DUFF & PHELPS CREDIT RATING CO, 10-K405, 1998-03-30

DUFF & PHELPS CREDIT RATING CO
10-K405, 1998-03-30
CONSUMER CREDIT REPORTING, COLLECTION AGENCIES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------

FORM 10-K

[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934

For the fiscal year ended December 31, 1997

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from ___________ to ___________

Commission file number 1-13286
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DUFF & PHELPS CREDIT RATING CO.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

ILLINOIS 36-3569514
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

55 East Monroe Street
Chicago, Illinois 60603
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (312) 368-3100
-----------

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
- ------------------------------- -----------------------------------------
Common Stock, without par value New York Stock Exchange

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 .
--- ---

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/

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 1998, computed by reference to the last reported
price at which the stock was sold on such date, was $223,799,844.

The number of shares outstanding of the registrant's common stock, without par
value, as of March 20, 1998 was 4,833,999.

Portions of the following Part of this Form 10-K into which the
documents are incorporated by document is incorporated
reference into this Form 10-K: by reference:
- ------------------------------ -------------------------------------
Duff & Phelps Credit Rating Co. Part III
Proxy Statement dated March 31, 1998

<PAGE>

PART I

Item 1. Business.

General

Duff & Phelps Credit Rating Co. ("Credit Rating" or the "Company") is
an internationally recognized credit rating agency which was established in
1982. The credit rating business was an outgrowth of the fixed income research
services provided by the firm, and/or its predecessors, dating back to 1932.
Credit Rating was incorporated in Illinois in 1987 as a wholly-owned subsidiary
of Duff & Phelps Corporation, at which time Duff & Phelps Corporation
contributed substantially all of the assets and liabilities of its credit rating
business to Credit Rating. On October 31, 1994, Duff & Phelps Corporation
distributed to its stockholders all of the outstanding shares of common stock of
Credit Rating. The dividend of one share of common stock of Credit Rating for
each three shares of Duff & Phelps Corporation common stock was distributed to
the stockholders of Duff & Phelps Corporation of record as of October 26, 1994.
As a result of the distribution, Credit Rating owns and operates the credit
rating business as an independent public company.

Products and Services

Credit Rating issues credit ratings on domestic and international
corporate and sovereign bonds, preferred stocks, commercial paper, certificates
of deposit, structured financings and insurance company claims paying ability.
To a lesser extent, Credit Rating issues credit ratings on municipal securities.
Credit ratings typically are issued for a fee paid by the issuer, and are
published for access by investors, issuers, investment bankers, traders and the
general public. Credit ratings concern only credit quality and are not
recommendations to either buy or sell rated securities, certificates of deposit
or insurance policies.

Credit ratings are issued in response to requests from issuers or
investment bankers. Requested ratings are for corporate short and long-term
fixed obligations, sovereign financings and structured finance programs,
including securitizations of receivables such as auto loans, credit cards,
residential real estate loans and commercial real estate loans, as well as
single project financings. In addition, claims paying ability ratings are issued
for life, property/casualty, financial guaranty, title and mortgage insurance
companies.

Credit Rating's professional staff analyzes the factors which determine
an issuer's credit quality and summarizes the basis for ratings. Credit ratings
are assigned and reviewed by a Credit Rating Committee composed of senior Credit
Rating officers and managers. Ratings are monitored and reviewed at appropriate
intervals depending on the type of rating.

<PAGE>

A watch list is utilized to alert clients to ratings that are under review for
potential rating changes. New ratings, the watch list, and changes to existing
ratings are primarily communicated through news releases to financial news
services, on-line data products, electronic and print media, and through Credit
Rating's research publications.

Credit Rating's research services include published reports concerning
new issues, detailed and summary reports on issuers, rating guides, comparative
statistical guides, and industry research. In addition, Credit Rating's research
is delivered to users electronically. Credit Rating is committed to a strong
research service as evidenced by a policy of hiring analysts with excellent
educational backgrounds, including many with prior employment experience in the
respective industries they follow. Credit Rating's research service is widely
distributed to domestic and international institutional investors including most
of the largest United States mutual funds, banks, trust companies, public and
private pension advisors and life and property/casualty insurance companies, as
well as investment banks. Credit Rating management believes that its policy of
allowing research subscribers direct access to credit analysts is attractive to
current and prospective subscribers.

Revenues

Revenue is derived from fees for ratings in connection with debt
issuance, annual surveillance of outstanding rated securities, and research
subscriptions. Although revenue is sensitive to the level of debt issuance, fees
from annual surveillance and research subscriptions tend to stabilize the
revenue base. Credit Rating's fee schedule depends upon the type and amount of
securities issued, the type of company or issue rated, the complexity of the
transaction, and the types of services subscribed to for research publications.
Revenues increased from $24.7 million in 1992 to $67.0 million in 1997, a
five-year compound annual growth rate of approximately 22 percent. This
performance reflects a number of factors: increased market penetration by Credit
Rating in the traditional corporate and structured finance rating businesses,
the increasing number of new financial instruments that require ratings, the
expansion of international rating activities, the growing use of multiple
agencies for ratings and the January 1994 transfer of the fixed income research
business from Credit Rating's former parent. No single client represented more
than 2.0 percent of Credit Rating's revenues in 1997.

Revenues for the year ended December 31, 1997, were $67.0 million,
an increase of 26 percent or $13.9 million, over the $53.1 million recorded
in 1996. Corporate rating revenues rose 19 percent or $5.2 million while
structured finance rating revenues increased 44 percent or $9.1 million.
Rating revenue increases were partially offset by a decline in fixed income
research revenues of $.4 million.

<PAGE>

Revenues for the year ended December 31, 1996, were $53.1 million, an
increase of 15 percent or $7.1 million, over the $46.0 million recorded in 1995.
Corporate rating revenues rose 13 percent or $3.2 million while structured
finance rating revenues increased 29 percent or $4.6 million. Rating revenue
increases were partially offset by a decline in fixed income research revenues
of $0.7 million.

Marketing

Credit Rating's marketing staff, as well as senior analytical staff,
introduces the rating service to prospective issuers, and markets Credit
Rating's research services to institutional investors, investment bankers, and
other key users of credit ratings. Management of Credit Rating believes that the
breadth of its research client base has led issuers to recognize the value of
its rating services to purchasers of securities rated by Credit Rating. Credit
Rating provides a comprehensive service that includes publicity for the ratings
and rating rationale for each issuer. Credit Rating also conducts seminars,
participates in conferences and publishes timely articles related to securities
analysis.

