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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, 2002
-------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _______ from to _______
Commission File Number: 1-13069
CHOICEPOINT INC.
-----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-2309650
- --------------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Alderman Drive, Alpharetta, Georgia 30005
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(770) 752-6000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(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, 2002
----- ----------------------------
Common Stock, $.10 Par Value 85,624,910
CHOICEPOINT INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2002
INDEX
Part I. FINANCIAL INFORMATION Page No.
- ------------------------------ --------
Item 1. Financial Statements
Consolidated Statements of Income (unaudited) -
Three Months Ended June 30, 2002 and 2001
and Six Months Ended June 30, 2002 and 2001 ............................ 3
Consolidated Balance Sheets (unaudited) -
June 30, 2002 and December 31, 2001 .................................... 4
Consolidated Statement of Shareholders' Equity (unaudited)-
Six Months Ended June 30, 2002 ......................................... 5
Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended June 30, 2002 and 2001 ................................ 6
Notes to Consolidated Financial Statements ..................................... 7
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition ....................... 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk ............. 21
Part II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................... 22
Item 2. Changes in Securities and Use of Proceeds .............................. 22
Item 3. Defaults Upon Senior Securities ........................................ 22
Item 4. Submission of Matters to a Vote of Security Holders .................... 22
Item 5. Other Information ...................................................... 22
Item 6. Exhibits and Reports on Form 8-K ....................................... 23
Signatures ..................................................................... 24
Exhibit Index .................................................................. 25
2
CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share data) 2002 2001 2002 2001
===================================================================================================================
Revenue $187,834 $162,806 $ 361,491 $318,487
Reimbursable expenses (Note 4) 9,923 8,139 19,942 17,089
-------- -------- --------- --------
Total revenue 197,757 170,945 381,433 335,576
-------- -------- --------- --------
Costs and expenses:
Cost of services 100,611 93,849 195,990 185,129
Reimbursable expenses 9,923 8,139 19,942 17,089
Selling, general and administrative 38,324 33,376 69,813 64,332
Merger-related costs & unusual items 7,384 -- 7,384 18,009
-------- -------- --------- --------
Total costs and expenses 156,242 135,364 293,129 284,559
Operating income 41,515 35,581 88,304 51,017
Interest expense, net 2,369 2,544 4,655 5,099
-------- -------- --------- --------
Income before income taxes 39,146 33,037 83,649 45,918
Provision for income taxes 15,033 13,116 32,122 18,784
-------- -------- --------- --------
Income before cumulative effect of change in accounting
principle 24,113 19,921 51,527 27,134
Cumulative effect of change in accounting principle, net
of tax (Note 12) -- -- 24,416 --
-------- -------- --------- --------
Net income $ 24,113 $ 19,921 $ 27,111 $ 27,134
======== ======== ========= ========
Earnings per share (Notes 5 & 6)
Basic:
Before cumulative effect of change in accounting $ 0.29 $ 0.24 $ 0.61 $ 0.33
Cumulative effect of accounting change, net -- -- (0.29) --
-------- -------- --------- --------
Net income $ 0.29 $ 0.24 $ 0.32 $ 0.33
======== ======== ========= ========
Weighted average shares - basic 84,468 82,053 84,201 81,833
Diluted:
Before cumulative effect of change in accounting $ 0.27 $ 0.23 $ 0.58 $ 0.31
Cumulative effect of accounting change, net -- -- (0.28) --
-------- -------- --------- --------
Net income $ 0.27 $ 0.23 $ 0.30 $ 0.31
======== ======== ========= ========
Weighted average shares - diluted 89,692 86,873 89,330 86,569
The accompanying notes are an integral part of these consolidated statements.
3
CHOICEPOINT INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except par values) June 30, 2002 December 31, 2001
====================================================================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 35,605 $ 53,033
Accounts receivable, net of allowance for doubtful accounts
of $6,497 in 2002 and $4,634 in 2001 147,767 128,307
Deferred income tax assets 8,232 7,266
Other current assets 18,552 24,064
-------- --------
Total current assets 210,156 212,670
Property and equipment, net 66,942 64,929
Goodwill 442,815 450,912
Other acquisition intangible assets 28,672 27,180
Deferred income tax assets 22,609 9,183
Other 69,671 67,518
-------- --------
Total Assets $840,865 $832,392
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt and current maturities of long-term debt $ 660 $156,426
Accounts payable 34,714 34,251
Accrued salaries and bonuses 22,580 33,697
Other current liabilities 58,148 60,315
-------- --------
Total current liabilities 116,102 284,689
Long-term debt, less current maturities 127,261 2,390
Postretirement benefit obligations 41,653 43,976
Other long-term liabilities 15,873 16,516
-------- --------
Total liabilities 300,889 347,571
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; 10,000 shares authorized, no
shares issued or outstanding -- --
Common stock, $.10 par value; shares authorized - 100,000;
issued - 85,652 in 2002 and 84,496 in 2001 8,565 8,450
Paid-in capital 325,116 297,612
Retained earnings 225,071 197,960
Cumulative other comprehensive loss, net (2,396) (3,635)
Treasury stock, at cost, 1,065 shares in 2002 and 1,042 shares
in 2001 (16,380) (15,566)
-------- --------
Total shareholders' equity 539,976 484,821
-------- --------
Total Liabilities and Shareholders' Equity $840,865 $832,392
======== ========
The accompanying notes are an integral part of these consolidated balance
sheets.
4
CHOICEPOINT INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
Cumulative Other
(In thousands) Comprehensive Common Paid-in Retained Comprehensive Treasury
Income Stock Capital Earnings Loss, net Stock Total
- -------------- ------- -------- -------- -------- -------- --------- --------
Balance, December 31, 2001 $8,450 $297,612 $197,960 $(3,635) $(15,566) $484,821
Net Income $27,111 -- -- 27,111 -- -- 27,111
Unrealized derivative gain on
cash flow hedges (net of taxes of
$825) 1,239 -- -- -- 1,239 -- 1,239
--------
Comprehensive income $28,350
========
Restricted stock plans, net 6 1,296 -- -- -- 1,302
Common stock redeemed -- -- -- -- (814) (814)
Stock options exercised 109 15,954 -- -- -- 16,063
Tax benefit of stock options exercised -- 10,254 -- -- -- 10,254
------ -------- -------- ------- -------- --------
Balance, June 30, 2002 $8,565 $325,116 $225,071 $(2,396) $(16,380) $539,976
====== ======== ======== ======= ======== ========
The accompanying notes are an integral part of this consolidated statement.
5
CHOICEPOINT INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
(In thousands) 2002 2001
===================================================================================================
Cash flows from operating activities:
Net income $ 27,111 $ 27,134
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change (net of tax) 24,416 --
Depreciation and amortization 21,482 28,604
Merger-related costs and unusual items 7,384 18,009
Compensation recognized under employee stock plans 1,302 852
Tax benefit of stock options exercised 10,254 6,342
Changes in assets and liabilities,
excluding effects of acquisitions:
Accounts receivable, net (17,186) (15,524)
Deferred income taxes (517) (6,320)
Other current assets 3,716 659
Current liabilities, excluding debt (17,645) (14,300)
Other long-term liabilities, excluding debt (902) (916)
--------- --------
Net cash provided by operating activities 59,415 44,540
Cash flows from investing activities:
Acquisitions, net of cash acquired (35,000) (51,209)
Additions to property and equipment, net (11,888) (10,130)
Additions to other assets, net (14,309) (16,752)
--------- --------
Net cash used by investing activities (61,197) (78,091)
Cash flows from financing activities:
Payments on Former Credit Facility (155,000) --
Borrowings under Credit Facility 125,000 --
Payments of other debt, net (895) (292)
Purchase of stock for employee benefit trust -- (852)
Redemption of common stock (814) --
Proceeds from exercise of stock options 16,063 15,094
--------- --------
Net cash (used) provided by financing activities (15,646) 13,950
--------- --------
Effect of foreign currency exchange rates on cash -- (11)
--------- --------
Net decrease in cash and cash equivalents (17,428) (19,612)
Cash and cash equivalents, beginning of period 53,033 44,909
--------- --------
Cash and cash equivalents, end of period $ 35,605 $ 25,297
========= ========
The accompanying notes are an integral part of these consolidated statements.
