-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AtyXMO2jWQ3qr8QzSqpUSp9vWFheixoa5YbUKxoS3GgZQSVfplaIsc0VHHlm85gP niOiVAKZGBC1SbGj6RVeUQ== 0000950144-99-003713.txt : 19990402 0000950144-99-003713.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950144-99-003713 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHOICEPOINT INC CENTRAL INDEX KEY: 0001040596 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-CONSUMER CREDIT REPORTING, COLLECTION AGENCIES [7320] IRS NUMBER: 582309650 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13069 FILM NUMBER: 99581068 BUSINESS ADDRESS: STREET 1: 1000 ALDERMAN DR CITY: ALPHARETTA STATE: GA ZIP: 30005 BUSINESS PHONE: 7707526000 MAIL ADDRESS: STREET 1: CHOICEPOINT INC STREET 2: 1000 ALDERMAN DR CITY: ALPHARETTA STATE: GA ZIP: 30005 10-K405 1 CHOICEPOINT INC 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Act of 1934 For the transition period from to ------- ------- 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) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which Title of each class registered ------------------- ------------------------------- Common Stock, par New York Stock Exchange value $.10 per share Securities registered pursuant to Section 12(g) of the Act: None --------------------- 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 [ ] Aggregate market value of the voting stock held by non-affiliates of the Registrant: $759,243,305 as of March 11, 1999 Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. 14,636,147 shares of Common Stock, par value $.10 per share, outstanding as of March 11, 1999. Documents incorporated by reference in this Annual Report on Form 10-K: Portions of the definitive proxy statement relating to the 1999 Annual Meeting of Shareholders in Part III, Items 10 (as related to Directors), 11, 12 and 13. Portions of the Annual Report to Shareholders for the year ended December 31, 1998 in Parts II and IV. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] ================================================================================ 2 TABLE OF CONTENTS
Page ---- PART I............................................................................................................1 ITEM 1. BUSINESS........................................................................................1 ITEM 2. PROPERTIES......................................................................................6 ITEM 3. LEGAL PROCEEDINGS...............................................................................6 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................6 PART II...........................................................................................................8 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......................8 ITEM 6. SELECTED FINANCIAL DATA.........................................................................8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........8 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................8 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................................................8 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............8 PART III..........................................................................................................9 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............................................9 ITEM 11. EXECUTIVE COMPENSATION..........................................................................9 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................................................................9 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................9 PART IV. .........................................................................................................9 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.................................9
3 PART I ITEM 1. BUSINESS GENERAL ChoicePoint Inc., a Georgia corporation ("ChoicePoint" or the "Company"), is a leading provider of intelligent information to help businesses, governments and individuals make better, more timely and more informed business decisions. ChoicePoint became an independent public company in August 1997 through the combination of the businesses that had comprised the Insurance Services Group of Equifax Inc. ("Equifax") within a separate company and the subsequent spinoff (the "Spinoff") of the Company's outstanding stock by Equifax as a stock dividend to the shareholders of Equifax. References to ChoicePoint or the Company mean ChoicePoint Inc., its subsidiaries and divisions after the Spinoff and the Insurance Services Group of Equifax prior to the Spinoff. Based on market share, ChoicePoint is a leading provider of risk management and fraud prevention information and related technology solutions to the insurance industry. The Company also offers risk management and fraud prevention solutions to organizations in other industries. Since its formation, the Company has been organized into three service groups: Property & Casualty Insurance Services; Life & Health Insurance Services; and Business & Government Services. Following a series of divestitures since the Spinoff, primarily in the life and health insurance areas, the Company has combined all of its insurance related operations into one service group, and since January 1, 1999, operates its business through two primary service groups: Insurance Services and Business & Government Services. ChoicePoint provides most major domestic insurance companies with underwriting and claims information services to assist those companies in assessing the insurability and associated policy pricing of individuals and property. The Company furnishes access to motor vehicle reports, maintains a database of claims histories, provides automated claims verification information services to both the property and casualty and the life and health insurance markets, and provides database marketing services, including pre-screened and direct marketing lists. ChoicePoint also offers pre-employment background investigations, pre-employment and regulatory compliance drug testing services, asset recovery services, and due diligence and public record information searches to other corporate and government organizations, as well as to the aforementioned insurance markets. ChoicePoint's strategic goal is to be the leading provider of enhanced information services to a broad range of industries. The Company is continuing to expand its database distribution, data gathering and technological capabilities, and believes that it is positioned to offer a variety of new products to a diverse set of industries. The Company intends to accomplish its goals by expanding its presence in business and government markets, pursuing acquisitions and strategic alliances, developing and enhancing key technological capabilities and maintaining solid financial performance. STRATEGIC ACQUISITIONS AND ALLIANCES Commencing in 1993, the Company initiated a strategy of acquiring organizations that add new data, markets and technology to ChoicePoint's operations. In April 1994, ChoicePoint acquired the assets of Programming Resources Company ("PRC"), headquartered in Hartford, Connecticut, which develops custom policy rating and issuance software for commercial property and casualty insurance companies. The PRC acquisition enhanced ChoicePoint's technological capability by adding a systems development competency and expanded the Company's presence in the commercial insurance market. In November 1994, ChoicePoint acquired Osborn Group Inc., formerly known as Osborn Laboratories, Inc. ("Osborn Group"), a blood, urine and saliva testing business that provides insurance companies with applicant-specific information. Osborn Group, which is the second largest laboratory of its kind in the United States, uses state-of-the-art technologies that incorporate voice, image and other data into its production and communication processes. Osborn Group also has a highly skilled research and development team, which researches alternative sampling and testing techniques for delivery of more effective and lower cost testing solutions to customers. 4 In 1996, ChoicePoint acquired Professional Test Administrators, Inc. ("PTA"), headquartered in Chicago, Illinois, to accelerate the Company's entry into the occupational health market. The PTA acquisition gave ChoicePoint the ability to administer all components of substance abuse programs, including results analysis. By serving the occupational health market, ChoicePoint is able to enhance the value of its employment services by creating a total hiring solution for customers. In furtherance of that objective, in 1997 ChoicePoint acquired the assets of Advanced HR Solutions, Inc., an automated payroll and employment verification service, and the assets of Drug Free, Inc., a drug testing information services company. In August 1996, ChoicePoint acquired 70% of the outstanding capital stock of CDB Infotek, an automated public records company with more than 1,600 online public record databases, including criminal, bankruptcy, judgment and lien databases. Thereafter, through the exercise of an option, the Company acquired the remaining outstanding shares of CDB Infotek, which is now a wholly owned subsidiary of ChoicePoint. Headquartered in Santa Ana, California, CDB Infotek serves corporations and the legal, insurance and investigative markets. The Company believes that significant potential exists to blend CDB Infotek's data with ChoicePoint's manual and database information gathering services to offer more comprehensive and effective information solutions to these markets. In addition, in furtherance of the Company's focus on building its strategic records capabilities to serve the government, healthcare and insurance markets, in October 1997 ChoicePoint acquired the assets of Medical Information Network, LLC ("MediNet"). MediNet is an online physician verification service that provides background information on physicians, including disciplinary data, education, board certifications, and criminal and civil convictions from sources such as the American Medical Association, U.S. Drug Enforcement Agency, U.S. Food and Drug Administration and state medical boards, to assist in fraud mitigation. In December 1997, the Company sold its paramedical examination business, Physical Measurements Information ("PMI"), to Pediatric Services of America, Inc. ("PSA"). In connection with that transaction, ChoicePoint entered into a strategic business alliance with PSA and its subsidiary, Insurance Medical Reporter, Inc. ("IMR"), pursuant to which ChoicePoint provides automated order and delivery system, status tracking and customer information system and laboratory testing services for IMR, and IMR provides paramedical collection and examination services for ChoicePoint. The Company believes that this strategic business alliance enables ChoicePoint to focus on providing technology and information management solutions for customers in the Company's Insurance Services group, while allowing it to offer those customers paramedical examination services through the alliance with IMR. To add to its hiring compliance offerings, during the second quarter of 1998, ChoicePoint acquired the assets of Attest National Drug Testing, Inc., a drug testing information services company, and Application Profiles, Inc., a full service pre-employment screening company. In September 1998, ChoicePoint entered into a strategic alliance with Intertech Information Management, Inc. ("Intertech"), a leading provider of document management and imaging services. The minority equity investment in Intertech allows the Company to license document management software that enables ChoicePoint to transform data from paper to electronic format, thereby enhancing efficiencies. In October 1998, the Company acquired Informus Corporation ("Informus") in order to expand its pre-employment screening services offerings. The Informus acquisition allows the Company to provide complete pre-employment background services to corporate customers, and the acquisition provides further growth opportunities for the Company in the small to mid-sized company market. Also in October 1998, the Company acquired Customer Development Corporation ("CDC"). CDC is a full-service, fully integrated database marketing company providing customized marketing programs primarily for clients in the insurance, consumer finance, publishing and banking industries. In November 1998, the Company acquired EquiSearch Services, Inc. ("EquiSearch"). The EquiSearch acquisition allows the Company to expand its value-added applications of Company data, while at the same time takes ChoicePoint in a new direction of offering consumer-benefit services. EquiSearch's primary function is to contract with companies or stock transfer agents to locate lost stockholders of Fortune 1000 and other public 2 5 corporations. Also in November 1998, the Company acquired Tyler-McLennon, Inc., a provider of employment background screening services and record searches. In December 1998, in order to increase the Company's presence in the personal automobile insurance market, ChoicePoint acquired DATEQ Information Network, Inc. ("DATEQ"), a provider of underwriting services to that market. The DATEQ acquisition allowed the Company to bring enhanced risk assessment products and services to its core insurance customer base. Also in December 1998, the Company sold its life and health insurance field underwriting services and insurance claim investigation services to PMSI Services, Inc. This transaction, when combined with the December 1997 sale of the paramedical examination business to PSA, completes ChoicePoint's strategy of exiting the labor-intensive life and health and investigative field businesses. PRODUCTS AND CUSTOMERS As indicated above, following a series of divestitures since the Spinoff, primarily in the life and health insurance areas, the Company has combined all of its insurance related operations into one service group, and, since January 1, 1999, operates through two primary service groups: Insurance Services and Business & Government Services. ChoicePoint's offices are currently located throughout the United States and in the United Kingdom. The Company's business is not seasonal. The following table reflects the revenue generated by each of ChoicePoint's three original service groups from 1996 through 1998 and the percentage contribution by each group to ChoicePoint's revenue for each such year. HISTORICAL REVENUE BY SERVICE GROUP
1998 1997 1996 (Dollars in thousands) Amount % Amount % Amount % Property & Casualty Insurance Services ........... $218,413 53% $186,759 45% $167,073 46% Life & Health Insurance Services ........... 79,730 20 143,979 34 146,696 40 Business & Government Services ..................... 108,332 27 86,583 21 52,712 14 -------- --- -------- --- -------- --- Total ............... $406,475 100% $417,321 100% $366,481 100% ======== === ======== === ======== ===
Property & Casualty Insurance Services. ChoicePoint provides underwriting information to property and casualty insurance companies in the United States and the United Kingdom. Personal lines property and casualty insurance services include automated direct marketing, underwriting and claims information, such as motor vehicle reports, the Company's Comprehensive Loss Underwriting Exchange ("C.L.U.E.(R)") database services, vehicle registration services, credit reports, modeling services, and driver's license information. C.L.U.E. is a proprietary database comprised of claims information contributed by major insurance underwriters (and accessed by those same underwriters), which enables them to assess underwriting risks and pending claims in the auto and home insurance markets. ChoicePoint's proprietary Auto 2000(R) and Homeowners 2000(R) systems use customer-specific decision making criteria to provide property and casualty insurance underwriters with decision management tools that streamline and reduce the cost of the underwriting process. This service group offers information delivery services to its clients using mainframe, personal computer and Internet web-based communications. 3 6 The Company's CUE UK database, a proprietary database containing home and motor insurance claims information, was developed by the Company in response to growing insurance fraud in the United Kingdom. The success of C.L.U.E. database services in the United States served as a catalyst for the development of the CUE UK database, which was specifically designed to serve the United Kingdom market. The CUE UK database compiles claim information contributed by the United Kingdom's larger insurers for use by the same insurers to detect fraudulent claims. The CUE UK database is comprised of the CUE Home and CUE Motor proprietary databases. In 1998, the Company announced a partnership with Experian Limited for the joint operation and eventual sale, estimated for the end of 1999, of the insurance services division in the United Kingdom. In addition to personal lines underwriting information, ChoicePoint provides services to the commercial property and casualty insurance market. Those services include commercial inspections for underwriting purposes, workers compensation audits of commercial properties, and development of high-end customized application rating and issuance software for commercial customers. Life & Health Insurance Services. ChoicePoint also provides laboratory information services and related technology offerings to major life and health insurance companies in the United States. The Company also provided medical records and application collection, health history interview services, verification of continued disability, investigations of contestable and accidental death claims and surveillance of claimants' activities in connection with potentially fraudulent claims until these services were sold in 1998. Business & Government Services. In addition to serving the property and casualty and life and health insurance markets, ChoicePoint provides risk management and fraud prevention services and related technology solutions, asset recovery services and database marketing services to Fortune 1000 corporations, asset-based lenders, legal and professional service providers, health care service providers and local, state and federal government agencies. For instance, the Company provides information and services to customers in a variety of industries for use in the hiring and employee regulatory compliance process, including: (i) pre-employment background screenings, which include credit and driving record checks, prior employment verification, education and licensing verification and criminal record searches; and (ii) comprehensive drug screening program management and administration. ChoicePoint believes that it is the only company in the United States that offers customers a full range of proprietary integrated services and products to manage and mitigate risk in the hiring process. The Company also provides enhanced information services to government agencies, such as (i) uncovering ownership of hidden assets, locating individuals and providing leads for criminal and civil investigations, (ii) providing parent locator services, which locate for the public sector individuals who are in violation of court mandates and (iii) screening of certain Medicare and Medicaid providers and provider applicants to assist in identifying and reducing health care fraud. In connection with its business and government services, the Company provides automated and in-demand searches and filings of public business records, including Uniform Commercial Code searches and filings, bankruptcy, lien and judgment searches, searches of partnership and corporation filing records, and criminal record searches to assist organizations and lending institutions in managing potential risk exposure. Customers. ChoicePoint's customer base includes substantially all domestic insurance companies, many Fortune 1000 companies and certain local, state and federal government agencies. The Company has more than 5,000 customers, most of which are insurance companies. No customer account represented more than 10% of the Company's total revenue in 1998. Both of ChoicePoint's current service groups have the capability to receive orders for and deliver products and services through electronic communications. The Company supplies software to customers that wish to access ChoicePoint using private networks. 