1 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549------------------------ (MARK ONE)FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934(MARK ONE)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
19982003OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
o 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 1-14037
THE DUN & BRADSTREETMOODY’S CORPORATION
(EXACT(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3998945 (STATE
(STATE OF INCORPORATION)(I.R.S.13-3998945
(I.R.S. EMPLOYER IDENTIFICATION NO.)ONE DIAMOND HILL ROAD, MURRAY HILL, NJ 07974 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)REGISTRANT'S99 CHURCH STREET, NEW YORK, NEW YORK 10007
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:
(908) 665-5000.(212) 553-0300.
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------- ---------------------COMMON STOCK, PAR VALUE $.01 PER SHARE.................SHARENEW YORK STOCK EXCHANGE PREFERRED SHARE PURCHASE RIGHTS........................RIGHTSNEW 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 by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes
[X]x No[ ]oIndicate 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'sRegistrant’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.[ ] As of January 15, 1999, 165,195,356 shares of Common Stock ofoIndicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yesx Noo
The
Dun & Bradstreet Corporation were outstanding and theaggregate market value ofsuchMoody’s Corporation Common Stock held by nonaffiliates* on June 30, 2003 (based upon its closing transaction price on the Composite Tape on such date) was approximately$5,017.6 million. *Calculated by excluding all$7.9 billion.As of January 31, 2004, 148.6 million shares
held by executive officers and directorsofthe Registrant without conceding that all such persons are "affiliates"Common Stock ofthe Registrant for purposes of federal securities laws.Moody’s Corporation were outstanding.1
DOCUMENTS INCORPORATED BY REFERENCE
PART III - --------Item 10 Directors and Executive Section entitled "Proposal No. 1 -- Election of Officers of the Registrant Directors" of the Company's proxy statement which will be filed no later than 120 days after December 31, 1998 Item 11 Executive Compensation Section entitled "Compensation of Executive Officers and Directors" of the Company's proxy statement which will be filed no later than 120 days after December 31, 1998 Item 12 Security Ownership of Section entitled "Security Ownership of Certain Beneficial Management and Others" of the Company's proxy Owners and Management statement which will be filed no later than 120 days after December 31, 1998 Item 13 Certain Relationships and Section entitled "Security Ownership of Related Transactions Management and Others" of the Company's proxy statement which will be filed no later than 120 days after December 31, 1998------------------------Portions of the Registrant’s definitive proxy statement for use in connection with its annual meeting of stockholders scheduled to be held on April 27, 2004, are incorporated by reference into Part III of this Form 10-K.
The Index to Exhibits is
located on Pages 78-81included as Part IV, Item 15(a)(3) of this Form10-K - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------10-K.
* Calculated by excluding all shares held by executive officers and directors of the Registrant without conceding that all such persons are “affiliates” of the Registrant for purposes of federal securities laws. 2
TABLE OF CONTENTSPART I
ITEM 1. BUSINESS
(a)(1) On JuneBackground
As used in this report, except where the context indicates otherwise, the terms “Moody’s” or “Company” refer to Moody’s Corporation and its subsidiaries. The Company’s executive offices are located at 99 Church Street, New York, NY 10007 and its telephone number is (212) 553-0300.
Prior to September 30,
1998 (the "1998 Distribution Date"),2000, the Company operated as part of The Dun & Bradstreet Corporation("(“Old D&B"&B”)separated. On September 8, 2000, the Board of Directors of Old D&B approved a plan to separate into two publicly traded companies--– the Company and The NewDun & BradstreetD&B Corporation("(“New D&B" or&B”). On September 30, 2000 (“the"Company"Distribution Date”)and R.H. Donnelley Corporation. The separation (the "1998 Distribution"), Old D&B distributed to its shareholders all of thetwo companies was accomplished through a tax-free dividend byoutstanding shares of New D&B common stock (the “2000 Distribution”). New D&B comprised the business of Old D&B of the Company, which is a new entity comprised of Moody's Investors Service ("Moody's") and the&B’s Dun & Bradstreet operating company (the"D“D&Boperating company"Business”). The remaining business of Old D&B consisted solely of the business of providing ratings and related research and credit risk management services (the “Moody’s Business”) and was renamed “Moody’s Corporation”.New D&B is the accounting successor to Old D&B, which was incorporated under the laws of the State of Delaware on April 8, 1998. Old D&B began operating as an independent publicly-owned corporation on July 1, 1998 as a result of its June 30, 1998 spin-off (the “1998 Distribution”) from the corporation now known as “R.H. Donnelley Corporation” and previously known as “The Dun & Bradstreet Corporation” (“Donnelley”). Old D&B became the accounting successor to Donnelley at the time of the 1998 Distribution.
