<PAGE>
- -----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1997
COMMISSION FILE NUMBER 1-13286
______________
DUFF & PHELPS CREDIT RATING CO.
(Exact name of Registrant as specified in its Charter)
ILLINOIS 36-3569514
(State of Incorporation) (I.R.S. Employer
Identification No.)
55 EAST MONROE STREET, CHICAGO, ILLINOIS 60603 (312)368-3100
(Address of principal executive offices) (Registrant's telephone
number)
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
--- ---
On July 31, 1997, the registrant had 4,899,623
shares of common stock outstanding.
- -----------------------------------------------------------------------------
<PAGE>
DUFF & PHELPS CREDIT RATING CO. AND SUBSIDIARIES
Quarter Ended June 30, 1997
Index
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Condensed Statements of Income 1
Three Months Ended June 30, 1997 and
Three Months Ended June 30, 1996
Consolidated Condensed Statements of Income 2
Six Months ended June 30, 1997 and
Six Months ended June 30, 1996
Consolidated Balance Sheets 3
June 30, 1997 and December 31, 1996
Consolidated Statements of Cash Flows 4
Six Months Ended June 30, 1997 and
Six Months Ended June 30, 1996
Notes to the Consolidated Financial Statements 5-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 8-9
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
<PAGE>
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
DUFF & PHELPS CREDIT RATING CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended
June 30, June 30,
1997 1996
------- --------
<S> <C> <C>
REVENUES (NOTE 1) $16,894 $12,989
EXPENSES
Employment expenses 6,749 5,292
Other operating expenses 4,728 2,807
Name usage fees--paid to former parent (Note 2) 500 500
Depreciation and amortization (Note 1) 538 505
------- --------
Total expenses 12,515 9,104
OPERATING INCOME 4,379 3,885
Other income 48 60
Interest expense (Note 3) 98 103
------- --------
EARNINGS BEFORE INCOME TAXES 4,329 3,842
Income taxes 1,827 1,639
------- --------
NET EARNINGS $2,502 $2,203
------- --------
------- --------
Weighted average shares outstanding (Note 1) 5,597 5,976
EARNINGS PER SHARE (NOTE 1) $0.45 $0.37
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
-1-
<PAGE>
DUFF & PHELPS CREDIT RATING CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
Six Six
Months Months
Ended Ended
June 30, June 30,
1997 1996
------- --------
REVENUES (NOTE 1) $31,290 $25,227
EXPENSES
Employment expenses 12,873 10,453
Other operating expenses 7,670 5,185
Name usage fees--paid to former parent (Note 2) 1,000 1,000
Depreciation and amortization (Note 1) 1,075 1,008
------- --------
Total expenses 22,618 17,646
OPERATING INCOME 8,672 7,581
Other income 226 97
Interest expense (Note 3) 217 228
------- --------
EARNINGS BEFORE INCOME TAXES 8,681 7,450
Income taxes 3,663 3,175
------- --------
NET EARNINGS $5,018 $4,275
------- --------
------- --------
Weighted average shares outstanding (Note 1) 5,629 5,997
EARNINGS PER SHARE (NOTE 1) $0.89 $0.71
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
-2-
<PAGE>
DUFF & PHELPS CREDIT RATING CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, December 31,
ASSETS 1997 1996
----------- --------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 554 $ 0
Accounts receivable, net of allowance for doubtful
accounts of $228 and $212, respectively 10,898 10,298
Other assets 542 642
----------- --------
Total current assets 11,994 10,940
OFFICE FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
net of accumulated depreciation of $3,590 and
$3,042, respectively (Note 1) 4,599 4,540
OTHER ASSETS:
Intangible assets (Note 1) 2,169 2,319
Goodwill (Note 1) 22,720 23,094
Other long-term investments 1,136 1,019
Other long-term assets 65 214
----------- --------
TOTAL ASSETS $42,683 $42,126
----------- --------
----------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued compensation and employment taxes $ 3,991 $ 5,756
Accounts payable 4,191 3,193
Accrued income tax 74 576
Advance service fee billings to clients (Note 1) 1,751 1,314
Other current liabilities 17 15
----------- --------
Total current liabilities 10,024 10,854
LONG -TERM DEBT (Note 3) 9,500 5,500
OTHER LONG-TERM LIABILITY (Note 4) 717 717
STOCKHOLDERS' EQUITY:
Preferred stock, no par value: 3,000 shares authorized,
zero outstanding 0 0
Common stock, no par value; 15,000 shares authorized,
4,926 and 5,541 shares issued and
outstanding, respectively 0 5,030
Retained earnings 22,442 20,025
----------- --------
TOTAL STOCKHOLDERS' EQUITY 22,442 25,055
----------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $42,683 $42,126
----------- --------
----------- --------
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
-3-
<PAGE>
DUFF & PHELPS CREDIT RATING CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Six Months
Ended Ended
June 30, June 30,
1997 1996
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 5,018 $ 4,275
Decrease (increase) in accounts receivable (600) 2,793
Decrease in accrued compensation and
employment taxes (1,765) (1,757)
Increase (decrease) in advance service
fee billings 437 (259)
Depreciation and amortization 1,075 1,007
