<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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, 1998
[ ] 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
-----------
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 60603
Chicago, Illinois (Zip Code)
(Address of principal executive offices)
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 19, 1999, computed by reference to the last reported
price at which the stock was sold on such date, was $234,810,791.
The number of shares outstanding of the registrant's common stock, without
par value, as of March 19, 1999 was 4,549,229.
Portions of the following documents Part of this form 10-k into which the
- ----------------------------------- -------------------------------------
are incorporated by reference into document is incorporated by reference:
- ----------------------------------- --------------------------------------
this Form 10-K:
- ---------------
Duff & Phelps Credit Rating Co.
Proxy Statement dated March 31, 1999 Part III
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Duff & Phelps Credit Rating Co. (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. The Company 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 the Company. On October 31, 1994, Duff & Phelps
Corporation distributed to its stockholders all of the outstanding shares of
common stock of the Company. The dividend of one share of common stock of the
Company 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, the Company owns and
operates the credit rating business as an independent public company.
PRODUCTS AND SERVICES
The Company issues 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 a lesser extent, the Company 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 buy, sell or hold 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.
The Company's professional staff analyzes the factors that 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 officers and managers of the Company. Ratings are monitored and
reviewed at appropriate intervals depending on the type of rating. A watch
list is utilized to alert clients to ratings that are under review for
potential rating changes. New
2
<PAGE>
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 the Company's research
publications.
The Company'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, the
Company's research is delivered to users electronically. The Company is
committed to delivering a valuable 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.
The Company's research service is widely distributed to domestic and
international institutional investors including most of the largest U.S.
mutual funds, banks, trust companies, public and private pension advisors and
life and property/casualty insurance companies, as well as investment banks.
The Company's 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. The Company's fee schedule depends on 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 $32.6 million in 1993 to $84.0 million
in 1998, a five-year compound annual growth rate of approximately 21 percent.
This performance reflects a number of factors: increased market penetration
by the Company 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 and the growing use
of multiple agencies for ratings. No single client represented more than 2.0
percent of the Company's revenues in 1998.
Revenues for the year ended December 31, 1998, were $84.0 million,
an increase of 25 percent or $17.0 million, over the $67.0 million recorded
in 1997. Corporate rating revenues rose 15 percent or $5.1 million, while
structured finance rating revenues increased 41 percent or $12.2 million.
Rating revenue increases were partially offset by a decline in research
revenues of $0.3 million.
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
3
<PAGE>
or $9.1 million. Rating revenue increases were partially offset by a decline
in research revenues of $0.4 million.
MARKETING
The Company's marketing staff, as well as senior analytical staff,
introduces the rating service to prospective issuers and markets the
Company's research services to institutional investors, investment bankers,
and other key users of credit ratings. The Company's management believes that
the breadth of its research has led issuers to recognize the value of its
rating services to investors of securities rated by the Company. The Company
provides a comprehensive service that includes publicity for the ratings and
rating rationale for each issuer or transaction. The Company also conducts
seminars, participates in conferences and publishes timely articles related
to securities analysis.
COMPETITION
The Company 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 the
Company.
The Company's management believes that significant growth
opportunities exist in the credit rating market for the following reasons: 1)
Multiple agencies are increasingly used for ratings in the domestic and
international markets; 2) Securities issuance continues to grow globally; 3)
Certain securities issued in the marketplace have become more complex; 4) New
and innovative asset-backed securities continue to be introduced into the
capital markets; 5) More international issuers now have the ability to access
the U.S. capital markets for financing than in the past; and 6) Global
markets continue to experience disintermediation.
The Company penetrates international markets through strategic joint
ventures and its U.S., London and Hong Kong offices. As part of its marketing
efforts, the Company attempts to identify new financial products or emerging
markets not fully covered by other rating agencies. This strategy has allowed
the Company to gain significant market penetration in rating domestic and
international structured financings. 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.
While precise statistics are not available on industry revenues as
each of the Company's competitors are privately owned or are part of larger
corporations, the Company estimates its comparable 1998 revenues to be equal
to approximately 17 percent of the revenues of its largest competitor. The
Company's market penetration, however, is believed to vary
4
<PAGE>
significantly depending on market sector. For example, the Company has an
inconsequential share of the municipal, mutual fund and high-yield rating
market, as historically it has not actively competed in these segments.