Competition

Credit Rating competes primarily with three other full-service
nationally recognized credit rating agencies. Moody's Investors Service, Inc.
and Standard & Poor's dominate the market and are much larger than Credit
Rating. Since multiple agencies are increasingly used for ratings in the
domestic and international markets, Credit Rating management believes that
significant growth opportunities exist in the credit ratings market. In
addition, more international issuers now have the ability to access the capital
markets of the United States for financing than in the past. Further, Credit
Rating penetrates the international market through strategic joint ventures and
its London and Hong Kong offices.

Structured finance ratings are transaction specific, and while growth
of related rating revenue has been substantial, there remains the potential for
further growth through penetration and continued development of the structured
finance markets, especially internationally. As part of its marketing efforts,
Credit Rating attempts to identify new financial products or emerging markets
not fully covered by other rating agencies. This strategy has allowed Credit
Rating to gain significant market penetration in rating domestic and
international structured real estate financings. Moreover, the London and Hong
Kong offices provide opportunities for Credit Rating to continue to penetrate
the structured finance rating market and to pursue rating opportunities in the
corporate market in Europe, Africa and in Asia as well.

While precise statistics are not available on industry revenues as each
of Credit Rating's competitors are privately owned or are part of larger
corporations, Credit Rating estimates its comparable 1997 revenues to be equal
to approximately 15 percent of the revenues of its

<PAGE>

largest competitor. Credit Rating's market penetration, however, is believed to
vary significantly depending on market sector. For example, Credit Rating has an
inconsequential share of the municipal and mutual fund rating market as
historically it has not actively competed in this segment. However, Credit
Rating believes its share of the rating business for insurance company claims
paying ability, structured financings, and certain segments of the corporate
market is much more meaningful. Specifically, in the United States market,
Credit Rating has issued claims paying ability ratings on 82 percent of the 100
largest life insurance companies. Credit Rating rates approximately 70 percent
of the companies comprising the investor-owned electric utility industry and
about 73 percent of the 50 largest local telephone companies. Of banks and
finance companies, Credit Rating rates approximately 80 percent and 70 percent,
respectively, of the 50 largest companies. Credit Rating also rates 48 percent
of Fortune 100 companies. On the structured finance side of the business, Credit
Rating currently rates nearly 75 percent of the privately-placed asset-backed
securities transactions and 60 percent of the top ten public issuers of
asset-backed securities. Market share penetration for the commercial real
estate-backed securities market is approximately 40 percent and about 30 percent
for the residential real estate-backed market.

Credit Rating believes that significant growth opportunities continue
to exist for the following reasons: 1) generally low market penetration; 2) the
growing use of multiple agencies for ratings; 3) the increasing number of new
financial instruments which require ratings; and 4) the growth of international
financial markets. Moreover, as part of its strategy to grow, Credit Rating has
established joint ventures in certain North and South American, European,
African and Asian countries (see "--International") and has offices in London
and Hong Kong.

International

Credit Rating has joint venture offices in Argentina, Bangladesh,
Brazil, Canada, Chile, Colombia, India, Indonesia, Italy, Mexico, Pakistan,
Peru, Singapore, South Africa, Turkey and Venezuela as of December 31, 1997 and
is pursuing joint venture relationships in several Asian and European countries.
Additionally, Credit Rating maintains its designation as a rating agency in
Japan, which was granted in October 1992 by the Minister of Finance of Japan.

In July 1994, Credit Rating organized Duff & Phelps Credit Rating Co.
of Europe, a U.S. wholly-owned subsidiary with an office in London, to provide
rating services in the United Kingdom and throughout Europe, as well as Africa.

In July 1996, Credit Rating organized Duff & Phelps Credit Rating Co.
of Asia, a U.S. wholly-owned subsidiary with an office in Hong Kong, to provide
rating services in Hong Kong and throughout Asia.

<PAGE>

Employees

As of December 31, 1997, Credit Rating employed 268 persons. Credit
Rating considers its employee relations to be satisfactory.

Executive Officers of Credit Rating

The executive officers of Credit Rating are as follows:

Name Age Position
- ---- --- --------

<S> <C> <C>
Paul J. McCarthy................................... 59 Chairman of the Board, Chief Executive Officer,
Chief Financial Officer and Director
Philip T. Maffei................................... 54 President, Chief Operating Officer and Director
Ernest T. Elsner................................... 57 Executive Vice President and General Counsel
Peter J. Stahl..................................... 48 Executive Vice President
Larry A. Brossman.................................. 64 Executive Vice President

</TABLE>

The executive officers of Credit Rating are elected annually and serve
at the discretion of the Board of Directors of Credit Rating.

Mr. McCarthy has been Chairman of the Board of Credit Rating since
December 1995 and Chief Executive Officer and a Director of Credit Rating since
February 1991. He has also been Chief Financial Officer of Credit Rating since
November 1994. Mr. McCarthy was also President of Credit Rating from February
1991 to December 1995. Mr. McCarthy was also an Executive Vice President and a
Director of Duff & Phelps Corporation from January 1992 to November 1994 and an
Executive Vice President and a Director of Duff & Phelps Inc. from February 1991
until its dissolution in November 1992. From May 1975 to February 1991, he
served as President, Chief Executive Officer and a Director of McCarthy,
Crisanti & Maffei, Inc., the investment research operations of which were
acquired by Duff & Phelps Corporation in February 1991.

Mr. Maffei has been President of Credit Rating since December 1995,
Chief Operating Officer of Credit Rating since October 1994 and a Director of
Credit Rating since February 1991. From February 1991 to December 1995, Mr.
Maffei was an Executive Vice President of Credit Rating. From May 1975 to
February 1991, he served as an Executive Vice President, Treasurer and a
Director of McCarthy, Crisanti and Maffei, Inc., the investment research
operations of which were acquired by Duff & Phelps Corporation in February 1991.

<PAGE>

Mr. Elsner has been General Counsel of Credit Rating since July 1995
and an Executive Vice President of Credit Rating since February 1991. Mr. Elsner
was a Senior Vice President of Credit Rating from January 1986 to January 1991.

Mr. Stahl has been an Executive Vice President of Credit Rating since
July 1994. From January 1992 to July 1994, Mr. Stahl was a Senior Vice President
of Credit Rating. From February 1991 to January 1992, Mr. Stahl was a Group Vice
President of Credit Rating. From March 1986 to February 1991, Mr. Stahl was Vice
President of Marketing of McCarthy, Crisanti & Maffei, Inc., the investment
research operations of which were acquired by Duff & Phelps Corporation in
February 1991.

Mr. Brossman has been an Executive Vice President of Credit Rating
since May 1996. Mr. Brossman was a Senior Vice President of Credit Rating from
January 1993 to May 1996, a Group Vice President of Credit Rating from January
1992 to January 1993 and a Vice President of Credit Rating from March 1988 to
January 1992.