6
CHOICEPOINT INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
1. ORGANIZATION
ChoicePoint Inc., a Georgia corporation ("ChoicePoint" or the "Company"), is the
leading provider of identification and credential verification services, which
transform data into Actionable Intelligence(R). ChoicePoint is committed to the
responsible use of information and the protection of personal privacy as
fundamental planks of the Company's business model. ChoicePoint's businesses are
focused on two primary markets - Insurance Services and Business & Government
Services.
The Insurance Services group ("Insurance") provides information
products and services used in the underwriting and claims processes by
property and casualty insurers. Major offerings to the personal lines
property and casualty market include claims history data, motor vehicle
records, police records, credit information and modeling services.
Additionally, ChoicePoint provides customized policy rating and
issuance software and property inspections and audits to the commercial
insurance market. Prior to the divestitures in August 2001 and February
2002 (see Note 11), ChoicePoint also provided laboratory testing
services and related technology solutions to the life and health
insurance market.
The Business & Government Services group ("B&G") provides information
products and services and direct marketing services to Fortune 1000
corporations, consumer finance companies, asset-based lenders, legal
and professional service providers, health care service providers and
federal, state and local government agencies. Major offerings include
pre-employment background screenings and drug testing administration
services, public record searches, credential verification, due
diligence information, Uniform Commercial Code searches and filings,
DNA identification services, database marketing services and people and
shareholder locator information searches.
2. BASIS OF PRESENTATION
ChoicePoint Inc. was established through the combination of the businesses that
comprised the Insurance Services Group of Equifax Inc. ("Equifax") within a
separate company and the subsequent spinoff on August 8, 1997 (the "Spinoff") of
the Company's outstanding stock by Equifax as a stock dividend to the
shareholders of Equifax.
The consolidated financial statements include the accounts of ChoicePoint and
its subsidiaries. All material transactions between entities included in the
consolidated financial statements have been eliminated. The consolidated
financial statements have been prepared on the historical cost basis, and
reflect all adjustments which are, in the opinion of management, necessary for a
fair statement of the financial position of ChoicePoint as of June 30, 2002, the
results of operations for the three months and six months ended June 30, 2002
and 2001, and the cash flows for the six months ended June 30, 2002 and 2001.
The adjustments have been of a normal recurring nature. Certain prior period
amounts have been reclassified to conform with the current period presentation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. These financial statements
should be read in conjunction with the notes to the financial statements
included in ChoicePoint's Consolidated Financial Statements for the year ended
December 31, 2001 as filed with the Securities and Exchange Commission in the
Annual Report on Form 10-K (File No. 1-13069). The current period's results are
not necessarily indicative of results to be expected for a full year.
7
On May 16, 2000, ChoicePoint completed a merger with DBT Online, Inc. ("DBT").
During the first quarter of 2001, the Company recorded merger-related costs and
unusual items of $18.0 million primarily related to the integration of the
Company's and DBT's public records platforms and sales and marketing
departments. Included in this charge were merger-related personnel costs of $1.8
million consisting primarily of stay bonuses for services rendered through March
31, 2001 and severance and termination benefit costs primarily related to the
integration of the two public records platforms and related sales and marketing
departments; other merger integration costs of $2.4 million consisting primarily
of duplicate data and lease exit costs; and asset impairments of $12.7 million
primarily reflecting the write-down of equipment and other long-lived assets
deemed to be impaired based on the integration plan for the two public records
platforms which was finalized in the first quarter of 2001. During the second
quarter of 2002, the Company recorded an unusual item charge of $7.4 million.
This charge included a write-down of minority investments in start-up companies
of $2.4 million, asset impairments of technology initiatives of $3.0 million,
$1.4 million of expenses primarily related to the closure of two facilities and
remaining obligations, and $0.6 million in severance and termination benefits.
The categories of costs incurred and the accrued balances at June 30, 2002 are
summarized below:
Remaining
Accrual at 2001 2002
(In thousands) June 30, 2002 Expense Expense
------------- ------- -------
Merger-related personnel costs $ -- $ 1,832 $ --
Other merger integration costs -- 2,433 --
Write down of minority investments -- -- 2,370
Asset impairments -- 12,693 2,985
Non-merger severance 456 982 609
Other one-time charges 1,416 69 1,420
------ ------- ------
$1,872 $18,009 $7,384
====== ======= ======
3. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements as well as reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
4. REVENUE AND EXPENSE RECOGNITION
ChoicePoint recognizes revenue when an agreement exists, prices are
determinable, service and products are delivered and collectibility is
reasonably assured. Revenues for the majority of information products and
services is generally billed on a transactional basis determined by customer
usage with some fixed elements. Direct marketing revenues are generally
recognized when projects are completed and delivered and are billed in
accordance with contractual terms. Revenues from software licenses requiring
significant production, modification or customization of the software are
accounted for using the percentage of completion method. Other software licenses
represent hosting arrangements under Emerging Issues Task Force ("EITF") Issue
No. 00-3, "Application of Statement of Position 97-2 to Arrangements that
Include the Right to Use Software Stored on Another Entity's Hardware." The
revenues and certain expenses related to these hosting arrangements are
recognized ratably over the term of the agreement.
Motor vehicle records registry revenue (the fee charged by states for motor
vehicle records) and other costs that are passed on by ChoicePoint to its
customers ("pass-through expense") are excluded from revenue and recorded as a
reduction to cost of services in the consolidated financial statements. For the
six months ended June 30, pass-through expense was $235.3 million in 2002 and
$206.3 million in 2001.
During 2002, the Company began applying the consensus reached in EITF Issue No.
01-14, "Income Statement Characterization of Reimbursements Received for
`Out-of-Pocket' Expenses Incurred," ("EITF
8
01-14") which requires the presentation of reimbursed out-of-pocket expenses on
a gross basis as revenues and expenses. As required, the Company reclassified
the prior periods presented herein to comply with the guidance in EITF 01-14.
Accordingly, reimbursed materials, shipping and postage charges in the Company's
direct marketing business during the three months ended June 30 of $9.9 million
in 2002 and $8.1 million in 2001, and during the six months ended June 30 of
$19.9 million in 2002 and $17.1 million in 2001 have been reclassified and
presented as revenues and expenses in the corresponding Consolidated Statements
of Income. The application of the EITF had no impact on net income.
5. EARNINGS PER SHARE
The income amount used in the numerator of the Company's earnings per share
("EPS") calculations is the same for both basic and diluted earnings per share.
The average outstanding shares used in the denominator of the calculation for
diluted earnings per share includes the dilutive effect of stock options.
6. STOCK SPLIT
On June 6, 2002, ChoicePoint effected a four-for-three stock split in the form
of a stock dividend for shareholders of record as of May 16, 2002. Share and per
share data for all periods presented have been adjusted to reflect the split.