However, the Company 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, the Company has issued claims paying ability ratings on 85
percent of the 100 largest life insurance companies. The Company rates
approximately 70 percent of the companies comprising the investor-owned
electric utility industry and about 80 percent of the 50 largest telecom and
cable TV companies. Of banks and finance companies, the Company rates 81
percent of the debt issued by the top 25 U.S. banks and 21 of the top 25 U.S.
finance companies. The Company also rates 48 percent of Fortune 100
companies. On the structured finance side of the business, the Company
currently rates the majority of the privately placed asset-backed securities
transactions and rates 13 of the top 25 public issuers of asset-backed
securities. Market share penetration for the commercial mortgage-backed
securities market is approximately 30 percent and about 44 percent for the
residential mortgage-backed securities market.
The Company believes that significant growth opportunities also
exist due to the generally low market penetration described above, in
addition to the growing use of multiple agencies for ratings, the increasing
number of new financial instruments that require ratings and the growth of
international financial markets as previously discussed. Moreover, as part of
its strategy to grow, the Company 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
The Company has affiliate offices in Argentina, Bangladesh, Brazil,
Canada, Chile, Colombia, Costa Rica, Czech Republic, India, Indonesia, Italy,
Korea, Malaysia, Mexico, Pakistan, Peru, Singapore, South Africa, Spain,
Turkey, Venezuela and Zimbabwe and is pursuing joint venture relationships in
several other countries. Additionally, the Company 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, the Company 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, the Company 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.
5
<PAGE>
EMPLOYEES
As of December 31, 1998, the Company employed 318 persons. The
Company considers its employee relations to be satisfactory.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Paul J. McCarthy 60 Chairman of the Board, Chief Executive Officer,
Chief Financial Officer and Director
Philip T. Maffei 55 President, Chief Operating Officer and Director
Ernest T. Elsner 58 Executive Vice President and General Counsel
Peter J. Stahl 49 Executive Vice President
Joseph C. Franzetti 43 Executive Vice President
Paul Taylor 36 Executive Vice President
</TABLE>
The executive officers of the Company are elected annually and serve
at the discretion of the Board of Directors of the Company.
Mr. McCarthy has been Chairman of the Board of the Company since
December 1995 and Chief Executive Officer and a Director of the Company since
February 1991. He has also been Chief Financial Officer of the Company since
November 1994. Mr. McCarthy was President of the Company 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.
Mr. Maffei has been President of the Company since December 1995,
Chief Operating Officer of the Company since October 1994 and a Director of
the Company since February 1991. From February 1991 to December 1995, Mr.
Maffei was an Executive Vice President of the Company.
Mr. Elsner has been General Counsel of the Company since July 1995
and an Executive Vice President of the Company since February 1991.
6
<PAGE>
Mr. Stahl has been an Executive Vice President of the Company since
July 1994. From January 1992 to July 1994, Mr. Stahl was a Senior Vice
President of the Company.
Mr. Franzetti has been an Executive Vice President of the Company
since January 1999. Mr. Franzetti was a Senior Vice President, Managing
Director of the Company from December 1996 to January 1999, and a Senior Vice
President of the Company from August 1993 to December 1996.
Mr. Taylor has been an Executive Vice President of the Company since
January 1999. Mr. Taylor was a Senior Vice President, Managing Director of
the Company from July 1994 to January 1999.
ITEM 2. PROPERTIES.
The Company, 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 103,188 square feet of office space.
ITEM 3. LEGAL PROCEEDINGS.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
7
<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:
<TABLE>
<CAPTION>
1998 High Low 1997 High Low
<S> <C> <C> <C> <C> <C>
Fourth Quarter $ 55 1/16 $ 40 1/2 Fourth Quarter $41 13/16 $31 15/16
Third Quarter 59 7/16 46 1/16 Third Quarter 32 29 5/8
Second Quarter 59 50 5/8 Second Quarter 30 3/4 25 3/4
First Quarter 50 3/8 36 5/8 First Quarter 27 1/8 23 7/8
</TABLE>
As of February 23, 1999, there were approximately 88 holders of
record of the Company's common stock.
DIVIDEND POLICY
During 1998 and 1997, 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.