Item 2. Properties.

Credit Rating, which is headquartered in Chicago, conducts its
operations through offices located in Chicago, Illinois; New York, New York;
London, England; and Hong Kong; in which locations it leases a total of
approximately 99,955 square feet of office space.

Item 3. Legal Proceedings.

During 1993, several legal actions were filed against Credit Rating in
the U.S. District Court for the Southern District of New York 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. Credit Rating had rated the Bonds but had
not rated the Notes. It was 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
contended that Credit Rating and the other defendants were liable for losses the
plaintiffs have suffered and for punitive damages. The holders of the Bonds also
sought recovery from Credit Rating of treble damages under the Racketeer
Influenced and Corrupt Organizations Act ("RICO"). It was asserted that Credit
Rating, 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. Credit Rating denied these
assertions. Credit Rating's ratings were based upon (and assumed the accuracy
of) the information provided to it by Towers and its officers. Credit Rating
took the position that it

<PAGE>

could not 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. In September 1997, the holders of the Bonds and the
Company resolved their disputes, and the legal actions filed by the holders of
the Bonds were dismissed by the federal courts. See Management's Discussion and
Analysis of Results of Operations and Financial Condition for the year ended
December 31, 1997.

Credit Rating is involved in other litigation, which in the opinion of
management, would not have a material adverse effect on Credit Rating's
financial position or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

<PAGE>

PART II

Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.

Price Range of Common Stock

The Company's common stock has traded on the New York Stock Exchange
("NYSE") under the ticker symbol "DCR" since October 24, 1994. The following
table sets forth the high and low sales prices per share for the common stock
traded on the NYSE for the periods indicated:

1997 High Low 1996 High Low
- ---- ---------- ---------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Fourth Quarter......... $41 13/16 $31 15/16 Fourth Quarter.......... $24 1/8 $21 7/8
Third Quarter.......... 32 29 5/8 Third Quarter........... 22 3/8 19 1/8
Second Quarter......... 30 3/4 25 3/4 Second Quarter.......... 21 1/4 16 1/8
First Quarter.......... 27 1/8 23 7/8 First Quarter........... 16 14

</TABLE>

As of February 24, 1998, there were approximately 98 holders of record
of the Company's common stock.

Dividend Policy

During 1997, 1996 and 1995, the Company paid a regular quarterly
dividend of $0.03 per share. The Company intends to continue to pay quarterly
cash dividends; however, future cash dividends will depend on the financial
condition, capital requirements and net earnings of the Company. Additionally,
the Company's bank credit agreement contains provisions which may limit the
aggregate dividends that the Company may pay on its common stock.

<PAGE>

Item 6. Selected Financial Data.

The following unaudited selected financial data of the Company should
be read in conjunction with the Company's Consolidated Financial Statements,
including the Notes thereto, and Management's Discussion and Analysis of
Financial Condition and Results of Operations.

FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993
- -------------------------------- -------- -------- --------- -------- --------
(In millions, except per share data)

<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues................................................................ $67.0 $53.1 $46.0 $40.4 $32.6
Operating expenses...................................................... 46.2 35.4 30.1 26.4 18.9
Income from operations before fees paid to former parent................ 20.8 17.7 15.9 14.0 13.7
Name use fee paid to former parent...................................... 2.0 2.0 2.0 2.0 2.0
Intercompany charges paid to former parent.............................. 0 0 0 0 10.8
Operating income........................................................ 18.8 15.7 13.9 12.0 0.9
Interest expense and other income....................................... 0 0.1 0.5 0.6 0.4
Earnings before income taxes............................................ 18.8 15.6 13.4 11.4 0.5
Income taxes............................................................ 8.1 6.6 5.8 4.9 0.5
Net earnings............................................................ $10.7 $9.0 $7.6 $6.5 $0

Per Common Share Data:
Diluted earnings per common share for the four years ended
December 31, 1997 and pro forma earnings
per share for the year ended December 31, 1993....................... $2.00 $1.54 $1.28 $1.12 $1.10
Cash dividends paid per common share.................................... $0.12 $0.12 $0.12 $0.03 $0

Balance Sheet Data (at end of period):
Working capital--exclusive of intercompany receivable/
payable to former parent in 1993..................................... $0.7 $0.5 $1.6 $0.3 $1.7
Goodwill, net........................................................... 22.3 23.1 23.8 24.6 25.3
Total assets............................................................ 45.5 42.4 42.3 41.0 36.1
Long-term debt.......................................................... 7.0 5.5 6.0 10.0 15.0
Stockholders' equity.................................................... $23.3 $25.1 $26.1 $20.8 $16.0

</TABLE>

<PAGE>

Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.

Results of Operations

Year Ended December 31, 1997, Compared with Year Ended December 31, 1996

Revenues for the year ended December 31, 1997, were $67.0 million, an
increase of 26 percent or $13.9 million, over the $53.1 million recorded in
1996. Corporate rating revenues rose $5.2 million while structured finance
rating revenues increased $9.1 million. Rating revenue increases were partially
offset by a decline in fixed-income research revenues of $0.4 million.

Corporate rating revenues, which increased 19 percent or $5.2 million
over 1996, demonstrated improved performance in all business sectors and were
driven by a strong increase in renewal revenues of $2.8 million, while new
client and issuance revenues added $2.4 million. Structured finance rating
revenues increased $9.1 million or 44 percent over the prior year. Structured
finance rating revenues posted healthy increases across the board in each
business line, with the residential mortgage-backed business contributing a
substantial portion of the overall revenue growth.

International rating revenues, which are incorporated in the above
comparisons, increased 43 percent over last year.

Operating income for the year ended December 31, 1997, was $18.8
million, an increase of $3.1 million or 19 percent over the $15.7 million
recorded in 1996. This increase reflects the revenue increases discussed above,
offset by increases in operating expense of $10.8 million, of which employment
expenses accounted for 48 percent, litigation expenses 32 percent, and other
operating expenses 20 percent. The increases in employment and other operating
expenses are the result of the growth and performance discussed above for each
business sector. Higher litigation costs in 1997 were incurred in connection
with the matters discussed in Note 5 to the Consolidated Financial Statements.

Interest expense increased nominally in 1997 due to a higher average
debt balance year over year. Other income increased approximately $0.3 million
as a result of dividends received from the Company's international partnerships.
Income tax expense increased proportionately with income.

