<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, 1998
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, 1998, the registrant had 4,837,666 shares of common stock
outstanding.
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<PAGE>
DUFF & PHELPS CREDIT RATING CO. AND SUBSIDIARIES
Quarter Ended June 30, 1998
Index
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Condensed Statements of Income 1
Three Months Ended June 30, 1998 and
Three Months Ended June 30, 1997
Consolidated Condensed Statements of Income 2
Six Months Ended June 30, 1998 and
Six Months Ended June 30, 1997
Consolidated Balance Sheets 3
June 30, 1998 and December 31, 1997
Consolidated Statements of Cash Flows 4
Six Months Ended June 30, 1998 and
Six Months Ended June 30, 1997
Notes to the Consolidated Financial Statements 5-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION 8-10
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 Months Three Months
Ended Ended
June 30, June 30,
1998 1997
----------- ------------
<S> <C> <C>
REVENUES (NOTE 1) $21,512 $16,894
EXPENSES
Employment expense 8,710 6,751
Other operating expenses 4,202 4,726
Name usage fees--paid to former parent (Note 2) 500 500
Depreciation and amortization (Note 1) 702 538
----------- ------------
Total expenses 14,114 12,515
OPERATING INCOME 7,398 4,379
Other income 31 48
Interest expense (Note 3) 52 98
----------- ------------
EARNINGS BEFORE INCOME TAXES 7,377 4,329
Income taxes 3,170 1,827
----------- ------------
NET EARNINGS $4,207 $2,502
----------- ------------
----------- ------------
Basic weighted average shares outstanding (Note 1) 4,837 5,061
BASIC EARNINGS PER SHARE (NOTE 1) $0.87 $0.49
Diluted weighted average shares outstanding (Note 1) 5,290 5,597
DILUTED EARNINGS PER SHARE (NOTE 1) $0.80 $0.45
</TABLE>
-1-
The accompanying notes to the consolidated financial statements
are integral part of these statements.
<PAGE>
DUFF & PHELPS CREDIT RATING CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1998 1997
---------- ----------
<S> <C> <C>
REVENUES (NOTE 1) $43,283 $31,290
EXPENSES
Employment expense 17,520 12,877
Other operating expenses 8,338 7,666
Name usage fees--paid to former parent (Note 2) 1,000 1,000
Depreciation and amortization (Note 1) 1,378 1,075
---------- ----------
Total expenses 28,236 22,618
OPERATING INCOME 15,047 8,672
Other income 242 226
Interest expense (Note 3) 194 217
---------- ----------
EARNINGS BEFORE INCOME TAXES 15,095 8,681
Income taxes 6,482 3,663
---------- ----------
NET EARNINGS $8,613 $5,018
---------- ----------
---------- ----------
Basic weighted average shares outstanding (Note 1) 4,827 5,100
BASIC EARNINGS PER SHARE (NOTE 1) $1.78 $0.98
Diluted weighted average shares outstanding (Note 1) 5,241 5,629
DILUTED EARNINGS PER SHARE (NOTE 1) $1.64 $0.89
</TABLE>
-2-
The accompanying notes to the consolidated financial statements
are integral part of these statements
<PAGE>
DUFF & PHELPS CREDIT RATING CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 304 $ 955
Accounts receivable, net of allowance for doubtful
accounts of $500 and $323, respectively 16,158 12,233
Other current assets 1,060 973
---------- ------------
Total current assets 17,522 14,161
OFFICE FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
net of accumulated depreciation of $4,585 and $3,748,
respectively (Note 1) 5,285 4,914
OTHER ASSETS:
Intangible assets, net (Note 1) 1,862 2,015
Goodwill, net (Note 1) 21,973 22,346
Other long-term investments 2,160 2,010
Other long-term assets 47 58
---------- ------------
Total assets $ 48,849 $ 45,504
---------- ------------
---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued compensation and employment taxes $ 6,368 $ 8,169
Accounts payable 3,005 3,275
Accrued income tax payable 690 719
Advance service fee billings to clients (Note 1) 2,087 1,259
Other current liabilities 5 29
---------- ------------
Total current liabilities 12,155 13,451
LONG-TERM DEBT 1,500 7,000
OTHER LONG-TERM LIABILITIES 2,768 1,776
STOCKHOLDERS' EQUITY:
Preferred stock, no par value: 3,000 shares authorized, zero issued and
outstanding 0 0
Common stock, no par value: 15,000 shares authorized, 4,838 and 4,807
shares issued and outstanding at June 30, 1998 and December 31, 1997,
respectively 1,187 363
Retained earnings 31,239 22,914
---------- ------------
Total stockholders' equity 32,426 23,277
---------- ------------
Total liabilities and stockholders' equity $ 48,849 $ 45,504
---------- ------------
---------- ------------
</TABLE>
-3-
The accompanying notes to the consolidated financial statements
are integral part of these statements.