4 7 COMPETITION The Company operates in a number of geographic and product and service markets, which are highly competitive. In the insurance services market, ChoicePoint's competitors include Trans Union Corporation, American Insurance Services Group, a unit of Insurance Services Office, Inc., Insurance Information Exchange, L.L.C., a subsidiary of AMS Services, Inc. and LabOne, Inc. with respect to insurance laboratory services. In the business and government services market, ChoicePoint's competitors in the automated public records market include DBT Online, Inc., Information America, Inc. and the Lexis-Nexis service of Reed Elsevier PLC, while its competitors in the pre-employment screening and drug testing services market include various security companies and clinical laboratories, including Pinkertons Inc., Avert, Inc. and Laboratory Corporation of America Holdings. Its competitors in other information services offerings include Acxiom Corporation and Harte-Hanks Communications, Inc. With respect to its offerings of consumer benefit services such as those provided by EquiSearch, the Company competes with Keane Tracers, Inc. and Shareholder Communications Corporation. In each of its markets, the Company competes on the basis of responsiveness to customer needs, price and the quality and range of products and services offered. SOURCES OF SUPPLY ChoicePoint's operations depend upon information derived from a wide variety of automated and manual sources. External sources of data include public records information companies, governmental authorities, and on-line search systems. ChoicePoint has no reason to anticipate the termination of any significant relationships with data suppliers. In the event that such a termination occurred, the Company believes that it could acquire the data from other sources, and such termination would not have a material adverse effect on the Company's financial condition or results of operations. ChoicePoint currently maintains databases that contain information provided and used by insurance underwriters. The information comprising these databases is not owned by ChoicePoint, and the participating organizations could discontinue contributing information to the databases. If this were to occur, the Company's financial condition and results of operations would be materially affected. ChoicePoint believes, however, that such an event is unlikely because contributors to the databases depend upon the aggregated information in such databases to conduct their business operations. EMPLOYEES As of December 31, 1998, ChoicePoint employed approximately 3,500 persons, none of whom were unionized. Substantially all of the Company's workforce is employed in the United States. As of December 31, 1998, ChoicePoint employed approximately 330 individuals in Olathe, Kansas in its Osborn Group facilities, approximately 210 individuals in Hartford, Connecticut in its PRC facilities, approximately 165 individuals in Santa Ana, California at its CDB Infotek location, approximately 340 individuals in Peoria, Illinois in its CDC location, approximately 175 individuals in St. Petersburg, Florida at its Application Profiles office, approximately 25 employees in White Plains, New York at its EquiSearch offices and approximately 25 individuals in the United Kingdom in connection with CUE UK. Approximately 600 individuals are employed in the Atlanta area in the Company's headquarters and two branch office locations. The balance of ChoicePoint's employees are located in the Company's remaining offices. ChoicePoint believes that its relations with its employees are good. PROPRIETARY MATTERS ChoicePoint owns a number of trademarks and trade names that ChoicePoint believes are important to its business. Except for the ChoicePoint trademark and logo, however, the Company is not dependent upon any single 5 8 trademark or trade name or group of trademarks or trade names. The current duration for federal registrations range from seven to fifteen years, but each registration may be renewed an unlimited number of times. Other trademarks and trade names used in the Company's business are registered and maintained in the U.S. and the United Kingdom. C.L.U.E., Auto 2000 and Homeowners 2000 are registered trademarks of ChoicePoint. FORWARD-LOOKING INFORMATION In addition to historical information, this report includes forward-looking statements and information that are based on management's beliefs, plans, expectations and assumptions and on information currently available to the Company. The words "may," "should," "expect," "anticipate," "intend," "plan," "continue," "believe," "seek," "estimate," and similar expressions used in this report that do not relate to historical facts are intended to identify forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. The forward-looking statements in this report are not guarantees of future performance and involve certain risks, uncertainties and assumptions. Such risks, uncertainties and assumptions include the following: (i) the levels of demand for ChoicePoint's existing services; (ii) the Company's ability to develop new services and to adapt existing services to new uses; (iii) the Company's ability to maintain acceptable margins and its ability to control its costs; (iv) the impact of federal, state and local regulatory requirements on the Company's business; (v) the impact of consolidation or other business developments in the insurance industry, which accounts for approximately 70% of the Company's revenue; (vi) unanticipated developments in the process of assessing and addressing issues related to the Year 2000 issue; and (vii) the uncertainty of economic conditions in general. Many of such factors are beyond the Company's ability to control or predict. As a result, ChoicePoint's future actions, financial condition, results of operations and the market price of the Company's common stock could differ materially from those expressed in any forward-looking statements made by the Company. Do not put undue reliance on forward-looking statements. The Company does not intend to publicly update any forward-looking statements that may be made from time to time by, or on behalf of, the Company, whether as a result of new information, future events or otherwise. ITEM 2. PROPERTIES ChoicePoint's principal executive offices are located in 206,000 square feet of office space in Alpharetta, Georgia, a suburb of Atlanta. ChoicePoint maintains 76 other offices in the United States and one office in the United Kingdom. These offices, all of which are leased, contain a total of approximately 534,000 square feet of space. Through Osborn Group, ChoicePoint owns two laboratory facilities in Olathe, Kansas with approximately 76,000 square feet of space. Through CDC, ChoicePoint owns four buildings in Peoria, Illinois representing approximately 182,000 square feet of space. The Company ordinarily leases office space of the general commercial type for conducting its business. ITEM 3. 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 condition 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 materially adverse to the Company could be reached. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders by the Company during the quarter ended December 31, 1998. 6 9 EXECUTIVE OFFICERS OF REGISTRANT Set forth below is certain biographical information with respect to each executive officer of the Company, as of March 11, 1999:
- ----------------------------------------------------------------------------------------- Name and Position Age Executive Officer Since ----------------- --- ----------------------- - ----------------------------------------------------------------------------------------- Derek V. Smith, President, Chief Executive Officer 44 1997 and a Director - ----------------------------------------------------------------------------------------- Douglas C. Curling, Executive Vice President, 44 1997 Chief Financial Officer and Treasurer - ----------------------------------------------------------------------------------------- Dan H. Rocco, Executive Vice President 59 1997 - ----------------------------------------------------------------------------------------- David T. Lee, Senior Vice President 39 1997 - ----------------------------------------------------------------------------------------- J. Michael de Janes, General Counsel and Secretary 41 1997 - -----------------------------------------------------------------------------------------
Derek V. Smith, 44, has served as President, Chief Executive Officer and a Director of the Company since May 1997. Mr. Smith served as Executive Vice President of Equifax and Group Executive of the Insurance Services Group of Equifax from 1993 until the Spinoff. From 1991 to 1993, he served as Senior Vice President and Chief Financial Officer of Equifax. He also serves as a director of Metris Companies Inc. Douglas C. Curling, 44, has served as Executive Vice President, Chief Financial Officer and Treasurer of ChoicePoint since the Spinoff. He served as Senior Vice President - Finance and Administration of the Insurance Services Group of Equifax from 1993 until the Spinoff. Dan H. Rocco, 59, has served as Executive Vice President of ChoicePoint since the Spinoff. He served as Senior Vice President - Operations of the Insurance Services Group of Equifax from 1993 until the Spinoff. Mr. Rocco served as President and General Manager of the Automated Services Division of the Insurance Services Group of Equifax from 1991 to 1993. David T. Lee, 39, has served as Senior Vice President of ChoicePoint since the Spinoff. He served as Vice President - Property and Casualty Marketing and Sales of the Insurance Services Group of Equifax from 1991 until the Spinoff. J. Michael de Janes, 41, has served as General Counsel of ChoicePoint since the Spinoff, and has been Secretary of the Company since April 1998. He served as Vice President and Counsel of the Insurance Services Group of Equifax from 1993 until the Spinoff. There are no family relationships among the officers of the Company, nor are there any arrangements or understandings between any of the officers and any other persons pursuant to which they were selected as officers. The Board of Directors may elect an officer or officers at any meeting of the Board of Directors. Each officer is elected to serve until his successor has been elected and has duly qualified. Elections of officers generally occur each year at the Board of Directors meeting held in conjunction with the Company's Annual Meeting of Shareholders. 7 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed and traded on the New York Stock Exchange under the symbol "CPS." Information regarding the high and low sales prices and the number of holders of the common stock is set forth under the captions "Market Information" and "Quarterly Activity" on the page 43 of the 1998 Annual Report to Shareholders (the "Annual Report"), a copy of which page is included in Exhibit 13 to this Form 10-K and is incorporated herein by reference. The Company does not pay cash dividends and does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain future earnings to finance its operations and the expansion of its business. Any future determination to pay cash dividends will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's financial condition, operating results, capital requirements and such other factors as the Board of Directors deems relevant. ITEM 6. SELECTED FINANCIAL DATA The information included under the caption "Financial Highlights" on the inside front cover page of the Annual Report, a copy of which page is included in Exhibit 13 to this Form 10-K, is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 19 through 23 of the Annual Report, a copy of which pages are included in Exhibit 13 to this Form 10-K, is incorporated herein by reference. ITEM 7A. 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 December 31, 1998. The information below should be read in conjunction with Note 6 of the "Notes to Consolidated Financial Statements." The Company has entered into a $250 million unsecured floating rate revolving credit facility (the "Credit Facility") with a group of banks. As of December 31, 1998, $189 million was outstanding under the Credit Facility. The Company has also entered into six interest rate swap agreements (the "Swap Agreements") to reduce the impact of changes in interest rates on its floating rate obligation. The Swap Agreements have a combined notional amount of $175 million at December 31, 1998 and mature at various dates from 2000 to 2007. The Swap Agreements involve the exchange of variable rate for fixed rate payments and effectively change the Company's interest rate exposure to a weighted average fixed rate of 5.43% plus a credit spread. Based on the Company's overall interest rate exposure at December 31, 1998, a near-term change in interest rates would not materially affect the consolidated financial position, results or operations or cash flows of the Company. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information included under the captions "Consolidated Statements of Income," "Consolidated Balance Sheets," "Consolidated Statements of Shareholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial Statements" on pages 24 through 41 of the Annual Report, copies of which pages are included in Exhibit 13 to this Form 10-K, is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company has neither changed its independent accountants nor had any disagreements on accounting and financial disclosures with such accountants. 8 11 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 4, 1999, contains, on pages 2 and 3 thereof, information relating to the Company's Directors and persons nominated to be elected Directors. Such information is incorporated herein by reference and made a part hereof. Information regarding the Company's executive officers is set forth in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION The Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 4, 1999, contains, on pages 7 through 10 thereof, information relating to executive compensation. Such information is incorporated herein by reference and made a part hereof. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 4, 1999, contains, on pages 5 and 6 thereof, information relating to security ownership of certain beneficial owners and management. Such information is incorporated herein by reference and made a part hereof. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 4, 1999, contains, on page 9 thereof, information relating to certain relationships and related transactions. Such information is incorporated herein by reference and made a part hereof. PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Index to exhibits, financial statements and schedules. (1) Financial Statements Consolidated Balance Sheets for the Years Ended December 31, 1998 and 1997 are incorporated by reference from the Annual Report, and are included in Exhibit 13 hereto. Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996 are incorporated by reference from the Annual Report, and are included in Exhibit 13 hereto. Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996 are incorporated by reference from the Annual Report, and are included in Exhibit 13 hereto. 9 12 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996 are incorporated by reference from the Annual Report, and are included in Exhibit 13 hereto. Notes to Consolidated Financial Statements are incorporated by reference from the Annual Report, and are included in Exhibit 13 hereto. Report of Arthur Andersen LLP on the foregoing financial statements is incorporated by reference from the Annual Report, and is included in Exhibit 13 hereto. (2) Financial Statement Schedules All schedules have been omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits required by Item 601 of Regulation S-K: The following exhibits are included in this Form 10-K:
- -------------------------------------------------------------------------------- EXHIBIT NO. DESCRIPTION - -------------------------------------------------------------------------------- 3.02 Bylaws of the Company, as amended - -------------------------------------------------------------------------------- 13 The inside front cover page and pages 19-41 and 43 of the Company's 1998 Annual Report to Shareholders - -------------------------------------------------------------------------------- 21 Subsidiaries of the Company - -------------------------------------------------------------------------------- 23 Consent of Arthur Andersen LLP, Independent Public Accountants - -------------------------------------------------------------------------------- 27 Financial Data Schedule (for SEC use only) - --------------------------------------------------------------------------------
The following exhibit is incorporated by reference to the Company's Current Report on Form 8-K/A, filed on January 12, 1999:
- -------------------------------------------------------------------------------- EXHIBIT NO. DESCRIPTION - -------------------------------------------------------------------------------- 2.1 Purchase Agreement, by and among ChoicePoint Services Inc., Thomas C. Lund, The Lund 1997 GRAT A Irrevocable Trust, The Lund 1997 GRAT B Irrevocable Trust and Allen Road Investments, L.P. - --------------------------------------------------------------------------------
10 13 The following exhibit is incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997:
- -------------------------------------------------------------------------------- EXHIBIT NO. DESCRIPTION - -------------------------------------------------------------------------------- 10* Form of Employment Agreement between the Company and each of Derek V. Smith, Douglas C. Curling, David T. Lee and J. Michael de Janes - --------------------------------------------------------------------------------
The following exhibit is incorporated by reference to the Company's Form 8-A, filed on November 5, 1997:
- -------------------------------------------------------------------------------- EXHIBIT NO. DESCRIPTION - -------------------------------------------------------------------------------- 4.02 Rights Agreement, dated as of October 29, 1997, by and between ChoicePoint Inc. and SunTrust Bank, Atlanta - --------------------------------------------------------------------------------
The following exhibits are incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997:
- -------------------------------------------------------------------------------- EXHIBIT NO. DESCRIPTION - -------------------------------------------------------------------------------- 10.01* ChoicePoint Inc. 1997 Omnibus Stock Incentive Plan 10.03 Distribution Agreement, dated as of July 31, 1997, by and between Equifax Inc. and ChoicePoint Inc. 10.04 Employee Benefits Agreement, dated as of July 31, 1997, between Equifax Inc. and ChoicePoint Inc. 10.05 Transition Support Agreement, dated as of July 31, 1997, between Equifax Inc. and ChoicePoint Inc. 10.06 Intercompany Information Services Agreement, dated as of July 31, 1997, by Equifax Inc. and ChoicePoint Inc. 10.07 Tax Sharing and Indemnification Agreement, dated as of July 31, 1997, by and between Equifax Inc. and ChoicePoint Inc. 10.08 Intellectual Property Agreement dated as of July 31, 1997, by and between Equifax Inc. and ChoicePoint Inc. 10.10 Revolving Credit Agreement, dated as of August 5, 1997, among ChoicePoint Inc., the Lenders Listed Therein and Wachovia Bank, N.A. as Administrative Agent, and SunTrust Bank, Atlanta, as Documentation Agent 10.11(a) Master Agreement, dated as of July 31, 1997, among ChoicePoint Inc., SunTrust Banks, Inc. and SunTrust Bank, Atlanta, as Agent 10.11(b) Lease agreement, dated as of July 31, 1997, between ChoicePoint Inc. and SunTrust Banks, Inc. - --------------------------------------------------------------------------------
11 14
10.11(c) Georgia Lease Supplement, dated as of July 31, 1997, between ChoicePoint Inc. and SunTrust Banks, Inc. 10.11(d) Operative Guaranty, dated as of July 31, 1997, by ChoicePoint Inc. as Guarantor 10.11(e) Construction Agency Agreement, dated as of July 31, 1997, between SunTrust Banks, Inc. and ChoicePoint Inc. 10.12 Sublease Agreement, dated as of July 31, 1997, between Equifax Inc. and Equifax Services Inc. (for certain property and building located at 1600 Peachtree Street, NW, Atlanta, Georgia) 10.13 Sublease Agreement, dated as of July 31, 1997, between Equifax Inc. and Equifax Services Inc. (for certain property and building located at 1525 Windward Concourse, Alpharetta, Georgia [J.V. White Technology Center])
The following exhibits are incorporated by reference to the Company's Registration Statement on Form S-1, as amended (File No. 333-30297):
Exhibit No. Description - -------------------------------------------------------------------------------- 3.01 Articles of Incorporation of the Company, as amended 4.01 Form of Common Stock certificate 10.02 ChoicePoint Inc. 401(k) Profit Sharing Plan 10.09* Agreement, dated July 24, 1996, by and between Equifax Inc. and Dan Rocco, to be effective January 1, 1996 (relating to the compensation of Mr. Rocco)
- ----------------------- * Represents a management contract or compensatory plan, contract or arrangement. Copies of the Company's Form 10-K that are furnished pursuant to the written request of the Company's shareholders do not include the exhibits listed above. Any shareholder desiring copies of one or more of such exhibits should write to the Company's Director, Investor Relations, specifying the exhibit or exhibits requested. (b) Reports on Form 8-K On November 13, 1998, the Company filed a Current Report on Form 8-K, which was subsequently amended by a Current Report on Form 8-K/A, filed on January 12, 1999, reporting the acquisition of Customer Development Corporation and its affiliated companies. 12 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Alpharetta, State of Georgia, on March 26, 1999. CHOICEPOINT INC. By: /s/ Derek V. Smith ------------------------------------- Derek V. Smith President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Derek V. Smith President, Chief Executive March 26, 1999 - ---------------------- Officer and Director Derek V. Smith /s/ Douglas C. Curling Executive Vice President, March 26, 1999 - ---------------------- Chief Financial Officer Douglas C. Curling and Treasurer (Principal Financial and Accounting Officer) /s/ C. B. Rogers, Jr. - ---------------------- Chairman and Director March 29, 1999 C. B. Rogers, Jr. /s/ Ron D. Barbaro - ---------------------- Director March 26, 1999 Ron D. Barbaro /s/ James M. Denny - ---------------------- Director March 29, 1999 James M. Denny /s/ Tinsley H. Irvin - ---------------------- Director March 26, 1999 Tinsley H. Irvin /s/ Ned C. Lautenbach - ---------------------- Director March 29, 1999 Ned C. Lautenbach /s/ Julia B. North - ---------------------- Director March 29, 1999 Julia B. North /s/ Charles I. Story - ---------------------- Director March 26, 1999 Charles I. Story 13 EX-3.02 2 BYLAWS OF THE COMPANY 1 CHOICEPOINT INC. BYLAWS Effective as of October 23, 1998 2 CHOICEPOINT INC. -------- BYLAWS -------- CONTENTS
ARTICLE ONE MEETINGS OF THE SHAREHOLDERS 1 Section 1.1 Annual Meeting 1 Section 1.2 Special Meetings 1 Section 1.3 Notice of Meetings 1 Section 1.4 Voting Groups 1 Section 1.5 Quorum 2 Section 1.6 Vote Required for Action 2 Section 1.7 Adjournments 2 Section 1.8 Presiding Officer 2 Section 1.9 Voting of Shares 2 Section 1.10 Proxies 3 Section 1.11 Record Date 3 Section 1.12 Shareholder Proposals and Nominations 3 ARTICLE TWO BOARD OF DIRECTORS 5 Section 2.1 General 5 Section 2.2 Number of Directors and Term of Office 5 Section 2.3 Election of Directors 6 Section 2.4 Vacancies 6 Section 2.5 Term Limits 6 Section 2.6 Stock Ownership Requirement 7 Section 2.7 Meetings 7 Section 2.8 Special Meetings 7 Section 2.9 Notice of Meetings 7 Section 2.10 Quorum; Adjournments 7 Section 2.11 Vote Required for Action 7 Section 2.12 Action by Directors Without a Meeting 7
3 Section 2.13 Compensation of Directors 8 ARTICLE THREE ELECTIONS OF OFFICERS AND COMMITTEES 8 Section 3.1 Election of Officers 8 Section 3.2 Executive Committee 8 Section 3.3 Other Committees 9 ARTICLE FOUR OFFICERS 9 Section 4.1 Officers 9 Section 4.2 Compensation of Officers 9 Section 4.3 Chairman of the Board 10 Section 4.4 Vice Chairman of the Board 10 Section 4.5 Chief Executive Officer 10 Section 4.6 President 10 Section 4.7 Executive Vice Presidents 11 Section 4.8 Vice Presidents 11 Section 4.9 Treasurer 11 Section 4.10 Secretary 11 Section 4.11 Voting of Stock 12 ARTICLE FIVE INDEMNIFICATION 12 Section 5.1 Definitions 12 Section 5.2 Basic Indemnification Arrangement 13
- 3 - 4 Section 5.3 Advances for Expenses 14 Section 5.4 Court-Ordered Indemnification and Advances for Expenses 15 Section 5.5 Determination of Reasonableness of Expenses 15 Section 5.6 Indemnification of Employees and Agents 16 Section 5.7 Liability Insurance 16 Section 5.8 Witness Fees 16 Section 5.9 Report to Shareholders 16 Section 5.10 No Duplication of Payments 16 Section 5.11 Subrogation 17 Section 5.12 Contract Rights 17 Section 5.13 Amendments 17 ARTICLE SIX CAPITAL STOCK 17 Section 6.1 Direct Registration of Shares 17 Section 6.2 Certificates for Shares 18 Section 6.3 Transfer of Shares 18 Section 6.4 Duty of Company to Register Transfer 18 Section 6.5 Lost, Stolen or Destroyed Certificates 19
- 4 - 5 Section 6.6 Authorization to Issue Shares and Regulations Regarding Transfer and Registration 19 ARTICLE SEVEN DISTRIBUTIONS AND DIVIDENDS 19 Section 7.1 Authorization or Declaration 19 Section 7.2 Record Date with Regard to Distributions and Share Dividends 19 ARTICLE EIGHT MISCELLANEOUS 20 Section 8.1 Corporate Seal 20 Section 8.2 Inspection of Books and Records 20 Section 8.3 Conflict with Articles of Incorporation or Code 20 Section 8.4 Severability 20 ARTICLE NINE AMENDMENTS 20 Section 9.1 Amendments 20 ARTICLE TEN FAIR PRICE REQUIREMENTS 21 Section 10.1 Fair Price Requirements 21 ARTICLE ELEVEN BUSINESS COMBINATIONS 21 Section 11.1 Business Combinations 21 - 5 -