Prior to the 1998 Distribution, Donnelley was the parent holding company for subsidiaries then engaged in the businesses currently conducted by New D&B, Moody’s and Donnelley. Prior to November 1, 1996, it also was the parent holding company of subsidiaries conducting business under the names Cognizant Corporation (“Cognizant”) and ACNielsen Corporation (“ACNielsen”). On that date Donnelley effected a spin-off of the capital stock of Cognizant and ACNielsen to its stockholders (the “1996 Distribution”). Cognizant subsequently changed its name to
"The Dun & Bradstreet Corporation," andNielsen Media Research, Inc. in connection with its 1998 spin-off of thecontinuing entity (i.e., Old D&B), consistingcapital stock ofR.H. Donnelley Inc., the operating company, and the DonTech partnership, changed its name to "R.H. Donnelley Corporation" ("Donnelley"IMS Health Incorporated (“IMS Health”).The tax-free stock dividend was issued on the 1998 Distribution Date to shareholders of record at the close of business on June 17, 1998. Due to the relative significance of Moody's and the D&B operating company, the transaction has been accounted for as a reverse spin-off and, as such, Moody's and the D&B operating company have been classified as continuing operations and R.H. Donnelley Inc. and DonTech have been classified as discontinued operations.For purposes of
effecting the 1998 Distribution and ofgoverning certainof the continuingongoing relationships between the Company andDonnelleyNew D&B after thetransaction,2000 Distribution and to provide for an orderly transition, thetwo companies haveCompany and New D&B entered into various agreements including a Distribution Agreement,(the "1998 Distribution Agreement"), aTax Allocation Agreement,(the "1998 Tax Allocation Agreement") and anEmployee Benefits Agreement,(the "1998 Employee Benefits Agreement"). The following descriptions summarize the material terms of such agreements, but are qualified by reference to the texts of such agreements, which are incorporated herein by reference. 1998 DISTRIBUTION AGREEMENT The 1998 DistributionShared Transaction Services Agreement,provided for, among other things, certain corporate transactions required to effect the 1998 DistributionInsurance andother arrangements between Old D&B (i.e., Donnelley) and the Company subsequent to the 1998 Distribution. In particular, the 1998 DistributionRisk Management Services Agreement,defines the assets and liabilities which were allocated to and assumed by the Company and those which remained with Donnelley. The 1998 Distribution Agreement also defines what constitutes the "New D&B Business" and what constitutes the "R.H. Donnelley Business". Pursuant to the 1998 Distribution Agreement, Old D&B transferred or caused to be transferred to the Company all its right, title and interest in the assets comprising the New D&B Business and other assets not specifically included in the R.H. Donnelley Business; and the Company transferred or caused to be transferred to Donnelley all its right, title and interest in the assets comprising the R.H. Donnelley Business. All assets were transferred without any representation or warranty, "as is-where is", and the relevant transferee bears the risk that any necessary consent to transfer was not obtained. Each party also agreed to exercise its respective commercially reasonable efforts promptly to obtain any necessary consents and approvals and to take such actions as may be reasonably 13 necessary or desirable to carry out the purposes of the 1998 DistributionData Services Agreement andthe other agreements summarized below. In general, pursuant to the terms of the 1998 Distribution Agreement, all assets of Old D&B prior to the 1998 Distribution Date, other than those relating to the R.H. Donnelley Business, became assets of the Company. The 1998 Distribution Agreement also provides for assumptions of liabilities and cross indemnities designed generally to allocate to the Company, effective as of the 1998 Distribution Date, financial responsibility for all liabilities of Old D&B, other than those specified to be transferred to Donnelley on or prior to the 1998 Distribution Date or to remain with Donnelley subsequent to the 1998 Distribution Date (which liabilities primarily relate to the R.H. Donnelley Business or the indebtedness incurred in connection with the 1998 Distribution). The 1998 Distribution Agreement provides for the allocation generally to the Company of the financial responsibility for the liabilities arising out of or in connection with former businesses, other than those formerly conducted by Donnelley prior to the 1998 Distribution. The 1998 Distribution Agreement provides that the Company will comply with and otherwise not take action inconsistent with each representation and statement made to the Internal Revenue Service in connection with Old D&B's request for a ruling letter as to certain tax aspects of the 1998 Distribution. The Company agrees to maintain its status as a company engaged in the active conduct of a trade or business, as defined in Section 355(b) of the Internal Revenue Code, to continue to own stock of certain operating subsidiaries constituting control (within the meaning of Section 368(c) of the Internal Revenue Code) of such operating subsidiaries and to maintain at least 90% of the fair market value of its assets in the form of stock and securities of certain operating subsidiaries, in each case until the second anniversary of the 1998 Distribution Date. The Company does not expect this limitation to inhibit its financing or other activities or its ability to respond to unanticipated developments. As a result of the representations in the request for a ruling letter and the covenants in the 1998 Distribution Agreement, the acquisition of control of the Company prior to the second anniversary may be more difficult or less likely to occur because of the potential substantial liabilities associated with a breach of such representations or covenants. The 1998 Distribution Agreement requires a party that takes or fails to take any action which contributes to a determination that the 1998 Distribution is not tax-free to Old D&B (i.e., Donnelley), the Company or their stockholders to indemnify the other party and its stockholders from any taxes arising therefrom. 