7. DEBT AND OTHER FINANCING
On May 10, 2002, ChoicePoint entered into a $325 million unsecured revolving
credit facility (the "Credit Facility") with a group of banks that extends
through a termination date of May 2005 and bears interest at variable rates
based on LIBOR plus an applicable margin. The Credit Facility contains covenants
customary for facilities of this type. Total borrowings under the Credit
Facility were $125 million at June 30, 2002. Prior to May 10, 2002, the Company
had a $250 million unsecured revolving credit facility (the "Former Credit
Facility"). Total borrowings under the Former Credit Facility were $155 million
at December 31, 2001 of which $30 million was repaid in the first quarter of
2002 and the remainder was repaid with proceeds from the Credit Facility. There
was $2.9 million of other long-term debt outstanding at June 30, 2002. There
were no short-term borrowings at June 30, 2002.
In 1997, the Company entered into a $25 million synthetic lease agreement for
the Company's headquarters building. Under the synthetic lease agreement, a
third-party lessor purchased the property, paid for the construction and leased
the building to the Company. In 2001, the Company entered into another synthetic
lease agreement for up to $52 million to finance the construction of its new
data center facility, which is anticipated to be completed during the first half
of 2003. Both leases expire in 2007, at which time the Company has the following
options for each lease: renew the lease for an additional five years, purchase
the building for the original cost or remarket the property. If the Company
elects to remarket the properties, ChoicePoint must guarantee the lessor 80% to
85% of the original cost.
The Company has accounted for the synthetic leases as operating leases and has
recorded rent expense of $142,000 for the second quarter of 2002 and $288,000
for the six months ended June 30, 2002. The Financial Standards Accounting Board
("FASB") is currently working on a new standard that might change current
generally accepted accounting principles in the United States to require the
Company to consolidate the synthetic leases. If the Company had elected to
purchase the properties instead of entering into the synthetic leases or if the
Company was required to change its accounting for the synthetic leases based on
a new accounting principle, total assets and debt would have increased by $32.6
million at June 30, 2002 and the Company would have recorded additional
depreciation expense of approximately $420,000 ($259,000 after tax) related to
the completed facility for the first six months of 2002.
In July 2001, the Company and certain of its subsidiaries entered into an
agreement (the "Receivables Facility") with a financial institution whereby it
may sell on a continuous basis, and without recourse, an undivided interest in
all eligible trade accounts receivable subject to limitations. The Company will
maintain the balance in the designated pool of accounts receivable sold by
selling undivided interests in new receivables as existing receivables are
collected. The Receivables Facility permits the advance of up
9
to $100 million on the sale of accounts receivable. There were no sales of
accounts receivable under the Receivables Facility during the six-month period
ended June 30, 2002.
8. DERIVATIVE FINANCIAL INSTRUMENTS
ChoicePoint has entered into two interest rate swap agreements (the "Swap
Agreements") to reduce the impact of changes in interest rates on its floating
rate long-term obligations. The interest rate swap agreement hedging the
Company's floating rate long-term obligations has a notional amount of $125
million at June 30, 2002 and December 31, 2001, and matures in August 2002. The
other interest rate swap agreement has a notional amount of $25 million, hedges
the synthetic lease agreement entered into in 1997 for the Company's
headquarters building, and matures in August 2007 when the lease expires.
Effective January 1, 2001, ChoicePoint adopted Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"), and its corresponding amendments under SFAS No. 138. SFAS No.
133 requires the Company to measure all derivatives at fair value and to
recognize them in the Consolidated Balance Sheet as an asset or liability,
depending on ChoicePoint's rights or obligations under the applicable derivative
contract. ChoicePoint's derivative instruments include the Swap Agreements which
have been designated as cash flow hedges to hedge the variability of cash flows
to be paid related to the Company's floating rate long-term obligations and the
1997 synthetic lease agreement and, as such, the effective portions of changes
in fair value are reported in cumulative other comprehensive loss ("OCL") and
are subsequently reclassified into earnings when the hedged item affects
earnings. Changes in the fair value of derivative instruments not designated as
hedging instruments and ineffective portions of hedges are recognized in
earnings in the current period. The adoption of SFAS No. 133 as of January 1,
2001, resulted in a charge to OCL of $2.8 million, net of taxes. As of June 30,
2002, the cumulative change in OCL related to these derivatives is $2.4 million,
net of taxes. The fair value of the interest rate swap agreements was a
liability of $4.0 million at June 30, 2002. For the six months ended June 30,
2002, there was no ineffectiveness related to these cash flow hedges.
9. STOCK OPTIONS
During the first six months of 2002, stock options to purchase approximately 2.8
million shares of ChoicePoint common stock were granted under the ChoicePoint
Inc. 1997 Omnibus Stock Incentive Plan. Exercise prices of these options are
equal to the fair market value on the date of grant.
10. COMPREHENSIVE INCOME
Total comprehensive income for the three months and six months ended
June 30, 2002 and 2001 was as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income $24,113 $19,921 $27,111 $27,134
Translation adjustments -- 99 -- (11)
Unrealized derivative gain (loss) on
cash flow hedges (net of taxes) 171 343 1,239 (2,436)
------- ------- ------- -------
Comprehensive income $24,284 $20,363 $28,350 $24,687
======= ======= ======= =======
11. ACQUISITIONS & DIVESTITURES
During the six months ended June 30, 2002, the Company acquired the insurance
market on-line consumer credit reporting, marketing and pre-screen list extract
services business of Experian Information Solutions, Inc., based in Chicago,
Illinois, and Total eData Corporation, an e-mail database company based in
Little Rock, Arkansas. The results of operations from the dates of acquisition
for these companies are included in the Consolidated Statements of Income. The
total purchase price of the acquisitions, which were accounted for using the
purchase method, was approximately $35 million. Goodwill of $28.9 million was
allocated to
10
Business & Government Services. The allocation of purchase price to the assets
and liabilities of certain acquisitions is preliminary and subject to change
based on the resolutions of pre-acquisition contingencies. As of June 30, 2002,
ChoicePoint has approximately $3.7 million accrued for transaction-related costs
including lease terminations and personnel-related costs related to these and
prior acquisitions.
In August 2001 and February 2002, the Company sold the two components of its
laboratory services business. The results of this business historically have
been included in the Insurance Services business segment. Operating segment
results have been restated for all periods to reflect the sale of this line of
business (see Note 13 to the Consolidated Financial Statements). There was no
material gain or loss on the sale of the operating unit sold in February 2002.
Subsequent to June 30, 2002, the Company acquired L&S Report Service, Inc. to
supplement the Company's police records business in P&C personal lines. This
transaction is not material to the Consolidated Financial Statements of the
Company.
12. GOODWILL AND INTANGIBLE ASSETS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" ("SFAS No.
141") effective July 1, 2001 and SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"), effective for the Company on January 1, 2002. SFAS No.
141 prohibits pooling of interests accounting for acquisitions initiated after
June 30, 2001. SFAS No. 142 required companies to cease amortizing goodwill that
existed at June 30, 2001 on December 31, 2001. Any goodwill resulting from
acquisitions completed after June 30, 2001 is no longer amortized. SFAS No. 142
also broadens the criteria for recording intangible assets separate from
goodwill and establishes a new method of testing goodwill for impairment on an
annual basis or on an interim basis if an event occurs or circumstances change
that would reduce the fair value of a reporting unit below its carrying value.
All of the provisions of SFAS No. 142 were adopted by ChoicePoint by June 30,
2002, and were applied retroactively to January 1, 2002. As a result of the
adoption of these accounting standards certain intangibles were subsumed into
goodwill and amortization of these assets and goodwill was discontinued
effective January 1, 2002.
Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value
of a reporting unit exceeds its estimated fair value. Upon completion of its
analysis for goodwill impairment in the second quarter of 2002 in accordance
with the adoption of SFAS No. 142, ChoicePoint recorded a one-time, non-cash
charge of $39.1 million ($24.4 million net of taxes) to reduce the carrying
value of its goodwill retroactive to January 1, 2002. Such charge is reflected
as a cumulative effect of change in accounting principle in the accompanying
Consolidated Statements of Income. In calculating the goodwill impairment
charge, the fair value of the impaired reporting units was estimated using a
discounted cash flow methodology. This impairment charge relates primarily to
the 1998 acquisition of EquiSearch Services, Inc. and the internet business
acquired as part of the DBT merger in May 2000. A summary of the change in
goodwill during the six months ended June 30, 2002, by business segment is as
follows:
December 31, Acquisitions &
(In thousands) 2001 Adjustments Impairments June 30, 2002
-- --------- -------------- ----------- -------------
Insurance $ 35,220 $ 38 $ -- $ 35,258
B&G 415,692 30,981 (39,116) 407,557
-------- ------- -------- --------
Total $450,912 $31,019 $(39,116) $442,815
======== ======= ======== ========
As of June 30, 2002 and December 31, 2001, the Company's other acquisition
intangible assets and accumulated amortization consisted of the following (in
thousands):
11
As of June 30, 2002 As of December 31, 2001
------------------------------------- -------------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
------- ------------ ------- ------- ------------ -------
Intangible assets subject to amortization:
Customer relationships $19,793 $ (1,826) $17,967 $16,272 $ (663) $15,609
Purchased data files 14,815 (13,845) 970 14,815 (13,197) 1,618
Internally developed software 13,032 (8,925) 4,107 11,532 (8,355) 3,177
Non-compete agreements 3,310 (2,749) 561 3,310 (2,586) 724
Other intangible assets 8,000 (2,933) 5,067 9,550 (3,498) 6,052
------- -------- ------- ------- -------- -------
Total $58,950 $(30,278) $28,672 $55,479 $(28,299) $27,180
======= ======== ======= ======= ======== =======
The Company recorded amortization expense of $2.9 million during the six months
ended June 30, 2002 compared to $2.5 million during the six months ended June
30, 2001 related to these other acquisition intangible assets.
During the six months ended June 30, 2002, the Company acquired the following
intangible assets based upon the preliminary allocations:
Weighted Average
(In thousands) Amount Amortization Period
------ -------------------
Internally developed software $1,500 three years
Customer relationships 3,521 five years
------
Total $5,021
======
The 2001 results on a historical basis do not reflect the provisions of SFAS No.
142. Had ChoicePoint adopted SFAS No. 142 on January 1, 2001, the historical net
income and basic and diluted earnings per share ("EPS") would have changed to
the adjusted amounts indicated below for the three months and six months ended
June 30:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(In thousands, except per share data) 2002 2001 2002 2001
----------- ---------- --------- ----------
Income before cumulative effect of change
in accounting $24,113 $19,921 $51,527 $27,134
Goodwill and other acquisition intangibles
amortization, net of taxes -- 3,388 -- 6,540
------- ------- ------- -------
Adjusted net income $24,113 $23,309 $51,527 $33,674
======= ======= ======= =======
Basic EPS before change in accounting $ 0.29 $ 0.24 $ 0.61 $ 0.33
Goodwill amortization -- 0.04 -- 0.08
------- ------- ------- -------
Adjusted basic EPS $ 0.29 $ 0.28 $ 0.61 $ 0.41
======= ======= ======= =======
Diluted EPS before change in accounting $ 0.27 $ 0.23 $ 0.58 $ 0.31
Goodwill amortization -- 0.04 -- 0.08
------- ------- ------- -------
Adjusted diluted EPS $ 0.27 $ 0.27 $ 0.58 $ 0.39
======= ======= ======= =======
13. SEGMENT DISCLOSURES
ChoicePoint operates primarily in two reportable segments: Insurance Services
and Business & Government Services. See Note 1 for a description of each
segment. Revenues and operating income for the three months and six months ended
June 30, 2002 and 2001 for the two segments, laser technology patents held by
the Company ("Royalty") and the divested and discontinued lines were as follows:
12
Three months ended
June 30, 2002 Three months ended June 30, 2001
---------------------- --------------------------------------
Operating Pro Forma Income
Income Operating Operating
(In thousands) Revenue (Loss) Revenue Income(Loss)(a) (Loss)
-------- --------- -------- --------------- ---------
Insurance $ 82,629 $ 38,326 $ 70,702 $ 32,732 $ 32,335
B&G core revenue 103,663 26,525 81,025 20,102 16,218
Reimbursable expenses (b) 9,923 -- 8,139 -- --
-------- -------- -------- -------- --------
B&G total 113,586 26,525 89,164 20,102 16,218
Royalty 1,542 933 1,807 1,191 1,191
Divested & discontinued (c) -- -- 9,272 67 (234)
Corporate and shared expenses (d) -- (16,885) -- (13,929) (13,929)
Unusual items (Note 2) -- (7,384) -- -- --
-------- -------- -------- -------- --------
Total $197,757 $ 41,515 $170,945 $ 40,163 $ 35,581
======== ======== ======== ======== ========
Six months ended Six months ended
June 30, 2002 June 30, 2001
---------------------- --------------------------------------
Operating Pro Forma Income
Income Operating Operating
(In thousands) Revenue (Loss) Revenue Income(Loss)(a) (Loss)
-------- --------- -------- --------------- ---------
Insurance $161,784 $ 75,917 $137,317 $ 61,802 $ 61,041
B&G core revenue 196,496 46,450 159,532 38,815 31,329
Reimbursable expenses (b) 19,942 -- 17,089 -- --
-------- -------- -------- -------- --------
B&G total 216,438 46,450 176,621 38,815 31,329
Royalty 3,139 1,930 3,464 2,242 2,242
Divested & discontinued (c) 72 (206) 18,174 (212) (814)
Corporate and shared expenses (d) -- (28,403) -- (24,772) (24,772)
Merger costs and unusual items
(Note 2) -- (7,384) -- (18,009) (18,009)
-------- -------- -------- -------- --------
Total $381,433 $ 88,304 $335,576 $ 59,866 $ 51,017
======== ======== ======== ======== ========
Divested & Unallocated
(In thousands) Insurance B&G Royalty Discontinued & Other(e) Total
--------- -------- ------ ----- ------- --------
ASSETS
June 30, 2002 $182,424 $598,474 $5,890 $ -- $54,077 $840,865
December 31, 2001 156,673 583,807 5,902 1,860 84,150 832,392
============================================================================================================
DEPRECIATION & AMORTIZATION
Three Months Ended:
June 30, 2002 $2,011 $7,104 $424 $ -- $1,136 $10,675
June 30, 2001 2,450 9,490 425 1,170 949 14,484
June 30, 2001 -
Pro forma(a) 2,053 5,606 425 869 949 9,902
13
(In thousands) Divested & Unallocated
Insurance B&G Royalty Discontinued & Other (e) Total
--------- --- ------- ------------ ----------- -----
Six Months Ended:
June 30, 2002 $4,048 $14,481 $848 $ 11 $2,094 $21,482
June 30, 2001 4,758 18,808 850 2,366 1,822 28,604
June 30, 2001 - Pro forma(a) 3,997 11,322 850 1,764 1,822 19,755
(a) Pro forma represents operating results and depreciation and
amortization, as applicable, as if SFAS No. 142 was effective January
1, 2001.
(b) Reimbursable expenses represent out-of-pocket expenses fully
reimbursed, and usually prepaid, by ChoicePoint's customers and
recorded as revenues and expenses in accordance with EITF 01-14 (see
Note 4).
(c) Divested and discontinued product lines include the operating results
from the laboratory services business sold in August 2001 and February
2002.
(d) Corporate and shared expenses represent costs of support functions,
research and development initiatives, incentives and profit sharing
that benefit both segments.