8
<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.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------
(In millions, except per share data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues $84.0 $67.0 $53.1 $46.0 $40.4
Operating expenses 53.6 46.2 35.4 30.1 26.4
Name use fee paid to former parent 2.0 2.0 2.0 2.0 2.0
Operating income 28.4 18.8 15.7 13.9 12.0
Interest income (expense) and other
income, net 0.4 0 (0.1) (0.5) (0.6)
Earnings before income taxes 28.8 18.8 15.6 13.4 11.4
Income taxes 12.4 8.1 6.6 5.8 4.9
Net earnings $16.4 $10.7 $9.0 $7.6 $6.5
PER COMMON SHARE DATA:
Diluted earnings per common share $3.16 $2.00 $1.54 $1.28 $1.12
Cash dividends paid per common share $0.12 $0.12 $0.12 $0.12 $0.03
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital $(3.4) $0.7 $0.5 $1.6 $0.3
Goodwill and organization costs, net 21.7 22.3 23.1 23.8 24.6
Total assets 44.2 45.5 42.4 42.3 41.0
Long-term debt 0 7.0 5.5 6.0 10.0
Stockholders' equity $24.8 $23.3 $25.1 $26.1 $20.8
</TABLE>
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998, COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Revenues for the year ended December 31, 1998, were $84.0 million,
an increase of 25 percent, or $17.0 million, over the $67.0 million recorded
in 1997. Corporate rating revenues grew $5.1 million, and structured finance
rating revenues increased $12.2 million. Rating revenue increases were
partially offset by a decline in research revenues of $0.3 million.
Corporate rating revenues, which increased 15 percent over 1997,
benefited from a high level of financing activity by non-financial
corporations. Structured finance rating revenues increased 41 percent over
1997 and were driven by a high level of real estate and asset-backed
financings.
International rating revenues, which are incorporated in the above
comparisons and contributed to the overall gains, increased 30 percent.
Strong performance by our European operation was offset by weaknesses in our
Asian operation, while our Latin American business remained relatively flat
year over year.
Operating expenses for the year ended December 31, 1998, were $55.6
million, an increase of $7.4 million or 15 percent over the $48.2 million
recorded in 1997. The increase was predominantly the result of higher
employment expenses as well as increased general and administrative expenses
directly attributable to the growth in business, offset, in part, by lower
professional service fees.
Operating income for the year ended December 31, 1998, was $28.4
million, an increase of $9.6 million, or 51 percent, over the $18.8 million
recorded in 1997.
Interest expense decreased $0.3 million for the year ended December
31, 1998, due to a lower average debt balance in 1998 versus 1997. Other
income, mostly derived from dividends paid by the Company's international
partnerships, increased nominally over the previous year. Income tax expense
increased proportionately with income before taxes.
Net earnings totaled $16.4 million for the year ended December 31,
1998, a $5.7 million, or 53 percent, increase over last year. Diluted
earnings per share increased 58 percent to $3.16 versus $2.00 in 1997. Basic
earnings per share increased to $3.45 in 1998 versus $2.14 in 1997. Earnings
per share gains are primarily the result of the performance described above
in addition to the reduction in weighted average shares
10
<PAGE>
outstanding as a result of the Company's stock repurchases of 347,355 common
shares during 1998.
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 grew $5.2 million, while structured
finance rating revenues increased $9.1 million. Rating revenue increases were
partially offset by a decline in 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 the prior year.
Operating expenses for the year ended December 31, 1997, were $48.2
million, an increase of $10.9 million or 29 percent over the $37.3 million
recorded in 1996. Employment expense accounted for 48 percent of the
increase, litigation expense accounted for 32 percent and other operating
expenses accounted for 20 percent. Higher litigation costs in 1997 were
incurred in connection with a suit that was dismissed in September of 1997.
Operating income for the year ended December 31, 1997, was $18.8
million, an increase of $3.1 million or 20 percent over the $15.7 million
recorded in 1996.
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 versus $1.54 in 1996. Basic earnings per share increased
to $2.14 in 1997 versus $1.66 in 1996. In addition to the financial
performance discussed above, a reduction of about 9 percent in the Company's
weighted average shares outstanding contributed to the approximate 30 percent
gain in earnings per share year over year. The decrease in weighted average
shares
11
<PAGE>
outstanding was predominantly the result of the Company's repurchase of
448,505 common shares in 1997.