6 BYLAWS OF CHOICEPOINT INC. ------------------- ARTICLE ONE MEETINGS OF THE SHAREHOLDERS Section 1.1 Annual Meeting. The Annual Meeting of the Shareholders of the Company shall be held during the first five months after the end of each fiscal year of the Company at such time and place, within or without the State of Georgia, as shall be fixed by the Board of Directors, for the purpose of electing Directors and for the transaction of such other business as may be properly brought before the meeting. Section 1.2 Special Meetings Special meetings of the Shareholders may be held at the principal office of the Company in the State of Georgia or at such other place, within or without the State of Georgia, as may be named in the call therefor. Such special meetings may be called by the Chairman of the Board of Directors, the Vice Chairman, the Chief Executive Officer, the President, the Board of Directors by vote at a meeting, a majority of the Directors in writing without a meeting, or by unanimous call of the Shareholders. Section 1.3 Notice of Meetings. Unless waived in accordance with the Georgia Business Corporation Code as amended from time-to-time (the "Code"), a notice of each meeting of Shareholders stating the date, time and place of the meeting shall be given not less than 10 days nor more than 60 days before the date thereof to each Shareholder entitled to vote at that meeting. In the case of an Annual Meeting, the notice need not state the purpose or purposes of the meeting unless the Articles of Incorporation or the Code requires the purpose or purposes to be stated in the notice of the meeting. Any irregularity in such notice shall not affect the validity of the Annual Meeting or any action taken at such meeting. In the case of a special meeting of the Shareholders, the notice of meeting shall state the purpose or purposes for which the meeting is called, and only business within the purpose or purposes described in such notice may be conducted at the meeting. Section 1.4 Voting Groups. Voting group means all shares of one or more classes or series that are entitled to vote and be counted together collectively on a matter at a meeting of Shareholders. All shares entitled to vote generally on the matter are for that purpose a single 7 voting group. Section 1.5 Quorum. With respect to shares entitled to vote as a separate voting group on a matter at a meeting of Shareholders, the presence, in person or by proxy, of a majority of the votes entitled to be cast on the matter by the voting group shall constitute a quorum of that voting group for action on that matter unless the Articles of Incorporation or the Code provides otherwise. Once a share is represented for any purpose at a meeting, other than solely to object to holding the meeting or to transacting business at the meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of the meeting unless a new record date is or must be set for the adjourned meeting pursuant to Section 1.11 of these Bylaws. Section 1.6 Vote Required for Action. If a quorum exists, action on a matter (other than the election of Directors) is approved if the votes cast favoring the action exceed the votes cast opposing the action, unless the Articles of Incorporation, provisions of these Bylaws validly adopted by the Shareholders, or the Code requires a greater number of affirmative votes. If the Articles of Incorporation or the Code provide for voting by two or more voting groups on a matter, action on that matter is taken only when voted upon by each of those voting groups counted separately. Section 1.7 Adjournments. Whether or not a quorum is present to organize a meeting, any meeting of Shareholders (including an adjourned meeting) may be adjourned by the holders of a majority of the voting shares represented at the meeting to reconvene at a specific time and place, but no later than 120 days after the date fixed for the original meeting unless the requirements of the Code concerning the selection of a new record date have been met. Section 1.8 Presiding Officer. The Chairman of the Board shall call the meeting of the Shareholders to order and shall act as Chairman of such meeting. In the absence of the Chairman of the Board, the meeting shall be called to order by any one of the following officers then present, in the following order: the Vice Chairman of the Board, the Chief Executive Officer, the President, the senior Executive Vice President, the next senior Executive Vice President, or any one of the Vice Presidents, who shall act as chairman of the meeting. The Secretary of the Company shall act as secretary of the meeting of the Shareholders. In the absence of the Secretary, at any meeting of the Shareholders, the presiding officer may appoint any person to act as Secretary of the meeting. Section 1.9 Voting of Shares. Unless the Articles of Incorporation or the Code provides - 8 - 8 otherwise, each outstanding share having voting rights shall be entitled to one vote on each matter submitted to a vote at a meeting of Shareholders. Section 1.10 Proxies. A Shareholder entitled to vote pursuant to Section 1.9 may vote in person or by proxy pursuant to an appointment of proxy executed in writing by the Shareholder. An appointment of proxy shall be valid for only one meeting to be specified therein, and any adjournments of such meeting, but shall not be valid for more than eleven months unless expressly provided therein. Appointments of proxy shall be dated and filed with the records of the meeting to which they relate. If the validity of any appointment of proxy is questioned, it must be submitted for examination to the Secretary of the Company or to a proxy officer or committee appointed by the Board of Directors. The Secretary or, if appointed, the proxy officer or committee shall determine the validity or invalidity of any appointment of proxy submitted, and reference by the Secretary in the minutes of the meeting to the regularity of an appointment of proxy shall be received as prima facie evidence of the facts stated for the purpose of establishing the presence of a quorum at the meeting and for all other purposes. Section 1.11 Record Date. For the purpose of determining Shareholders entitled to notice of a meeting of the Shareholders, to demand a special meeting, to vote, or to take any other action, the Board of Directors may fix a future date as the record date, which date shall be not more than 70 days prior to the date on which the particular action, requiring a determination of the Shareholders, is to be taken. A determination of the Shareholders entitled to notice of or to vote at a meeting of the Shareholders is effective for any adjournment of the meeting unless the Board of Directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. If no record date is fixed by the Board of Directors, the 70th day preceding the date on which the particular action, requiring a determination of the Shareholders, is to be taken shall be the record date for that purpose. Section 1.12 Shareholder Proposals and Nominations. (a) No proposal for a Shareholder vote (other than a proposal that appears in the Company's proxy statement after compliance with the procedures set forth in Securities and Exchange Commission Rule 14a-8) shall be submitted by a Shareholder (a "Shareholder Proposal") to the Company's Shareholders unless the Shareholder submitting such proposal (the "Proponent") shall have filed a written notice setting forth with particularity (i) the names and business addresses of the Proponent and all natural persons, corporations, partnerships, trusts or any other type of legal entity or recognized ownership vehicle (collectively, a "Person") acting in concert with the Proponent; (ii) the name and address of the Proponent and the Persons identified in clause (i), as they appear on the Company's books (if they so appear); (iii) the class and number of shares of - 9 - 9 the Company beneficially owned by the Proponent and by each Person identified in clause (i); (iv) a description of the Shareholder Proposal containing all material information relating thereto; and (v) such other information as the Board of Directors reasonably determines is necessary or appropriate to enable the Board of Directors and Shareholders of the Company to consider the Shareholder Proposal. The presiding officer at any meeting of the Shareholders may determine that any Shareholder Proposal was not made in accordance with the procedures prescribed in these Bylaws or is otherwise not in accordance with law, and if it is so determined, such officer shall so declare at the meeting and the Shareholder Proposal shall be disregarded. (b) Only persons who are selected and recommended by the Board of Directors or the committee of the Board of Directors designated to make nominations, or who are nominated by Shareholders in accordance with the procedures set forth in this Section 1.12, shall be eligible for election, or qualified to serve, as Directors. Nominations of individuals for election to the Board of Directors of the Company at any Annual Meeting or any special meeting of Shareholders at which Directors are to be elected may be made by any Shareholder of the Company entitled to vote for the election of Directors at that meeting by compliance with the procedures set forth in this Section 1.12. Nominations by Shareholders shall be made by written notice (a "Nomination Notice"), which shall set forth (i) as to each individual nominated, (A) the name, date of birth, business address and residence address of such individual; (B) the business experience during the past five years of such nominee, including his or her principal occupations and employment during such period, the name and principal business of any corporation or other organization in which such occupations and employment were carried on, and such other information as to the nature of his or her responsibilities and level of professional competence as may be sufficient to permit assessment of such prior business experience; (C) whether the nominee is or has ever been at any time a director, officer or owner of five percent or more of any class of capital stock, partnership interests or other equity interest of any corporation, partnership or other entity; (D) any directorships held by such nominee in any company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940, as amended; and (E) whether such nominee has ever been convicted in a criminal proceeding or has ever been subject to a judgment, order, finding or decree of any federal, state or other governmental entity, concerning any violation of federal, state or other law, or any proceeding in bankruptcy, which conviction, order, finding, decree or proceeding may be material to an evaluation of the ability or integrity of the nominee; and (ii) as to the Person submitting the Nomination Notice and any Person acting in concert with such Person, (X) the name and business address of such Person, (Y) the name and address of such Person as they appear on the Company's books (if they so appear), and (Z) the class and number of shares of the Company that are beneficially owned by - 10 - 10 such Person. A written consent to being named in a proxy statement as a nominee, and to serve as a Director if elected, signed by the nominee, shall be filed with any Nomination Notice. If the presiding officer at any meeting of the Shareholders determines that a nomination was not made in accordance with the procedures prescribed by these Bylaws, such officer shall so declare to the meeting and the defective nomination shall be disregarded. (c) If a Shareholder Proposal or Nomination Notice is to be submitted at an Annual Meeting of the Shareholders, it shall be delivered to the Secretary of the Company at the principal executive office of the Company within the time period specified in Securities and Exchange Commission Rule 14a-8(a)(3)(i). Subject to Section 1.3 as to matters that may be acted upon at a special meeting of the Shareholders, if a Shareholder Proposal or Nomination Notice is to be submitted at a special meeting of the Shareholders, it shall be delivered to the Secretary of the Company at the principal executive office of the Company no later than the close of business on the earlier of (i) the 30th day following the public announcement that a matter will be submitted to a vote of the Shareholders at a special meeting, or (ii) the 15th day following the day on which notice of the special meeting was given. ARTICLE TWO BOARD OF DIRECTORS Section 2.1 General. Subject to the Articles of Incorporation, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed under the direction of, the Board of Directors. In addition to the powers and authority expressly conferred upon it by these Bylaws and the Articles of Incorporation, the Board of Directors may exercise all such lawful acts and things as are not by law, by the Articles of Incorporation or by these Bylaws directed or required to be exercised or done by the Shareholders. Section 2.2 Number of Directors and Term of Office. The number of Directors shall be not less than seven, nor more than fifteen Shareholders, and shall be fixed within such range by the Board of Directors. The Directors shall be divided into three classes, designated as Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of Directors constituting the entire Board of Directors. At each Annual Meeting of the Shareholders, successors to the class of Directors whose term expires at that Annual Meeting of Shareholders shall be elected for a three-year term. If the number of Directors has changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of - 11 - 11 Directors in each class as nearly equal as possible, and any additional Director of any class elected to the Board of Directors to fill a vacancy resulting from an increase in such a class shall hold office for a term that shall coincide with the remaining term of that class, unless otherwise required by law, but in no case shall a decrease in the number of Directors for a class shorten the term of an incumbent Director. A Director shall hold office until the Annual Meeting of Shareholders for the year in which such Director's term expires and until his or her successor shall be elected and qualified, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Section 2.3 Election of Directors. A Director shall be elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting of Shareholders at which a quorum is present. Section 2.4 Vacancies. Any vacancy on the Board of Directors that results from an increase in the number of Directors or from prior death, resignation, retirement, disqualification or removal from office of a Director shall be filled by a majority of the Board of Directors then in office, though less than a quorum, or by the sole remaining Director. Any Director elected to fill a vacancy resulting from prior death, resignation, retirement, disqualification or removal from office of a director, shall have the same remaining term as that of his or her predecessor. Section 2.5 Term Limits. The Chairman of the Board may serve as a Director until reaching 70 years of age. Any other Director reaching 70 years of age (or 65 years of age for Directors, other than Chairman of the Board, who are also employees of the Company) or who ceases to continue a regular business relationship (as defined below) shall automatically retire from the Board, except that a non-employee Director who ceases to continue a regular business relationship may continue serving as a Director until the next Annual Meeting of the Shareholders, or 70 years of age, whichever first occurs. Notwithstanding the preceding, a non-employee Director may, at the request of the Chairman and if ratified by the Board, continue to serve until age 70 if the Director continues in a position or business activity that the Board determines would be of substantial benefit to the Company. For purposes of this Section 2.5, the expression "regular business relationship" means a relationship as an employee, consultant or officer of a substantial business, professional or educational organization, which requires exercise of business judgment on a regular basis, and which is not lower in seniority than the position with such organization occupied by the Director at the time of the Director's first election to the Board of Directors of the Company. - 12 - 12 Section 2.6 Stock Ownership Requirement. Every Director shall be a Shareholder of the Company. Directors shall serve for the terms for which they are elected and until their successors shall have been duly chosen, unless any such term is sooner ended as herein permitted; provided, however, that if a Director ceases to be a Shareholder, the disposition of the stock shall constitute a resignation of the Director's office as a Director. Section 2.7 Meetings. Regular meetings of the Board of Directors shall be held at such times as the Board of Directors may determine from time to time. Section 2.8 Special Meetings. Special meetings of the Board of Directors shall be held whenever called by the direction of the Chairman of the Board, or in his or her absence, by the Vice Chairman, or in his or her absence, by either the Chief Executive Officer or the President. Special meetings of the Board may also be called by one-third of the Directors then in office. Unless otherwise indicated in the notice thereof, any and all business of the Company may be transacted at any special meeting of the Board of Directors. Section 2.9 Notice of Meetings. Unless waived in accordance with the Code, notice of each regular or special meeting of the Board of Directors, stating the date, time and place of the meeting, shall be given not less than two days before the date thereof to each Director. Section 2.10 Quorum; Adjournments. A majority of the Board of Directors shall constitute a quorum for the transaction of business. Whether or not a quorum is present to organize a meeting, any meeting of Directors (including a reconvened meeting) may be adjourned by a majority of the Directors present, to reconvene within 120 days at a specific time and place. At any adjourned meeting, any business may be transacted that could have been transacted at the meeting prior to adjournment. If notice of the original meeting was properly given, it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted if the date, time and place of the adjourned meeting are announced at the meeting prior to adjournment. Section 2.11 Vote Required for Action. If a quorum is present when a vote is taken, the affirmative vote of a majority of Directors present is the act of the Board of Directors unless the Code, the Articles of Incorporation, or these Bylaws require the vote of a greater number of Directors. Section 2.12 Action by Directors Without a Meeting. Any action required or permitted to be - 13 - 13 taken at any meeting of the Board of Directors or any action that may be taken at a meeting of a committee of the Board of Directors may be taken without a meeting if the action is taken by all the members of the Board of Directors or of the committee, as the case may be. The action must be evidenced by one or more written consents describing the action taken, signed by each Director or each Director serving on the committee, as the case may be, and delivered to the Company for inclusion in the minutes or filing with the corporate records. Section 2.13 Compensation of Directors. Directors who are salaried officers or employees of the Company shall receive no additional compensation for service as a Director or as a member of a committee of the Board of Directors. Each Director who is not a salaried officer or employee of the Company shall be compensated as established from time-to-time by the Board of Directors. ARTICLE THREE ELECTIONS OF OFFICERS AND COMMITTEES Section 3.1 Election of Officers. At the April meeting of the Board of Directors in each year, or, if not done at that time, then at any subsequent meeting, the Board of Directors shall proceed to the election of executive officers of the Company, and of the Executive Committee, as hereinafter provided for. Section 3.2 Executive Committee. The Board of Directors may elect from their members an Executive Committee which shall include the Chairman of the Board, the Chief Executive Officer, and the President. The Executive Committee shall consist of not less than three nor more than five members, the precise number to be fixed by resolution of the Board of Directors from time to time. Each member shall serve for one year and until his or her successor shall have been elected, unless that term is sooner terminated by the Board of Directors. The Board of Directors shall fill the vacancies in the Executive Committee by election. The Chairman of the Board shall serve as Chairman of the Executive Committee, if so designated by the Board of Directors. All action by the Executive Committee shall be reported to the Board of Directors at its meeting next succeeding such action, and shall be subject to revision or alteration by the Board - 14 - 14 of Directors, provided that no rights or interests of third parties shall be affected by any such revision or alteration. The Executive Committee shall fix its own rules and proceedings, and shall meet where and as provided by such rules or by resolution of the Board of Directors. In every case, the affirmative vote of a majority of all the members of the Committee shall be necessary to its adoption of any resolution. Except as prohibited by the Code, during the interval between the meetings of the Board of Directors, the Executive Committee shall possess and may exercise all the powers of the Board in the management of all the affairs of the Company, including the making of contracts, the purchase and sale of property, the execution of legal instruments, and all other matters in which specific direction shall not have been given by the Board of Directors. Section 3.3 Other Committees. The Board of Directors is authorized and empowered to appoint from its own body or from the officers of the Company, or both, such other committees as it may think best, and may delegate to or confer upon such committees all or such part of its powers except as prohibited by the Code, and may prescribe the exercise thereof as it may deem proper. ARTICLE FOUR OFFICERS Section 4.1 Officers. The officers of the Company, unless otherwise provided by the Board from time to time, shall consist of the following: a Chairman of the Board, a Chief Executive Officer, a President, one or more Vice Presidents (one or more of whom may be designated Executive Vice President, one or more of whom may be designated Corporate Vice President and one or more of whom may be designated Senior Vice President), a Treasurer, and a Secretary, who shall be elected by the Board of Directors. The Board of Directors may from time to time elect a Vice Chairman of the Board. The Board of Directors, or any officer to whom the Board may delegate such authority, may also appoint such other officers as it or they may see fit, and may prescribe their respective duties. All officers, however elected or appointed, may be removed with or without cause by the Board of Directors, and any officer appointed by another officer may also be removed, with or without cause, by the appointing officer or any officer senior to the appointing officer. Any two or more of the offices may be filled by the same person. Section 4.2 Compensation of Officers. The Executive Committee shall approve salaries of - 15 - 15 all elected officers and such other employees as may be designated by the Executive Committee, except that salaries of members of the Executive Committee shall be fixed by the Management Compensation Committee of the Board of Directors or by the Board of Directors. Section 4.3 Chairman of the Board. The Chairman of the Board of Directors shall have such powers and duties as from time to time may be assigned by the Board of Directors and serve as Chief