<PAGE>
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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 MARCH 31, 1999
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 April 30, 1999, the registrant had 4,497,996 shares of common
stock outstanding.
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<PAGE>
DUFF & PHELPS CREDIT RATING CO. AND SUBSIDIARIES
Quarter Ended March 31, 1999
Index
<TABLE>
<CAPTION>
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Consolidated Condensed Statements of Income 1
Three Months Ended March 31, 1999 and
Three Months Ended March 31, 1998
Consolidated Balance Sheets 2
March 31, 1999 and December 31, 1998
Consolidated Statements of Cash Flows 3
Three Months Ended March 31, 1999 and
Three Months Ended March 31, 1998
Notes to the Consolidated Financial Statements 4-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 8-10
</TABLE>
<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
March 31, March 31,
1999 1998
----------- ------------
<S> <C> <C>
REVENUES (NOTE 1) $22,194 $21,771
EXPENSES
Employment expenses 9,513 8,810
Other operating expenses 3,446 4,136
Name use fee--paid to former parent (Note 2) 500 500
Depreciation and amortization (Note 1) 680 676
--------- --------
Total expenses 14,139 14,122
OPERATING INCOME 8,055 7,649
Other income 128 210
Interest expense (Note 3) 87 142
--------- --------
EARNINGS BEFORE INCOME TAXES 8,096 7,717
Income taxes 3,473 3,311
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NET EARNINGS $ 4,623 $ 4,406
--------- --------
--------- --------
Basic weighted average shares outstanding (Note 1) 4,556 4,816
BASIC EARNINGS PER SHARE (NOTE 1) $ 1.01 $ 0.91
Diluted weighted average shares outstanding (Note 1) 4,971 5,222
DILUTED EARNINGS PER SHARE (NOTE 1) $ 0.93 $ 0.84
</TABLE>
-1-
The accompanying notes to the consolidated financial statements are
an integral part of these statements.
<PAGE>
DUFF & PHELPS CREDIT RATING CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
---------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,093 $ 618
Accounts receivable, net of allowance for doubtful
accounts of $598 and $494, respectively 12,302 11,611
Other current assets 1,258 1,197
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Total current assets 15,653 13,426
OFFICE FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
net of accumulated depreciation of $5,834 and $5,422, respectively (Note 1) 4,715 4,880
OTHER ASSETS:
Goodwill and organization costs, net (Note 1) 21,546 21,742
Intangible assets, net (Note 1) 1,634 1,710
Other long-term investments 2,362 2,316
Other long-term assets 112 133
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TOTAL ASSETS $46,022 $44,207
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---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued compensation and employment taxes $ 3,934 $10,767
Accounts payable 3,478 3,154
Current maturities of line of credit borrowings (Note 3) 7,000 1,500
Advance service fee billings to clients (Note 1) 1,018 1,166
Accrued income taxes 1,080 228
Other current liabilities 32 5
---------- ------------
Total current liabilities 16,542 16,820
OTHER LONG-TERM LIABILITIES 3,516 2,585
STOCKHOLDERS' EQUITY:
Preferred stock, no par value: 3,000 shares authorized, zero outstanding 0 0
Common stock, no par value; 15,000 shares authorized, 4,546 and 4,544 shares
issued and outstanding, respectively 0 0
Retained earnings 25,964 24,802
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TOTAL STOCKHOLDERS' EQUITY 25,964 24,802
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $46,022 $44,207
---------- ------------
---------- ------------
</TABLE>
-2-
The accompanying notes to the consolidated financial statements are
an integral part of these statements.
<PAGE>
DUFF & PHELPS CREDIT RATING CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 4,623 $ 4,406
Increase in accounts receivable (690) (1,384)
Decrease in accrued compensation and employment taxes (6,833) (4,661)
Increase (decrease) in advance service fee billings (148) 289
Depreciation and amortization 680 676
Increase in accrued income taxes 3,258 2,440
Increase in other assets and liabilities - net 1,240 895
---------- ------------
Cash provided by operating activities 2,130 2,661
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CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in other long-term investments (45) (265)
Purchase of office furniture, equipment
and leasehold improvements-net of retirements (247) (608)
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Cash used in investing activities (292) (873)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to shareholders (137) (144)
Decrease in deferred financing costs 8 5
Issuances of common stock 1,880 352
Repurchases of common stock (7,614) 0
Increase of line of credit borrowings 10,500 6,000
Decrease of line of credit borrowings (5,000) (7,000)
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Cash used in financing activities (363) (787)
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NET CHANGE IN CASH 1,475 1,001
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CASH, BEGINNING OF PERIOD 618 955
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CASH, END OF PERIOD $ 2,093 $ 1,956
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</TABLE>
-3-
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 directly or through international partners in North
America, South America, Europe, Asia and Africa.