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, 1998 and 1997, capital
expenditures, net of retirements totaled $1.7 million and $1.8 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.
Cash investments of $0.6 million in 1998 and $0.9 million in 1997
were for ownership shares in certain joint ventures.
Financing activities for the year ended December 31, 1998, included
stock repurchases of 347,355 common shares amounting to $16.7 million, net
debt payments of $5.5 million and dividend payments totaling approximately
$0.6 million. During 1997, the Company repurchased 448,505 of its common
shares for approximately $13.9 million and made dividend payments totaling
approximately $0.6 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 December 31, 1998, $1.5 million
was outstanding and current at a weighted average interest rate of 6.0
percent, compared with $7.0 million outstanding at December 31, 1997, at a
weighted average interest rate of 6.4 percent. Commitment fees are accrued on
the unused facility at an annual rate of .25 percent and are paid quarterly.
The 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.
12
<PAGE>
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 11 to the Consolidated
Financial Statements, Segment Information, for the Company's disclosures
regarding segment reporting.
MARKET RISK
As of December 31, 1998, only 12 percent of the Company's total
assets were located outside of the United States. International revenues
totaled approximately 15 percent of the Company's total revenues in 1998. 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.
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.
13
<PAGE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements that are subject to
risks and uncertainties, including but not limited to the following: the
Company's performance is highly dependent on corporate debt issuances and
structured finance transactions, which may decrease for any number of
reasons, including changes in interest rates and adverse economic conditions;
the Company's performance is affected by the demand for and 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - For the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows - For the Years Ended December
31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity - For the
Years Ended December 31, 1998, 1997 and 1996
Notes to the Consolidated Financial Statements
Report of Independent Public Accountants
14
<PAGE>
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 618 $ 955
Accounts receivable, net of allowance for doubtful
accounts of $494 and $323, respectively 11,611 12,233
Other current assets 1,197 973
-------------------------
Total current assets 13,426 14,161
OFFICE FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS,
net of accumulated depreciation of $5,422 and $3,748,
respectively (Note 1) 4,880 4,914
OTHER ASSETS:
Goodwill and organization costs, net (Note 1) 21,742 22,412
Intangible assets, net (Note 1) 1,710 2,015
Other long-term investments (Note 3) 2,316 1,823
Other long-term assets 133 179
--------------------------
Total assets $ 44,207 $ 45,504
--------------------------
--------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued compensation and employment taxes $ 10,767 $ 8,169
Accounts payable 3,154 3,275
Current maturities of long-term debt (Note 4) 1,500 0
Advance service fee billings to clients (Note 1) 1,166 1,259
Accrued income taxes 228 719
Other current liabilities 5 29
---------------- ---------
Total current liabilities 16,820 13,451
LONG-TERM DEBT (Note 4 ) 0 7,000
OTHER LONG-TERM LIABILITIES (Note 8) 2,585 1,776
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,
4,544 and 4,807 shares issued and outstanding,
respectively 0 363
Retained earnings 24,802 22,914
----------------------------
Total stockholders' equity 24,802 23,277
----------------------------
Total liabilities and stockholders' equity $ 44,207 $ 45,504
----------------------------
----------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these balance sheets.