(e) Unallocated and Other includes certain corporate items and eliminations
that are not allocated to the segments.
Substantially all of the Company's operations are located in the United States
and no customer represents more than 10% of total operating revenue.
14. COMMITMENTS AND CONTINGENCIES
The Company provides for estimated legal fees and settlements relating to
pending lawsuits. The Company regards all such lawsuits as occurring in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a materially adverse effect on the
Company's financial position, liquidity, or results of operations.
In April 2002, the Company renewed or executed its employment agreements with
certain executive officers including its Chief Executive Officer, President and
Chief Financial Officer for periods up to five years which provide for
compensation and certain other benefits. The agreements also provide for
severance pay and benefits in the event of a "change in control" of ChoicePoint.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
INTRODUCTION
ChoicePoint Inc., a Georgia corporation ("ChoicePoint" or the "Company"), is the
leading provider of identification and credential verification services, which
transform data into Actionable Intelligence. ChoicePoint is committed to the
responsible use of information and the protection of personal privacy as
fundamental planks of the Company's business model. ChoicePoint's businesses are
focused on two primary markets - Insurance Services and Business & Government
Services. See Note 1 to the Consolidated Financial Statements for a description
of each market.
On June 6, 2002, ChoicePoint effected a four-for-three stock split in the form
of a stock dividend for shareholders of record as of May 16, 2002. On March 7,
2001, ChoicePoint effected a three-for-two stock split in the form of a stock
dividend payable to shareholders of record as of February 16, 2001. Share and
per share data for all periods presented have been adjusted to reflect the
splits.
RESULTS OF OPERATIONS
REVENUE
The analysis below provides a reconciliation of revenues on a reported and
comparable basis ($ in thousands):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------
Revenue $197,757 $170,945 16% $381,433 $335,576 14%
Less revenue for:
Reimbursable expenses per EITF 01-14 9,923 8,139 19,942 17,089
Divested & Discontinued product lines -- 9,272 72 18,174
----- ----- ----- ------
Core Revenue $187,834 $154,534 22% $361,419 $300,313 20%
Consolidated internal revenue growth, which excludes the effect of revenue from
acquisitions and divestitures, was approximately 11% for the second quarter of
2002 and 9% for the six months ended June 30, 2002. Our revenue growth was
driven primarily from continued strong unit performances in all of the Insurance
Services' product lines, positive internal growth in each of the Business &
Government Services product lines, and acquisitions.
The Company, in its Business & Government segment, was reimbursed for certain
out-of-pocket expenses totaling $9.9 million and $8.1 million for the three
months ended June 30, 2002 and 2001, respectively and $19.9 million and $17.1
million for the six months ended June 30, 2002 and 2001, respectively. In
accordance with EITF 01-14 (see Note 4 to the Consolidated Financial
Statements), the Company has presented these reimbursable expenses on a gross
basis as revenues and expenses. As these expenses are fully reimbursed, without
mark-up, by our clients and in a majority of cases prepaid by the customers,
there is no impact on operating income, net income, EPS, cash flows or the
balance sheet; therefore, we have excluded the impact of these reimbursable
expenses from the discussions below. We believe core revenue is a more
appropriate way to measure the revenue growth of our Company; therefore, all of
the following revenue discussions are based on core revenue which excludes the
impact of the reimbursable expenses.
SEGMENT REVENUE
Insurance Services' major offerings include claims history data, motor vehicle
records, police records, credit information and modeling services to the
personal lines property and casualty market, and customized policy rating and
issuance software and property inspections and audits to the commercial
insurance market. In August 2001 and February 2002, the Company sold the two
components of its laboratory services business. The results of this business
historically have been included in the Insurance Services business segment.
Operating segment results discussed below have been restated for all periods to
reflect the sale of this line of business (see Notes 11 and 13 to the
Consolidated Financial Statements).
15
In the second quarter of 2002, Insurance Services revenue was $82.6 million, up
17%, or $11.9 million, from $70.7 million in the second quarter of 2001. For the
first six months of 2002, Insurance Services revenue grew 18%, or $24.5 million,
to $161.8 million from $137.3 million in the same prior year period. This growth
was driven by strong unit performance across all businesses led by increases in
C.L.U.E.(R) Property, NCF(TM) (National Credit File) and C.L.U.E. Auto volumes.
During the six months ended June 30, 2001, the Company acquired Insurity
Solutions, Inc. Excluding this acquisition and the dispositions discussed above,
internal revenue growth in Insurance Services was 17% from the three months
ended June 30, 2001 to the three months ended June 30, 2002 and 18% for the six
months ended June 30 2002.
Business & Government Services' major offerings include pre-employment
background screenings and drug testing administration services, public record
searches, credential verification, due diligence information, Uniform Commercial
Code searches and filings, DNA identification services, database marketing
services and people and shareholder locator information services.
Business & Government Services' revenue for the second quarter of 2002 increased
$22.6 million, or 28%, to $103.7 million from $81.0 million in the second
quarter of 2001. For the six months ended June 30, 2002, Business & Government
Services' revenue was $196.5 million, up 23%, or $37.0 million, from $159.5
million in the same period of the prior year. This growth was driven primarily
by positive internal growth in each of the product lines and the integration of
recent acquisitions in workplace solutions and direct marketing. During the
first six months of 2002, the Company acquired the insurance market on-line
consumer credit reporting, marketing and pre-screen list extract services
business of Experian Information Solutions, Inc., and Total eData Corporation,
an e-mail database company based in Little Rock, Arkansas. In 2001, the Company
acquired the pre-employment and drug testing businesses of Pinkerton Services
Corporation, a unit of Securitas AB of Sweden, Marketing Information and
Technology, Inc., a provider of large-scale direct marketing systems for Fortune
500 clients, BTi Employee Screening Services, Inc., ABI Consulting, Inc., The
Bode Technology Group, Inc., and certain assets of National Medical Review
Offices, Inc. Excluding the acquisitions discussed above, internal revenue
growth for Business & Government Services was 6% from the three months ended
June 30, 2001 to the three months ended June 30, 2002 and 2% for the six months
ended June 30, 2002.
Second quarter royalty revenue from laser technology patents held by the Company
decreased slightly from $1.8 million in 2001 to $1.5 million in 2002. For the
six months ended June 30, royalty revenue was $3.1 million in 2002 compared with
$3.5 million in 2001. The remaining patents underlying this revenue expire
between November 2004 and May 2005.
Divested and discontinued product lines include the operating results from the
two components of the laboratory services business sold in August 2001 and
February 2002 (see Note 11 to the Consolidated Financial Statements).
MERGER-RELATED COSTS AND UNUSUAL ITEMS
Unusual items of $7.4 million in the second quarter of 2002 included a
write-down of minority investments in start-up companies of $2.4 million, asset
impairments of technology initiatives of $3.0 million, $1.4 million of expenses
primarily related to the closure of two facilities and remaining obligations,
and $0.6 million in severance and termination benefits. Merger-related costs and
unusual items of $18.0 million in the first quarter of 2001 primarily related to
the DBT merger in May 2000 and related integration of the Company's two public
records businesses in connection with this merger, the plan for which was
finalized in the first quarter of 2001. The merger-related costs and unusual
items in 2001 include asset impairments, stay bonuses, severance and termination
benefits, and duplicate data and lease exit costs (See Note 2 to the
Consolidated Financial Statements).