Decrease in income taxes payable (519) (525)
Decrease in other assets and liabilities - net 1,130 128
-------- ---------
Cash provided by operating activities 4,776 5,662
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in other long-term investments 9 (174)
Purchase of office furniture, equipment
and leasehold improvements-net of retirements (608) (890)
-------- ---------
Cash used in investing activities (599) (1,064)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Deferred financing (11) 0
Dividends paid to shareholders (307) (330)
Issuances of common stock 664 373
Repurchase of common stock (7,969) (3,241)
Increase of long-term debt 10,500 1,500
Decrease of long-term debt (6,500) (3,000)
-------- ---------
Cash used in financing activities (3,623) (4,698)
-------- ---------
NET CHANGE IN CASH 554 (100)
-------- ---------
CASH, BEGINNING OF PERIOD 0 233
-------- ---------
CASH, END OF PERIOD $ 554 $ 133
-------- ---------
-------- ---------
</TABLE>
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
-4-
<PAGE>
DUFF & PHELPS CREDIT RATING CO. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1 SIGNIFICANT ACCOUNTING POLICIES:
GENERAL
Duff & Phelps Credit Rating Co. (the "Company") is an internationally
recognized credit rating agency which provides ratings and research on
corporate, structured and sovereign financings, as well as insurance claims
paying ability. The Company has offices in Chicago, New York, London and
Hong Kong and operates directly or through international partners in North
and South America, Europe, Asia and Africa. The Company is also a designated
rating agency in Japan.
On October 31, 1994, the spin-off of the Company from its former parent
company, Phoenix Duff & Phelps Corporation, formerly Duff & Phelps
Corporation ("D&P"), was finalized. The Company's shares, held by D&P,
were distributed October 31, 1994, to D&P shareholders as a tax-free
distribution. D&P shareholders received one of the Company's shares for
every three shares held of D&P. The distribution resulted in the Company
operating as a free standing entity whose common stock is publicly traded on
the New York Stock Exchange under the ticker symbol "DCR."
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates affect the reported amounts of assets,
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements. In addition, they affect the reported amounts
of revenues and expenses during the period. Actual results could differ from
those estimates.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles and include those
assets, liabilities, revenues and expenses directly attributable to the
Company's operations in the periods presented.
PRINCIPLES OF CONSOLIDATION
During July 1994, the Company organized a U.S. subsidiary, Duff & Phelps
Credit Rating Co. of Europe, with an office located in London, England. In
July 1996, the Company organized a U.S. subsidiary, Duff & Phelps Credit
Rating Co. of Asia, with an office in Hong Kong. The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries, Duff & Phelps Credit Rating Co. of Europe and Duff & Phelps
Credit Rating Co. of Asia. All significant intercompany balances have been
eliminated.
EARNINGS PER SHARE
Earnings per share were computed using the weighted average number of
shares of common stock and common stock equivalents outstanding. Common stock
equivalents are based on outstanding stock options under a non-qualified
stock option plan.
-5-
<PAGE>
REVENUE RECOGNITION
Rating revenues are typically recognized when services rendered for
credit ratings are complete, generally when billed. Revenues are dependent,
in large part, on levels of debt issuance. The Company's fee schedule
depends on the type and amount of securities rated and the complexity of
securities issued. Research revenues are billed in advance and amortized over
the subscription period.
GOODWILL AND INTANGIBLE ASSETS
In 1987, an acquisition of the former parent resulted in goodwill and
intangible assets allocated to the Company of approximately $5.0 million and
$6.0 million, respectively. In 1989, another acquisition of the former
parent resulted in a "push-down" of goodwill to the Company of
approximately $24.0 million.
Goodwill and intangible assets are shown net of accumulated
amortization. Goodwill is amortized over its estimated remaining life of
approximately 31 years, and intangible assets are amortized over remaining
lives of 3 through 12 years.
The Company periodically evaluates whether significant events have
occurred which may require a revision of the estimated useful life of
goodwill and intangible assets or an impairment of the recoverability of
remaining balances. The Company uses an estimate of future undiscounted cash
flows over the remaining useful life of goodwill and intangible assets to
measure recoverability as required by Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of."
DEPRECIATION AND AMORTIZATION
Office furniture and equipment are stated at cost less accumulated
depreciation and are depreciated on a straight-line basis over the estimated
remaining lives of the assets, which, on a composite basis, is five years.