1998 TAX ALLOCATION AGREEMENT Under the 1998 Tax Allocation Agreement, the Company is generally liable for all income taxes of Old D&B (i.e., Donnelley) and its subsidiaries attributable to periods prior to the 1998 Distribution, provided that in the case of any separate company state or local income taxes, Donnelley and its subsidiaries and the Company and its subsidiaries are liable for their own liabilities arising from any audit adjustment. For income taxes attributable to periods beginning after the 1998 Distribution, the Company is liable for taxes relating to the Company and its subsidiaries; and Donnelley is liable for taxes relating to Donnelley and its subsidiaries. For all other taxes, the Company and its subsidiaries and Donnelley and its subsidiaries are responsible for their own liabilities for all periods. 24 1998 EMPLOYEE BENEFITS AGREEMENT The 1998 Employee Benefits Agreement allocates responsibility for certain employee benefits matters on and after the 1998 Distribution Date. Under the 1998 Employee Benefits Agreement, Donnelley adopted a new defined benefit pension plan and a new defined contribution savings plan for its employees; and the Company assumed and became the sponsor of the Old D&B defined benefit pension plan and the Old D&B defined contribution savings plan for the benefit of its employees and in general former employees who terminated employment on or prior to the 1998 Distribution Date ("Former Old D&B Employees"). Assets and liabilities of the Old D&B pension plan and account balances under the Old D&B savings plan that were attributable to Donnelley employees were transferred to the applicable new Donnelley plan. Generally, the Company assumed and became the sponsor of Old D&B's nonqualified supplemental pension plans for the benefit of persons who, prior to the 1998 Distribution Date, were participants thereunder; provided, however, that with respect to Donnelley employees, the Company generally retained only those liabilities that were vested prior to the 1998 Distribution Date. Donnelley is required to guarantee payment of the benefits under these plans to its employees in the event that the Company is unable to satisfy its obligations. The 1998 Employee Benefits Agreement required Donnelley to adjust outstanding equity-based grants (i.e., Old D&B stock options, restricted stock and performance share opportunities) held by Donnelley employees as of the 1998 Distribution Date in a manner intended to preserve, as closely as possible, the economic value of the pre-spin-off grants. Similarly, outstanding equity-based grants held by Company employees as of the 1998 Distribution Date were canceled and then converted into Company Common Stock-based grants in a manner intended to preserve, as closely as possible, the economic value of the pre-spin-off grants. Former Old D&B Employees holding Old D&B stock options were given the choice of receiving either adjusted Donnelley stock options or replacement Company stock options. Except as otherwise provided in the 1998 Employee Benefits Agreement, as of the 1998 Distribution Date, Donnelley employees generally ceased participation in Old D&B's employee benefits plans, and Donnelley and the Company will each generally recognize, among other things, its respective employees' past service with Old D&B under its employee benefits plans. 1996 DISTRIBUTION AGREEMENTS On November 1, 1996 (the "1996 Distribution Date"), the company then known as The Dun & Bradstreet Corporation ("Historical D&B") reorganized into three publicly traded independent companies by spinning off, through a tax-free dividend, two of its businesses to shareholders (the "1996 Distribution"). The 1996 Distribution resulted in the following three companies: (1) Old D&B, (2) ACNielsen Corporation ("ACNielsen") and (3) Cognizant Corporation ("Cognizant"). For purposes of effecting the transaction and of governing certain of the continuing relationships among Old D&B, Cognizant and ACNielsen after the 1996 Distribution, the three companies entered into various agreements, including a Distribution Agreement (the "1996 Distribution Agreement"), a Tax Allocation Agreement (the "1996 Tax Allocation Agreement"), an Employee Benefits Agreement (the "1996 Employee Benefits Agreement") and an Indemnity and Joint Defense Agreement (the "1996 Indemnity and Joint Defense Agreement"). The following 35Transition Services Agreement.Detailed descriptions