16
OPERATING INCOME
The analysis below provides a reconciliation of revenues on a reported and
comparable basis ($ in thousands):
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- -------------------------------------
2002 2001 Change 2002 2001 Change
------- ------- ------- -------
Operating Income as reported $41,515 $35,581 17% $88,304 $51,017 73%
Add back charges from:
Goodwill amortization -- 4,582 -- 8,849
Merger costs and unusual items 7,384 -- 7,384 18,009
------- ------- ------- -------
Comparable Operating Income $48,899 $40,163 22% $95,688 $77,875 23%
The Company's operating income was $48.9 million, excluding unusual items, or
26.0% as a percent of revenue before reimbursable expenses in the second quarter
of 2002, up from $35.6 million in the second quarter of 2001. Excluding
merger-related costs and unusual items, for the first six months of 2002
operating income was $95.7 million or 26.5% as a percent of revenue, up from
$69.0 million or 21.7% of revenue in the prior year. Included in the second
quarter 2001 operating income, reported as cost of services in the Consolidated
Statements of Income, was $4.6 million of goodwill amortization. Excluding this
goodwill amortization as if SFAS No. 142 had been adopted January 1, 2001 ("pro
forma"), operating income for the second quarter of 2001 excluding
merger-related costs and unusual items was $40.2 million, or 24.7% of revenue,
and for the six months ended June 30, 2001 operating income was $77.9 million,
or 24.5% of revenue. The improvement in operating margins from pro forma 2001 to
2002 was primarily as a result of the revenue growth in Insurance Services
discussed above, cost synergies realized in the integration of the Company's
acquisitions and our continued focus on improving cost efficiencies.
SEGMENT OPERATING INCOME
Insurance Services had second quarter 2002 operating income of $38.3 million,
resulting in an operating margin of 46.4%, compared with 45.7% in the second
quarter of 2001. For the six months ended June 30, operating income was $75.9
million or 46.9% of revenue in 2002 compared to $61.0 million or 44.5% of
revenue in 2001. Excluding goodwill amortization, second quarter pro forma
operating margins were 46.3% and six month pro forma operating margins were
45.0% in 2001.
Business & Government Services had second quarter 2002 operating income of $26.5
million, resulting in an operating margin of 25.6% compared with 20.0% in the
second quarter of 2001. For the six months ended June 30, operating income was
$46.5 million or 23.6% of revenue in 2002 compared to $31.3 million or 19.6% of
revenue in 2001. Excluding goodwill amortization, second quarter pro forma
operating margins were 24.8% and six month operating margins were 24.3% in 2001.
The margin increase from second quarter pro forma 2001 is primarily due to
revenue growth and cost control measures across the segment offset slightly by
lower than average margins within recent acquisitions.
Corporate and shared expenses represent costs of support functions, research and
development initiatives, incentives and profit sharing that benefit both
Insurance Services and Business & Government Services. Corporate and shared
expenses were $16.9 million for the second quarter of 2002, up from $13.9
million in 2001. The increase in corporate and shared expenses is primarily due
to the increase in compensation expense recognized under employee stock plans
and incentives and additional resources to support the growth of the Company.
INTEREST EXPENSE, NET
Interest expense, net was $2.4 million for the second quarter of 2002, down from
$2.5 million in 2001. For the six months ended June 30, 2002, interest expense,
net was $4.7 million, a decrease of $0.4 million from $5.1 million in the first
six months of 2001 due to slightly lower average debt outstanding and lower
interest rates.
17
INCOME TAXES
ChoicePoint's overall effective tax rate was 38.4% for the second quarter of
2002 and 39.7% for the three months ended June 30, 2001. For the first six
months of 2002, our effective tax rate was 38.4% compared with 40.9% for the
first six months of the prior year. Excluding goodwill amortization,
merger-related costs and unusual items, our effective tax rate for the six
months ended June 30, 2002 was 38.4% compared to 38.0% for the same period of
2001.
FINANCIAL CONDITION AND LIQUIDITY, INCLUDING OFF-BALANCE SHEET ITEMS
The Company's sources of cash liquidity include cash and cash equivalents, cash
from operations, amounts available under credit facilities, and other external
sources of funds. The Company's short-term and long-term liquidity depends
primarily upon its level of net income, working capital management (accounts
receivable, accounts payable and accrued expenses), and long-term debt. On May
10, 2002 ChoicePoint entered into a $325 million unsecured revolving credit
facility (the "Credit Facility") with a group of banks that extends through a
termination date of May 2005 and bears interest at variable rates based on LIBOR
plus an applicable margin. Total borrowings under the Credit Facility were $125
million at June 30, 2002. Prior to May 10, 2002 the Company had a $250 million
unsecured revolving credit facility (the "Former Credit Facility") (see Note 7
to the Consolidated Financial Statements). Total borrowings under the Former
Credit Facility were $155 million at December 31, 2001. In addition, there was
$2.9 million of other long-term debt outstanding at June 30, 2002. There were no
short-term borrowings at June 30, 2002.
In July 2001, to obtain an additional source of financing, the Company and
certain of its subsidiaries entered into an agreement (the "Receivables
Facility") with a financial institution whereby the Company may sell on a
continuous basis, and without recourse, an undivided interest in all eligible
trade accounts receivable subject to limitations. The Company will maintain the
balance in the designated pool of accounts receivable sold by selling undivided
interests in new receivables as existing receivables are collected. The
Receivables Facility is an off-balance sheet financial instrument that permits
the advance of up to $100 million on the sale of accounts receivable. There were
no sales of accounts receivable under the Receivables Facility during 2001 or
the first six months of 2002.
In 1997, the Company entered into a $25 million synthetic lease agreement for
the Company's headquarters building. Under the synthetic lease agreement, a
third-party lessor purchased the property, paid for the construction and leased
the building to the Company. In 2001, the Company entered into another synthetic
lease agreement for up to $52 million to finance the construction of its data
center facility that will be constructed in 2002. Both leases expire in 2007, at
which time the Company has the following options for each lease: renew the lease
for an additional five years, purchase the building for the original cost or
remarket the property. If the Company elects to remarket the property,
ChoicePoint must guarantee the lessor 80% to 85% of the original cost.
The Company has accounted for the synthetic leases as operating leases and has
recorded rent expense. The Financial Standards Accounting Board is currently
working on a new standard that might change current generally accepted
accounting principles in the United States to require the Company to consolidate
the synthetic leases. If the Company had elected to purchase the properties
instead of entering into the synthetic leases or if the Company was required to
change its accounting for the synthetic leases based on a new accounting
principle, our assets and debt would have increased by $32.6 million at June 30,
2002 and the Company would have recorded additional depreciation expense of
approximately $420,000 for the six months ended June 30, 2002.
18
Contractual obligations and the related future payments at June 30, 2002 are as
follows:
Payments Due by Period
(In thousands) Total 2002 2003 2004 Thereafter
- -------------------------------------------------------------------------------------------------
Debt $127,204 $ 104 $ 130 $ 140 $126,830
Capital Lease Obligations 717 436 281 - -
Operating Leases and Other
Commitments 71,006 8,983 16,321 13,900 31,802
- -------------------------------------------------------------------------------------------------
Total Contractual Cash
Obligations $198,927 $9,523 $16,732 $14,040 $158,632
=================================================================================================
Derivative financial instruments at June 30, 2002 and December 31, 2001 consist
of two interest rate swap agreements (see Note 8 to the Consolidated Financial
Statements) entered into to limit the effect of changes in interest rates on the
Company's floating rate long-term obligations and 1997 synthetic lease
agreement. At June 30, 2002, the total notional amount under these swap
agreements was $150 million and the Company paid a weighted average fixed rate
of 6.45% during the second quarter of 2002. Amounts currently due to or from
interest rate swap counterparties are recorded as expense in the period in which
they accrue. The Company does not enter into derivative financial instruments
for trading or speculative purposes. The fair value of the interest rate swap
agreements was a liability of $4.0 million at June 30, 2002 and is accounted for
in accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
We believe that our existing cash balance, available debt, and cash flows from
operations will be sufficient to meet our working capital and capital
expenditure requirements for the next twelve months. However, any material
variance of our operating results from our projections or the investments in or
acquisitions of businesses, products, or technologies could require us to obtain
additional equity or debt financing.