Net earnings totaled $10.7 million in 1997, a $1.7 million or 19
percent increase over last year. Diluted earnings per share increased to $2.00
for the year over $1.54 in 1996. In addition to the financial performance
discussed above, a reduction of 9 percent in the Company's diluted weighted
average shares outstanding contributed to the 30 percent gain in earnings per
share year over year. The decrease in diluted weighted average shares
outstanding was predominantly the

<PAGE>

result of the Company's repurchase of 448,505 common shares in 1997. Basic
earnings per share increased to $2.14 versus $1.66 for the same reasons
discussed above.

Year Ended December 31, 1996, Compared with Year Ended December 31, 1995

Revenues for the year ended December 31, 1996, were $53.1 million,
an increase of 15 percent or $7.1 million, over the $46.0 million recorded in
1995. Corporate rating revenues rose $3.2 million, while structured finance
rating revenues increased $4.6 million. Rating revenue increases were
partially offset by a decline in fixed-income research revenues of $0.7
million.

Corporate rating revenues, which increased 13 percent or $3.2 million
over 1995, include improved performance by all sectors of the corporate rating
business and were driven by a strong increase in new client fees. Structured
finance rating fees increased 29 percent over the prior year led by the strong
performances of the asset-backed and commercial real estate sectors.
International rating fees, which are included in the above comparisons,
significantly contributed to the overall growth.

Operating income for the year ended December 31, 1996, was $15.7
million, an increase of $1.8 million, or 13 percent, over the $13.9 million
recorded in 1995. This increase reflects the revenue increases discussed above,
offset by an increase in employment expense of $3.7 million and an increase in
operating expenses of $1.6 million. Expense increases can be attributed to the
growth in both domestic and international business, which necessitated an
increase in the number of employees, additional travel expenses, office
expansions and an office addition in Hong Kong.

Interest expense decreased $0.3 million in 1996 due to the reduction in
the average debt balance and interest rate. Other income increased approximately
$0.1 million as a result of dividends received from the Company's international
partnerships. Income tax expense increased proportionately with income.

Net earnings totaled $9.0 million in 1996, a $1.4 million or 18 percent
increase over 1995. Diluted earnings per share increased 20 percent to $1.54 in
1996 compared with $1.28 in 1995. Diluted weighted average shares outstanding
decreased 2 percent due to the Company's stock repurchases of 573,391 common
shares and equivalents in 1996. Basic earnings per share were $1.66 in 1996
versus $1.36 for 1995.

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 years ended December 31, 1997, 1996 and 1995,
capital expenditures totaled $1.8 million, $1.5 million and $1.4 million,
respectively. These capital expenditures were primarily for

<PAGE>

leasehold improvements, computer equipment and office furniture. The Company
expects capital expenditures to approximate $2.0 million in 1998.

During 1997, the Company repurchased 448,505 of its common shares for
approximately $13.9 million. In 1996, the Company repurchased 573,391 of its
common shares and equivalents for approximately $11.4 million. In 1995, the
Company repurchased 155,333 of its common shares for approximately $2.2 million.
Future share repurchases are contingent upon the Company's financial condition,
capital requirements and earnings.

The Company has in place a $20.0 million revolving bank credit
agreement that expires December 31, 1999. At December 31, 1997, $7.0 million was
outstanding under the facility at a weighted average interest rate of
approximately 6.4 percent, compared with $5.5 million outstanding at December
31, 1996, at a weighted average interest rate of 6.3 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.

<PAGE>

Item 8. Financial Statements and Supplementary Data.

Consolidated Balance Sheets--December 31, 1997 and 1996

Consolidated Statements of Income--For the Years Ended December 31,
1997, 1996 and 1995

Consolidated Statements of Cash Flows--For the Years Ended
December 31, 1997, 1996 and 1995

Consolidated Statements of Changes in Stockholders' Equity--For the
Years Ended December 31, 1997, 1996 and 1995

Notes to the Consolidated Financial Statements

Report of Independent Public Accountants

<PAGE>

CONSOLIDATED BALANCE SHEETS
(In thousands)

December 31, 1997 1996
- ------------ ------------------- --------------------

<S> <C> <C>
ASSETS

CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 955 $ 0
Accounts receivable, net of allowance for doubtful
accounts of $323 and $219, respectively............................ 12,233 10,547
Other current assets................................................... 973 642
------------------- --------------------
Total current assets........................................................ 14,161 11,189

OFFICE FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
net of accumulated depreciation of $3,748 and $3,042,
respectively (Note 1).................................................. 4,914 4,540

OTHER ASSETS:
Goodwill, net (Note 1).................................................. 22,346 23,094
Intangible assets, net (Note 1)......................................... 2,015 2,319
Other long-term investments (Note 3).................................... 2,010 1,178
Other long-term assets.................................................. 58 55
------------------- --------------------
Total assets................................................................. $45,504 $42,375
------------------- --------------------
------------------- --------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accrued compensation and employment taxes............................... $ 8,169 $ 5,756
Accounts payable........................................................ 3,275 3,442
Advance service fee billings to clients (Note 1)........................ 1,259 870
Accrued income taxes.................................................... 719 576
Other current liabilities............................................... 29 15
------------------- --------------------
Total current liabilities.................................................... 13,451 10,659

LONG-TERM DEBT (Note 4)...................................................... 7,000 5,500

OTHER LONG-TERM LIABILITIES (Note 8)......................................... 1,776 1,161

STOCKHOLDERS' EQUITY:
Preferred stock, no par value: 3,000 shares authorized, zero
shares issued and outstanding......................................... 0 0
Common stock, no par value: 15,000 shares authorized, 4,807 and 5,152
shares issued and outstanding, respectively........................... 363 5,032
Retained earnings........................................................ 22,914 20,023
------------------- --------------------
Total stockholders' equity.................................................... 23,277 25,055
------------------- --------------------
Total liabilities and stockholders' equity.................................... $45,504 $42,375
------------------- --------------------
------------------- --------------------
</TABLE>

The accompanying notes to the consolidated financial statements are an integral
part of these balance sheets.