On October 31, 1994, the spin-off of the Company from its former parent
company, Phoenix Investment Partners, Ltd., 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 on 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
these 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 financial statements to conform with the current
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, which has 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 were 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.
-4-
<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 ended March 31 (in thousands):
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Basic Weighted Average Shares Outstanding 4,556 4,816
Stock Options Outstanding 1,165 1,145
Reduction in Shares for Treasury Stock Proceeds (750) (739)
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Diluted Weighted Average Shares Outstanding 4,971 5,222
----- -----
----- -----
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</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. Certain monitoring fees are billed in advance and are
amortized over the length of the life of the security.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets are shown net of accumulated
amortization. Goodwill is amortized over its estimated remaining life of
approximately 29 years, and intangible assets are amortized over remaining
lives of one through 10 years.
The Company periodically evaluates whether significant events have
occurred that may require a revision of the estimated useful life of goodwill
and intangible assets or an impairment of the recoverability of remaining
balances. The Company uses an estimate of future undiscounted cash flows over
the remaining useful life of goodwill and intangible assets to measure
recoverability. 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 three to 10 years. Leasehold
improvements are amortized over the remaining lives of the related leases
which are one to 10 years.
2 RELATED PARTIES:
NAME USE FEES PAID TO D&P
A name use fee agreement in effect between the Company and the former
parent requiring payment of $2.0 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 $10,000 per year.
SERVICE FEES PAID TO THE COMPANY
The Company provides the former parent 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.
-5-
<PAGE>
3 LINE OF CREDIT AND LONG-TERM DEBT:
At March 31, 1999, the Company had current debt obligations of $7.0
million, at an interest rate of 5.4 percent due on December 31, 1999, under
the Company's $20.0 million revolving credit facility. At March 31, 1998,
long-term debt totaled $6.0 million at a weighted average interest rate of
approximately 6.2 percent.
The credit agreement contains financial covenants that require the
Company to 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
periods presented.
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 are no proceedings 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.
5 SEGMENT INFORMATION:
The primary business of the Company is to provide credit ratings on
domestic and international corporate bonds, sovereign bonds, preferred
stocks, commercial paper, certificates of deposit, structured financings and
insurance company claims paying ability. To assess performance of the
Company, executive management regularly reviews the financial statements on a
consolidated basis. In addition, executive management reviews revenues by
major service type on a consolidated basis.
The following table presents, on an enterprise wide-basis, revenues by
service type and revenues and long-lived assets by geographic area for the
periods ended March 31, (in thousands):
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
REVENUES BY SERVICE TYPE
Corporate Rating Revenues $10,446 $10,383
Structured Finance Rating Revenues 10,927 10,611
Research Revenues 821 777
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Consolidated Total 22,194 21,771
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GEOGRAPHIC REVENUES
United States 18,332 18,335
International 3,862 3,436
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Consolidated Total 22,194 21,771
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------- -------
LONG-LIVED ASSETS
United States 29,552 30,615
International 817 864
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Consolidated Total 30,369 31,479
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------- -------
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</TABLE>
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<PAGE>
6 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.
Net cash interest and fees paid were $0.09 million and $0.1 million for the
three months ended March 31, 1999 and 1998, respectively.
7 QUARTERLY DIVIDEND:
On May 11, 1999, the Company declared its regular quarterly dividend of
$0.03 per share payable June 14, 1999, to shareholders of record May 25, 1999.
-7-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999, COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
Revenues for the three months ended March 31, 1999, were $22.2 million,
an increase of two percent from the $21.8 million recorded in 1998. Corporate
rating revenues totaled $10.4 million, and structured finance rating revenues
increased to $10.9 million, while other revenues were $0.9 million.
Revenues in the first quarter of 1999 increased despite the tremendous
growth experienced in the first quarter of 1998. 1998's extraordinary level
of structured finance transactions, as well as extensive financing activity
by non-financial corporations, resulted in a difficult comparison with the
first quarter of 1999. Nevertheless, structured finance revenues increased
three percent in the first quarter of 1999 versus 1998, while corporate
rating revenues were essentially unchanged. International revenues, which are
included in the above comparisons, increased 12 percent as a result of strong
growth in DCR's Latin American business.
Operating expenses for the three months ended March 31, 1999, were $14.1
million, essentially unchanged from the comparable 1998 period. This
primarily reflected higher compensation costs due to business growth offset
by lower travel and bad debt expenses. The latter cost was impacted in 1998
by the weakness in the developing markets which necessitated a higher
receivable reserve.
Operating income for the three months ended March 31, 1999, was $8.1
million, an increase of $0.5 million, or seven percent, over the $7.6 million
recorded in 1998.
Interest expense decreased for the first quarter 1999, due to a lower
average debt balance and lower interest rates in 1999 versus 1998. Other
income was mostly derived from dividends paid by the Company's international
partnerships. Income tax expense increased in line with pre-tax income.