Executive Officer of the Company if so designated by the Board of Directors. The Chairman of the Board shall preside at all meetings of the Shareholders and shall preside at all meetings of the Board of Directors and the Executive Committee. Except where by law the signature of the Chief Executive Officer or President is required, the Chairman of the Board shall have the same power as the Chief Executive Officer or President to sign all authorized certificates, contracts, bonds, deeds, mortgages, and other instruments. Section 4.4 Vice Chairman of the Board. If the Chairman of the Board is not designated Chief Executive Officer by the Board of Directors, then, if so designated by the Board of Directors, the Vice Chairman shall serve as Chief Executive Officer. It shall be the duty of the Vice Chairman of the Board, in the absence of the Chairman of the Board, to preside at meetings of the Shareholders, at meetings of the Directors, and at meetings of the Executive Committee. The Vice Chairman shall do and perform all acts incident to the office of Vice Chairman and, if so designated, those of Chief Executive Officer, subject to the approval and direction of the Board of Directors. Section 4.5 Chief Executive Officer. The Chief Executive Officer shall direct the business and policies of the Company and shall have such other powers and duties as from time to time may be assigned by the Board of Directors. In the event of a vacancy in the office of Chairman and Vice Chairman of the Board or during the absence or disability of the Chairman and the Vice Chairman, the Chief Executive Officer shall have all of the rights, powers and authority given hereunder to the Chairman of the Board. The Chief Executive Officer may sign all authorized certificates, contracts, bonds, deeds, mortgages and other instruments, except in cases in which the signing thereof shall have been expressly delegated to some other officer or agent of the Company. In general, the Chief Executive Officer shall have the usual powers and duties incident to the office of a Chief Executive Officer of a corporation and such other powers and duties as from time to time may be assigned by the Board of Directors or Chairman of the Board. Section 4.6 President. The President shall be the Chief Operating Officer of the Company - 16 - 16 and shall have general charge of the business of the Company subject to the specific direction and approval of the Board of Directors or its Chairman or Vice Chairman or the Executive Committee. The President shall also serve as Chief Executive Officer of the Company if so designated by the Board of Directors. In the event of a vacancy in the office of Chairman and Vice Chairman of the Board or during the absence or disability of both the Chairman, the Vice Chairman, and the Chief Executive Officer, the President shall serve as Chief Executive Officer and shall have all of the rights, powers and authority given hereunder to the Chairman of the Board. The President may sign all authorized certificates, contracts, bonds, deeds, mortgages and other instruments, except in cases in which the signing thereof shall have been expressly delegated to some other officer or agent of the Company. In general, the President shall have the usual powers and duties incident to the office of a president of a corporation and such other powers and duties as from time to time may be assigned by the Board or Chairman or Vice Chairman of the Board. Section 4.7 Executive Vice Presidents. Each shall have authority, on behalf of the Company, to execute, approve, or accept agreements for service, bids, or other contracts, and shall sign such other instruments as each is authorized or directed to sign by the Board of Directors or its Committee or by the Chief Executive Officer or the President. Each shall do and perform all acts incident to the office of the Executive Vice President of the Company or as may be directed by its Board of Directors or its Committee or the Chief Executive Officer or the President. Section 4.8 Vice Presidents. There shall be one or more Vice Presidents of the Company, as the Board of Directors may from time to time elect. Each Vice President shall have such power and perform such duties as may be assigned by or under the authority of the Board of Directors. Section 4.9 Treasurer. The Treasurer shall be responsible for the custody of all funds and securities belonging to the Company and for the receipt, deposit or disbursement of funds and securities under the direction of the Board of Directors. The Treasurer shall cause to be maintained full and true accounts of all receipts and disbursements and shall make reports of the same to the Board of Directors, the Chief Executive Officer, and the President upon request. The Treasurer shall perform all duties as may be assigned from time to time by the Board of Directors. Section 4.10 Secretary. The Secretary shall be responsible for preparing minutes of the acts and proceedings of all meetings of the Shareholders and of the Board of Directors and any - 17 - 17 committees thereof. The Secretary shall have authority to give all notices required by law or these Bylaws, and shall be responsible for the custody of the corporate books, records, contracts and other documents. The Secretary may affix the corporate seal to any lawfully executed documents and shall sign any instruments as may require the Secretary's signature. The Secretary shall authenticate records of the Company and shall perform whatever additional duties and have whatever additional powers the Board of Directors may from time to time assign. In the absence or disability of the Secretary or at the direction of the Chief Executive Officer, any Assistant Secretary may perform the duties and exercise the powers of the Secretary. Section 4.11 Voting of Stock. Unless otherwise ordered by the Board of Directors or Executive Committee, the Chairman of the Board, the Vice Chairman, the Chief Executive Officer, the President or any Executive Vice President of the Company shall have full power and authority in behalf of the Company to attend and to act and to vote at any meetings of shareholders of any corporation in which the Company may hold stock, and at such meetings may possess and shall exercise any and all rights and powers incident to the ownership of such stock which such owner thereof (the Company) might have possessed and exercised if present. The Board of Directors or Executive Committee, by resolution from time to time, may confer like powers upon any other person or persons. ARTICLE FIVE INDEMNIFICATION Section 5.1 Definitions. As used in this Article, the term: (a) "Company" includes any domestic or foreign predecessor entity of the Company in a merger or other transaction in which the predecessor's existence ceased upon consummation of the transaction. (b) "Director" or "Officer" means an individual who is or was a member of the Board of Directors or an officer elected by the Board of Directors, respectively, or who, while a Director or Officer, is or was serving at the Company's request as a director, officer, partner, trustee, employee, or agent of another domestic or foreign corporation, partnership, joint venture, trust, employee benefit plan, or other entity. A Director or Officer is considered to be serving an employee benefit plan at the Company's request if his or her duties to the Company also - 18 - 18 impose duties on, or otherwise involve services by, the Director or Officer to the plan or to participants in or beneficiaries of the plan. "Director" or "Officer" includes, unless the context otherwise requires, the estate or personal representative of a Director or Officer. (c) "Disinterested Director" or "Disinterested Officer" means a Director or Officer, respectively who at the time of an evaluation referred to in subsection 5.5(b) is not: (1) A Party to the Proceeding; or (2) An individual having a familial, financial, professional, or employment relationship with the person whose advance for Expenses is the subject of the decision being made with respect to the Proceeding, which relationship would, in the circumstances, reasonably be expected to exert an influence on the Director's or Officer's judgment when voting on the decision being made. (d) "Expenses" includes counsel fees. (e) "Liability" means the obligation to pay a judgment, settlement, penalty, fine (including an excise tax assessed with respect to an employee benefit plan), and reasonable Expenses incurred with respect to a Proceeding. (f) "Party" includes an individual who was, is, or is threatened to be made a named defendant or respondent in a Proceeding. (g) "Proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, arbitrative or investigative and whether formal or informal. (h) "Reviewing Party" shall mean the person or persons making the determination as to reasonableness of Expenses pursuant to Section 5.5 of this Article, and shall not include a court making any determination under this Article or otherwise. - 19 - 19 Section 5.2 Basic Indemnification Arrangement. (a) The Company shall indemnify an individual who is a Party to a Proceeding because he or she is or was a Director or Officer against Liability incurred in the Proceeding; provided, however, that the Company shall not indemnify a Director or Officer under this Article for any Liability incurred in a Proceeding in which the Director or Officer is adjudged liable to the Company or is subjected to injunctive relief in favor of the Company: (1) For any appropriation, in violation of his or her duties, of any business opportunity of the Company; (2) For acts or omissions which involve intentional misconduct or a knowing violation of law; (3) For the types of liability set forth in Section 14-2-832 of the Code; or (4) For any transaction from which he or she received an improper personal benefit. (b) If any person is entitled under any provision of this Article to indemnification by the Company for some portion of Liability incurred, but not the total amount thereof, the Company shall indemnify such person for the portion of such Liability to which such person is entitled. Section 5.3 Advances for Expenses. (a) The Company shall, before final disposition of a Proceeding, advance funds to pay for or reimburse the reasonable Expenses incurred by a Director or Officer who is a Party to a Proceeding because he or she is a Director or Officer if he or she delivers to the Company: (1) A written affirmation of his or her good faith belief that his or her conduct does not constitute behavior of the kind described in subsection 5.2(a) above; and (2) His or her written undertaking (meeting the qualifications set forth below - 20 - 20 in subsection 5.3(b)) to repay any funds advanced if it is ultimately determined that he or she is not entitled to indemnification under this Article or the Code. (b) The undertaking required by subsection 5.3(a)(2) above must be an unlimited general obligation of the proposed indemnitee but need not be secured and shall be accepted without reference to the financial ability of the proposed indemnitee to make repayment. If a Director or Officer seeks to enforce his or her rights to indemnification in a court pursuant to Section 5.4 below, such undertaking to repay shall not be applicable or enforceable unless and until there is a final court determination that he or she is not entitled to indemnification, as to which all rights of appeal have been exhausted or have expired. Section 5.4 Court-Ordered Indemnification and Advances for Expenses. A Director or Officer who is a Party to a Proceeding shall have the rights to court-ordered indemnification and advances for expenses as provided in the Code. Section 5.5 Determination of Reasonableness of Expenses. (a) The Company acknowledges that indemnification of a Director or Officer under Section 5.2 has been pre-authorized by the Company as permitted by Section 14-2-859(a) of the Code, and that pursuant to Section 14-2-856 of the Code, no determination need be made for a specific Proceeding that indemnification of the Director or Officer is permissible in the circumstances because he or she has met a particular standard of conduct. Nevertheless, except as set forth in subsection 5.5(b) below, evaluation as to reasonableness of Expenses of a Director or Officer for a specific Proceeding shall be made as follows: (1) If there are two or more Disinterested Directors, by the Board of Directors of the Company by a majority vote of all Disinterested Directors (a majority of whom shall for such purpose constitute a quorum) or by a majority of the members of a committee of two or more Disinterested Directors appointed by such a vote; or (2) If there are fewer than two Disinterested Directors, by the Board of Directors (in which determination Directors who do not qualify as Disinterested Directors may participate); or - 21 - 21 (3) By the Shareholders, but shares owned by or voted under the control of a Director or Officer who at the time does not qualify as a Disinterested Director or Disinterested Officer may not be voted on the determination. (b) Notwithstanding the requirement under subsection 5.5(a) that the Reviewing Party evaluate the reasonableness of Expenses claimed by the proposed indemnitee, any Expenses claimed by the proposed indemnitee shall be deemed reasonable if the Reviewing Party fails to make the evaluation required by subsection 5.5(a) within sixty (60) days following the proposed indemnitee's written request for indemnification or advance for Expenses. Section 5.6 Indemnification of Employees and Agents. The Company may indemnify and advance Expenses under this Article to an employee or agent of the Company who is not a Director or Officer to the same extent and subject to the same conditions that a Georgia corporation could, without shareholder approval under Section 14-2-856 of the Code, indemnify and advance Expenses to a Director, or to any lesser extent (or greater extent if permitted by law) determined by the Chief Executive Officer, in each case consistent with public policy. Section 5.7 Liability Insurance. The Company may purchase and maintain insurance on behalf of an individual who is a Director, Officer, employee or agent of the Company or who, while a Director, Officer, employee or agent of the Company, serves at the Company's request as a director, officer, partner, trustee, employee or agent of another domestic or foreign corporation, partnership, joint venture, trust, employee benefit plan, or other entity against Liability asserted against or incurred by him or her in that capacity or arising from his or her status as a Director, Officer, employee, or agent, whether or not the corporation would have power to indemnify or advance Expenses to him or her against the same Liability under this Article or the Code. Section 5.8 Witness Fees. Nothing in this Article shall limit the Company's power to pay or reimburse Expenses incurred by a person in connection with his or her appearance as a witness in a Proceeding at a time when he or she is not a Party. Section 5.9 Report to Shareholders. To the extent and in the manner required by the Code from time to time, if the Company indemnifies or advances Expenses to a Director or Officer in connection with a Proceeding by or in the right of the Company, the Company shall report the - 22 - 22 indemnification or advance to the Shareholders. Section 5.10 No Duplication of Payments. The Company shall not be liable under this Article to make any payment to a person hereunder to the extent such person has otherwise actually received payment (under any insurance policy, agreement or otherwise) of the amounts otherwise payable hereunder. Section 5.11 Subrogation. In the event of payment under this Article, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of the indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. Section 5.12 Contract Rights. The right to indemnification and advancement of Expenses conferred hereunder to Directors and Officers shall be a contract right and shall not be affected adversely to any Director or Officer by any amendment of these Bylaws with respect to any action or inaction occurring prior to such amendment; provided, however, that this provision shall not confer upon any indemnitee or potential indemnitee (in his or her capacity as such) the right to consent or object to any subsequent amendment of these Bylaws. Section 5.13 Amendments. It is the intent of the Company to indemnify and advance Expenses to its Directors and Officers to the full extent permitted by the Code, as amended from time to time. To the extent that the Code is hereafter amended to permit a Georgia business corporation to provide to its directors greater rights to indemnification or advancement of Expenses than those specifically set forth hereinabove, this Article shall be deemed amended to require such greater indemnification or more liberal advancement of Expenses to the Company's Directors and Officers, in each case consistent with the Code as so amended from time to time. No amendment, modification or rescission of this Article, or any provision hereof, the effect of which would diminish the rights to indemnification or advancement of Expenses as set forth herein shall be effective as to any person with respect to any action taken or omitted by such person prior to such amendment, modification or rescission. ARTICLE SIX CAPITAL STOCK Section 6.1 Direct Registration of Shares. The Company may, with the Board of Directors' - 23 - 23 approval, participate in a direct registration system approved by the Securities and Exchange Commission and by the New York Stock Exchange or any securities exchange on which the stock of the Company may from time to time be traded, whereby shares of capital stock of the Company may be registered in the holder's name in uncertificated, book-entry form on the books of the Company. Section 6.2 Certificates for Shares. Except for shares represented in book-entry form under a direct registration system contemplated in Section 6.1, the interest of each Shareholder in the Company shall be evidenced by a certificate or certificates representing shares of the Company which shall be in such form as the Board of Directors from time to time may adopt. Share certificates shall be numbered consecutively, shall be in registered form, shall indicate the date of issuance, the name of the Company and that it is organized under the laws of the State of Georgia, the name of the Shareholder, and the number and class of shares and the designation of the series, if any, represented by the certificate. Each certificate shall be signed by the Chairman of the Board, the President or other Chief Executive Officer and by a Vice President or the Secretary or may be signed with the facsimile signatures of the Chairman of the Board, the President or other Chief Executive Officer and by a Vice President or the Secretary, and in all cases a stock certificate must also be signed by the transfer agent for the stock. The corporate seal need not be affixed. Section 6.3 Transfer of Shares. The Board of Directors shall have authority to appoint a transfer agent and/or a registrar for the shares of its capital stock, and to empower them or either of them in such manner and to such extent as it may deem best, and to remove such agent or agents from time to time, and to appoint another agent or other agents. Transfers of shares shall be made upon the transfer books of the Company, kept at the office of the transfer agent designated to transfer the shares, only upon direction of the registered owner, or by an attorney lawfully constituted in writing. With respect to certificated shares, before a new certificate is issued, the old certificate shall be surrendered for cancellation or, in the case of a certificate alleged to have been lost, stolen, or destroyed, the requirements of Section 6.5 of these Bylaws shall have been met. Transfer of shares shall be in accordance with such reasonable rules and regulations as may be made from time to time by the Board of Directors. Section 6.4 Duty of Company to Register Transfer. Notwithstanding any of the provisions of Section 6.3 of these Bylaws, the Company is under a duty to register the transfer of its shares only if: - 24 - 24 (a) the certificate or transfer instruction is endorsed by the appropriate person or persons; and (b) reasonable assurance is given that the endorsement or affidavit is genuine and effective; and (c) the Company either has no duty to inquire into adverse claims or has discharged that duty; and (d) the requirements of any applicable law relating to the collection of taxes have been met; and (e) the transfer in fact is rightful or is to a bona fide purchaser. Section 6.5 Lost, Stolen or Destroyed Certificates. Any person claiming a share certificate to be lost, stolen or destroyed shall make an affidavit or affirmation of the fact in the manner required by the Company and, if the Company requires, shall give the Company a bond of indemnity in form and amount, and with one or more sureties satisfactory to the Company, as the Company may require, whereupon an appropriate new certificate may be issued in lieu of the one alleged to have been lost, stolen or destroyed. Section 6.6 Authorization to Issue Shares and Regulations Regarding Transfer and Registration. The Board of Directors and the Executive Committee shall have power and authority to issue shares of capital stock of the Company and to make all such rules and regulations as, respectively, they may deem expedient concerning the transfer and registration of shares of the capital stock of the Company. ARTICLE SEVEN DISTRIBUTIONS AND DIVIDENDS Section 7.1 Authorization or Declaration. Unless the Articles of Incorporation provide otherwise, the Board of Directors from time to time in its discretion may authorize or declare distributions or share dividends in accordance with the Code. Section 7.2 Record Date with Regard to Distributions and Share Dividends. For the purpose of determining Shareholders entitled to a distribution (other than one involving a purchase, - 25 - 25 redemption, or other reacquisition of the Company's shares) or a share dividend, the Board of Directors may fix a date as the record date. If no record date is fixed by the Board of Directors, the record date shall be determined in accordance with the provisions of the Code. ARTICLE EIGHT MISCELLANEOUS Section 8.1 Corporate Seal. If the Board of Directors determines that there should be a corporate seal for the Company, it shall be in the form as the Board of Directors may from time to time determine. Section 8.2 Inspection of Books and Records. The Board of Directors shall have power to determine which accounts, books and records of the Company shall be opened to the inspection of Shareholders, except those as may by law specifically be made open to inspection, and shall have power to fix reasonable rules and regulations not in conflict with the applicable law for the inspection of accounts, books and records which by law or by determination of the Board of Directors shall be open to inspection. Without the prior approval of the Board of Directors in its discretion, the right of inspection set forth in Section 14-2-1602(c) of the Code shall not be available to any Shareholder owning two percent or less of the shares outstanding. Section 8.3 Conflict with Articles of Incorporation or Code. To the extent that any provision of these Bylaws conflicts with any provision of the Articles of Incorporation, such provision of the Articles of Incorporation shall govern. To the extent that any provision of these Bylaws conflicts with any non-discretionary provision of the Code, such provision of the Code shall govern. Section 8.4 Severability. In the event that any of the provisions of these Bylaws (including any provision within a single section, subsection, division or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, the remaining provisions of these Bylaws shall remain enforceable to the fullest extent permitted by law. - 26 - 26 ARTICLE NINE AMENDMENTS Section 9.1 Amendments. Subject, in each case, to the Articles of Incorporation: (a) the Board of Directors shall have power to alter, amend or repeal these Bylaws or adopt new Bylaws; and (b) any Bylaws adopted by the Board of Directors may be altered, amended or repealed, and new Bylaws may be adopted, by the Shareholders, as provided by the Code; and (c) Articles Ten and Eleven of these Bylaws shall be amended only in the manner provided by relevant provisions of the Code. ARTICLE TEN FAIR PRICE REQUIREMENTS Section 10.1 Fair Price Requirements. All of the requirements of Article 11, Part 2, of the Code, included in Sections 14-2-1110 through 1113 (and any successor provisions thereto), shall be applicable to the Company in connection with any business combination, as defined therein, with any interested shareholder, as defined therein. ARTICLE ELEVEN BUSINESS COMBINATIONS Section 11.1 Business Combinations. All of the requirements of Article 11, Part 3, of the Code, included in Sections 14-2-1131 through 1133 (and any successor provisions thereto), shall be applicable to the Company in connection with any business combination, as defined therein, with any interested shareholder, as defined therein. - 27 - EX-13 3 ANNUAL REPORT 1 [SELECTED PAGES FROM THE COMPANY'S 1998 ANNUAL REPORT TO SHAREHOLDERS] EXHIBIT 13 2 FINANCIAL HIGHLIGHTS