<PAGE>

CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

For the Years Ended December 31, 1997 1996 1995
- -------------------------------- -------------- --------------- ---------------

<S> <C> <C> <C>
REVENUES (Note 1)........................................ $66,954 $53,083 $45,983

EXPENSES:
Employment expense.................................. 27,768 22,520 18,849
Other operating expenses (Note 2)................... 15,902 10,804 9,477
Name usage fees paid to former parent (Note 2)...... 2,000 2,000 2,000
Depreciation and amortization (Note 1).............. 2,490 2,020 1,725
--------------- ---------------- ----------------
Total Expenses........................................... 48,160 37,344 32,051
--------------- ---------------- ----------------

OPERATING INCOME......................................... 18,794 15,739 13,932

Other income (Note 3).................................... 510 283 237
Interest expense (Note 4)................................ 495 413 712
--------------- ---------------- ----------------

EARNINGS BEFORE INCOME TAXES............................. 18,809 15,609 13,457

Income taxes (Note 6).................................... 8,131 6,634 5,825
--------------- ---------------- ----------------
NET EARNINGS............................................. $10,678 $8,975 $7,632
--------------- ---------------- ----------------
--------------- ---------------- ----------------

Basic weighted average shares outstanding (Note 1)....... 4,986 5,416 5,619
Basic earnings per share (Note 1)........................ $2.14 $1.66 $1.36

Diluted weighted average shares outstanding (Note 1)..... 5,330 5,846 5,953
Diluted earnings per share (Note 1)...................... $2.00 $1.54 $1.28

</TABLE>

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

<PAGE>

Consolidated Statements of Cash Flows
(In thousands)

For the Years Ended December 31, 1997 1996 1995
- -------------------------------- ------------ ------------ ------------

<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net earnings.......................................................... $10,678 $8,975 $7,632

Adjustments to reconcile net earnings to cash provided by operating
activities:
Increase in accounts receivable....................................... (1,686) (199) (2,203)
Increase (decrease) in advance service fee billings to clients........ 1,458 19 (1,213)
Depreciation and amortization......................................... 2,490 2,020 1,725
Increase (decrease) in accrued income taxes payable................... 1,128 186 (78)
Increase in other assets and liabilities, net......................... 1,311 1,982 1,162
------------ ------------ ------------
Cash provided by operating activities...................................... 15,379 12,983 7,025
------------ ------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of office furniture, equipment,
and leasehold improvements.......................................... (1,811) (1,496) (1,380)
Increase in other long-term investments............................... (857) (380) (156)
------------ ------------ ------------
Cash used in investing activities.......................................... (2,668) (1,876) (1,536)
------------ ------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES:

Dividends paid to shareholders........................................ (599) (651) (674)
Deferred financing costs.............................................. (4) 30 30
Issuance of common stock.............................................. 1,232 1,141 337
Repurchases of common stock and stock equivalents..................... (13,885) (11,360) (2,163)
Repayments of long-term debt.......................................... (15,750) (8,500) (6,000)
Increases in long-term debt........................................... 17,250 8,000 2,000
Long-term lease payments.............................................. 0 0 (4)
------------ ------------ ------------
Cash used in financing activities.......................................... (11,756) (11,340) (6,474)
------------ ------------ ------------

Net change in cash......................................................... 955 (233) (985)
------------ ------------ ------------

Cash and cash equivalents, beginning of year............................... 0 233 1,218
------------ ------------ ------------

Cash and cash equivalents, end of year..................................... $955 $0 $233
------------ ------------ ------------
------------ ------------ ------------

</TABLE>

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

<PAGE>

Consolidated Statements of Changes in Stockholders' Equity
(In thousands)

<TABLE>
<CAPTION>
Common Stock Retained Earnings Total
------------------- ---------------------- --------------------

<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994................. $16,089 $4,741 $20,830
Net earnings................................. 0 7,632 7,632
Stock option exercises....................... 337 0 337
Tax benefit of stock options exercised....... 107 0 107
Dividend paid to shareholders................ 0 (674) (674)
Stock repurchased............................ (2,163) 0 (2,163)
------------------- ---------------------- --------------------

BALANCE AT DECEMBER 31, 1995................. $14,370 $11,699 $26,069
Net earnings................................. 0 8,975 8,975
Stock option exercises....................... 1,141 0 1,141
Deferred compensation........................ 50 0 50
Tax benefit of stock options exercised....... 831 0 831
Dividend paid to shareholders................ 0 (651) (651)
Stock and stock equivalents repurchased...... (11,360) 0 (11,360)
------------------- ---------------------- --------------------

BALANCE AT DECEMBER 31, 1996................. $5,032 $20,023 $25,055
Net earnings................................. 0 10,678 10,678
Stock option exercises....................... 1,232 0 1,232
Deferred compensation........................ 55 0 55
Tax benefit of stock options exercised....... 741 0 741
Dividend paid to shareholders................ 0 (599) (599)
Stock repurchased............................ (6,697) (7,188) (13,885)
------------------- ---------------------- --------------------

BALANCE AT DECEMBER 31, 1997................. $363 $22,914 $23,277
------------------- ---------------------- --------------------
------------------- ---------------------- --------------------
</TABLE>

The following table provides a summary of common stock issued and outstanding:

For The Years Ended December 31, 1997 1996 1995
- -------------------------------- ------------------- ---------------------- --------------------

<S> <C> <C> <C>
BALANCE AT JANUARY 1,....................... 5,152 5,541 5,650
Repurchases of common stock................. (448) (525) (155)
Stock option exercises...................... 103 136 46
------------------- ---------------------- --------------------

BALANCE AT DECEMBER 31,..................... 4,807 5,152 5,541
------------------- ---------------------- --------------------
------------------- ---------------------- --------------------

</TABLE>

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

<PAGE>

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1 SIGNIFICANT ACCOUNTING POLICIES:

General

Duff & Phelps Credit Rating Co. (the "Company") is an internationally
recognized credit rating agency that 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
with international partners in North America, South America, Asia, Europe and
Africa.

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 that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

The accompanying consolidated financial statements have been
prepared in accordance with GAAP and include those assets, liabilities,
revenues and expenses directly attributable to the Company's operations in
the years presented. Certain reclassifications have been made to the prior
year's financial statements to conform with the 1997 presentation.

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 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 at December 31
for each of the years presented. Common stock equivalents are based on
outstanding stock options under a non-qualified stock option plan. Recently the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standard No. 128 ("SFAS 128") which changes the computation and the disclosure
of earnings per share ("EPS") data. SFAS 128 replaces the presentation of
"primary" EPS wtih "basic" EPS. Under SFAS 128 "diluted" EPS, the dilutive
effect of outstanding share options is computed similarly to "primary" EPS as
historically calculated by the Company.

<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 under SFAS No. 128 for the years indicated (in thousands):

Basic Weighted Average Shares Outstanding.......... 4,986 5,416 5,619

Stock Options Outstanding.......................... 1,179 1,085 1,100

Reduction in Shares for Treasury Stock Proceeds.... (835) (655) (766)
-------- -------- -------

Diluted Weighted Average Shares Outstanding........ 5,330 5,846 5,953
- --------------------------------------------------------------------------------------

</TABLE>

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 net earnings over
the remaining useful life of goodwill and intangible assets to measure
recoverability. At December 31, 1997, the Company believes that the full
amount of goodwill and intangible assets is recoverable.

Depreciation

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, on
average from 2 to 10 years.