summarize some of the material terms of such agreements, but are qualified by reference to the texts of such agreements, which are incorporated herein by reference. The 1996 Distribution Agreement provided for, among other things, assumptions of liabilities and cross indemnities designed generally to allocate to Old D&B, effective asof the 1996,Distribution Date, financial responsibility for all liabilities of Historical D&B, except for certain liabilities arising out of or in connection with the businesses that became part of Cognizant or ACNielsen as a result of the 1996 Distribution. Similarly, the 1996 Distribution Agreement provided for the allocation generally to Old D&B of the financial responsibility for the liabilities arising out of or in connection with then-former businesses, including those formerly conducted by or associated with Cognizant or ACNielsen; provided that liabilities related to certain prior business transactions were allocated to Cognizant if such liabilities exceed certain specified amounts. See Note 13 (Contingencies) in Part II, Item 8 on Pages 63-65 of this Form 10-K. Except as otherwise provided1998 and 2000 Distributions are contained in the1996 Distribution Agreement (as described above), the 1996 Tax Allocation Agreement provided, among other things, that Old D&B must pay Historical D&B's entire consolidated tax liability for the tax years that CognizantCompany’s 2000 annual report on Form 10-K, filed on March 15, 2001.The Company
Moody’s is a provider of credit ratings, research and
ACNielsen were included in Historical D&B's consolidated Federal income tax return. For periods prior to the 1996 Distribution Date, Old D&B is generally liable for stateanalysis covering debt instruments andlocal taxes measured by income or imposed in lieu of income taxes. The 1996 Tax Allocation Agreement allocated liability to Old D&B, Cognizant and ACNielsen for their respective shares of other state and local taxes as well as any foreign taxes attributable to periods prior to the 1996 Distribution Date. The 1996 Employee Benefits Agreement provided, among other things, that Old D&B retains responsibility for (i) benefits owed to former employees who terminated employment with Historical D&B on or prior to the 1996 Distribution Date under Historical D&B's defined benefit pension plan, defined contribution savings plan and welfare plans, (ii) all benefits under Historical D&B's nonqualified supplemental pension plans that were vested prior to the 1996 Distribution Date, (iii) unexercised Historical D&B stock options held by Old D&B employees and Historical D&B retirees and disabled employees as of the 1996 Distribution Date, which options were adjusted to reflect the 1996 Distribution, and (iv) all employee benefits litigation liabilities that were asserted prior to the 1996 Distribution Date (but not such liabilities that relate to the retirement and savings plan assets of Cognizant or ACNielsen employees that were transferred to Cognizant and ACNielsen, respectively). Pursuant to the 1996 Indemnity and Joint Defense Agreement, Old D&B, Cognizant and ACNielsen agreed (i) to certain arrangements allocating potential liabilities arising out of the legal action filed by Information Resources, Inc. on July 29, 1996 and (ii) to conduct a joint defense of such action. See Note 13 (Contingencies) in Part II, Item 8 on Pages 63-65 of this Form 10-K. Pursuant to the terms of the 1996 Distribution Agreement, as a condition to the 1998 Distribution, the Company undertook to be jointly and severally liable with Old D&B (i.e., Donnelley) to Cognizant and ACNielsen for any liabilities arising under the 1996 Distribution Agreement and related agreements. Pursuant to the 1998 Distribution Agreement, as between Donnelley and the Company, all liabilities and rights of Old D&B under the 1996 Distribution Agreement and related agreements became liabilities and rights of the Company, and the Company must indemnify Donnelley against any such liabilities. 46 On June 30, 1998, Cognizant completed a spin-off of its IMS Health Incorporated subsidiary, after which Cognizant's name was changed to "Nielsen Media Research, Inc." Pursuant to the terms of the 1996 Distribution Agreement, as a condition to the Cognizant spin-off, IMS Health Incorporated undertook to be jointly and severally liable with Cognizant (i.e., Nielsen Media Research, Inc.) to Old D&B (i.e., Donnelley) and ACNielsen for any liabilities arising under the 1996 Distribution Agreement and related agreements. As between Donnelley and the Company, Donnelley's rights under this IMS Health Incorporated undertaking were assigned to the Company pursuant to the provision of the 1998 Distribution Agreement describedsecurities in theimmediately preceding paragraph. (a)(2) Not applicable. (b) Operating segment data for the years ended December 31, 1998, 1997global capital markets and1996 is included in Note 15 (Segment Information) in Part II, Item 8 on Pages 67-70 of this Form 10-K. (c) The Dun & Bradstreet Corporation (i.e., "New D&B") isanon-operating holding company whose revenue is derived primarily from dividends received from its subsidiaries. As of December 31, 1998, the number of full-time equivalent employees of the Company was approximately 12,500. The Company consists of the D&B operating company and Moody's. A narrative description of the Company's operations follows. THE DUN & BRADSTREET OPERATING COMPANY GENERAL The D&B operating company is the world's largestprovider ofbusiness-to-businessquantitative creditmarketingassessment services, credit training services andpurchasing information and commercial receivables management services. It has been in business for over 150 years and in 1998 had $1.42 billion in revenue. The D&B operating company operates offices in 36 countries, conducts operations in four other countries through minority interests in joint venture companies, and operates through independent correspondents in over 150 additional countries. At the core of the D&B operating company's products and services is its global database, the