(thousands of dollars) 1998 1997 1996 1995 1994 ----------------------------------------------------------------------------------------------------------- Operating revenue $406,475(*) $417,321 $366,481 $328,990 $284,566 Operating income before unusual items and restructuring provision 65,166 52,286 47,611 41,078 16,577 Operating income 61,408 46,077 47,611 31,928 16,577 Net income 35,419 28,944 23,280 14,865 6,612 Total assets 534,199 359,971 301,824 200,779 193,820 Long-term debt, less current maturities 191,697 95,457 1,051 -- 5 Total shareholders' equity 159,572 127,745 196,327 104,641 98,028 EBITDA(**) 101,247 87,753 66,265 45,249 26,610 Employees 3,500 3,700 4,600 4,400 4,600
* 1998 comparable revenues were impacted by the December 1997 divestiture of the paramedical services business, which accounted for approximately $58.8 million in 1997 revenues; and by revenues from acquisitions of approximately $15.9 million in 1998. **EBITDA represents earnings before interest, taxes, depreciation and amortization. 3 19 ChoicePoint Management's Discussion and Analysis of Financial Condition and Results of Operations Introduction ChoicePoint is a leading provider of risk management and fraud prevention information and related technology solutions to the insurance industry. The Company also offers risk management and fraud prevention solutions to organizations in other industries. ChoicePoint was formed as a result of the spinoff of the Insurance Services Group of Equifax Inc. into a separate, public company, in August of 1997 (the "Spinoff"). Since its formation, ChoicePoint has been organized into three service groups: Property and Casualty Insurance Services, Life and Health Insurance Services and Business and Government Services. The Company has offered the following products through these groups: Property and Casualty Insurance Services (P&C) Automated underwriting and claims information for home and auto insurers, commercial inspections, worker's compensation audits of commercial properties and customized application rating and issuance software development. Life and Health Insurance Services (L&H) Underwriting and claims information for life and health insurers, including medical records collection, laboratory services and investigative services. Business and Government Services (B&G) Pre-employment background searches, drug screenings, public records searches, people locator services, Uniform Commercial Code searches and filings, and database marketing services. In December 1998, ChoicePoint divested its labor-intensive life and health and investigative field businesses, as described below. Beginning in 1999, ChoicePoint will report revenue in two service groups: Insurance Services and Business and Government Services. Results of Operations Revenue and operating income for the years ended December 31, 1998, 1997 and 1996 were as follows:
============================================================ Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------ (In thousands) P&C revenue $218,413 $186,759 $167,073 L&H revenue 79,730 143,979 146,696 B&G revenue 108,332 86,583 52,712 - ------------------------------------------------------------ Operating revenue 406,475 417,321 366,481 Costs and expenses 341,309 365,035 318,870 - ------------------------------------------------------------ Operating income before unusual items 65,166 52,286 47,611 Unusual items 3,758 6,209 -- ============================================================ Operating income $ 61,408 $ 46,077 $ 47,611 ============================================================
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Consolidated revenue decreased $10.8 million, or 2.6%, from $417.3 million in 1997 to $406.5 million in 1998, primarily due to the sale of ChoicePoint's paramedical examination business in December 1997. Excluding the effect of that sale, consolidated revenues increased $48.0 million, or 13.4%, from $358.5 million in 1997 to $406.5 million in 1998. Revenue from Property and Casualty Insurance Services grew $31.7 million, or 16.9%, from $186.8 million in 1997 to $218.4 million in 1998, driven primarily by strong unit performance in personal lines products and the development of a new generation of commercial worker's compensation software at a large insurance customer. In total, revenue from the sale of this new software was approximately $10.8 million in 1998. Revenues in the field-based claims and inspection products decreased approximately $4.8 million in 1998. Revenue from Life and Health Insurance Services decreased $64.2 million, or 44.6%, from $144.0 million in 1997 to $79.7 million in 1998 primarily due to the sale of the paramedical examination business noted above. Excluding the effect of that sale, revenue from Life and Health Insurance Services decreased $5.4 million, or 6.3%, from $85.1 million in 1997 to $79.7 million in 1998, due primarily to unit 4 ChoicePoint decline in traditional field-based life and health inspection reports and laboratory services. Revenue from Business and Government Services increased $21.7 million, or 25.1%, from $86.6 million in 1997 to $108.3 million in 1998. Incremental revenue from acquisitions made since the first quarter of 1997 contributed $15.9 million of the increase. Operating income before unusual items increased $12.9 million, or 24.6%, from $52.3 million in 1997 to $65.2 million in 1998. Operating margins (excluding the effects of unusual items) increased from 12.5% in 1997 to 16.0% in 1998, primarily as a result of strong revenue performance in property and casualty personal lines products. Included in operating results in 1998 and 1997 were $6.2 million and $1.3 million, respectively, of expenses incurred to modify existing computer systems and applications to address the Year 2000 issues. Unusual items of $3.8 million in 1998 include $2.0 million for the writedown of a noncompete agreement and $1.8 million for writedowns of certain software and database assets and severance expenses. Operating income after unusual items increased by $15.3 million, or 33.3%, from $46.1 million in 1997 to $61.4 million in 1998. ChoicePoint recognized a pre-tax gain of $8.8 million as a result of the sale of its life and health insurance field underwriting services and insurance claim investigative services (collectively the "field businesses") to PMSI Services, Inc., an affiliate of Examination Management Services, Inc. and the planned sale of its payroll verification business. The Company sold the field businesses in December 1998 for approximately $23.0 million in a combination of cash, a note receivable, and warrants. In addition, the Company retained certain net assets, primarily accounts receivable. See Note 4 to the consolidated financial statements. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Consolidated revenue increased $50.8 million, or 13.9%, from $366.5 million in 1996 to $417.3 million in 1997. Revenue improvements in two of the three business groups were partially offset by revenue declines in Life and Health Insurance Services. Revenue from Property and Casualty Insurance Services grew $19.7 million, or 11.8%, from $167.1 million in 1996 to $186.8 million in 1997, driven primarily by strong unit performance in personal lines products. Revenue from Life and Health Insurance Services decreased $2.7 million, or 1.9%, from $146.7 million in 1996 to $144.0 million in 1997, as growth in laboratory services was offset by decreases in other lines, primarily due to the sale of ChoicePoint's paramedical examination business in December 1997, which represented $4.9 million of the decline. Revenue from Business and Government Services increased $33.8 million, or 64.3%, from $52.7 million in 1996 to $86.5 million in 1997. Revenue increased in all business units within Business and Government Services with $23.7 million coming from CDB Infotek. In August 1996, ChoicePoint acquired 70% of the outstanding capital stock of CDB Infotek. That acquisition was accounted for as a purchase, and the results of operations of CDB Infotek have been included in ChoicePoint's consolidated statements of income from the date of acquisition. The other business units within Business and Government Services posted revenue gains of 23.8%. Operating income before unusual items increased $4.7 million, or 9.8%, from $47.6 million in 1996 to $52.3 million in 1997. Operating margins (excluding the effects of unusual items) decreased from 13.0% in 1996 to 12.5% in 1997. Operating margins before unusual items were impacted by $4.9 million of other charges in the fourth quarter of 1997. Included in the $4.9 million of other charges were $1.9 million of expense related to new stock-based compensation plans, $1.0 million for a contribution to the employees' profit sharing plan to offset the adverse effect of transitioning from Equifax's defined benefit pension plan, $1.0 million to establish a ChoicePoint charitable foundation, $860,000 for adjusting receivables for a renegotiated customer contract and $100,000 to fund an under-reserved compensation plan. 5 21 Included in the $6.2 million charge of unusual items in 1997 were $1.8 million of charges related to expenses of the Spinoff and $4.4 million for write-downs of certain assets in the Company's labor-intensive field businesses and its commercial P&C software company. Operating income after unusual items and other charges decreased $1.5 million, or 3.2%, from $47.6 million in 1996 to $46.1 million in 1997. ChoicePoint recognized a pre-tax gain of $14.0 million on the sale of its paramedical examination business to Pediatric Services of America, Inc. during the fourth quarter of 1997. The Company sold this business in December 1997 for approximately $21.7 million in a combination of cash and stock. In addition, the Company retained certain net assets, primarily accounts receivable. Income Taxes Historically, the Company had been included in the consolidated federal income tax return of Equifax. Prior to the Spinoff on August 7, 1997, ChoicePoint's provision for income taxes reflected federal and state income taxes calculated on ChoicePoint's separate income, but recognized the impact of unitary tax regulations of certain states on ChoicePoint as a member of the Equifax consolidated group. ChoicePoint's overall effective tax rates were 43.3% in 1998, 45.9% in 1997, and 43.2% in 1996. The decrease in effective tax rates from 1997 to 1998 is primarily due to a reduction in the state income tax rate due to ChoicePoint no longer being part of Equifax's consolidated group for unitary tax purposes. The increase in effective tax rates from 1996 to 1997 is primarily the result of foreign income being subject to tax and increased goodwill amortization not deductible for income taxes. The increase is partially offset by a reduction in the state income tax rate due to ChoicePoint no longer being part of Equifax's consolidated group, as discussed above. If the provision for income taxes prior to the Spinoff had been calculated for ChoicePoint as a separate taxable entity for federal and state income tax purposes, the Company estimates that its overall effective tax rate would have been 44.5% in 1997 and 40.8% in 1996. Financial Conditions and Liquidity Cash provided by operations increased from $55.4 million in 1997 to $70.8 million in 1998. This increase was primarily attributable to the increase in net income, as adjusted for depreciation and amortization, and decreased marketable securities. During 1998, ChoicePoint used $168.1 million for investing activities, including $138.6 million for acquisitions, $16.9 million for other assets, of which $8.4 million related to software developed for internal use with the remainder related primarily to purchased data files, software and software developed for external use. In addition, $13.6 million was used for additions to property and equipment, primarily system upgrades. In 1997, ChoicePoint used $25.4 million for investing activities, including $20.0 million for additions to property and equipment and $10.8 million for acquisitions. Net cash provided by financing activities was $89.3 million in 1998, as the proceeds from a credit facility were used to pay for acquisitions and purchase stock held by employee benefit trusts. In 1997, net cash used by financing activities was $5.1 million, as proceeds from a credit facility were used to pay Spinoff related costs. The Company's short-term and long-term liquidity depends primarily upon its level of net income, accounts receivable, accounts payable, accrued expenses and long-term debt. In August 1997, ChoicePoint entered into a $250 million unsecured revolving credit facility (the "Credit Facility") with a group of banks. The Credit Facility is a revolving facility expandable to $300 million, subject to approval of the lenders, and bears interest at variable rates. Borrowings under the Credit Facility increased from $95.0 million at December 31, 1997 to $189.0 at December 31, 1998 due primarily to the acquisitions made in 1998. The commitment termination date and final maturity of the Credit Facility will occur in August 2002. ChoicePoint may use additional borrowings under the Credit Facility to finance acquisitions and for general corporate cash requirements. For a more complete description of the terms of the Credit Facility, see Note 6 to the consolidated financial statements. The Company also utilized lines of credit ("Lines of Credit") with two banks during 1998. As of December 31, 1998, $5.1 million was outstanding on these Lines of Credit. In addition, as of December 31, 1998, approximately $22.7 million of short-term 6 ChoicePoint notes payable for acquisitions were outstanding. In January 1999, these short-term notes payable were paid and an additional $30.0 million was borrowed under the Credit Facility. Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased $13.5 million, or 15.4%, from $87.8 million in 1997 to $101.2 million in 1998. EBITDA is presented not as a substitute for income from operations, net income or cash flows from operating activities. The Company has included EBITDA data (which are not a measure of financial performance under generally accepted accounting principles) because such data are used by certain investors to analyze and compare companies on the basis of operating performance, leverage and liquidity, and to determine a company's ability to service debt. Interest expense was $7.7 million in 1998 and $6.6 million in 1997. Prior to the Spinoff, ChoicePoint was charged corporate interest expense from Equifax based on the relationship of its net assets to total Equifax net assets, excluding corporate debt. After the Spinoff, interest expense also includes interest on the revolving Credit Facility and Lines of Credit discussed above. ChoicePoint has entered into six interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate long-term obligation. See Note 6 to the consolidated financial statements. The Company anticipates capital expenditures will be approximately $10.0 million in 1999, which will be used primarily for system upgrades. In addition, the Company anticipates additions to other assets, for capitalized software development, purchased data files and software to be approximately $9.0 million in 1999. No cash dividends have been paid. The Company does not anticipate paying any cash dividends on its common stock in the near future. Year 2000 The term "Year 2000 issue" is a general term used to describe the various problems that may result from the improper processing of dates and date-sensitive calculations by computers and other machinery as the year 2000 approaches. The Year 2000 issue exists because many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. In order to distinguish 21st century dates from 20th century dates, these date code fields must be able to interpret four digit entries. The Company's State of Readiness ChoicePoint has established a central Year 2000 department to coordinate and report, on a continuing basis, with regard to the assessment, remediation planning, implementation, and contingency planning processes directed toward addressing the Company's Year 2000 issues. ChoicePoint is engaged in a continuous process of assessing the impact of the Year 2000 issue on its reporting system and operations. As part of that process, certain computer systems and software programs used, and in some cases developed, by ChoicePoint have been or will need to be upgraded in order to address Year 2000 requirements. The Company has assessed its noninformation technology systems, which includes systems that contain embedded technology. However, the Company has determined that these systems present less of a risk to the Company's operations. ChoicePoint is also continuing to supply and receive data and inquiries from its vendors and customers. Current remediation efforts are in place to accept and transmit data in both 2-digit and 4-digit formats within applicable ChoicePoint applications. ChoicePoint uses the Gartner Group's April 1997 COMpliance Progress And REadiness (COMPARE) Scale to measure its progress in addressing the Year 2000 issue. The COMPARE scale has five levels: Level One - Preliminary Activity (problem not determined and risk is high) Level Two - Problem Determination (IT and non-IT inventories completed, risk levels understood) Level Three - Plan Complete/Resources Committed (estimated costs have been determined, required resources have been committed, initial project plans complete) Level Four - Operational Sustainability (systems and key partners are compliant and certified) Level Five - Fully Compliant (all systems are compliant and the Year 2000 threat has been completely neutralized throughout the business process chain) 7 23 At a minimum, all material ChoicePoint applications have achieved level three and several areas have reached level four. The Costs to Address the Company's Year 2000 Issues During 1998 and 1997, the Company incurred approximately $6.2 million and $1.3 million, respectively, to modify existing computer systems and applications to address the Year 2000 issue. The Company estimates 1999 expenditures of approximately $7.0 to $8.0 million. The Company has funded and expects to continue to fund, the costs of Year 2000 assessment and remediation from available cash flows. The Risks of the Company's Year 2000 Issues ChoicePoint is continuously identifying Year 2000 risks and developing contingency plans to address these risks as they are identified. If the Company's remediation plan is not successful, there would be a significant disruption of the Company's ability to transact business with its major customers and suppliers and it could have a material adverse effect on the Company's financial position and results of operations. The Company has not begun the systems integration testing phase of its Year 2000 initiative; however, a separate test environment has been established for complete integration testing. Until system integration testing is substantially in process and the Company has begun receiving Year 2000 data from suppliers for all applications, the Company cannot completely determine the success of its remediation plan. However, ChoicePoint believes it is devoting the resources necessary to achieve a level of readiness that will meet its Year 2000 challenges in a timely manner. ChoicePoint believes its assessment, remediation planning, and plan implementation processes will be effective to achieve Year 2000 readiness. The Company's Contingency Plans The Company is developing contingency plans as business risks are identified to help mitigate the risk of a disruption in operations resulting from a Year 2000-related event. The Company will continuously reassess Year 2000 risks and develop contingency plans for reasonably likely worst case scenarios. New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of the transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement the statement as of the beginning of any fiscal quarter after issuance. The Company has not yet quantified the impact of adopting SFAS No. 133 on it's financial statements and has not determined the timing of or method of it's adoption of the statement. The adoption of SFAS No. 133 is not expected to have a material impact on earnings or other comprehensive income. However, changes in the Company's derivative instruments and hedging activities could increase volatility in earnings and other comprehensive income. Forward-Looking Statements This report may contain certain information that constitutes forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Those statements, to the extent they are not historical facts, should be considered forward-looking and subject to various risks and uncertainties. Such forward-looking statements are made based upon management's assessments of various risks and uncertainties, as well as assumptions made in accordance with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of such risks and uncertainties, including those identified in the Company's Annual Report on Form 10-K for the fiscal year ending December 31, 1998 and the other filings made by the Company from time to time with the Securities and Exchange Commission. The Company undertakes no obligation to publicly release any revisions to any forward-looking statement contained herein to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. 8 ChoicePoint Consolidated Statements of Income
Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------- (In thousands, except per share data) Operating revenue $406,475 $417,321 $366,481 Costs and expenses: Cost of services 268,108 280,765 252,118 Selling, general and administrative 73,201 84,270 66,752 Unusual items 3,758 6,209 -- - ------------------------------------------------------------------------------------------------- Total costs and expenses 345,067 371,244 318,870 - ------------------------------------------------------------------------------------------------- Operating income 61,408 46,077 47,611 Gain on sale of businesses, net 8,807 14,038 -- Interest expense 7,748 6,649 6,597 - ------------------------------------------------------------------------------------------------- Income before income taxes 62,467 53,466 41,014 Provision for income taxes 27,048 24,522 17,734 - ------------------------------------------------------------------------------------------------- Net income $ 35,419 $ 28,944 $ 23,280 ================================================================================================= Earnings per share - basic (Note 3) $ 2.44 $ -- $ -- ================================================================================================= Weighted average shares - basic 14,542 -- -- ================================================================================================= Earnings per share - diluted (Note 3) $ 2.36 $ -- $ -- ================================================================================================= Weighted average shares - diluted 15,006 -- -- =================================================================================================
The accompanying notes are an integral part of these consolidated statements. 9 25 ChoicePoint Consolidated Balance Sheets
December 31, 1998 1997 - ------------------------------------------------------------------------------------------------------ (In thousands, except par values) Assets Current assets: Cash and cash equivalents $ 18,883 $ 26,858 Marketable securities -- 9,000 Accounts receivable, net of allowance for doubtful accounts of $3,286 in 1998 and $1,847 in 1997 103,191 90,266 Deferred income tax assets 8,372 10,503 Other current assets 13,160 9,492 - ------------------------------------------------------------------------------------------------------ Total current assets 143,606 146,119 Property and equipment, net 55,279 42,985 Goodwill, net 253,140 127,731 Deferred income tax assets 19,010 15,406 Other 63,164 27,730 - ------------------------------------------------------------------------------------------------------ Total Assets $ 534,199 $ 359,971 ====================================================================================================== Liabilities and Shareholders' Equity Current liabilities: Short-term debt and current maturities of long-term debt $ 5,623 $ 593 Notes payable for acquisitions 22,701 -- Accounts payable 24,645 17,371 Accrued salaries and bonuses 17,537 15,664 Other current liabilities 54,454 43,610 - ------------------------------------------------------------------------------------------------------ Total current liabilities 124,960 77,238 Long-term debt, less current maturities 191,697 95,457 Postretirement benefit obligations 53,251 53,834 Other long-term liabilities 4,719 5,697 - ------------------------------------------------------------------------------------------------------ Total liabilities 374,627 232,226 Commitments and Contingencies (Note 10) 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 and outstanding - 14,660 in 1998 and 14,641 in 1997 1,466 1,464 Paid-in capital 119,037 112,655 Retained earnings 49,163 13,744 Cumulative translation adjustments (176) (118) Stock held by employee benefit trusts, at cost, 203 shares in 1998 (9,918) -- - ------------------------------------------------------------------------------------------------------ Total shareholders' equity 159,572 127,745 - ------------------------------------------------------------------------------------------------------ Total Liabilities and Shareholders' Equity $ 534,199 $ 359,971 ======================================================================================================
The accompanying notes are an integral part of these consolidated balance sheets. 10 ChoicePoint Consolidated Statements of Shareholders' Equity
Equifax Cumulative Stock Held Comprehensive Equity Common Paid-in Retained Translation by Benefit Income Investment Stock Capital Earnings Adjustments Trusts Total - -------------------------------------------------------------------------------------------------------------------------- (In thousands) Balance, December 31, 1995 $ 104,684 $ -- $ -- $ -- $ (43) $ -- $104,641 Net income $23,280 23,280 -- -- -- -- -- 23,280 Net transactions with Equifax -- 68,450 -- -- -- -- -- 68,450 Translation adjustments (44) -- -- -- -- (44) -- (44) - -------------------------------------------------------------------------------------------------------------------------- Comprehensive income 23,236 -- -- -- -- -- -- -- Balance December 31, 1996 196,414 -- -- -- (87) -- 196,327 Net income (from January 1, 1997 through July 31, 1997) 15,200 15,200 -- -- -- -- -- 15,200 Intercompany transactions with Equifax -- 1,609 -- -- -- -- -- 1,609 Repayment of Equifax intercompany debt -- (72,602) -- -- -- -- -- (72,602) Debt assumed from Equifax -- (29,000) -- -- -- -- -- (29,000) Distribution of common stock -- (111,621) 1,457 110,164 -- -- -- -- Restricted stock plans, net -- -- 6 1,642 -- -- -- 1,648 Stock options exercised -- -- 1 266 -- -- -- 267 Other -- -- -- 583 -- -- -- 583 Net income (from August 1, 1997 to December 31, 1997) 13,744 -- -- -- 13,744 -- -- 13,744 Translation adjustments (31) -- -- -- -- (31) -- (31) - -------------------------------------------------------------------------------------------------------------------------- Comprehensive income 28,913 -- -- -- -- -- -- -- Balance December 31, 1997 -- 1,464 112,655 13,744 (118) -- 127,745 Net income 35,419 -- -- -- 35,419 -- -- 35,419 Restricted stock plans, net -- -- (2) 2,550 -- -- -- 2,548 Stock options exercised -- -- 4 601 -- -- -- 605 Cost of shares repurchased -- -- -- -- -- -- (9,918) (9,918) Other -- -- -- 3,231 -- -- -- 3,231 Translation adjustments (58) -- -- -- -- (58) -- (58) - -------------------------------------------------------------------------------------------------------------------------- Comprehensive income $35,361 -- -- -- -- -- -- -- Balance, December 31, 1998 $ -- $1,466 $119,037 $49,163 $(176) $(9,918) $159,572 ==========================================================================================================================
The accompanying notes are an integral part of these consolidated statements. 11 27 ChoicePoint Consolidated Statements of Cash Flows
Year Ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------- (In thousands) Cash flows from operating activities: Net income $ 35,419 $ 28,944 $ 23,280 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31,032 27,638 18,654 Provision for unusual items 3,758 6,209 -- Gain on sale of businesses, net (8,807) (14,038) -- Compensation recognized under employee stock plans 3,059 1,892 -- Changes in assets and liabilities, excluding effects of acquisitions and divestitures: Marketable securities and other current assets 10,864 (1,213) (1,582) Accounts receivable, net 1,297 (11,483) (7,362) Deferred income taxes (1,473) (6,883) 2,052 Current liabilities, excluding debt (5,003) 24,850 (60) Other long-term liabilities, excluding debt 683 (496) 1,797 Net cash provided by operating activities 70,829 55,420 36,779 Cash flows from investing activities: Acquisitions, net of cash acquired (138,630) (10,778) (69,654) Cash proceeds from sale of businesses 1,000 11,707 -- Additions to property and equipment (13,625) (19,997) (18,098) Additions to other assets, net (16,878) (6,351) (4,034) Net cash used by investing activities (168,133) (25,419) (91,786) Cash flows from financing activities: Proceeds from long-term debt 115,042 112,000 -- Payments on long-term debt (21,551) (17,928) (315) Net short-term borrowings 5,104 -- -- Payment of debt assumed in acquisition -- -- (11,778) Payment of debt assumed from Equifax -- (29,000) -- Payment of Equifax intercompany debt -- (72,602) -- Net transactions with Equifax -- 1,609 68,159 Purchases of stock held by employee benefit trusts (9,918) -- -- Proceeds from exercise of stock options 605 267 -- Other -- 583 -- Net cash provided (used) by financing activities 89,282 (5,071) 56,066 Effect of foreign currency exchange rates on cash 47 202 22 Net (decrease) increase in cash (7,975) 25,132 1,081 Cash and cash equivalents, beginning of year 26,858 1,726 645 Cash and cash equivalents, end of year $ 18,883 $ 26,858 $ 1,726 ==========================================================================================================
The accompanying notes are an integral part of these consolidated statements. 12 ChoicePoint Notes to Consolidated Financial Statements Note 1 SPINOFF AND BASIS OF PRESENTATION ChoicePoint Inc., a Georgia corporation ("ChoicePoint" or the "Company"), was established through the combination of the businesses that comprised the Insurance Services Group of Equifax Inc. ("Equifax") within a separate company and the subsequent spinoff in 1997 (the "Spinoff") of the Company's outstanding stock by Equifax as a stock dividend to the shareholders of Equifax. In the Spinoff, each shareholder of Equifax received one share of the Company's common stock, par value $.10 per share (the "Common Stock"), for every ten shares of Equifax common stock owned. The effective time of the Spinoff was July 31, 1997, and the Common Stock began regular trading on the New York Stock Exchange on August 8, 1997. References to ChoicePoint or the Company mean ChoicePoint Inc., its subsidiaries and divisions after the Spinoff, and the Insurance Services Group of Equifax prior to the Spinoff. Prior to the Spinoff, the consolidated financial statements of ChoicePoint include substantially all of the assets, liabilities, revenues, and expenses of the business conducted through Equifax's Insurance Services Group. All material transactions between entities included in the consolidated financial statements have been eliminated. The consolidated financial statements have been prepared on the historical cost basis, and present the Company's financial position, results of operations and cash flows as derived from Equifax's historical financial statements where applicable. Note 2 NATURE OF OPERATIONS ChoicePoint is a leading provider of risk management and fraud prevention information and related technology solutions to the insurance industry. The Company also offers risk management and fraud prevention solutions to organizations in other industries. Since its formation, ChoicePoint has been organized into three service groups: Property and Casualty Insurance Services, Life and Health Insurances Services and Business and Government Services. The Company has offered the following products through these groups: Property and Casualty Insurance Services Automated underwriting and claims information for home and auto insurers, commercial inspections, worker's compensation audits of commercial properties and customized application rating and issuance software development. Life and Health Insurance Services Underwriting and claims information for life and health insurers, including medical records collection, laboratory services and investigative services. Business and Government Services Pre-employment background searches, drug screenings, public records searches, people locator services, Uniform Commercial Code searches and filings, and database marketing services. Note 3 SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Revenue and Cost of Services Presentation Motor vehicle records registry revenue, the fee charged by states for motor vehicle records which is passed on by ChoicePoint to its customers, is excluded from revenue and is recorded as a reduction to cost of services in the consolidated financial statements. Registry revenue was $309,771,000 in 1998, $257,989,000 in 1997 and $224,783,000 in 1996. Customer Development Corporation (Note 4) passes on material, shipping and postage charges to their customers. These charges are excluded from revenue and are recorded as a reduction to cost of services in the consolidated financial statements. Charges passed through to customers from the date of acquisition until December 31, 1998 were $6,419,000. Marketable Securities Marketable securities at December 31,1997 consisted of 495,000 shares of common stock of Pediatric Services of America, Inc. ("PSA") which were received in connection with the sale of the Company's paramedical 13 29 examination business. The common stock was purchased by PSA during 1998 (Note 4). Property and Equipment Property and equipment at December 31, 1998 and 1997 consisted of the following:
================================================== December 31, 1998 1997 - -------------------------------------------------- (In thousands) Land, buildings, and improvements $ 21,561 $ 11,945 Data processing equipment and furniture 96,963 80,711 - -------------------------------------------------- 118,524 92,656 Less: Accumulated depreciation (63,245) (49,671) - -------------------------------------------------- $ 55,279 $ 42,985 - -------------------------------------------------- ==================================================
The cost of property and equipment is depreciated primarily on the straight-line basis over estimated asset lives of 30 to 40 years for buildings; useful lives, not to exceed lease terms, for leasehold improvements; three to five years for data processing equipment and eight to 20 years for furniture. Depreciation expense was $14,498,000 in 1998, $12,403,000 in 1997, and $9,302,000 in 1996. Goodwill and Other Assets Except for a strategic investment accounted for under the cost method, the Company accounts for all acquisitions using the purchase method of accounting. As a result, goodwill and other acquisition intangibles are recorded at the time of purchase. Goodwill is amortized on a straight-line basis over 20 to 40 years. Amortization expense was $6,519,000 in 1998, $4,616,000 in 1997, and $2,873,000 in 1996. As of December 31, 1998 and 1997, accumulated amortization was $21,593,000 and $13,648,000, respectively. Other assets at December 31, 1998 and 1997 consisted of the following:
==================================================== December 31, 1998 1997 - ---------------------------------------------------- (In thousands) Other acquisition intangibles, net $21,304 $17,956 System development and other deferred costs, net 20,811 9,774 Note receivable and warrants due to divestiture (Note 4) 17,426 -- Investment in subsidiary 3,623 -- $63,164 $27,730 - ---------------------------------------------------- ====================================================
Other acquisition intangibles include software, data files, technology, workforce and noncompete agreements and are being amortized on a straight-line basis over five to ten years. Amortization expense for other acquisition intangibles was $4,899,000 in 1998, $5,832,000 in 1997, and $3,127,000 in 1996. As of December 31, 1998 and 1997, accumulated amortization was $17,899,000 and $14,452,000, respectively. System development and other deferred costs are being amortized on a straight-line basis primarily over three to five years. Amortization expense for system development and other deferred costs were $5,116,000 in 1998, $4,787,000 in 1997, and $3,352,000 in 1996. As of December 31, 1998 and 1997, accumulated amortization was $20,174,000 and $15,511,000, respectively. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position No. 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires companies to capitalize certain direct costs, including external, payroll and interest costs. The Company has historically capitalized significant costs of software developed or obtained for internal use. For the years ended December 31, 1998 and 1997, approximately $8,413,000 and $1,520,000, respectively, of costs of software developed for internal use was capitalized. Impairment of Goodwill and Long-lived Assets The Company regularly evaluates whether events and circumstances have occurred that indicate the carrying amount of goodwill or other long-lived assets may warrant revision or may not be recoverable. When factors indicate that goodwill or other assets should be evaluated for possible impairment, the Company uses an estimate of the future undiscounted net cash flows of the related business over the remaining life of the goodwill or other assets in measuring whether the goodwill or other assets are recoverable. If the carrying amount exceeds undiscounted cash flows, an impairment loss would be recognized for the difference between the carrying amount and its estimated fair value. Foreign Currency Translation The assets and liabilities of foreign subsidiaries are translated at the year-end rate of exchange and income statement items are translated at the average rates prevailing during the year. The resulting translation adjustment is recorded as a component of shareholders' equity. Foreign 14 ChoicePoint Notes to Consolidated Financial Statements currency transaction gains and losses, which are not material, are recorded in the consolidated statements of income. Consolidated Statements of Cash Flows The Company considers cash equivalents to be short-term cash investments with original maturities of three months or less. Prior to the Spinoff, tax provisions were settled through the intercompany account and Equifax made income tax payments on behalf of the Company. The tax payments made subsequent to the Spinoff by ChoicePoint and the tax payments made prior to the Spinoff by Equifax on behalf of ChoicePoint (based on the income tax returns filed or to be filed) were approximately $24,953,000 in 1998, $21,979,000 in 1997, and $14,842,000 in 1996. Interest paid on long-term debt, excluding amounts charged by Equifax prior to the Spin-off, totaled $5,960,000 in 1998, $2,314,000 in 1997, and $147,000 in 1996. In 1998, 1997 and 1996, the Company acquired various businesses that were accounted for as purchases (Note 4). In conjunction with these transactions, liabilities were assumed as follows:
============================================================== Year Ended December 31, 1998 1997 1996 - -------------------------------------------------------------- (In thousands) Fair value of assets acquired $162,154 $10,986 $97,204 Cash paid for acquisitions 137,384 10,778 71,661 - -------------------------------------------------------------- Liabilities assumed $ 24,770 $ 208 $25,543 - -------------------------------------------------------------- ==============================================================
Included in the liabilities assumed above are $22,701,000 of short-term notes payable for acquisitions which were paid in January 1999. Financial Instruments The Company's financial instruments recorded on the balance sheet consist primarily of cash and cash equivalents, marketable securities, accounts receivable, accounts payable and debt. The carrying amounts approximate their fair values because of the short maturity of these instruments, or in the case of debt, because it bears interest at current market rates. In addition, the Company received a note receivable and warrants in conjunction with a 1998 divestiture which is discussed in detail in Note 4. Off balance sheet derivative financial instruments at December 31, 1998 and 1997 consist of interest rate swap agreements (Note 6) entered into to limit the effect of changes in interest rates on the Company's floating rate long-term obligation. Amounts currently due to or from interest rate swap counterparties are recorded in interest expense in the period in which they accrue. The Company does not enter into financial instruments for trading or speculative purposes. The fair value of the interest rate swap agreements, estimated by each bank based upon its internal valuation models, were $(2,346,000) at December 31, 1998. Earnings Per Share Historical earnings per share for 1997 and 1996 are not presented since the companies that comprise ChoicePoint were majority-owned subsidiaries of Equifax or one of its affiliates and were recapitalized as part of the Spinoff. See Note 12 for pro forma earnings per share for 1997. Earnings per share - diluted includes the dilutive effect of stock options. Reclassifications Certain prior-year amounts have been reclassified to conform with the current- year presentation. New Pronouncements The Company adopted the following new pronouncements in 1998: Comprehensive Income - In 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Company has chosen to disclose comprehensive income, which consists of net income and foreign currency translation adjustments, in the Consolidated Statements of Shareholders' Equity. Prior years have been restated to conform to the SFAS No. 130 requirements. Segment Information - In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." See Note 14 for disclosure. Pensions and Other Postretirement Plans - In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and 15 31 Other Postretirement Benefits." The provisions of SFAS No. 132 revise employers' disclosures about pensions and other postretirement plans (Note 9) but does not change the measurement or recognition of these plans. Note 4 ACQUISITIONS AND DIVESTITURES Acquisitions During 1998, 1997 and 1996, the Company acquired or made equity investments in the following businesses:
=================================================== Date Percentage Business Acquired Ownership - --------------------------------------------------- DATEQ Information Network, Inc. Dec. 1998 100.0% EquiSearch Services, Inc. Nov. 1998 100.0 Tyler-McLennon, Inc. Nov. 1998 100.0 Customer Development Corporation Oct. 1998 100.0 Informus Corporation Oct. 1998 100.0 Intertech Information Management Inc. Sept. 1998 10.6 Application Profiles, Inc. June 1998 100.0 Attest National Drug Testing, Inc. April 1998 100.0 CDB Infotek (additional purchase) Mar. 1998 27.4 Drug Free, Inc. Nov. 1997 100.0 Medical Information Network, LLC Oct. 1997 100.0 CDB Infotek (additional purchase) Sept. 1997 2.6 Advanced HR Solutions, Inc. June 1997 100.0 CDB Infotek Aug. 1996 70.0 Professional Test Administrators, Inc. April 1996 100.0 =================================================
With the exception of Intertech, which was accounted for under the cost method, the 1998 acquisitions were accounted for as purchases. The 1998 acquisitions had an aggregate purchase price of $162,154,000, with $133,312,000 allocated to goodwill, and $10,081,000 to other intangible assets (primarily technology, workforce, software and noncompete agreements). Goodwill from the 1998 acquisitions is amortized on a straight-line basis over 25 to 30 years and other intangible assets over five to ten years. The following unaudited pro forma information has been prepared as if the acquisitions had occurred on January 1, 1997. The information is based on historical results of the separate companies and may not necessarily be indicative of the results that could have been achieved or of results which may occur in the future. The pro forma information includes the expense for amortization of goodwill and other intangible assets and interest expense resulting from these transactions. The pro forma information also includes $14.6 million ($8.6 million after tax) of one-time expenses recorded in 1998 by Customer Development Corporation for Equity Participation Plans which were paid as a result of the sale. The expense was recorded prior to the acquisition and is not included in ChoicePoint's historical financial statements.