15
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES (NOTE 1) $ 83,995 $ 66,954 $53,083
EXPENSES:
Employment expense 34,831 27,768 22,520
Other operating expenses 15,914 15,902 10,804
Name usage fees paid to former parent (Note 2) 2,000 2,000 2,000
Depreciation and amortization (Note 1) 2,828 2,490 2,020
-----------------------------------------
Total Expenses 55,573 48,160 37,344
-----------------------------------------
OPERATING INCOME 28,422 18,794 15,739
Other income (Note 3) 590 510 283
Interest expense, net (Note 4) 146 495 413
-----------------------------------------
EARNINGS BEFORE INCOME TAXES 28,866 18,809 15,609
Income taxes (Note 6) 12,432 8,131 6,634
-----------------------------------------
NET EARNINGS $ 16,434 $ 10,678 $ 8,975
-----------------------------------------
-----------------------------------------
Basic weighted average shares outstanding (Note 1) 4,767 4,986 5,416
BASIC EARNINGS PER SHARE (NOTE 1) $ 3.45 $ 2.14 $ 1.66
Diluted weighted average shares outstanding (Note 1) 5,195 5,330 5,846
DILUTED EARNINGS PER SHARE (NOTE 1) $ 3.16 $ 2.00 $ 1.54
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 16,434 $ 10,678 $ 8,975
Adjustments to reconcile net earnings to cash
provided by operating activities:
(Increase) decrease in accounts receivable 622 (1,686) (199)
Increase in accrued compensation and employment taxes 2,598 2,412 1,238
Increase (decrease) in advance service fee billings to clients (93) 1,458 19
Depreciation and amortization 2,828 2,490 2,020
Increase in accrued income taxes payable 713 1,128 186
Increase (decrease) in other assets and liabilities, net 682 (1,101) 744
---------------------------------
Cash provided by operating activities 23,784 15,379 12,983
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of office furniture, equipment,
and leasehold improvements (1,715) (1,811) (1,496)
Increase in other long-term investments (611) (857) (380)
-------------------------------
Cash used in investing activities (2,326) (2,668) (1,876)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to shareholders (572) (599) (651)
(Increase) decrease in deferred financing costs 27 (4) 30
Issuance of common stock 927 1,232 1,141
Repurchases of common stock and stock equivalents (16,677) (13,885) (11,360)
Repayments of long-term debt (15,500) (15,750) (8,500)
Increases in long-term debt 10,000 17,250 8,000
-------------------------------
Cash used in financing activities (21,795) (11,756) (11,340)
-------------------------------
Net change in cash (337) 955 (233)
-------------------------------
Cash and cash equivalents, beginning of year 955 0 233
-------------------------------
Cash and cash equivalents, end of year $ 618 $ 955 $ 0
-------------------------------
-------------------------------
</TABLE>
- -------------------------------------------------------------------------------
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
17
<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, 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
Net earnings 0 16,434 16,434
Stock option exercises 927 0 927
Deferred compensation 54 0 54
Tax benefit of stock options exercised 1,359 0 1,359
Dividend paid to shareholders 0 (572) (572)
Stock repurchased (2,703) (13,974) (16,677)
----------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 0 $ 24,802 $ 24,802
---------------------------------------------------
---------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
THE FOLLOWING TABLE PROVIDES A SUMMARY OF COMMON STOCK ISSUED AND OUTSTANDING:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1 4,807 5,152 5,541
Repurchases of common stock (347) (448) (525)
Stock option exercises 84 103 136
-------------------------------------------------
BALANCE AT DECEMBER 31 4,544 4,807 5,152
-------------------------------------------------
-------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the consolidated financial statements are an
integral part of these statements.
18
<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. The Company is also a designated rating agency in
Japan.
On October 31, 1994, the spin-off of the Company from its former parent
company, Phoenix 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, 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 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.
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 years ended December 31 (in thousands):
19
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Weighted Average Shares Outstanding 4,767 4,986 5,416
Stock Options Outstanding 1,310 1,179 1,085
Reduction in Shares for Treasury Stock Proceeds (882) (835) (655)
----- ----- -----
Diluted Weighted Average Shares Outstanding 5,195 5,330 5,846
----- ----- -----
----- ----- -----
- ---------------------------------------------------------------------------------
</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:
SERVICE 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 years 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.
20
<PAGE>
3 OTHER LONG-TERM INVESTMENTS:
The Company's other long-term investments are composed of
investments made in international rating agency partnerships in Argentina,
Brazil, Chile, Colombia, Czech Republic, India, Indonesia, Italy, Mexico,
Pakistan, Peru, Singapore, South Africa, Spain, and Turkey.
4 LINE OF CREDIT AND LONG-TERM DEBT:
At December 31, 1998, the Company had current debt obligations of
$1.5 million, at an interest rate of 6.0 percent due on December 31, 1999,
under the Company's $20.0 million revolving credit facility. At December 31,
1997, long-term debt totaled $7.0 million at a weighted average interest rate
of approximately 6.4 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 years
presented.
5 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.
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," which requires the use of the asset and liability method of
accounting for income taxes.