<PAGE>
DUFF & PHELPS CREDIT RATING CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, June 30,
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 8,613 $ 5,018
Increase in accounts receivable, net (3,925) (600)
Decrease in accrued compensation and employment taxes (1,801) (1,765)
Increase in advance service fee billings 828 437
Depreciation and amortization 1,378 1,075
Increase/(decrease) in accrued income taxes payable 397 (519)
Increase in other assets and liabilities, net 591 1,130
---------- ----------
Cash provided by operating activities 6,081 4,776
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease/(increase) in other long-term investments (150) 9
Purchase of office furniture, equipment
and leashold improvements, net of retirements (1,203) (608)
---------- ----------
Cash used in investing activities (1,353) (599)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividend paid to shareholders (289) (307)
Decrease/(increase) in deferred financing costs 11 (11)
Issuances of common stock 399 664
Repurchases of common stock 0 (7,969)
Increase of long-term debt 8,000 10,500
Decrease of long-term debt (13,500) (6,500)
---------- ----------
Cash used in financing activities (5,379) (3,623)
---------- ----------
NET CHANGE IN CASH (651) 554
CASH, BEGINNING OF PERIOD 955 0
---------- ----------
CASH, END OF PERIOD $ 304 $ 554
---------- ----------
---------- ----------
</TABLE>
-4-
The accompanying notes to the consolidated financial statements
are integral part of these statements.
<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
America, 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 of record October 26, 1994,
as a tax-free distribution for which a favorable tax ruling was obtained from
the Internal Revenue Service. D&P shareholders received one of the Company's
shares for every three shares held of D&P common stock, and cash payments
were made in lieu of fractional shares. 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. Certain reclassifications have
been made to prior year's financial statements to conform with the current
presentation.
PRINCIPLES OF CONSOLIDATION
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 and transactions have been eliminated.
EARNINGS PER SHARE
Earnings per share are computed using the weighted average number of
shares of common stock and common stock equivalents outstanding for each of
the periods presented. Common stock equivalents are based on outstanding
stock options under a non-qualified stock option plan.
-5-
<PAGE>
Following is a reconciliation of the denominator used to calculate basic
earnings per share to the denominator used to calculate diluted earnings per
share for the periods indicated (in thousands):
June 30, 1998 1997
------------------------------------------------------------------------
Basic Weighted Average Shares Outstanding 4,827 5,100
Stock Options Outstanding 1,137 1,021
Reduction in Shares for Treasury Stock Proceeds (723) (492)
------------------------------------------------------------------------
Diluted Weighted Average Shares Outstanding 5,241 5,629
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
Goodwill and intangible assets are shown net of accumulated
amortization. Goodwill is amortized over its estimated remaining life of
approximately 30 years, and intangible assets are amortized over remaining
lives of 2 through 11 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 discounted cash
flows over the remaining useful life of goodwill and intangible assets to
measure recoverability. Management believes that the full amount of goodwill
and intangible assets is recoverable.