largest and most comprehensive of its kind in the world, containing information on more than 50 million public and private businesses from more than 200 countries. In addition, the D&B operating company's D-U-N-S(R) Numbering System (a numerical system usedcredit process software toidentify companies and company affiliations) is an internationally recognized common company identifier that is recommended or endorsed by the U.S. Government, the European Commission, the International Standards Organization, the United Nations Edifact Council and other global standard-setting organizations. The D&B operating company uses its global database, the D-U-N-S(R) Number's hierarchical information and its expertise in organizing and rationalizing data to help customers determine creditworthiness, predict market demand and pinpoint prospective clients, and increase purchasing efficiency. The D&B operating company's goal is to help customers grow profitably by ensuring that their business strategies, decisions and actions are based on a consistent flow of quality information throughout their supply and demand chains. The D&B operating company's 1998 revenue was derived from CREDIT INFORMATION SERVICES (69.4%), MARKETING INFORMATION SERVICES (19.9%), PURCHASING INFORMATION SERVICES (1.6%), and RECEIVABLES MANAGEMENT SERVICES (9.1%). Within these categories, a 57 further differentiation may be made between the D&B operating company's traditional products and services ("Traditional Products") and its value-added products and services ("Value-Added Products"). In general, Traditional Products consist of standard-format reports (typically credit reports, marketing lists and labels) containing information from the D&B operating company's global database, whereas Value-Added Products integrate customer and D&B data and provide decision-support tools and services through the use of proprietary software solutions. Value-Added Products provide easy, open access to the D&B operating company's database and are scalable for use on individual desktops, in networks and on computer hosts. They are designed to improve customers' decision making, speed-of-action and productivity, and to help customers realize greater value from their information and technology investments. Value-Added Products account for an increasingly significant portion of the D&B operating company's revenues, having grown since their introduction in 1994 to about $200 million in 1998. Through alliances being developed with major enterprise application software providers, the D&B operating company is expanding on the strategy behind its Value-Added Products. In 1998, the D&B operating company began to offer a new level of services by which it cleanses, consolidates and migrates legacy client and vendor data to a customer's new enterprise resource planning (ERP) system and links this data with the D-U-N-S(R) number ("Data Rationalization Services"). The D&B operating company then offers real-time, online access to its global database through the customer's ERP system. Management intends to improve customers' processes by electronically integrating information from the D&B operating company's global database into enterprise resource planning (ERP), enterprise relationship management (ERM) and other decision-support systems, and believes that this represents a significant opportunity for the D&B operating company. Management expects that the opportunity to provide these services will grow rapidly along with the expansion of the ERP/ERM market itself, which has grown at an average annual rate of approximately 40% since 1995. Customers use the D&B operating company's CREDIT INFORMATION SERVICES to extend commercial credit, approve loans and leases, underwrite insurance, evaluate clients, and make other financial and risk assessment decisions. The D&B operating company's largest customers for this information are major manufacturers and wholesalers, insurance companies,banks and othercredit andfinancial institutions.Its core credit information is available through a variety of Traditional Products, including the Business Information Report, which contains commercial credit information that may include basic background information, financial and public records data, and information on financial strength and payment history. Customers can access this information through the D&B operating company's web site, personal computer, mail, telephone, fax and customized connections with the customers' computer systems. Credit Information Services are also distributed by a number of other firms, including leading vendors of online information services and the web sites of certain third parties. Credit Information Services also include Value-Added Products such as Predictive Scoring Services and Decision Support Services. Predictive Scoring Services use statistical models to help customers predict the likelihood of delinquent payment, failure to pay within terms, discontinuation of operations or the filing of a bankruptcy petition. Decision Support Services include desktop decision-support systems, such as Risk Assessment Manager(TM) (DecisionMaker(TM) outside the U.S.), which use customers' rules to automate credit decisions using internal and external information, including information from the D&B operating company's global database. 