document).
Approximately 7% of the net proceeds (as defined in the Plan document), less
certain predefined selling expenses, were to be contributed to a participant
trust and/or directly to the Plan participants on the qualified disposition
date. Since a qualified disposition was not probable at the time, as defined in
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies," no compensation expense was recorded for the year ended December
31, 1997 or for the nine months ended September 30, 1998.
The sale of CDC to ChoicePoint represented a qualified disposition as defined in
the Plan and, accordingly, CDC recognized $5.1 million compensation expense in
October 1998 prior to the sale. In addition, CDC initiated four new Equity
Participation Plans ("New Plans") in October 1998 prior to the sale. These New
Plans entitled certain key employees of CDC to receive approximately 13% of the
net proceeds (as defined by the New Plan documents), less certain predefined
selling expenses. The related compensation expense of approximately $9.8 million
was also recognized by CDC in October 1998 prior to the sale.
As a result, the one time pre tax compensation expenses of $5.1 million and $9.8
million have not been included in the accompanying pro forma operating results
of CDC.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to the report to be signed on its
behalf by the undersigned hereunto duly authorized.
CHOICEPOINT INC.
(Registrant)
By: /s/ Doug C. Curling
-------------------------------------
Doug C. Curling
Executive Vice President,
Chief Financial Officer and Treasurer
Date: January 11, 1999
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