Leasehold improvements are amortized over the remaining lives of the related
leases, which, on a composite basis, is 11 years.
NEW ACCOUNTING PRONOUNCEMENTS
Recently the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS 128") which changes the
disclosure of earnings per share ("EPS") data. SFAS 128 replaces the
presentation of "primary" EPS with "basic" EPS. Under SFAS 128
"diluted" EPS, the dilutive effect of outstanding share options is computed
similarly to "fully diluted" EPS. Under SFAS 128 the dilutive effect of
outstanding shares is computed using the "average share price" for the
period rather than the "greater of the average share price or end of period
share price." By these standards the pro forma basic EPS for the six months
ended June 30, 1997 would be $.98 per share for 5,099,984 average shares
outstanding; and for the six months ended June 30, 1996 would be $.78 per
share for 5,508,412 average shares outstanding. The difference between these
weighted average share figures and those presented on the consolidated
condensed statements of income is due to the dilutive effect of outstanding
stock options.
2 RELATED PARTIES:
SERVICE FEES PAID TO D&P
A name use fee agreement in effect between the Company and D&P requiring
payment of $2 million per year is included in the Company's financial results
for the periods presented. Effective September 30, 2000, the name use fee
reduces to $10 thousand per year.
-6-
<PAGE>
SERVICE FEES PAID TO THE COMPANY
The Company and D&P are parties to service and support agreements under
which the Company provides D&P with fixed income research services for an
annual fee of $0.9 million and administrative services for a fee that
represents actual expenses incurred by the Company on behalf of D&P. For the
years presented, the fixed-income research fees are included in revenue, and
the administrative support fees offset other operating expenses. The fixed
income research agreement expires on September 30, 2000.
3 LONG-TERM DEBT AND SUPPLEMENTAL CASH FLOWS INFORMATION:
Long-term debt obligations were $9.5 million and $5.5 million, bearing
interest of 6.2 percent and 6.3 percent, for the periods ended June 30, 1997
and December 31, 1996, respectively. Cash interest and fees paid were $.1
million for three months ended June 30, 1997 and $.2 million for the six
months ended June 30, 1997.
Dividends paid totaled $0.2 million, and repurchases of 160,900 shares
amounted to $4.8 million during the second quarter of 1997.
Income taxes paid were $2.4 million during the second quarter of 1997
and $4.2 million in the first half of 1997.
4 LITIGATION MATTERS:
During 1993, several legal actions were filed against the Company in
federal court by holders of secured promissory notes ("Notes") of Towers
Financial Corporation ("Towers") and holders of bonds ("Bonds") issued by
subsidiaries of Towers in five structured financing transactions. Towers
collapsed in 1993 amid allegations of massive fraud and is in bankruptcy.
The Company had rated the Bonds but had not rated the Notes. It is alleged
that $245 million of Notes were sold that are worthless and that $200 million
of Bonds were sold that have lost much or all of their value. Directors and
officers of Towers, lawyers, accountants, broker-dealers and the indenture
trustee for the Bonds were also named as defendants in one or more of the
actions. The plaintiffs in the actions contend that the Company and the
other defendants are liable for losses the plaintiffs have suffered and for
punitive damages. The holders of the Bonds also sought recovery from the
Company of treble damages under the Racketeer Influenced and Corrupt
Organizations Act ("RICO"). It is asserted that the Company, in its
ratings and its monitoring of the transactions after ratings were issued, was
either fraudulent or negligent in failing to discover the alleged fraud of
Towers and its officers or in taking other action that allegedly induced
purchases of the Bonds and the Notes. The Company denies these assertions.
The Company's ratings were based upon (and assumed the accuracy of) the
information provided to it by Towers and its officers. The Company has taken
the position that it cannot be expected to detect fraud or discover variances
from the structure of a rated security when the information provided to it
demonstrates compliance with that structure. In 1996, the legal actions
filed by the holders of the Notes were dismissed by the federal courts and
the RICO claim of the holders of the Bonds was dismissed. One holder of Notes
claiming to represent holders of approximately $17 million of Notes filed a
class action against the Company in Illinois state court alleging the state
law claims previously asserted in federal court.
Management intends to vigorously defend these actions, and at this time,
cannot make an assessment with regard to such litigation's effect on the
Company's financial position or results of operations. The Company is
involved in other litigation, which in the opinion of management, would not
have a material adverse effect on the Company's financial position or results
of operations.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED WITH
THREE MONTHS ENDED JUNE 30, 1996
Revenues for the three months ended June 30, 1997, were $16.9 million,
an increase of approximately 30 percent, or $3.9 million over the $13.0
million recorded in the corresponding period in 1996.
