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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      September 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.

(770) 752-6000

N/A

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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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.

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CHOICEPOINT INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2002
INDEX

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CHOICEPOINT INC.

The accompanying notes are an integral part of these consolidated statements.

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CHOICEPOINT INC.

The accompanying notes are an integral part of these consolidated balance sheets.

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CHOICEPOINT INC.

The accompanying notes are an integral part of this consolidated statement.

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CHOICEPOINT INC.

The accompanying notes are an integral part of these consolidated statements.

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CHOICEPOINT INC.

1.     Organization

ChoicePoint Inc., a Georgia corporation (“ChoicePoint” or the “Company”), is the leading provider of identification and credential verification services serving the information needs of business, government and individuals. 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 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 September 30, 2002, the results of operations for the three months and nine months ended September 30, 2002 and 2001, and the cash flows for the nine months ended September 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.

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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 September 30, 2002 are summarized below:

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. Software revenues for our Insurance segment are generated primarily by licensing customized software, including maintenance support, and providing professional services. Revenues from software licenses requiring significant production, modification or customization of the software are generally accounted for using the percentage of completion method. Revenues from maintenance support are recognized ratably over the term of the agreement. Software revenues for our B&G segment 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 up front costs 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 nine months ended September 30, pass-through expense was $366.4 million in 2002 and $313.1 million in 2001.

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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 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 September 30 of $10.1 million in 2002 and $10.8 million in 2001, and during the nine months ended September 30 of $30.0 million in 2002 and $27.9 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.     Equity

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.

On September 30, 2002, shareholders of the Company approved an amendment to the Articles of Incorporation to increase the authorized common stock of the Company from 100 million shares to 400 million shares which became effective October 3, 2002.

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 $90 million at September 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 $2.6 million of other long-term debt outstanding at September 30, 2002. There were no short-term borrowings at September 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 for the third quarter of $141,000 in 2002 and $196,000 in 2001, and for the nine months ended September 30 of $429,000 in 2002 and $964,000 in 2001. 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 $40.7 million at September 30, 2002 and the Company would have recorded additional depreciation expense of approximately $625,000 ($385,000 after tax) related to the $25 million synthetic lease for the first nine months of 2002. No depreciation would have been recorded related to the amount drawn under the $52 million synthetic lease since the data center facility is still under construction.

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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 to $100 million on the sale of accounts receivable. There were no sales of accounts receivable under the Receivables Facility during the nine-month period ended September 30, 2002.

8.     Derivative Financial Instruments

At September 30, 2002, ChoicePoint had four interest rate swap agreements (the “Swap Agreements”) outstanding that reduce the impact of changes in the benchmark interest rate (LIBOR) on its interest expense. One interest rate swap agreement has a notional amount of $25 million and matures in August 2007. The other three interest rate swap agreements are forward starting swaps which have a total notional amount of $42 million, become effective May 2003 and mature in August 2007. ChoicePoint has designated all of these swaps as hedges of the variability in expected future interest payments on $67 million of borrowings. The Company had a fifth interest rate swap agreement to reduce the impact of changes in the benchmark interest rate (LIBOR) on $125 million of borrowings which expired in August 2002.

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 only derivative instruments are the Swap Agreements which have been designated as cash flow hedges to hedge the variability in expected future interest payments on a portion of the Company’s borrowings and, as such, the effective portions of changes in fair value are reported in accumulated other comprehensive loss (“OCL”) and are subsequently reclassified into earnings when the hedged item affects earnings. As of September 30, 2002, the fair value of the interest rate Swap Agreements was a liability of $4.4 million which has been recorded net of taxes in OCL. For the nine months ended September 30, 2002, there was no ineffectiveness related to these cash flow hedges.

9.     Stock Options

During the first nine 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 nine months ended September 30, 2002 and 2001 was as follows (in thousands):

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11.     Acquisitions & Divestitures

During the nine months ended September 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; Total eData Corporation, an e-mail database company based in Little Rock, Arkansas; and L&S Report Service, Inc., a police reports provider to the P&C insurance industry based in Phoenix, Arizona. 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 $46 million. Goodwill of $28.7 million was allocated to Business & Government Services, and $8.5 million was allocated to Insurance 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 September 30, 2002, ChoicePoint has approximately $3.0 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.

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 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 nine months ended September 30, 2002, by business segment is as follows:

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As of September 30, 2002 and December 31, 2001, the Company’s other acquisition intangible assets and accumulated amortization consisted of the following (in thousands):

The Company recorded amortization expense of $4.4 million during the nine months ended September 30, 2002 compared to $3.8 million during the nine months ended September 30, 2001 related to these other acquisition intangible assets.

During the nine months ended September 30, 2002, the Company acquired the following intangible assets based upon the preliminary allocations:

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 nine months ended September 30:

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 nine months ended September 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:

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