Income tax expense was as follows for the years ended December 31
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $10,354 $6,733 $5,682
Foreign, State and Local,
Net of Federal Benefit 1,923 1,154 812
------- ------ ------
12,277 7,887 6,494
------- ------ ------
Deferred
Federal 131 208 122
State 24 36 18
------- ------ ------
155 244 140
------- ------ ------
Income Taxes $12,432 $8,131 $6,634
------- ------ ------
------- ------ ------
- ---------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
The following table presents a reconciliation from the federal
statutory rate to the effective tax rate for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Statutory Rate 35% 35% 35%
Foreign, State and Local Average Rates,
Net of Federal Benefit 5 5 5
Goodwill and Intangible 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 liability for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred Tax Assets:
Long-Term Reserves $ 0 $ 0 $ 280
Allowance for Doubtful Accounts 205 132 88
Accrued Vacation 11 8 7
Deferred Tax Liabilities:
Depreciation and Amortization (322) (401) (392)
----- ----- -----
Net Deferred Tax Liability $(106) $(261) $ (17)
----- ----- -----
----- ----- -----
- ------------------------------------------------------------------------------
</TABLE>
The net deferred tax liability is included in other long-term
liabilities. Management has determined that a valuation allowance for total
deferred tax assets is not required.
Tax benefits related to the exercise of options were approximately
$1.4 million, $0.7 million and $0.8 million for the years ended December 31,
1998, 1997 and 1996, respectively, and are included in stockholders' equity.
7 LEASES:
The Company leases its office space in New York, London and Hong
Kong and subleases its 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 1998, 1997 and 1996 were $2.3 million, $1.8 million and $1.3
million, respectively. Annual minimum lease payments under operating leases
for the five years subsequent to December 31, 1998, and thereafter, are as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $ 2,611
2000 2,596
2001 2,234
2002 2,238
2003 1,423
2004 AND THEREAFTER 6,644
--------
Total $17,746
--------
--------
</TABLE>
22
<PAGE>
8 OTHER LONG-TERM LIABILITIES:
Other long-term liabilities include a net 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 1,725,000 shares of common stock to
be granted to key employees, officers and directors.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS SHARES OPTION PRICE EXERCISABLE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
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
Granted 236,877 $43.24- 49.1875
Exercised (84,350) $ 1.85- 22.625
Canceled (21,701) $14.375-36.875
---------
Balance December 31, 1998 1,310,157 873,930
---------
---------
- --------------------------------------------------------------------------------
</TABLE>
The Plan is administered by a committee of the Board of Directors.
As of December 31, 1998, options to purchase 1,310,157 common shares were
granted and outstanding under the Plan; 1,273,742 were held by the Company's
employees, officers, and directors, and 36,415 were held by the former parent
employees, officers, and directors. The options outstanding vest and become
exercisable on average in even annual installments over three years at a
weighted average exercise price of $14.80. Options held by participants
terminate no later than 10 years from the date of grant.
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 on the average fair value at the grant date for option
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 would have been reduced
by approximately $408,085 in 1998, $245,210 in 1997, and $102,136 in 1996.
Basic earnings per share would have been reduced by $.08 in 1998, $.05 in
1997 and $.02 in 1996. Diluted earnings per share would have been reduced by
$.07 in 1998, $.05 in 1997, and $.02 in 1996.
The average fair value of the options granted in 1998 is estimated
at $20.94 per option on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: dividend yield of .26
percent; volatility of 20.21 percent; risk-free interest rate of 4.98
percent; assumed forfeiture rate of 5 percent per year and an expected life
of 10 years.
23
<PAGE>
The average fair value of the options granted in 1997 is estimated
at $18.16 per option on the date of grant using the Black-Scholes option
pricing model with the following assumptions: dividend yield of .28 percent;
volatility of 24.85 percent; risk-free interest rate of 5.62 percent; assumed
forfeiture rate 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 per option on the date of grant using the Black-Scholes option
pricing model with the following assumptions: dividend yield of .45 percent;
volatility of 18.25 percent; risk-free interest rate of 6.26 percent; assumed
forfeiture rate of 5 percent per year and an expected life of 10 years.