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, typically 3 to 10 years. Leasehold
improvements are amortized over the remaining lives of the related leases
which on average are 2 to 10 years.
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.
SERVICE FEES PAID TO THE COMPANY
The Company provides D&P with fixed income research services for an annual
fee of $0.9 million. For the periods presented, the fixed income research
fees are included in revenue. The fixed income research agreement expires on
September 30, 2000.
-6-
<PAGE>
3 LONG-TERM DEBT AND SUPPLEMENTAL CASH FLOWS INFORMATION:
Long-term debt obligations were $1.5 million and $7.0 million at
weighted average interest rates of approximately 6.1 percent and 6.4 percent,
for the periods ended June 30, 1998 and December 31, 1997, respectively.
Cash interest and fees paid were $0.2 million for the first six months ended
June 30, 1998 and 1997.
Income taxes paid were $3.8 million during the second quarter of 1998
and $6.1 million in the first half of 1998.
4 LITIGATION MATTERS:
The Company and its subsidiaries are from time to time parties to
various legal actions arising in the normal course of business. Management
believes that there is no proceeding threatened or pending against the
Company or any of its subsidiaries which, if determined adversely, would have
a material adverse effect on the financial condition or results of operations
of the Company.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
- - ---------------------
THREE MONTHS ENDED JUNE 30, 1998, COMPARED WITH
-----------------------------------------------
THREE MONTHS ENDED JUNE 30, 1997
--------------------------------
Revenues for the quarter ended June 30, 1998, were $21.5 million, an
increase of 27 percent or $4.6 million, over the $16.9 million recorded in
the second quarter of 1997. Corporate rating revenues rose $1.8 million
while structured finance rating revenues increased $2.8 million.
Corporate rating revenues, which increased 22 percent over 1997, were
benefited by a high level of financing activity by non-financial
corporations. Structured finance rating revenues increased 36 percent over
the prior year and were driven by an extraordinary level of real estate and
asset backed transactions.
International rating revenues, which are incorporated in the above
comparisons and contributed to the overall gains, increased 36 percent over
last year.
Operating income for the three months ended June 30, 1998, was $7.4
million, an increase of $3.0 million or 68 percent over the $4.4 million
recorded in 1997. This increase is a result of the revenue increases
discussed above, offset by increases in operating expense of $1.6 million
primarily due to increases in employment and other operating expenses as a
result of the growth and performance discussed above.
Interest expense decreased nominally in the second quarter of 1998
primarily due to a lower average debt balance. Income tax expense increased
proportionately with income before taxes.
Net earnings totaled $4.2 million for the three months ended June 30,
1998, a $1.7 million or 68 percent increase over last year. Diluted earnings
per share increased 78 percent to $.80 versus $0.45 in 1997. Basic earnings
per share increased to $.87 in 1998 versus $0.49 in 1997. Earnings per share
gains are primarily the result of the performance described above in addition
to the reduction in shares outstanding due to historical stock repurchases.
SIX MONTHS ENDED JUNE 30, 1998, COMPARED WITH
---------------------------------------------
SIX MONTHS ENDED JUNE 30, 1997
------------------------------
Revenues for the six months ended June 30, 1998, were $43.3 million, an
increase of 38 percent or $12.0 million, over the $31.3 million recorded in
the corresponding period in 1997. Rating revenues accounted for $12.1
million of the increase and were offset by a decline in other revenues of
$0.1 million.
Rating revenues were favorably impacted by a 29 percent increase in
corporate rating revenues and a 55 percent increase in structured finance
rating revenues for the same reasons as described above.
International rating revenues, which are incorporated in the above
comparisons and contributed to the overall gains, increased 51 percent over
last year.
Operating income for the six months ended June 30, 1998, was $15.0
million, an increase of $6.3 million or 72 percent over the $8.7 million
recorded in 1997. This increase reflects the revenue increases discussed
above, offset by increases in operating expense of $5.6 million primarily
reflecting increases in employment and other operating expenses as a result
of the growth and performance discussed above.