68 Traditionally, Credit Information Services were offered pursuant to an annual contract requiring a minimum volume commitment. In January 1998, the D&B operating company began to offer customers a choice of how to purchase these services. Customers can now continue to commit to an annual contract or opt for a flexible, monthly, pay-as-you-go plan, with no minimum usage requirement. The Company believes that these changes, along with concurrent changesFounded insales force compensation and service practices, generated increased revenue growth rates for the D&B operating company in 1998 by attracting and retaining a broader range of customers and providing a strong incentive for the D&B operating company's sales force to familiarize customers with the full line of the D&B operating company's solutions. The D&B operating company's MARKETING INFORMATION SERVICES provide business-to- business marketing information and analysis designed to help customers conduct market segmentation, client profiling, prospect selection and marketing list development using information from the D&B operating company's global database. Marketing Information Services' Traditional Products are delivered in print, on diskette, magnetic tape and CD-ROM, through online information services and other third parties, and via the D&B operating company's web site and the web sites of certain third parties. Marketing Information Services also include Value-Added Products such as Market Spectrum(TM), a suite of database marketing products and services that enhance internal customer data with external information and analysis that can help target the most profitable clients and prospects; analyze market penetration, territory alignment and market segmentation; and perform demand estimation. The D&B operating company's PURCHASING INFORMATION SERVICES help give customers a better understanding of their supplier base, thereby enabling them to rationalize their supplier rosters, leverage buying power, minimize supply-related risks and identify and evaluate new sources of supply. In addition to reports containing information from the D&B operating company's global database delivered in a variety of ways, products in this area include such Value-Added Products as Supplier Spend Analysis and Supplier Assessment Manager(TM). Supplier Spend Analysis is a process by which the D&B operating company integrates customers' supplier data with information from the D&B operating company's global database and from third parties and then applies analytical and benchmarking techniques designed to identify opportunities for reducing purchasing costs and risks. Supplier Assessment Manager(TM) uses decision-support software to automate the scoring and monitoring of supplier performance, capabilities and risks using internal and external information. The D&B operating company's RECEIVABLES MANAGEMENT SERVICES ("RMS") provide customers with a full range of commercial accounts receivable management services, including Traditional Products, such as third-party collection of accounts and letter demand services, and Value-Added Products, such as receivables management outsourcing programs. These services substitute for and/or enhance customers' own internal management of accounts receivable. RMS services and collects delinquent commercial receivables on behalf of1900, Moody’s employs approximately30,000 customers primarily in the business-to-business market. Principal markets include insurance, telecommunications, and transportation services. RMS also provides cross-border commercial receivables services in which the RMS worldwide offices service cross-border claims for one another. In third-party collections, RMS uses the Dun & Bradstreet name to communicate with commercial debtors about delinquent accounts. Revenues are generally earned on a 79 contingent fee basis. Receivables outsourcing programs are selected by customers seeking to outsource their commercial accounts receivable function to a third-party vendor. Services include debt verification and collection, customer service functions and analytical reporting. In the U.S., RMS has sold franchises to third parties, which are given permission to sell debt collection services under the Dun & Bradstreet and RMS names. These franchises cover portions of 21 states. RMS uses franchises to complement its field sales and telesales forces. These franchises are located in less concentrated markets where local presence is preferred. RMS continues to be responsible for all product fulfillment. Customer ownership remains with RMS, with franchisees retaining exclusive access in their markets. Certain jurisdictions require licensing for consumer and commercial debt collection. RMS, and in some instances the individual collectors, must be licensed in order to conduct business in these jurisdictions. The laws under which such licenses are granted generally require annual license renewal and provide for denial, suspension or revocation for improper actions or other reasons. GEOGRAPHIC BUSINESS SEGMENTS; COMPETITION The D&B operating company manages its business globally through three geographic segments: United States; Europe/Africa/Middle East; and Asia Pacific, Canada and Latin America. None of the D&B operating company's business segments is dependent on a single customer, or a few customers, such that a loss of any one or more would have a material adverse effect on that business segment. DUN & BRADSTREET UNITED STATES The D&B operating company's United States segment ("D&B U.S.") had 1998 revenue of $902.5 million, comprised of Credit Information Services (68.2%), Marketing Information Services (22.0%), Purchasing Information Services (2.5%) and Receivables Management Services (7.3%). D&B U.S.'s Credit Information Services is the leading commercial credit-reporting agency in the U.S. However, it faces substantial competition from in-house operations