Cash and cash equivalents totaled $35.6 million as of June 30, 2002. Cash
provided by operations was $59.4 million for the first six months of 2002
compared to $44.5 million for the first six months of 2001. The increase in cash
provided by operations was primarily attributable to the increased net income
excluding the cumulative effect of the change in accounting principle as
discussed in Note 12 as compared to June 30, 2001. During the first six months
of 2002, ChoicePoint continued to invest in future growth. Cash used by
investing activities was $61.2 million, consisting of $35 million for
acquisitions, $11.9 million for property and equipment and $14.3 million for
other asset additions, primarily purchased data files and internally developed
and externally purchased software. In the first six months of 2001, cash used by
investing activities was $78.1 million, including $51.2 million for
acquisitions, $10.1 million for additions to property and equipment and $16.8
million for additions to other assets. Excluding the headquarters facility
expansion discussed above, the Company anticipates full-year capital
expenditures to be in the range of $50 million to $60 million for 2002, which
will be used primarily for the development of a new public records technology
platform, new product development, system upgrades, and other assets, including
purchased data files and internally developed and externally purchased software.
Cash used by financing activities of $15.6 million in the first six months of
2002 included $30 million of payments on the Credit Facility offset by $16.1
million of proceeds from the exercise of stock options. Cash provided by
financing activities of $14.0 million in the first six months of 2001 included
$15.1 million of proceeds from the exercise of stock options offset by purchases
of stock held by our employee benefit trust of $0.9 million.
Earnings before interest, taxes, depreciation and amortization ("EBITDA"),
excluding merger-related costs and unusual items, increased $9.5 million in the
second quarter of 2002, or 19%, from the second quarter of 2001, to $59.6
million. For the first six months ended June 30, EBITDA increased $19.5 million,
or 20.0%, to $117.2 million in 2002. EBITDA margins increased from 30.8% for the
second quarter of 2001 to 31.7% for the second quarter of 2002 due to
ChoicePoint's strong operating performance. The Company has included EBITDA data
(which is not a measure of financial performance under generally accepted
accounting principles and may differ from that of other companies) because such
data is used by certain investors to analyze and compare companies on the basis
of operating performance, leverage and liquidity
19
and to determine a company's ability to service debt. EBITDA is not presented as
a substitute for income from operations, net income or cash flows from operating
activities.
Economic Value Added ("EVA") measures the value created in excess of the cost of
capital used to run the business. The Company uses EVA as a performance measure
to make operational, capital and compensation decisions. EVA increased $1.6
million in the second quarter of 2002 and $3.2 million for the six months ended
June 30, 2002 due primarily to strong operating results and capital management.
The Company uses cash generated to invest in growing the business and to fund
acquisitions and operations. Therefore, no cash dividends have been paid and the
Company does not anticipate paying any cash dividends on its common stock in the
near future.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
ChoicePoint adopted, effective January 1, 2002, new accounting rules for
goodwill and certain intangible assets. Among the requirements of the new rules
is that goodwill and certain intangible assets be assessed for impairment using
fair value measurement techniques. During the second quarter of 2002, the
Company completed its impairment review and has recorded a $39.1 million
non-cash pretax charge for the impairment of goodwill resulting primarily from
the EquiSearch Services, Inc. acquisition in 1998 and the internet business the
Company acquired as part of the DBT merger in May 2000. The charge is
non-operational in nature and is reflected as a cumulative effect of an
accounting change in the accompanying consolidated financial statements (Note
12). In order to enhance comparability, the Company compares current year
results to the prior year exclusive of this charge.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States, which require the Company to
make estimates and assumptions (see Note 3 to the Consolidated Financial
Statements). The Company believes that of its significant accounting policies,
the following may involve a higher degree of judgment and complexity:
Purchase price allocation: Over its history, the Company's growth has been
partly driven by acquisitions. The application of the purchase method of
accounting requires companies to assign values to acquired assets and
liabilities, including intangible assets acquired based on their fair value. The
determination of fair value for acquired assets, particularly intangible assets,
requires a high degree of judgment, and estimates often involve significant
subjectivity due to the lack of transparent market data or listed market prices.
The Company generally uses internal cash flow models and other evaluations as
well as third-party appraisals in determining the fair value of assets acquired;
however, the use of different valuation models or assumptions could produce
different financial results.
Intangible assets: On January 1, 2002, ChoicePoint adopted SFAS No. 142.
ChoicePoint has assessed its intangible assets for impairment during the six
months ending June 30, 2002, and is required to assess these assets on at least
an annual basis thereafter. The Company's intangible assets are primarily made
up of goodwill, software, customer relationships, data files and non-compete
agreements related to acquisitions. In assessing the recoverability of
ChoicePoint's intangible assets, the Company must make assumptions regarding the
estimated future cash flows to determine fair value of the respective assets. If
these estimates or their related assumptions change in the future, ChoicePoint
may be required to record impairment charges for these assets.
Impairment and other exit activities: As discussed in Notes 2 and 11 to the
Consolidated Financial Statements, in connection with selling and integrating
certain business operations, the Company has incurred certain exit costs,
generally for the accrual of remaining leasehold obligations, data contract
obligations and targeted terminated employee separation costs, and asset
impairment charges for data and software assets that will no longer be used.
Inherent in the accruals for exit costs and the assumptions used in impairment
analyses are certain significant management judgments and estimates. The Company
periodically reviews and reevaluates the assumptions used for the accrual of
exit costs and adjusts the accrual as necessary.
20
Software developed for internal use: The Company capitalizes certain direct
costs incurred in the development of internal use software. Amortization of such
costs as cost of sales is done on a straight-line basis generally over three to
five years. The Company periodically evaluates the recoverability of capitalized
costs or as changes in circumstance suggest a possible impairment may exist.
Primarily in connection with the DBT Merger and integration of the Company's
public records businesses in 2001 and reevaluation of technology initiatives in
2002, capitalized software costs were written down by $2.7 million and $3.0
million, respectively. Amortization of capitalized software costs amounted to
$4.2 million and $3.0 million for the six months ended June 30, 2002 and 2001.
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made by or on behalf of the Company may
constitute "forward-looking statements" as defined under the Private Securities
Litigation Reform Act of 1995. Words or phrases such as "should result," "are
expected to," "we anticipate," "we estimate," "we project," or similar
expressions are intended to identify forward-looking statements. These
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those expressed in any forward-looking
statements. These risks and uncertainties include, but are not limited to, the
following important factors: demand for the Company's services, product
development, maintaining acceptable margins, maintaining secure systems, ability
to control costs, the impact of federal, state and local regulatory requirements
on the Company's business, specifically the public records market and privacy
matters affecting the Company, the impact of competition and customer
consolidations, ability to continue our long-term business strategy including
growth through acquisitions, ability to attract and retain qualified personnel
and the uncertainty of economic conditions in general. Additional information
concerning these risks and uncertainties is contained in the Company's filings
with the Securities and Exchange Commission, including the Company's Annual
Report on Form 10-K for the year ended December 31, 2001. Readers are cautioned
not to place undue reliance on forward-looking statements, since the statements
speak only as of the date that they are made, and the Company undertakes no
obligation to publicly update these statements based on events that may occur
after the date of this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. The
information below summarizes the Company's market risk associated with its debt
obligations as of June 30, 2002. The information below should be read in
conjunction with Note 7 to the Consolidated Financial Statements.