========================================================= Year Ended December 31, 1998 1997 - --------------------------------------------------------- (In thousands, except per share data) Revenue $455,437 $476,784 Net income 24,198 24,359 Earnings per share - basic 1.66 1.67 Earnings per share - diluted 1.61 1.64 ========================================================
The 1997 acquisitions were accounted for as purchases and had an aggregate purchase price of $10,778,000, with $9,982,000 allocated to goodwill, and $50,000 to other intangible assets (noncompete agreement). The 1996 acquisitions were accounted for as purchases and had an aggregate purchase price of $71,661,000, with $59,457,000 allocated to goodwill, and $20,932,000 to other intangible assets (primarily data files and software). Results of operations have been included in the consolidated statements of income from the dates of acquisition for all acquisitions accounted for under the purchase method. Divestitures In December 1998, the Company sold its life and health insurance field underwriting services and insurance claim investigation services (collectively the "field businesses") to PMSI Services, Inc. ("PMSI"). The field businesses were sold for approximately $23,000,000 in a combination of cash - $1,000,000, a note receivable - $10,000,000 and warrants - $12,000,000. In addition, the Company retained certain net assets, primarily accounts receivable. The note receivable is due and payable on September 1, 2004 and bears interest at 8.5% through June 30, 1999 and 13.5% thereafter. The warrants are convertible into PMSI stock. PMSI or its parent may purchase the warrants at any time for $12.0 million; however, repurchase is required at the maturity date of the 16 ChoicePoint Notes to Consolidated Financial Statements notes or whenever a capital event (as defined in the agreement) takes place by PMSI or its parent company, Examination Management Services, Inc. In recording the divestiture, ChoicePoint discounted the warrants by 8.5% over the term of the note receivable. The note receivable and the warrants, less the discount of $4,574,000, are recorded in other long-term assets at December 31, 1998. The discount will be amortized over the term of the notes receivable and any unamortized discount will be recognized as additional gain to the extent cash is received prior to the stated maturity. In December 1998, the Company recognized a pretax gain of $8,807,000 on the sale of the field businesses and on the planned sale of its payroll verification business. The pretax gain was net of transaction-related costs, including lease termination and personnel-related costs of $5,925,000 that were accrued at the time of the divestiture. ChoicePoint is also obligated to provide transitional services to PMSI for a period of time in 1999. The amount related to the planned sale of its payroll verification business that was netted against the gain was $2,315,000. In November 1998, the Company entered into a strategic partnership with Experian Limited (U.K.) leading to the sale of ChoicePoint, Ltd., the Company's United Kingdom-based insurance services division in December 1999. In December 1997, the Company sold its paramedical examinations business to PSA. The business unit was sold for approximately $21,707,000 in a combination of cash - $11,707,000, and PSA stock - $10,000,000. In addition, the Company retained certain net assets, primarily accounts receivable. In December 1997, the Company transferred approximately $1,000,000 of the PSA common stock to ChoicePoint's newly established charitable foundation. During the third quarter of 1998, PSA repurchased the PSA stock from ChoicePoint at the original stock price under an agreement protecting ChoicePoint from a decrease in PSA's stock price. Note 5 TRANSACTIONS WITH EQUIFAX Prior to the Spinoff, under Equifax's centralized cash management system, short-term advances from Equifax and excess cash sent to Equifax were reflected as intercompany debt and were included in Equifax's equity investment account through July 31, 1997 (Note 8). As a result of the Spinoff, the net intercompany debt at July 31, 1997, totaling $72,602,000, was repaid in the third quarter of 1997. ChoicePoint was charged corporate costs through July 31, 1997. The amount of corporate costs included in the accompanying consolidated statements of income were $0 in 1998, $5,952,000 in 1997, and $11,260,000 in 1996. These allocations were based on an estimate of the proportion of corporate expenses related to ChoicePoint, utilizing such factors as revenues, number of employees, number of transactions processed and other applicable factors. In the opinion of management, the corporate charges have been made on a reasonable basis and approximate all the incremental costs ChoicePoint would have incurred had it been operating on a stand-alone basis. These amounts have been included in selling, general, and administrative expenses. ChoicePoint was also charged corporate interest expense through July 31, 1997 based on the relationship of its net assets to total Equifax net assets, excluding corporate debt, in amounts of $0 in 1998, $3,612,000 in 1997, and $6,215,000 in 1996. These amounts are included in interest expense. In addition to the above, in 1998 and 1997 ChoicePoint paid approximately $5,319,000 and $5,500,000, respectively, to Equifax for credit reports and transitional services. In 1996, ChoicePoint paid approximately $2,475,000 to Equifax for credit reports. Note 6 DEBT Long-term debt at December 31, 1998 and 1997 was as following:
======================================================= December 31, 1998 1997 - ------------------------------------------------------- (In thousands) Credit facility $ 189,000 $ 95,000 Other long-term debt 2,600 -- Capital leases 617 1,050 - ------------------------------------------------------- 192,217 96,050 Less current maturities (520) (593) - ------------------------------------------------------- $ 191,697 $ 95,457 - ------------------------------------------------------- =======================================================
17 33 In August 1997, ChoicePoint entered into a $250 million unsecured revolving credit facility (the "Credit Facility") with a group of banks. The Credit Facility is a revolving facility expandable to $300 million, subject to approval of the lenders. The commitment termination date and final maturity of the Credit Facility will occur in August 2002. Revolving loans under the Credit Facility bear interest at the following rates as applicable and selected by the Company from time to time: (1) the lender's Base Rate, (2) LIBOR plus the applicable margin, (3) the lender's Cost of Funds plus the applicable margin, and (4) the Competitive Bid Rate offered by the syndicate lenders at their discretion. The applicable margins range from .16% to .45% per annum based on ChoicePoint's leverage ratio. The average interest rate based on the terms of the Credit Facility at December 31, 1998 and 1997 was 5.44% and 6.12%, respectively. The Credit Facility contains covenants customary for facilities of this type. Such covenants include limitations, in certain circumstances, on the ability of the Company and its subsidiaries to (i) effect a change of control of the Company, (ii) incur certain types of liens, and (iii) transfer or sell assets. The Credit Facility also requires compliance with financial covenants, including (i) maximum leverage and (ii) minimum fixed charge coverage. ChoicePoint has entered into six interest rate swap agreements (the "swap agreements") to reduce the impact of changes in interest rates on its floating rate long-term obligation. The agreements have a combined notional amount of $175 million and $85 million at December 31, 1998 and 1997, respectively, and mature at various dates from 2000 to 2007. These agreements involve the exchange of variable rate for fixed rate payments and effectively change the Company's interest rate exposure to a weighted average fixed rate of 5.43% plus a credit spread. The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreements. However, the Company does not anticipate nonperformance by the counterparties. Scheduled maturities of long-term debt subsequent to December 31, 1998 are as follows: $520,000 in 1999, $270,000 in 2000, $159,000 in 2001, $189,168,000 in 2002, and $2,100,000 thereafter. Short-term borrowings at December 31, 1998 includes $5,103,000 from a line of credit with a bank. The weighted average interest rate on short-term borrowings was 6.0% at December 31, 1998. There were no short-term borrowings during 1997. Note 7 INCOME TAXES Prior to the Spinoff, the Company was included in the consolidated federal income tax return of Equifax. ChoicePoint's provision for income taxes in the accompanying consolidated statements of income reflects federal and state income taxes calculated on ChoicePoint's separate income, but recognizes the impact of unitary tax regulations of certain states on ChoicePoint as a member of the Equifax consolidated group through July 31, 1997, the effective date of the Spinoff. The Company records deferred income taxes using enacted tax laws and rates for the years in which the taxes are expected to be paid. Deferred income tax assets and liabilities are recorded based on the differences between the financial reporting and income tax bases of assets and liabilities. The provision for income taxes consists of the following:
Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------- (In thousands) Current: Federal $ 22,604 $ 18,997 $ 12,538 State 4,392 5,463 4,048 Foreign 1,743 1,277 444 - ------------------------------------------------------------------- 28,739 25,737 17,030 - ------------------------------------------------------------------- Deferred: Federal (1,731) (722) 878 State 326 (419) (169) Foreign (286) (74) (5) - ------------------------------------------------------------------- (1,691) (1,215) 704 - ------------------------------------------------------------------- Total $ 27,048 $ 24,522 $ 17,734 ===================================================================
18 ChoicePoint Notes to Consolidated Financial Statements The provision for income taxes is based upon income before income taxes as follows:
Year Ended December 31, 1998 1997 1996 - ---------------------------------------------------------------- (In thousands) United States $58,043 $49,917 $38,373 Foreign 4,424 3,549 2,641 - ---------------------------------------------------------------- $62,467 $53,466 $41,014 ================================================================
The provision for income taxes is reconciled with the federal statutory rate as follows:
Year Ended December 31, 1998 1997 1996 - --------------------------------------------------------------- Federal statutory rate 35.0% 35.0% 35.0% State and local taxes, net of federal tax benefit 4.9 6.1 6.2 Tax effect resulting from foreign activities (.2) (.1) (1.8) Goodwill amortization 2.4 2.7 2.1 Other 1.2 2.2 1.7 - --------------------------------------------------------------- Overall effective rate 43.3% 45.9% 43.2% ===============================================================
Components of the Company's deferred income tax assets and liabilities at December 31, 1998 and 1997 are as follows:
December 31, 1998 1997 - ----------------------------------------------------- (In thousands) Deferred income tax assets: Postretirement benefits $22,086 $22,342 Reserves and accrued expenses 8,372 10,255 Employee compensation programs 3,279 3,857 Other 3,080 2,133 - ----------------------------------------------------- 36,817 38,587 - ----------------------------------------------------- Deferred income tax liabilities: Purchased software, data files, technology, and other assets (3,391) (5,069) Depreciation (1,494) (1,652) Deferred expenses (3,358) (4,896) Other (1,192) (1,061) - ----------------------------------------------------- (9,435) (12,678) - ----------------------------------------------------- Net deferred income tax assets $27,382 $25,909 =====================================================
Note 8 SHAREHOLDERS' EQUITY Equifax Equity Investment Prior to July 31, 1997, Equifax's equity investment included the original investment in ChoicePoint, accumulated income of ChoicePoint, and the net intercompany payable due to Equifax reflecting transactions described in Note 5. The July 31, 1997 net intercompany debt balance of $72,602,000 was repaid to Equifax in the third quarter of 1997. The $72,602,000 included actual intercompany debt of $85,602,000 reduced by $13,000,000 for an employee benefit obligation assumed by ChoicePoint (Note 9). Stock Options Equifax had certain Stock Option Plans (the "Plans") under which incentive stock options and nonqualified stock options were granted to officers, key employees and directors of Equifax. In connection with the separation of ChoicePoint from Equifax, stock options under the Plans that were not exercised prior to the date of the Spinoff were adjusted. Upon the Spinoff and except as set forth below, ChoicePoint employees retained the vested Equifax stock options granted under the various Equifax equity-based compensation plans. All unvested stock options granted under the Equifax plans were canceled and replacement options were granted under the ChoicePoint equity-based plan. Certain senior officers of ChoicePoint were permitted to choose either to retain vested Equifax stock options or receive replacement options under the ChoicePoint plan. All Equifax options that were replaced with ChoicePoint options were at amounts and at exercise prices that preserved the economic benefit of the Equifax stock options at the Spinoff date. As a result, options for 713,152 of ChoicePoint shares were issued to replace Equifax options. The options have exercise prices ranging from $8.21 per share to $28.45 per share. Prior to the Spinoff, The 1997 Omnibus Stock Incentive Plan (the "Omnibus Plan") was approved for ChoicePoint. The Omnibus Plan authorizes grants of stock options, stock appreciation rights, restricted stock, deferred shares, performance shares and performance units for an aggregate of four million shares of ChoicePoint Common Stock. The Omnibus 19 35 Plan requires options to be granted at fair market value except the options granted as replacement options under the prior Equifax equity-based plans. In 1997, options for 761,902 shares were granted at fair market value under the Omnibus Plan with an option price of $38.75. During 1998, options for 625,750 shares were granted at fair market value under the Omnibus Plan of which 81,500 options were performance-based options. A summary of changes in all outstanding options and the related weighted average exercise price per share is as follows:
December 31, 1998 December 31, 1997 - ---------------------------------------------------------------------------------------------------- Shares Avg. Price Shares Avg. Price Balance, beginning of year 1,458,415 $28.45 -- -- Granted: Replacement options -- -- 713,152 $17.10 New options (at market price) 625,750 $44.05 761,902 $38.75 Canceled (199,406) $37.02 (5,835) $13.80 Exercised (36,673) $20.51 (10,804) $14.16 - ---------------------------------------------------------------------------------------------------- Balance, end of year 1,848,086 $33.28 1,458,415 $28.45 - ---------------------------------------------------------------------------------------------------- Exercisable at end of year 609,695 $22.71 326,384 $16.98 ====================================================================================================
The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable - -------------------------------------------------------------------------------------------------------------- Weighted Avg. Weighted Weighted Remaining Average Average Contractual Exercise Exercise Range of Exercise Prices Shares Life In Years Price Shares Price - -------------------------------------------------------------------------------------------------------------- $08.21 - $22.60 481,670 5.66 $14.91 336,796 $13.68 $24.48 - $28.25 133,516 7.08 $26.36 111,262 $26.74 $38.75 - $38.75 662,300 8.76 $38.75 161,637 $38.75 $43.75 - $48.38 570,600 9.11 $44.06 -- -- 1,848,086 7.94 $33.28 609,695 $22.71 ==============================================================================================================
Equifax also had a deferred bonus plan in the form of restricted stock for certain key officers. As of the Spinoff, the ChoicePoint officers were granted ChoicePoint restricted stock which preserved the economic benefit of the Equifax plans. Approximately 151,000 shares of restricted stock were granted, of which 90,000 shares are performance based. In addition, during 1998 and 1997, approximately 549 and 59,000 restricted shares, respectively, were granted at market price under the Omnibus Plan. The 1997 restricted shares vest in four years based on continuous employment. The compensation cost charged against income for restricted stock was $3,059,000 in 1998 and $1,892,000 in 1997. Pro Forma Information During 1997 the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." In accordance with the provisions of SFAS No. 123, the Company has elected to apply APB Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, the Company does not recognize compensation cost in connection with its stock option plans. If the Company had elected to recognize compensation cost for these plans based on the fair value at grant date as prescribed by SFAS No. 123, net income and net income per share would have been reduced to the pro forma amounts indicated in the following table: 20 ChoicePoint Notes to Consolidated Financial Statements
Year Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) SFAS 123 SFAS 123 SFAS 123 Reported Pro forma Reported Pro forma Reported Pro forma - -------------------------------------------------------------------------------------------------------------------------- Net income $ 35,419 $ 30,901 $ 28,944 $ 27,832 $ 23,280 $22,547 Pro forma net income (Note 12) -- -- 28,520 27,408 -- -- Earnings per share - basic 2.44 2.12 -- -- -- -- Earnings per share - diluted 2.36 2.06 -- -- -- -- Pro forma earnings per share - basic -- -- 1.95 1.88 -- -- Pro forma earnings per share - diluted -- -- 1.92 1.84 -- --