2 RELATED PARTIES:

Service Fees Paid to D&P

Support agreements in effect between the Company and D&P include a name
use fee of $2.0 million per year and actual charges for D&P administrative
services, which are included in the Company's financial results for the years
presented. Effective September 30, 2000, the name use fee reduces to $10,000 per
year.

Service Fees Paid to the Company

The Company and D&P are party 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 publication printing services for a fee which 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
publication printing

<PAGE>

support fees offset other operating expenses. The fixed income research
agreement expires on September 30, 2000.

3 OTHER LONG-TERM INVESTMENTS:

The Company's other long-term investments are composed of investments
made in international rating agency partnerships in Argentina, Chile, Colombia,
India, Italy, Singapore, Mexico, Pakistan, Peru, South Africa, Turkey and
Venezuela.

The Company accounts for its joint venture investments under either the
cost or equity method as dictated by ownership interest.

4 LONG-TERM DEBT:

The Company had long-term debt obligations of $7.0 million and $5.5
million at weighted average interest rates of approximately 6.4 percent and 6.3
percent on December 31, 1997 and 1996, respectively.

The $7.0 million outstanding at December 31, 1997, under the Company's
$20.0 million, revolving credit facility, is due on December 31, 1999.

The credit agreement contains financial covenants which require that
the Company maintain certain ratios and satisfy certain financial tests,
including restrictions on the ability to incur indebtedness and limitations on
the amount of capital expenditures, common stock dividends and advances to
subsidiaries. The Company was in compliance with such covenants for all years
presented.

5 LITIGATION MATTERS:

During 1993, several legal actions were filed against the Company in
the U.S. District Court for the Southern District of New York 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 was 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
contended that the Company and the other defendants were 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 was 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 denied 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 took the
position that it could not 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. In September 1997, the holders of the
Bonds and the Company resolved their disputes, and the legal actions filed by
the holders of the Bonds were dismissed by the federal courts. See Management's
Discussion and Analysis of Results of Operations and Financial Condition for the
year ended December 31, 1997.

<PAGE>

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.

6 INCOME TAXES:

The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income
Taxes."

Income tax expense was as follows for the years ended December 31 (in
thousands):

Current
Federal................................. $6,733 $5,682 $4,961
State................................... 1,154 812 780
------ ------ ------
7,887 6,494 5,741
------ ------ ------
Deferred
Federal................................. 208 122 73
State................................... 36 18 11
------ ------ ------
244 140 84
------ ------ ------
Income Taxes..................................... $8,131 $6,634 $5,825
------ ------ ------
------ ------ ------
- ----------------------------------------------------------------------------------

</TABLE>

The following table presents a reconciliation from the federal statutory
rate to the effective tax rate for the years ended December 31:

1997 1996 1995
- ----------------------------------------------------------------------------------

<S> <C> <C> <C>
Federal Statutory Rate............................. 35% 35% 35%
State and Local Average Rates,
Net of Federal Benefit......................... 5 5 5
Goodwill Amortization & Other...................... 3 3 3
------ ------ ------
Effective Rate..................................... 43% 43% 43%
------ ------ ------
------ ------ ------
- ----------------------------------------------------------------------------------

</TABLE>

Deferred tax assets and liabilities represent the amount of taxes
receivable or payable in future years as a result of differences between the tax
bases of assets and liabilities and amounts reported in the financial statements
as of year end. The effects of these temporary differences comprised the net
deferred tax asset (liability) for the years presented (in thousands):

1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred Tax Assets:
Long-Term Reserves.................... $ 0 $ 280 $ 385
Allowance for Doubtful Accounts....... 132 88 86
Accrued Vacation...................... 8 7 0
Deferred Tax Liabilities:
Depreciation and Amortization......... (401) (392) (348)
------ ------ ------
Net Deferred Tax Asset (Liability)............. $(261) $ (17) $ 123
------ ------ ------
------ ------ ------
- -----------------------------------------------------------------------------------

</TABLE>

The net deferred tax assets (liabilities) are included in other long-term
assets (liabilities). Management has determined that a valuation allowance is
not required.

<PAGE>

Tax benefits related to the exercise of options were $741,311, $830,998
and $107,304 for the years ended December 31, 1997, 1996 and 1995, respectively,
and are included in stockholders' equity.

7 LEASES:

The Company leases its existing office space in New York, London, Hong Kong
and subleases its existing office space in Chicago. A substantial portion of
these leases expire on December 31, 2008. The agreements include escalation
clauses, the effect of which cannot be determined at this time. Lease payments
for 1997, 1996 and 1995 were $1.8 million, $1.3 million and $1.2 million,
respectively. Annual minimum lease payments under operating leases for the five
years subsequent to December 31, 1997, and thereafter, are as follows (in
thousands):

<S> <C>
1998.................... $ 2,354
1999.................... 2,597
2000.................... 2,133
2001.................... 2,226
2002.................... 2,238
2003 and thereafter..... 8,742
-------
Total................... $20,290
-------
-------
</TABLE>

8 OTHER LONG-TERM LIABILITIES:

Other long-term liabilities include the deferred tax liability and advanced
client billings for services to be performed beyond the current year.

9 STOCK OPTION PLAN:

The Company's 1994 Long Term Stock Incentive Plan (the "Plan") allows
for awards of up to a maximum of 1,575,000 shares of common stock to be
granted to key employees, officers and directors. The Plan is administered by
a committee of the Board of Directors. As of December 31, 1997, options to
purchase 1,179,331 common shares were granted and outstanding under the Plan;
1,131,000 were held by the Company's employees and directors, and 48,331 were
held by D&P's employees and directors. The options outstanding vest and
become exerciseable on average in even annual installments over three years
at a weighted average exercise price of $17.86. Options held by participants
terminate no later than 10 years from the date of grant.