of the businesses it seeks as customers and from other general and specialized credit-reporting agencies and other information services providers. It believes the principal attributes in judging the competition are information quality, availability, service and price. D&B U.S.'s Marketing Information Services, while a market leader in its industry, faces competition from data providers who have competitive distribution channels, delivery formats and data quality. D&B U.S.'s Purchasing Information Services enjoys a unique position as a provider of business information that can be used to reduce purchasing costs. In this area, D&B U.S. faces competition from in-house operations of the businesses it seeks as customers and from other general and specialized information and professional services providers. It believes the principal attributes in judging the competition are information quality, availability, service and price. RMS is the leader in the commercial receivables management industry in the U.S. There are several consumer collection agencies that have larger receivables portfolios, particularly health-care and credit card collection providers. The third-party commercial collection market is highly fragmented with over 5,000 collection agencies. The outsourcing market has significantly fewer competitors due to the need for larger-scale operations by the 810 receivables providers. Both markets are very price-competitive, with status and statistical reporting and speed-of-service as key qualitative attributes. DUN & BRADSTREET EUROPE/AFRICA/MIDDLE EAST The D&B operating company's Europe/Africa/Middle East segment ("D&B Europe") had 1998 revenue of $427.7 million, comprised of Credit Information Services (73.1%), Marketing Information Services (15.3%) and Receivables Management Services (11.6%). D&B Europe expects to commence offering Purchasing Information Services in 1999. D&B Europe has operations in 20 countries and conducts operations in three other countries through minority interests in joint venture companies. D&B Europe is believed to be the largest single supplier of commercial credit information services in Europe. However, the competitive environment varies considerably from country to country. In some countries, leadership positions exist, whereas in others the businesses are highly competitive. The competition is primarily local and there are no competitors offering a comparable range of global services or capabilities. D&B Europe faces competition from banks, credit insurance companies, public information suppliers (such as company registries), consumer information companies, application software developers, online content providers and in-house operations of businesses, as well as direct competition from businesses providing similar services. Management believes that the increase in cross-border trade expected to result from the European Monetary Union may represent a significant opportunity for D&B Europe over time since it is the only pan-European commercial data provider. The transition to a single European currency also entails certain risks to D&B Europe's business, as described under the caption "New European Currency" in Part II, Item 7 on Pages 30-31 of this Form 10-K. D&B Europe continues to invest in data systems and is continuing its rollout to the European market of a range of new cross-border products. D&B Europe has also continued investing heavily in a new technology platform, which is expected to result in enhanced product/service flexibility as well as opportunities to streamline operations. D&B Europe is subject to the usual risks inherent in carrying on business in certain countries outside of the U.S., including currency fluctuations and possible nationalization, expropriation, price controls, changes in the availability of data from public sector sources, limits on collecting certain types of personal information or on providing information across borders, or other restrictive governmental actions. Management believes that the risks of nationalization or expropriation are reduced because its basic service is the delivery of information, rather than the production of products that require manufacturing facilities or the use of natural resources. DUN & BRADSTREET ASIA PACIFIC, CANADA AND LATIN AMERICA The D&B operating company's Asia Pacific, Canada and Latin America segment ("D&B APCLA") had 1998 revenue of $88.6 million, comprised of Credit Information Services (63.8%), Marketing Information Services (21.4%) and Receivables Management Services (14.8%). D&B APCLA has operations in 15 countries and conducts operations in one other country through a minority interest in a joint venture company. It faces competition from banks, credit insurance companies, public information suppliers (such as company registries), consumer information companies, application software developers, online content providers 911 and in-house operations of businesses as well as direct competition from businesses providing similar services. The competition is primarily local and there are no competitors offering a comparable range of global services or capabilities. In 1996, D&B APCLA reorganized its operations in Brazil, Mexico, Chile and Venezuela. It continues to provide cross-border services originating in Latin America through local affiliates, small local operations centers and an operations center in Florida. In the Asia Pacific region, D&B APCLA has entered into joint venture and distribution arrangements to leverage its staff and data sourcing and distribution capabilities and is exploring additional such opportunities. D&B