The growth in revenues and earnings was the result of strong performance
by both the corporate and structured finance rating businesses, which posted
14 percent and 66 percent revenue increases, respectively. Each major
segment of the Company's corporate rating business achieved higher revenues
due to the addition of new clients and continuing moderate level of financing
activity. The structured finance revenue increase was primarily contributed
by the on-going strong performance of the real estate and asset-backed
sectors. The Company's international business, which is incorporated in the
corporate and structured revenue comparisons above, also exhibited strong
double-digit revenue growth.
For the quarter ending June 30, 1997, operating expenses were up 37
percent primarily reflecting higher compensation expenses and travel
expenses reflecting the increase in business and higher expenses and legal
fees incurred in the connection with the litigation matters discussed in
Note 4.
Net earnings for the second quarter of 1997 increased 14 percent to $2.5
million, while earnings per share increased 22 percent to $0.45 compared with
$0.37 in 1996.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH
SIX MONTHS ENDED JUNE 30, 1996
Revenues for the six months ended June 30, 1997, were $31.3 million, an
increase of 24 percent, or $6.1 million over the $25.2 million recorded in
the corresponding period in 1996. Rating revenues accounted for $6.5 million
of the increase and were offset by a decline in other revenues of $.4 million.
Rating revenues were favorably impacted by a 14 percent increase in
corporate rating revenues and a 50 percent increase in structured finance
rating revenues for the same reasons as described above.
Operating income for the six months ended June 30, 1997, was $8.7
million, an increase of 14 percent, or $1.1 million over the $7.6 million
recorded in the first half of 1996. This increase is a result of the revenue
increase discussed above, offset by an increase in operating expenses of $5
million or approximately 28 percent. Expense increases were primarily
related to higher compensation and travel expenses reflecting the increase in
business and higher expenses and legal fees incurred in connection with the
litigation matters discussed in Note 4.
Net earnings for the first half of 1997 increased to $5 million from
$4.3 million, while earnings per share were $0.89 compared to last year's
$0.71.
-8-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Capital expenditures totaled $0.6 million for the first half of 1997 and
are anticipated to be approximately $1.8 million for the 1997 fiscal year,
primarily for leasehold improvements, office fixtures and computer equipment
to accommodate the increase in staff.
Dividends paid totaled $0.3 million in the first half of 1997, and
repurchases of 281,250 shares during the first half of 1997 amounted to $8
million.
The Company has in place a $20 million, revolving credit agreement. As
of June 30, 1997, $9.5 million was outstanding under the facility at a
floating rate of approximately 6.2 percent. Commitment fees are accrued on
the unused facility at an annual rate of .25 percent and are paid quarterly.
The credit agreement contains certain financial covenants which the Company
is currently in compliance with.
The Company believes that funds provided by operations and amounts
available under its credit agreement will provide adequate liquidity for the
foreseeable future.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995
This report contains forward-looking statements that are subject to risks and
uncertainties, including but not limited to the following: the Company's
performance is highly dependent on corporate debt issuances and structured
finance transactions, which may decrease for any number of reasons including
changes in interest rates and adverse economic conditions; the Company's
performance is affected by the demand for and the market acceptance of the
Company's services; and the Company's performance may be impacted by changes
in the performance of the financial markets and general economic conditions.
Accordingly, actual results may differ materially from those set forth in the
forward-looking statements. Attention is also directed to other risk factors
set forth in documents filed by the Company with the Securities and Exchange
Commission.
-9-
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 13, 1997 an annual meeting of stockholders was held.
(b) Each of the five nominees for director were elected by a majority
of shareholders' votes to serve until the next annual meeting of stockholders
and until their successors are duly elected and qualified. The directors
elected were Paul J. McCarthy, Philip T. Maffei, Milton L. Meigs, Jonathan
Ingham and Donald J. Herdrich.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Description
27 Financial Data Schedule
-10-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Duff & Phelps Credit Rating Co.
/s/ Marie C. Becker
------------------------------------
Marie C. Becker, Vice President and
Chief Accounting Officer/Controller
August 11, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATION FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 544
<SECURITIES> 0
<RECEIVABLES> 10,999
<ALLOWANCES> 228
<INVENTORY> 0
<CURRENT-ASSETS> 11,994
<PP&E> 8,191
<DEPRECIATION> 3,591
<TOTAL-ASSETS> 42,683
<CURRENT-LIABILITIES> 10,024
<BONDS> 9,500
0
0
<COMMON> 0
<OTHER-SE> 22,441
<TOTAL-LIABILITY-AND-EQUITY> 42,683
<SALES> 0
<TOTAL-REVENUES> 31,290
<CGS> 0
<TOTAL-COSTS> 18,709
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 217
<INCOME-PRETAX> 8,681
<INCOME-TAX> 3,663
<INCOME-CONTINUING> 5,018
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,018
<EPS-PRIMARY> .89
<EPS-DILUTED> .89
</TABLE>