Outstanding Options Shares Option Price Exercisable
- ------------------- ------- ------- ------- -------------
<S> <C> <C> <C>
Balance December 31, 1994.............. 960,112 291,013

Granted................................ 207,800 $12.13 - 14.38
Exercised.............................. (46,505) $ 1.85 - 10.00
Canceled............................... (21,667) $ 9.00 - 16.50
---------
Balance December 31, 1995.............. 1,099,740 506,920

Granted................................ 229,035 $19.13 - 22.63
Exercised.............................. (135,605) $ 1.85 - 16.50
Canceled............................... (108,067) $ 1.85 - 16.50
---------
Balance, December 31, 1996............. 1,085,103 590,817

Granted................................ 234,056 $31.34 - 36.875
Exercised.............................. (103,291) $ 2.06 - 22.625
Canceled............................... (36,537) $ 9.00 - 22.625
---------
Balance December 31, 1997.............. 1,179,331 763,352
---------
---------
</TABLE>
23

<PAGE>

The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for the Plan. Accordingly, no compensation expense has been
recognized for its stock-based compensation plan. Had compensation cost for the
Company's stock option plan been determined based upon the average fair value at
the grant date for awards under the Plan consistent with the methodology
prescribed under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share for both basic and diluted would have been reduced by approximately
$275,211 or $.05 per share in 1997, $224,000 or $.04 per share in 1996 and
$83,000 or $.01 per share for 1995. The average fair value of the options
granted in 1997 is estimated at $18.16 on the date of grant using the
Black-Scholes option pricing model with the following assumptions: dividend
yield .28 percent; volatility 24.85 percent; risk-free interest rate of 5.62
percent; assumed forfeiture of 5 percent per year and an expected life of 10
years. The average fair value of the options granted in 1996 is estimated at
$10.19 on the date of grant using the Black-Scholes option pricing model with
the following assumptions: dividend yield .45 percent; volatility 18.25 percent;
risk-free interest rate of 6.26 percent; assumed forfeiture of 5 percent per
year and an expected life of 10 years. The average fair value of the options
granted during 1995 is estimated as $6.14 on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: dividend
yield of .45 percent; volatility of 20.95 percent; risk-free interest rate of
5.75 percent; assumed forfeiture rate of 5 percent per year and an expected life
of 10 years.

10 QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
(In thousands, except per share data)

The following is a summary of condensed quarterly financial information for
years ended 1997 and 1996:

<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue
1997.............. $14,395 $16,894 $16,710 $18,955
1996.............. 12,238 12,989 12,184 15,672

Operating Income
1997.............. 4,293 4,379 4,113 6,009
1996.............. 3,696 3,885 3,549 4,609

Net Earnings
1997.............. 2,516 2,502 2,280 3,380
1996.............. 2,072 2,203 2,062 2,639

Basic Earnings Per Share
1997.............. 0.49 0.49 0.46 0.70
1996.............. 0.38 0.40 0.38 0.50

Diluted Earnings Per Share
1997.............. 0.44 0.45 0.44 0.65
1996.............. 0.35 0.37 0.35 0.46
- --------------------------------------------------------------------------------

</TABLE>

<PAGE>

11 SUPPLEMENTAL CASH FLOW INFORMATION:

For purposes of the consolidated statements of cash flows, the Company
considers investments with maturities of three months or less to be cash
equivalents.

Cash interest and fees paid were $0.5 million, $0.4 million and $0.7
million for the years ended December 31, 1997, 1996 and 1995, respectively.

Income taxes paid were $6.9 million, $6.4 million and $5.9 million in
1997, 1996 and 1995, respectively.

12 SUBSEQUENT EVENTS:

On February 13, 1998, the Company declared its regular quarterly dividend
of $0.03 per share payable March 6, 1998, to shareholders of record February 24,
1998.

25
<PAGE>

Report of Independent Public Accountants

TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
DUFF & PHELPS CREDIT RATING CO.:

We have audited the accompanying consolidated balance sheets of DUFF & PHELPS
CREDIT RATING CO. (an Illinois corporation) and subsidiaries as of December 31,
1997 and 1996, and the related statements of income, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. 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 Duff & Phelps Credit Rating Co.
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Chicago, Illinois
February 3, 1998 (except with respect to the matter
discussed in Note 12, as to which
the date is February 13, 1998)

26
<PAGE>

Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.

None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

Information regarding directors and nominees for directors of Credit
Rating is included under the caption entitled "Election of Directors" in Credit
Rating's Proxy Statement dated March 31, 1998 and is incorporated herein by
reference.

For information regarding the executive officers of Credit Rating,
reference is made to the section entitled "Executive Officers of Credit Rating"
in Part I, Item 1 of this report.

Item 11. Executive Compensation.

Information regarding executive compensation of Credit Rating's
directors and executive officers is included under the caption entitled
"Executive Compensation" in Credit Rating's Proxy Statement dated March 31, 1998
and is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Information regarding beneficial ownership of the Common Stock by
certain beneficial owners and by management of Credit Rating is included under
the caption entitled "Principal Holders of Common Stock" in Credit Rating's
Proxy Statement dated March 31, 1998 and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

None.

<PAGE>

PART IV

Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K.

(a) The following documents are filed as a part of this report:

1. Financial Statements

(a) Duff & Phelps Credit Rating Co. Financial Statements

The Consolidated Financial Statements of Credit Rating, together with
the report thereon of Arthur Andersen LLP, consisting of:

Consolidated Balance Sheets--December 31, 1997 and 1996

Consolidated Statements of Income--For the Years Ended
December 31, 1997, 1996 and 1995

Consolidated Statements of Cash Flows--For the Years Ended December
31, 1997, 1996 and 1995

Consolidated Statements of Changes in Stockholders' Equity--For the
Years Ended December 31, 1997, 1996 and 1995

Notes to Consolidated Financial Statements

Report of Independent Public Accountants

All schedules have been omitted either as inapplicable or because the
required information is included in the financial statements or notes thereto.

<PAGE>

3. Exhibits
<TABLE>
<CAPTION>

Exhibit
No. Description
- ------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of Duff & Phelps
Credit Rating Co.(1)

3.2 Bylaws of Duff & Phelps Credit Rating Co.(3)

4 Form of Common Stock Certificate.(1)

10.1 Duff & Phelps Credit Rating Co. 1994 Long-Term Stock Incentive
Plan.(1)(6)

10.2 Tax Sharing and Indemnification Agreement.(2)

10.3 Distribution and Indemnity Agreement.(2)

10.4 Services Agreement.(2)

10.41 Amendment to Services Agreement.(3)

10.5 Name Use Agreement.(2)

10.6 Sublease Agreement relating to Chicago, Illinois office space.(2)

10.7 Lease Assignment Agreement relating to New York, New York office
space.(2)

10.8 Form of Severance Protection Agreement between the Registrant and
its executive officers.(1)(6)

10.9 Duff & Phelps Credit Rating Co. Incentive Compensation Plan.
(5)(6)

10.10 Credit Agreement among Duff & Phelps Credit Rating Co., various
financial institutions and Bank of America Illinois.(2)

10.11 Second Amendment to Credit Agreement among Duff & Phelps Credit Rating Co.,
various financial institutions and Bank of America Illinois.(4)

21 Subsidiaries of Duff & Phelps Credit Rating Co.

23 Consent of Arthur Andersen LLP.

27 Financial Data Schedule.

</TABLE>
- ----------------
(1) Incorporated herein by reference to the corresponding exhibit to the
Registrant's registration statement on Form 10, as amended.

(2) Incorporated herein by reference to the corresponding exhibit to the
Registrant's Annual Report on Form 10-K for 1994.