10 QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The following is a summary of condensed quarterly financial
information for the years ended 1998 and 1997 (in thousands, except per share
data):
<TABLE>
<CAPTION>
First Second Third Fourth
QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue
1998 $21,771 $21,512 $19,108 $21,604
1997 14,395 16,894 16,710 18,955
Operating Income
1998 7,649 7,398 6,255 7,120
1997 4,293 4,379 4,113 6,009
Net Earnings
1998 4,406 4,207 3,784 4,037
1997 2,516 2,502 2,280 3,380
Basic Earnings Per Share
1998 0.91 0.87 0.79 0.88
1997 0.49 0.49 0.46 0.70
Diluted Earnings Per Share
1998 0.84 0.80 0.72 0.81
1997 0.44 0.45 0.44 0.65
- --------------------------------------------------------------------------------
</TABLE>
11 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.
24
<PAGE>
The following table presents, on an enterprise wide-basis, revenues
by service type and revenues and long-lived assets by geographic area.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
- ------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
REVENUES BY SERVICE TYPE
Corporate Rating Revenues $38,516 $33,436 $28,225
Structured Finance Rating Revenues 42,151 29,940 20,790
Research Revenues 3,328 3,578 4,068
------- ------- -------
Consolidated Total 83,995 66,954 53,083
------- ------- -------
------- ------- -------
GEOGRAPHIC REVENUES
United States 71,120 57,048 46,141
International 12,875 9,906 6,942
------- ------- -------
Consolidated Total 83,995 66,954 53,083
------- ------- -------
------- ------- -------
LONG-LIVED ASSETS
United States 27,607 28,749 29,889
International 3,174 2,594 1,297
------- ------- -------
Consolidated Total 30,781 31,343 31,186
------- ------- -------
------- ------- -------
</TABLE>
12 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 $0.2 million, $0.5 million and
$0.4 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Income taxes paid were $11.7 million, $6.9 million and $6.4 million
in 1998, 1997 and 1996, respectively.
13 SUBSEQUENT EVENT:
On February 12, 1999, the Company declared its regular quarterly
dividend of $0.03 per share payable March 5, 1999, to shareholders of record
February 23, 1999.
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, 1998 and 1997, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Duff & Phelps
Credit Rating Co. and subsidiaries as of December 31, 1998, and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 1, 1999 (except with respect to the matter
discussed in Note 13, as to which
the date is February 12, 1999)
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 the
Company is included under the caption entitled "Election of Directors" in the
Company's Proxy Statement dated March 31, 1999 and is incorporated herein by
reference.
For information regarding the executive officers of the Company,
reference is made to the section entitled "Executive Officers of the Company"
in Part I, Item 1 of this report.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation of the Company's
directors and executive officers is included under the caption entitled
"Executive Compensation" in the Company's Proxy Statement dated March 31,
1999 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 the Company is included under
the caption entitled "Principal Holders of Common Stock" in the Company's
Proxy Statement dated March 31, 1999 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
27
<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 the Company, together with the
report thereon of Arthur Andersen LLP, consisting of:
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - For the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows - For the Years Ended December
31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity - For the
Years Ended December 31, 1998, 1997 and 1996
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.
28
<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)(5)
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)(5)
10.9 Duff & Phelps Credit Rating Co. Incentive Compensation Plan.(5)
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.
(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.
29
<PAGE>
(5) 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.
30
<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, 1999.
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, 1999 by the
following persons on behalf of the Registrant in the capacities indicated.
SIGNATURE TITLE
- --------- -----
/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 Group Vice President, Accounting &
- -------------------------- Finance (Principal Accounting Officer)
Marie C. Becker
/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
<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)(5)
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)(5)
10.9 Duff & Phelps Credit Rating Co. Incentive Compensation Plan.(5)
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.
(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) 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 10.9
INCENTIVE COMPENSATION PLAN
PURPOSE
The development of Duff & Phelps Credit Rating Co. (the "Company")
as a professional financial services corporation requires an Incentive
Compensation Plan for its officers. The Plan is designed to provide incentive
compensation based on the overall performance of Duff & Phelps Credit Rating
Co.
The Incentive Compensation Plan has two main purposes. First, the
Plan is designed to reward outstanding performance of the officers who by
their positions can make a meaningful contribution to the growth of the
Company. Specific objectives of the Plan include the attraction, motivation,
and retention of key management and professional staff. Participation in the
Plan should focus officers' attention on providing top quality service to our
clients, increasing productivity and obtaining new business opportunities to
increase the profitability of the Company. In addition to the opportunity for
extra compensation, the Plan provides some variability in the Company's
salary structure depending upon the overall financial success of the Company.