Interest expense decreased nominally in the first half of 1998 primarily
due to a lower average debt balance. Income tax expense increased
proportionately with income before taxes.
-8-
<PAGE>
Net earnings totaled $8.6 million for the six months ended June 30,
1998, a $3.6 million or 72 percent increase over last year. Diluted earnings
per share increased 84 percent to $1.64 versus $0.89 in 1997. Basic earnings
per share increased to $1.78 in 1998 versus $0.98 in 1997. Earnings per
share gains are primarily the result of the performance described above in
addition to the reduction in shares outstanding due to historical stock
repurchases.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
The Company has typically financed its operations, which do not require
significant amounts of working capital or capital expenditures, through funds
provided by operations.
For the first six months ended June 30, 1998, capital expenditures, net
of retirements totaled $1.2 million. These capital expenditures were
primarily for leasehold improvements, computer equipment and office
furniture. The Company expects capital expenditures to approximate $2.0
million in 1998.
Other cash investments for the second quarter of 1998 included payments
made for ownership shares in certain joint ventures.
Financing activities in the first six months of 1998 included the
Company's dividend payments totaling approximately $0.3 million.
The Company has in place a $20.0 million revolving bank credit agreement
that expires December 31, 1999. At June 30, 1998, $1.5 million was
outstanding under the facility at a weighted average interest rate of
approximately 6.1 percent, compared with $7.0 million outstanding at December
31, 1997, at a weighted average interest rate of 6.4 percent. Commitment
fees are accrued on the unused facility at an annual rate of .25 percent and
are paid quarterly.
The bank credit agreement contains the following financial covenants
among others: (i) a minimum net worth test; (ii) a maximum leverage test; and
(iii) a limitation on indebtedness and capital expenditures. The Company is
currently in compliance with such covenants. The bank credit agreement also
imposes certain restrictions on sale of assets, mergers or consolidations,
creation of liens, investments, leases and loans and certain other matters.
The Company believes that funds provided by operations and amounts
available under its credit agreement will provide adequate liquidity for the
foreseeable future.
YEAR 2000
- - ---------
The Company is taking steps to ensure that all systems will be fully
compliant with Year 2000 requirements. Certain software applications are
already fully compliant. The Company is soliciting written assurances from
outside software vendors and third parties that their software will be
century-compliant. The Company believes that substantially all its systems
will be in compliance prior to the commencement of the Year 2000, and that
the Company will have no material business risk from such Year 2000 issues.
The cost to ensure compliance is estimated to be immaterial to the results of
operations at this time.
-9-
<PAGE>
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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On May 13, 1998 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.
August 12, 1998
/S/ Marie C. Becker
----------------------------------------------------------
Marie C. Becker, Group Vice President, Accounting & Finance
(Principal Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 304
<SECURITIES> 0
<RECEIVABLES> 16,158
<ALLOWANCES> 500
<INVENTORY> 0
<CURRENT-ASSETS> 17,522
<PP&E> 5,285
<DEPRECIATION> 4,585
<TOTAL-ASSETS> 48,849
<CURRENT-LIABILITIES> 12,155
<BONDS> 1,500
0
0
<COMMON> 1,187
<OTHER-SE> 31,239
<TOTAL-LIABILITY-AND-EQUITY> 48,849
<SALES> 0
<TOTAL-REVENUES> 43,283
<CGS> 0
<TOTAL-COSTS> 28,236
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 194
<INCOME-PRETAX> 15,095
<INCOME-TAX> 6,482
<INCOME-CONTINUING> 8,613
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,613
<EPS-PRIMARY> 1.78
<EPS-DILUTED> 1.64
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<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> 2,518
<OTHER-SE> 22,441
<TOTAL-LIABILITY-AND-EQUITY> 42,683
<SALES> 0
<TOTAL-REVENUES> 31,290
<CGS> 0
<TOTAL-COSTS> 22,618
<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> .98
<EPS-DILUTED> .89
</TABLE>