(3) Incorporated herein by reference to the corresponding exhibit to the
Registrant's Annual Report on Form 10-K for 1995.

<PAGE>

(4) Incorporated herein by reference to the corresponding exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.

(5) Incorporated herein by reference to the corresponding exhibit to
the Registrant's Annual Report on Form 10-K for 1996.

(6) Denotes management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report pursuant to Item 601
of Regulation S-K.

(b) Reports on Form 8-K.

None.

This annual report contains forward looking statements that are subject
to risks and uncertainties, including but not limited to the following:
Credit Rating's performance is highly dependent on corporate debt
issuances and structured finance transactions, which may decrease for a
variety of reasons including changes in interest rates and adverse
economic conditions; Credit Rating's performance is affected by the
demand for and the market acceptance of Credit Rating's services; and
Credit Rating'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 Credit Rating with the
Securities and Exchange Commission.

<PAGE>

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 on the 26th day of
March, 1998.

DUFF & PHELPS CREDIT RATING CO.

By /s/ Paul J. McCarthy
-----------------------------------------
Paul J. McCarthy
Chairman of the Board and Chief Executive
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on the 26th day of March, 1998 by the
following persons on behalf of the Registrant in the capacities indicated.

Signature Title
- --------- -----
<S> <C>
/s/ Paul J. McCarthy Chairman of the Board, Chief Executive
- -------------------------- Officer, Chief Financial Officer and Director
Paul J. McCarthy (Principal Executive and Financial Officer)

/s/ Marie C. Becker Controller, Treasurer and Secretary
- --------------------------
Marie C. Becker (Principal Accounting Officer)

/s/ Philip T. Maffei President, Chief Operating Officer and
- -------------------------- Director
Philip T. Maffei

/s/ Milton L. Meigs Director
- --------------------------
Milton L. Meigs

/s/ Jonathan Ingham Director
- --------------------------
Jonathan Ingham

/s/ Donald J. Herdrich Director
- --------------------------
Donald J. Herdrich

</TABLE>

<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>

Exhibit
No. Description
- ------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of Duff & Phelps
Credit Rating Co.(1)

3.2 Bylaws of Duff & Phelps Credit Rating Co.(3)

4 Form of Common Stock Certificate.(1)

10.1 Duff & Phelps Credit Rating Co. 1994 Long-Term Stock Incentive
Plan.(1)(6)

10.2 Tax Sharing and Indemnification Agreement.(2)

10.3 Distribution and Indemnity Agreement.(2)

10.4 Services Agreement.(2)

10.41 Amendment to Services Agreement.(3)

10.5 Name Use Agreement.(2)

10.6 Sublease Agreement relating to Chicago, Illinois office space.(2)

10.7 Lease Assignment Agreement relating to New York, New York office
space.(2)

10.8 Form of Severance Protection Agreement between the Registrant and
its executive officers.(1)(6)

10.9 Duff & Phelps Credit Rating Co. Incentive Compensation Plan.
(5)(6)

10.10 Credit Agreement among Duff & Phelps Credit Rating Co., various
financial institutions and Bank of America Illinois.(2)

10.11 Second Amendment to Credit Agreement among Duff & Phelps Credit Rating Co.,
various financial institutions and Bank of America Illinois.(4)

21 Subsidiaries of Duff & Phelps Credit Rating Co.

23 Consent of Arthur Andersen LLP.

27 Financial Data Schedule.

</TABLE>
- ----------------
(1) Incorporated herein by reference to the corresponding exhibit to the
Registrant's registration statement on Form 10, as amended.

(2) Incorporated herein by reference to the corresponding exhibit to the
Registrant's Annual Report on Form 10-K for 1994.

(3) Incorporated herein by reference to the corresponding exhibit to the
Registrant's Annual Report on Form 10-K for 1995.

<PAGE>

(4) Incorporated herein by reference to the corresponding exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997.

(5) Incorporated herein by reference to the corresponding exhibit to
the Registrant's Annual Report on Form 10-K for 1996.

(6) Denotes management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report pursuant to Item 601
of Regulation S-K.

<PAGE>

Exhibit 21

Subsidiaries of the Registrant

Name Jurisdiction of Incorporation
- ---- -----------------------------

<S> <C>
Duff & Phelps Credit Rating Co. of Europe........ Illinois

Duff & Phelps Credit Rating Co. of Asia.......... Illinois

</TABLE>

<PAGE>
EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 33-86488, 33-88186, 333-1440 and 333-11823.

ARTHUR ANDERSEN LLP

Chicago, Illinois
March 26, 1998

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATION FOUND IN
THE COMPANY'S FORM 10-K FOR 1997, 1996 AND 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 995
<SECURITIES> 0
<RECEIVABLES> 12,233
<ALLOWANCES> 323
<INVENTORY> 0
<CURRENT-ASSETS> 14,161
<PP&E> 4,914
<DEPRECIATION> 3,748
<TOTAL-ASSETS> 45,504
<CURRENT-LIABILITIES> 13,451
<BONDS> 7,000
0
0
<COMMON> 363
<OTHER-SE> 22,914
<TOTAL-LIABILITY-AND-EQUITY> 45,504
<SALES> 0
<TOTAL-REVENUES> 66,954
<CGS> 0
<TOTAL-COSTS> 48,160
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 495
<INCOME-PRETAX> 18,809
<INCOME-TAX> 8,131
<INCOME-CONTINUING> 10,678
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,678
<EPS-PRIMARY> 2.14
<EPS-DILUTED> 2.00

</TABLE>

<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 0 233
<SECURITIES> 0 0
<RECEIVABLES> 10,547 10,308
<ALLOWANCES> 219 212
<INVENTORY> 0 0
<CURRENT-ASSETS> 11,189 11,070
<PP&E> 4,540 4,013
<DEPRECIATION> 3,042 2,249
<TOTAL-ASSETS> 42,375 42,483
<CURRENT-LIABILITIES> 10,659 9,464
<BONDS> 5,500 6,000
0 0
0 0
<COMMON> 5,032 14,370
<OTHER-SE> 20,023 11,699
<TOTAL-LIABILITY-AND-EQUITY> 42,375 42,483
<SALES> 0 0
<TOTAL-REVENUES> 53,083 45,983
<CGS> 0 0
<TOTAL-COSTS> 37,344 32,051
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 413 712
<INCOME-PRETAX> 15,609 13,457
<INCOME-TAX> 6,634 5,825
<INCOME-CONTINUING> 8,975 7,632
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,975 7,632
<EPS-PRIMARY> 1.66 1.36
<EPS-DILUTED> 1.54 1.28

</TABLE>