Net earnings totaled $4.6 million for the period ended March 31, 1999, a
$0.2 million, or five percent, increase over last year. Diluted earnings per
share increased 11 percent to $0.93 versus $0.84 in 1998. Basic earnings per
share increased to $1.01 in 1999 versus $0.91 in 1998. Earnings per share
gains are the result of the performance described above in addition to the
reduction in weighted average shares outstanding as a result of the Company's
stock repurchases of 347,355 common shares during 1998 and 142,300 shares in
the first three months of 1999. Since the inception of the Company's
repurchase program, a total of 1,666,884 shares have been repurchased as of
March 31, 1999.
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 three months ended March 31, 1999 and 1998, capital
expenditures, net of retirements totaled $0.2 million and $0.6 million,
respectively. These capital expenditures were primarily for leasehold
improvements, computer equipment and office furniture. The Company expects
capital expenditures to approximate $2.0 million in 1999. Other cash
investments for the first quarter included payments for ownership shares in
certain joint ventures.
-8-
<PAGE>
Financing activities for the three months ended March 31, 1999, included
stock repurchases of 142,300 common shares amounting to $7.6 million and
dividend payments totaling approximately $0.1 million. Future share
repurchases are contingent upon the Company's financial condition, capital
requirements and earnings, as well as the market price and availability of
the Company's common stock.
The Company has in place a $20.0 million revolving bank credit agreement
that expires December 31, 1999. At March 31, 1999, $7.0 million was
outstanding and current at a weighted average interest rate of 5.4 percent.
At March 31, 1998, long-term debt totaled $6.0 million at a weighted average
interest rate of 6.2 percent. Commitment fees are accrued on the unused
facility at an annual rate of 0.25 percent and are paid quarterly.
The Company is currently in the process of renegotiating the credit line
due to its upcoming expiration.
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.
SEGMENT REPORTING
The primary business of the Company is to provide credit ratings on
domestic and international corporate bonds, sovereign bonds, preferred
stocks, commercial paper, certificates of deposit, structured financings and
insurance company claims paying ability. To assess performance of the
Company, executive management regularly reviews the financial statements on a
consolidated basis. In addition, executive management reviews revenues by
major service type on a consolidated basis. See Note 5 to the Consolidated
Financial Statements, Segment Information, for the Company's disclosures
regarding segment reporting.
MARKET RISK
As of March 31, 1999, only seven percent of the Company's total assets
were located outside of the United States. International revenues totaled
approximately 17 percent of the Company's total revenues for the first
quarter 1999. The majority of the revenue was invoiced in U.S. dollars. The
Company feels that any exposure to loss due to foreign exchange fluctuations
is minimal and immaterial to the financial statements at this time;
therefore, the Company has not entered into any hedging transactions.
The Company's exposure to changes in interest rates is limited to
borrowings under the current line of credit. Management believes that any
potential losses due to interest rate fluctuations would be minimal and
immaterial to the financial statements based on current loan levels;
therefore, the Company has not entered into any interest rate swap agreements.
YEAR 2000
The Year 2000 issue is the result of computer programs using a two-digit
format instead of four digits to indicate years, which could cause a system
failure or other computer errors in connection with Year 2000 computing. The
Company is taking steps to ensure that all systems will be fully compliant
with Year 2000 requirements. The Company has adopted a Year 2000 compliance
program and is currently in the assessment and renovation phases of such
program. Certain material software applications, including all internally
developed mission critical systems, are already fully compliant.
-9-
<PAGE>
The Company is soliciting written assurances from outside vendors and other
third parties that their software and other products will be
century-compliant.
Ultimately, critical vendors who cannot give adequate reassurances of their
readiness will be eliminated. The Company believes that substantially all its
systems will be in compliance prior to the commencement of the Year 2000.
Nevertheless, the Company expects to develop a contingency plan in 1999. The
cost to ensure compliance is estimated to be immaterial to the results of
operations at this time.
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 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.
-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.
May 12, 1999
/s/ Marie C. Becker
------------------------------------------
Marie C. Becker
Group Vice President, Accounting & Finance
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATION FOUND ON
PAGES 1 AND 2 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,093
<SECURITIES> 0
<RECEIVABLES> 12,302
<ALLOWANCES> 597
<INVENTORY> 0
<CURRENT-ASSETS> 15,653
<PP&E> 4,715
<DEPRECIATION> 5,834
<TOTAL-ASSETS> 46,022
<CURRENT-LIABILITIES> 16,542
<BONDS> 7,000
0
0
<COMMON> 0
<OTHER-SE> 25,964
<TOTAL-LIABILITY-AND-EQUITY> 46,022
<SALES> 0
<TOTAL-REVENUES> 22,194
<CGS> 0
<TOTAL-COSTS> 14,139
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87
<INCOME-PRETAX> 8,096
<INCOME-TAX> 3,473
<INCOME-CONTINUING> 4,623
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,623
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 0.93
</TABLE>