The weighted average grant date fair value per share of options granted in 1998 and 1997 was $16.96 and $13.49, respectively. The fair value of each option granted in 1998 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield, 0%; expected volatility, 32%; risk-free interest rate, 5.6%; and expected life in years, 5.3. Pro forma income for 1996 noted above is based on the fair value of Equifax options held by ChoicePoint employees. Shareholder Rights Plan On October 29, 1997, the Company's Board of Directors adopted a Shareholder Rights Plan (the "Rights Plan"). The Rights Plan contains provisions to protect the Company's shareholders in the event of an unsolicited offer to acquire the Company, including offers that do not treat all shareholders equally, the acquisition in the open market of shares constituting control without offering fair value to all shareholders, and other coercive, unfair or inadequate takeover bids and practices that could impair the ability of the ChoicePoint Board of Directors to represent shareholders' interests fully. Pursuant to the Rights Plan, the ChoicePoint Board of Directors declared a dividend of one Share Purchase Right (a "Right") for each outstanding share of the Company's Common Stock as of November 14, 1997. The Rights will be represented by, and trade together with, the Company's Common Stock. The Rights will not be immediately exercisable and will not become exercisable unless certain triggering events occur. Among the triggering events will be the acquisition of 20% or more of the Company's Common Stock by a person or group of affiliated or associated persons. Unless previously redeemed by the ChoicePoint Board of Directors, upon the occurrence of one of the specified triggering events, each Right that is not held by the 20% or more shareholder will entitle its holder to purchase one share of common stock or, under certain circumstances, additional shares of common stock at a discounted price. The Rights will cause substantial dilution to a person or group that attempts to acquire ChoicePoint on terms not approved by the ChoicePoint Board of Directors. Thus, the Rights are intended to encourage persons who may seek to acquire control of ChoicePoint to initiate such an acquisition through negotiation with the Board of Directors. Grantor Trusts ChoicePoint has established two grantor trusts totaling $10.0 million plus accumulated interest earnings. The funds in the grantor trusts are used to purchase ChoicePoint common stock in the open market as previously approved by the Board of Directors for distribution under its various compensation and benefit plans. During 1998, funds from the grantor trusts totaling $9,918,000 were used to purchase 202,600 shares of ChoicePoint common stock, which are reflected as stock held by employee benefit trusts, at cost, in the December 31, 1998 balance sheet. Approximately $558,000 of cash remains in the grantor trusts at December 31, 1998 and is included in cash and cash equivalents in the accompanying consolidated balance sheets. At December 31, 1997, the grantor trusts contained $10,000,000 of cash which was included in cash and cash equivalents in the accompanying consolidated balance sheets. 21 37 Note 9 EMPLOYEE BENEFITS Equifax Plans Historically, the Company had participated in the Equifax United States Retirement Income Plan, a non-contributory defined benefit qualified retirement plan and in Equifax's retirement savings plan, a plan that provided for annual contributions at the discretion of the Board of Directors. Total expense allocated to ChoicePoint for these plans through the Spinoff and included in the Company's financial results was $0 in 1998, $1,448,000 in 1997 and $4,942,000 in 1996. ChoicePoint has not adopted a defined benefit plan for its employees; however, it adopted a profit sharing plan, as described below, prior to the Spinoff. 401(k) Profit Sharing Plan ChoicePoint has adopted a 401(k) profit sharing plan, under which eligible Company employees may contribute up to 16% of their compensation. ChoicePoint intends to make minimum matching contributions in the form of ChoicePoint Common Stock equal to 25% of employee contributions up to the first 6% of an employee's contributions. The match made on eligible employee contributions for 1998 and 1997 was 55% in each year. Employee contributions will be invested in one of the available investment funds, including a ChoicePoint stock fund. Matching contributions will be invested in the ChoicePoint stock fund. ChoicePoint may make additional contributions based on achievement of targeted performance levels. The expense for the 401(k) profit sharing plan was $3,050,000 in 1998 and $1,905,000 in 1997. As a result of the Spinoff, ChoicePoint assumed an obligation to contribute to a defined contribution plan for certain ChoicePoint employees. The additional benefits are intended to offset the adverse impact of transitioning out of a defined benefit pension plan and represent the present value of the estimated future contributions. In exchange for this obligation, Equifax made a capital contribution to ChoicePoint in the amount of $13,000,000 and ChoicePoint's intercompany liability to Equifax was reduced accordingly. In 1998 and 1997, $1,950,000 and $0, respectively, was included in the Company's financial results and contributed to the 401(k) profit sharing plan to offset the adverse impact of transitioning out of the defined benefit plan. Postretirement Benefits The Company provides certain health care and life insurance benefits for eligible retired employees. Health care benefits are provided through a trust, while life insurance benefits are provided through an insurance company. The Company accrues the cost of providing postretirement benefits for medical and life insurance coverage over the active service period of each employee. The following table presents a reconciliation of the changes in the plan's benefit obligations and fair value of assets at December 31, 1998 and 1997:
December 31, 1998 1997 - ---------------------------------------------------------- (In thousands) Change in benefit obligation: Obligation at beginning of year $ 56,191 $ 55,893 Service cost 807 454 Interest cost 3,886 2,004 Actuarial gain (2,867) (366) Benefit payments (5,188) (1,794) - ---------------------------------------------------------- Obligation at end of year 52,829 56,191 - ---------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year 0 0 Employer contributions 5,188 1,794 Benefit payments (5,188) (1,794) - ---------------------------------------------------------- Fair value of plan assets at end of year 0 0 - ---------------------------------------------------------- Funded status: Funded status at end of year and net amount recognized (52,829) (56,191) Unrecognized prior service cost (12,958) (6,150) Unrecognized loss 8,936 4,907 - ---------------------------------------------------------- Net amount recognized (56,851) (57,434) Less current portion (3,600) (3,600) - ---------------------------------------------------------- Accrued benefit cost $(53,251) $(53,834) ==========================================================
The current portion is included in other current liabilities in the accompanying consolidated balance sheets. The benefit obligation at beginning of year for 1997 noted above is as of July 1, 1997. 22 ChoicePoint Notes to Consolidated Financial Statements Net periodic postretirement benefit expense includes the following components:
Year Ended December 31, 1998 1997 1996 - --------------------------------------------------------------- (In thousands) Service cost $ 807 $ 907 $ 823 Interest cost on accumulated benefit obligation 3,886 4,008 3,667 Amortization of prior service credit (1,879) (2,308) (2,652) Amortization of losses 0 28 118 - --------------------------------------------------------------- Net periodic post- retirement benefit expense $ 2,814 $ 2,635 $ 1,956 ===============================================================
The following are weighted average assumptions used in the computation of postretirement benefit expense and the related obligation:
Year Ended December 31, 1998 1997 1996 - ----------------------------------------------------------------- Discount rate used to determine accumulated postretirement benefit obligation at December 31 6.75% 7.25% 7.50% Initial health care cost trend rate 9.5% 10.0% 10.50 Ultimate health care cost trend rate 6.00% 6.00% 6.00% Year ultimate health care cost trend rate reached 2005 2005 2005
If the health care cost trend rate were increased 1% for all future years, the accumulated postretirement benefit obligation as of December 31, 1998 would have increased 10.4%. The effect of such a change on the aggregate of service and interest cost for 1998 would have been an increase of 9.9%. If the health care cost trend rate were decreased 1% for all future years, the accumulated postretirement benefit obligation as of December 31, 1998 would have decreased 8.2%. The effect of such a change on the aggregate of service and interest cost for 1998 would have been a decrease of 7.6%. The Company continues to evaluate ways in which it can better manage these benefits and control its costs. Any changes in the plan, revisions to assumptions, or changes in the Medicare program that affect the amount of expected future benefits may have a significant effect on the amount of the reported obligation and future annual expense. Note 10 COMMITMENTS AND CONTINGENCIES Leases The Company's operating leases involve principally office space and office equipment. Rental expense relating to these leases was $12,757,000 in 1998, $14,769,000 in 1997, and $13,353,000 in 1996. Future minimum payment obligations for noncancelable operating leases exceeding one year are as follows as of December 31, 1998:
Year Amount - ---------------------------- (In thousands) 1999 $ 9,567 2000 7,986 2001 5,606 2002 4,391 2003 3,615 Thereafter 6,392 - ---------------------------- $37,557 ============================
Lease Agreement The Company has entered into a $24.0 million operating lease agreement for an office facility in Alpharetta, Georgia. Under the agreement, the lessor purchased the property from a third party and leased the facility to the Company. The initial term of the lease is ten years at which time the Company has the following three options: to renew for an additional five years, to purchase at original cost, or to remarket the property. Data Processing Services Agreement In April 1993, the Company began outsourcing a portion of its computer data processing operations and related functions to IBM Global Services("IBM"). In 1995 a new five-year outsourcing agreement was reached with IBM. Under the terms of the agreement, the Company will pay IBM an estimated $3.5 million a year over the five-year term of the agreement, although this amount could be more or less depending upon various factors such as the inflation rate, the 23 39 introduction of significant new technologies or changes in the Company's data processing needs as a result of acquisitions or divestitures. Under certain circumstances (e.g., a change in control of the Company), the Company may cancel the IBM agreement; however, the agreement provides that the Company must pay a significant penalty in the event of such a cancellation. Change in Control Provisions in Employment Agreements The Company has entered into employment agreements with certain executive officers which provide certain severance pay and benefits in the event of a "change in control" of ChoicePoint. Such events are consistent with these described in the Omnibus Plan. The severance payment is a derivative of annual compensation multiplied by a factor not to exceed three plus payments for other benefits. At December 31, 1998, the maximum contingent liability under the agreements or plans was approximately $26,164,000. In addition, the Company's restricted stock and stock option plans provide that all outstanding grants under the Omnibus Plan shall become fully vested. Litigation A limited number of lawsuits seeking damages are brought against the Company each year. The Company provides for estimated legal fees and settlements relating to pending lawsuits. In the opinion of management, the ultimate resolution of these matters will not have a materially adverse effect on the Company's financial position, liquidity or results of operations. The accrued liability for litigation at December 31, 1998 and 1997 was $2,779,000 and $4,002,000 respectively, and is included in other current liabilities in the accompanying consolidated balance sheets. Note 11 UNUSUAL ITEMS Unusual items of $3,758,000 in 1998 include $2,042,000 for the write-down of a noncompete agreement and $1,716,000 for the write-down of certain software and database assets and severance expenses. Unusual items of $6,209,000 in 1997 include approximately $1,840,000 of charges related to Spinoff expenses and approximately $4,405,000 for write-downs of certain assets in the Company's labor intensive field business and its commercial P&C software company. Note 12 PRO FORMA CONSOLIDATED FINANCIAL DATA (UNAUDITED) The following unaudited pro forma consolidated net income and pro forma earnings per share present the consolidated results of operations of ChoicePoint assuming that the Spinoff had been completed as of the beginning of 1997. Historical earnings per share are not presented since the companies that comprise ChoicePoint were majority owned subsidiaries of Equifax or one of its affiliates, and were recapitalized as part of the Spinoff. The information presented below is not necessarily indicative of the results that could have been achieved by ChoicePoint as an independent company or of results which may occur in the future.
(In thousands, except per share data) 1997 - ------------------------------------------------------ Historical net income $28,944 Pro forma adjustments - net of taxes: Reversal of interest expense from Equifax (a) 2,165 Incremental interest expense (b) (2,589) Pro forma net income $28,520 - ------------------------------------------------------ Pro forma weighted average shares - basic (c) 14,595 - ------------------------------------------------------ Pro forma earnings per share - basic $ 1.95 - ------------------------------------------------------ Pro forma weighted average shares - diluted (c) 14,891 - ------------------------------------------------------ Pro forma earnings per share - diluted $ 1.92 ======================================================
Following are the pro forma adjustments to the accompanying pro forma consolidated net income: a) To eliminate the $3.6 million ($2.2 million net of tax) corporate interest expense for the year ended December 31, 1997 charged to ChoicePoint. Equifax charged interest expense through the effective date of the Spinoff - July 31, 1997. b) To record $4.3 million ($2.6 million net of tax) for the year ended December 31, 1997 of interest expense on borrowings to fund the repayment of net intercompany debt owed to Equifax, the repayment of $29.0 million of Equifax debt assumed by ChoicePoint, and interest on borrowings to fund $10.0 million for two ChoicePoint 24 ChoicePoint Notes to Consolidated Financial Statements grantor trusts. The interest expense also includes interest for borrowings for the CDB Infotek acquisition. An interest rate of 6.5% is assumed on the borrowings. c) Pro forma weighted average shares outstanding prior to the Spinoff is based on the number of ChoicePoint shares issued and outstanding, including restricted stock, on the date of the Spinoff (August 7, 1997). The pro forma weighted average shares - diluted also include the dilutive effect of stock options. Note 13 QUARTERLY FINANCIAL SUMMARY (UNAUDITED) Following is a summary of the unaudited interim results of operations for each quarter in the years ended December 31, 1998 and 1997:
First Second Third Fourth Quarter Quarter Quarter Quarter Total - -------------------------------------------------------------------------------------------------------------- (In thousands, except per share data) Year Ended December 31, 1998 Revenue $ 94,550 $106,702 $101,887 $103,336 $406,475 Operating income 15,010 16,484 16,242 13,672 61,408 Net income 7,578 8,312 8,188 11,341 35,419 Earnings per share - diluted .50 .55 .55 .76 2.36 Year Ended December 31, 1997 Revenue $102,852 $108,623 $106,489 $ 99,357 $417,321 Operating income 12,198 15,559 15,810 2,510 46,077 Net income 5,541 7,300 7,778 8,325 28,944 Pro forma net income 5,340 7,099 7,756 8,325 28,520 Pro forma earnings per share - diluted .36 .48 .52 .56 1.92
Operating income decreased in the fourth quarter of 1998 due to $3,758,000 of charges for unusual items (Note 11). The gain on the sale of a business unit (Note 4), largely offset by the unusual items discussed above, positively impacted net income in the fourth quarter of 1998. The net effect of these two items on fourth quarter net income was $2,979,000 or $.20 per share. Operating income decreased in the fourth quarter of 1997 due to $6,209,000 of charges for unusual items (Note 11) and $4,852,000 of other charges. Included in the $4,852,000 of other charges were $1,892,000 of expense related to new restricted stock plans (Note 8), $1,000,000 for a contribution to the Company's profit sharing plan to offset the adverse effect of transitioning from Equifax's defined benefit pension plan, $1,000,000 to establish a ChoicePoint charitable foundation (Note 4), $860,000 for adjusting receivables for a re-negotiated customer contract and $100,000 to fund an under-reserved compensation plan. The gain on the sale of a business unit (Note 4), largely offset by the unusual items and other charges discussed above, positively impacted net income in the fourth quarter of 1997. 25 41 Note 14 SEGMENT DISCLOSURES ChoicePoint operates in a single reportable segment primarily in the risk management industry. However, since its formation, the Company has received revenues from three service groups: Property and Casualty Insurance Services ("P&C"), Life and Health Insurance Services ("L&H"), and Business and Government Services ("B&G"). See Note 2 for a description of each service group. ChoicePoint's production facilities and balance sheets are generally managed on a consolidated basis and therefore, impacted all three service groups. As a result, operating profits and assets were not allocated to the three service groups. Revenue for the years ended December 31, 1998, 1997 and 1996 for the three service groups were as follows:
Year Ended December 31, 1998 1997 1996 (In thousands) - -------------------------------------------------------------------- P&C revenue $218,413 $186,759 $167,073 L&H revenue 79,730 143,979 146,696 B&G revenue 108,332 86,583 52,712 - -------------------------------------------------------------------- Operating revenue $406,475 $417,321 $366,481 ====================================================================
Substantially all of the Company's operations are located in the United States and no customer represents more than 10% of total operating revenue. 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of ChoicePoint Inc.: We have audited the accompanying consolidated balance sheets of ChoicePoint Inc. (a Georgia corporation) and subsidiaries (as defined in Note 1) as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ChoicePoint Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Arthur Anderson LLP Atlanta, Georgia February 19, 1999 27 ChoicePoint Directors and Officers
Directors Executive Officers C.B. Rogers Jr. Derek V. Smith Chairman of the Board of Directors President and Chief Executive Officer of the Company Dan H. Rocco Derek V. Smith Executive Vice President President and Chief Executive Officer of the Company Doug C. Curling Executive Vice President, Ron D. Barbaro Chief Financial Officer and Treasurer Chairman and Chief Executive Officer of Ontario Casino Corporation and David T. Lee Ontario Lottery Corporation Senior Vice President James M. Denny J. Michael de Janes Managing Director of William Blair Capital General Counsel and Corporate Secretary Partners L.L.C. Operating Officers Tinsley H. Irvin and Key Management Retired Chairman and Chief Executive Officer of Alexander & Alexander Services, Inc. Tom Brierley Moses Brown Ned C. Lautenbach Dave Cook Partner of Clayton, Dubilier & Rice Sharyn Doanes Dan Filo Julia B. North Jeffrey Glazer President and Chief Executive Officer of Paul Goldstein VSI Enterprises, Inc. Joe Houlton Ken Kavanaugh Charles I. Story Tom Klebeck President and Chief Executive Officer Charlotte Lee of INROADS, Inc. Don McGuffey Kelly McLoughlin Jeff McWey Mike Milligan Jim Mussatto Gail Peterson Jeff Piefke Michael Prentice Tim Prunk Sally Sullivan David Trine Jim Zimbardi
28 43 ChoicePoint Shareholder Information General Information For more information about ChoicePoint, our products and services, employment opportunities, and current events at the Company, call us at 770-752-6000 or visit our web site at: http://www.choicepointinc.com Investor Information To obtain copies of the Company's Form 10-K, Form 10-Q or quarterly earnings releases, please contact: Kelly McLoughlin Investor Relations ChoicePoint Inc. 1000 Alderman Drive Alpharetta, Georgia 30005 or call 770-752-4050 Financial reports can also be accessed on our web site at http://www.choicepointinc.com Market Information ChoicePoint shares began regular trading on the New York Stock Exchange on August 8, 1997 under the symbol CPS. As of March 1, 1999, the approximate number of shareholders of record was 5,486. No cash dividends have been paid. The Company does not anticipate paying any cash dividends on its common stock in the near future. Quarterly Activity 1998 High Low - ----------------------------------------------------------------- First quarter 56.50 41.75 Second quarter 58.75 47.31 Third quarter 50.50 37.38 Fourth quarter 64.50 41.00 - ----------------------------------------------------------------- 1997 High Low - ----------------------------------------------------------------- Third quarter* 38.63 30.75 Fourth quarter 48.13 35.00 - ----------------------------------------------------------------- *Includes 3rd quarter since the Spinoff
Annual Meeting The Annual Meeting of Shareholders of ChoicePoint Inc. will be held May 4, 1999 at 10:30 a.m. at the Company's headquarters at 1000 Alderman Drive, Alpharetta, Georgia. Independent Public Accountants Arthur Andersen LLP Atlanta, Georgia Transfer Agent and Registrar SunTrust Bank, Atlanta P.O. Box 4625 Atlanta, Georgia 30302 Trademarks and Service Marks SchoolCheck, ChoicePoint, the logo, the domain name and the tag line are trademarks of ChoicePoint Inc. EX-21 4 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21 Subsidiaries of ChoicePoint Inc.
Name State or Country of Incorporation ---- --------------------------------- ChoicePoint Services Inc. Georgia PRC Corporation Georgia Professional Test Administrators, Inc. Illinois Intellisys, Inc. Georgia CDB Infotek California Innovative Data Services, Inc. Delaware Application Profiles Inc. Georgia ChoicePoint Business and Government Services Inc. Georgia Osborn Group Inc. Delaware Mid-American Technologies, Inc. Kansas Applied BioConcepts Inc. Kansas Osborn Laboratories (Canada) Inc. Canada ChoicePoint Limited United Kingdom Customer Development Corporation Illinois National Credit Audit Corporation Illinois Optimum Graphics Printing, Inc. Illinois Financial Database Services Company Illinois Customer Database Technologies, Inc. Illinois CDC Realty LLC Delaware EquiSearch Services Inc. Georgia DATEQ Information Network, Inc. Georgia
EX-23 5 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent accountants, we hereby consent to the incorporation of our reports incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statement File No. 333-32453. /s/ Arthur Andersen LLP Atlanta, Georgia March 26, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
5 U.S. DOLLARS 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 18,883 0 106,477 3,286 0 143,606 118,524 63,245 534,199 124,960 0 0 0 1,466 158,106 534,199 406,475 406,475 268,108 268,108 76,959 0 7,748 62,467 27,048 35,419 0 0 0 35,419 2.44 2.36
-----END PRIVACY-ENHANCED MESSAGE-----