As of June 30, 2002, $125 million was outstanding under the Credit Facility. The
Company has also entered into an interest rate swap agreement (the "Swap
Agreement") to reduce the impact of changes in interest rates on its floating
rate long-term obligations. The Swap Agreement had a notional amount of $125
million at June 30, 2002 and matures in August 2002. The Swap Agreement involves
the exchange of variable rate for fixed rate payments and effectively changes
the Company's interest rate exposure to a weighted average fixed rate of
approximately 6.45% through August 2002, the expiration of the Swap Agreement.
Based on the Company's overall interest rate exposure at June 30, 2002, a
near-term change in interest rates would not materially affect the consolidated
financial position, results of operations or cash flows of the Company. As noted
above, as of June 2002, $125 million is outstanding under the Credit Facility,
all of which is hedged with the Swap Agreement. A one percent change in interest
rates would not result in any change in annual interest expense based on this
level of borrowing.
21
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
On June 6, 2002, ChoicePoint effected a four-for-three stock split in the form
of a stock dividend for shareholders of record as of May 16, 2002.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 25, 2002 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 reelection of one
director for a term expiring in 2005:
FOR WITHHELD
Bernard Marcus 56,724,811 555,963
Votes cast for or withheld regarding the election of two
directors for terms expiring in 2005:
FOR WITHHELD
Dr. John J. Hamre 57,078,604 202,170
Terrence Murray 56,756,382 524,392
Directors whose term of office continue after the meeting are
as follows:
Terms expiring in 2003 Terms expiring in 2004 Terms expiring in 2005
Douglas C. Curling Thomas M. Coughlin Dr. John J. Hamre
James M. Denny Bonnie G. Hill Bernard Marcus
Kenneth G. Langone Derek V. Smith Terrence Murray
Charles I. Story
(b) Ratification of the appointment of Deloitte & Touche
LLP as independent public accountants of the Company
for the fiscal year ending December 31, 2002:
FOR AGAINST ABSTAIN
56,262,694 943,118 74,962
ITEM 5. OTHER INFORMATION
Not Applicable.
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Incorporation of the Company, as amended (incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement on
Form S-1, as amended, File No. 333-30297).
3.2 Bylaws of the Company, as amended (incorporated by reference to Exhibit
3.2 of the Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
4.1 Rights Agreement, dated as of October 29, 1997, by and between
ChoicePoint Inc. and SunTrust Bank, Atlanta (incorporated by reference
to Exhibit 4.2 of the Company's Form 8-A, filed November 5, 1997).
4.2 Amendment No. 1 to the Rights Agreement, dated as of June 21, 1999,
between ChoicePoint Inc. and SunTrust Bank, Atlanta (incorporated by
reference to Exhibit 4.2 of the Company's Report on Form 8-A/A, filed
August 17, 1999).
4.3 Amendment No. 2 to the Rights Agreement between ChoicePoint Inc. and
SunTrust Bank, Atlanta dated February 14, 2000 (incorporated by
reference to Exhibit 4.1 of the Company's Current Report on Form 8-K,
filed February 15, 2000).
4.4 Amendment No. 3 to the Rights Agreement between ChoicePoint Inc. and
SunTrust Bank, as Rights Agent (incorporated by reference to Exhibit
4.4 of the Company's Report on Form 8-A/A, filed July 30, 2002).
4.5 Form of Common Stock certificate (incorporated by reference to Exhibit
4.1 of the Company's Registration Statement on Form S-1, File No.
333-30297).
10.1 Revolving Credit Agreement, dated as of May 10, 2002, among ChoicePoint
Inc., the Lenders listed therein, SunTrust Bank, as Administrative
Agent, Wachovia Bank, National Association, as Syndication Agent, U.S.
Bank National Association and BNP Paribas, as Documentation Agents, and
First Union Securities, Inc. (d/b/a/ Wachovia Securities) and SunTrust
Capital Markets, Inc., as Co-Lead Arrangers (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
three months ended March 31, 2002).
10.2 Employment and Compensation Agreement between the Company and Derek V.
Smith as of April 25, 2002.
10.3 Employment and Compensation Agreement between the Company and Douglas
C. Curling as of April 25, 2002.
10.4 Employment and Compensation Agreement between the Company and Steven W.
Surbaugh as of April 25, 2002.
10.5 Employment and Compensation Agreement between the Company and David T.
Lee as of April 25, 2002.
10.6 Employment and Compensation Agreement between the Company and J.
Michael de Janes as of April 25, 2002.
99.1 Certification of Derek V. Smith, Chief Executive Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Steven W. Surbaugh, Chief Financial Officer, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Not Applicable
23
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, 2002 /s/ Derek V. Smith
- ----------------------- --------------------------------------------
Date Derek V. Smith, Chairman and
Chief Executive Officer
August 13, 2002 /s/ Steven W. Surbaugh
- ----------------------- --------------------------------------------
Date Steven W. Surbaugh, Chief Financial Officer
(Principal Financial Officer)
24
EXHIBIT INDEX
Exhibit Description of Exhibit
3.1 Articles of Incorporation of the Company, as amended (incorporated by
reference to Exhibit 3.1 of the Company's Registration Statement on
Form S-1, as amended, File No. 333-30297).
3.2 Bylaws of the Company, as amended (incorporated by reference to Exhibit
3.2 of the Company's Annual Report on Form 10-K for the year ended
December 31, 2001).
4.1 Rights Agreement, dated as of October 29, 1997, by and between
ChoicePoint Inc. and SunTrust Bank, Atlanta (incorporated by reference
to Exhibit 4.2 of the Company's Form 8-A, filed November 5, 1997).
4.2 Amendment No. 1 to the Rights Agreement, dated as of June 21, 1999,
between ChoicePoint Inc. and SunTrust Bank, Atlanta (incorporated by
reference to Exhibit 4.2 of the Company's Report on Form 8-A/A, filed
August 17, 1999).
4.3 Amendment No. 2 to the Rights Agreement between ChoicePoint Inc. and
SunTrust Bank, Atlanta dated February 14, 2000 (incorporated by
reference to Exhibit 4.1 of the Company's Current Report on Form 8-K,
filed February 15, 2000).
4.4 Amendment No. 3 to the Rights Agreement between ChoicePoint Inc. and
SunTrust Bank, as Rights Agent (incorporated by reference to Exhibit
4.4 of the Company's Report on Form 8-A/A, filed July 30, 2002).
4.5 Form of Common Stock certificate (incorporated by reference to Exhibit
4.1 of the Company's Registration Statement on Form S-1, File No.
333-30297).
10.1 Revolving Credit Agreement, dated as of May 10, 2002, among ChoicePoint
Inc., the Lenders listed therein, SunTrust Bank, as Administrative
Agent, Wachovia Bank, National Association, as Syndication Agent, U.S.
Bank National Association and BNP Paribas, as Documentation Agents, and
First Union Securities, Inc. (d/b/a/ Wachovia Securities) and SunTrust
Capital Markets, Inc., as Co-Lead Arrangers (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
three months ended March 31, 2002).
10.2 Employment and Compensation Agreement between the Company and Derek V.
Smith as of April 25, 2002.
10.3 Employment and Compensation Agreement between the Company and Douglas
C. Curling as of April 25, 2002.
10.4 Employment and Compensation Agreement between the Company and Steven W.
Surbaugh as of April 25, 2002.
10.5 Employment and Compensation Agreement between the Company and David T.
Lee as of April 25, 2002.
10.6 Employment and Compensation Agreement between the Company and J.
Michael de Janes as of April 25, 2002.
99.1 Certification of Derek V. Smith, Chief Executive Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Steven W. Surbaugh, Chief Financial Officer, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
25