The Plan provides a basis for the distribution of incentive compensation
based upon the overall profitability of Duff & Phelps Credit Rating Co. as
well as predetermined standards of performance for each individual. This Plan
is meant to be a guideline for determining the amount of and the allocation
of incentive compensation.
PLAN GOVERNANCE
The Compensation Committee of the Duff & Phelps Credit Rating Co.
Board of Directors is responsible for the governance of the Plan.
Recommendations regarding eligibility, participation, performance assessment
and earned awards are made to the Compensation Committee by the Executive
Committee. The determination of the Compensation Committee shall be
conclusive and binding on all participants. The Compensation Committee has
the right to make changes to the Plan if necessary because of unusual
circumstances or because of the Company's financial needs.
ELIGIBILITY
Employees who are officers of the Company will be eligible to
participate in the Plan. Under special circumstances, support staff managers
and staff members who are not officers will be eligible to participate in the
Plan.
PARTICIPATION
Each person's participation in the Plan will be subject to the
annual nomination by the officer's supervisor and approval by the Executive
Committee.
1
<PAGE>
PERFORMANCE ASSESSMENT
The Plan incorporates an evaluation of performance which is based on
qualitative and/or quantitative factors. Each officer will be evaluated by
his/her supervisor at least once each year. This evaluation will be made with
the participant and will include a review of each area of responsibility,
work performance, and results achieved. This evaluation will be the basis for
the incentive compensation recommendation.
AWARD DETERMINATION
Awards under the Incentive Compensation Plan are recommended to the
Executive Committee for each participant. This recommendation will be made
after a review with the officer of his/her performance for the year. The
Executive Committee will review, modify, and/or approve the recommendation
for each individual before submission to the Compensation Committee for final
approval.
INCENTIVE COMPENSATION FUND
The target amount of incentive compensation is determined at the
beginning of each year and takes into consideration the level of current and
future income of the Company plus the cash needs of the business. The amount
of the incentive compensation will vary by an amount equal to 40% of the
operating income variance from the goal. The total amount available to be
distributed as cash awards under the Incentive Compensation Plan cannot
exceed 20% of the Company's pre-tax operating income before depreciation,
bonuses and name use fees.
The incentive compensation is much more sensitive in percentage
terms than the operating income. This leverage aspect is designed to provide
incentive opportunities for increased profitability of the Company and to
provide downside protection to the Company if the goals are not met.
VESTING OF AWARDS
Awards under the Plan will vest as of the last day of each Plan
year. Participants who leave the Company during a Plan year forfeit any
rights to an award for that year. The Executive Committee may make a partial
award to a participant who leaves the Company during a Plan year due to
death, total and permanent disability, or retirement.
PAYMENT OF AWARD
The payment of awards will be made as soon as practicable after the
Executive Committee completes its assessment of individual and corporate
performance for the year and the Compensation Committee of the Board of
Directors approves the awards.
2
<PAGE>
TERMS OF EMPLOYMENT
Nothing in the plan shall interfere with or limit in any way the
right of the Company to terminate any participant's employment at any time,
nor confer upon any participant any right to continue in the employ of the
Company.
3
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Name Jurisdiction of Incorporation
- ---- -----------------------------
Duff & Phelps Credit Rating Co. of Europe Illinois
Duff & Phelps Credit Rating Co. of Asia Illinois
<PAGE>
ARTHUR ANDERSEN LLP
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, 333-11823 and
333-63741.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 25, 1999
<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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 618
<SECURITIES> 0
<RECEIVABLES> 11,611
<ALLOWANCES> 494
<INVENTORY> 0
<CURRENT-ASSETS> 13,426
<PP&E> 4,880
<DEPRECIATION> 5,422
<TOTAL-ASSETS> 44,207
<CURRENT-LIABILITIES> 16,820
<BONDS> 1,500
0
0
<COMMON> 0
<OTHER-SE> 24,802
<TOTAL-LIABILITY-AND-EQUITY> 44,207
<SALES> 0
<TOTAL-REVENUES> 83,995
<CGS> 0
<TOTAL-COSTS> 55,573
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 146
<INCOME-PRETAX> 28,866
<INCOME-TAX> 12,432
<INCOME-CONTINUING> 16,434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,434
<EPS-PRIMARY> 3.45
<EPS-DILUTED> 3.16
</TABLE>