APCLA is subject to the usual risks inherent in carrying on business in certain countries outside of the U.S., including currency fluctuations and possible nationalization, expropriation, price controls, changes in the availability of data from public sector sources, limits on collecting certain types of personal information or on providing information across borders, or other restrictive governmental actions. Management believes that the risks of nationalization or expropriation are reduced because its basic service is the delivery of information, rather than the production of products that require manufacturing facilities or the use of natural resources. THE D&B OPERATING COMPANY'S STRATEGY As technology changes and evolves, the D&B operating company is changing the way it provides solutions to customers. The D&B operating company's strategy is to integrate its information in business processes through both back-office and front-office solutions. This means extending its business beyond a core transaction-based service -- primarily credit reports and marketing lists -- to the provision of quality business information through technology-based packaged applications. The D&B operating company is pursuing new opportunities to increase revenue growth and profitability by building on its core competencies in providing business information and analysis to companies2,300 people worldwide.Following are the key components of this strategy: - EXPAND THE USE OF TRADITIONAL PRODUCTS. Traditional Products annually generate more than $1 billion in revenue worldwide. Additional distribution of these products and services will be pursued through new customer sales efforts and through expanded use of the Internet. Because many of these products are used in conjunction with or are accessed through Value-Added Products, the D&B operating company hopes to increase the distribution and sale of Traditional Products globally through the sale of Value-Added Products. - FOCUS RESOURCES ON THE DEVELOPMENT AND DEPLOYMENT OF VALUE-ADDED PRODUCTS. Revenues from Value-Added Products, D&B U.S.'s fastest-growing product area, are expected to continue to grow through the accelerated rollout of existing Value-Added Products around the world, as well as through the expansion of the D&B operating company's Global Accounts Program. The Global Accounts Program targets very large customers having multi-country operations spanning the D&B operating company's three geographic segments. - BECOME A MAJOR CONTENT PROVIDER FOR USERS OF ENTERPRISE DECISION-SUPPORT SOFTWARE SYSTEMS. The D&B operating company aims to become the leading business information provider to the enterprise resource planning (ERP) and enterprise relationship management (ERM) markets. In February 1999, the D&B operating company announced a strategic alliance with SAP AG, the leading 1012 provider of enterprise application solutions, to provide users of SAP's R/3 software with Data Rationalization Services and online access to the D&B operating company's global database. The D&B operating company is actively pursuing alliances with other major business application software providers. - IDENTIFY AND DEVELOP ELECTRONIC COMMERCE PRODUCTS AND SERVICES. The D&B operating company has begun developing solutions to establish itself as a major third-party provider of information for business-to-business electronic commerce via the Internet. Inclusion of D&B operating company data for verification, authentication and registration services could help both buyers and sellers as well as network providers to identify dependable business partners. Management of the D&B operating company believes that the significant growth anticipated in the electronic commerce marketplace will create the need for a trusted, independent third party to provide verification, authentication and registration services. The D&B operating company intends to identify and pursue opportunities to participate in these processes and to develop new products and services and reposition existing products and services for the electronic commerce market. - IMPROVE THE PROFITABILITY OF INTERNATIONAL OPERATIONS. As described above, the accelerated rollout of Value-Added Products around the world is expected to be a key factor in improving international profitability. In addition, cost structures have been and will continue to be reviewed with the intent of implementing further efficiencies to improve international profit margins. For example, the building of a pan-European technology platform is expected to eliminate duplicative development efforts and reduce ongoing systems maintenance costs. MOODY'S INVESTORS SERVICE, INC. GENERAL Moody's is a leading global credit rating agency. Moody's publishes credit opinions, research, and ratings on fixed-income securities, issuers of securities and other credit obligations. It also provides a broad range of business and financial information. Credit ratings help investors analyze the credit risks associated with fixed-income securities. Ratings also create efficiencies in fixed-income markets by providing reliable, credible, and independent assessments of credit risk. For issuers, Moody's services increase market liquidity and may reduce transaction costs. Moody's employs over 680 analysts and has a total of more than 1,300 associates located around the world. Moody'sMoody’s maintains offices in1219 countries and hasbegun to expandexpanded into developing markets through joint ventures or affiliation agreements with local rating agencies.Moody's provides ratings and information on governmental and commercial entities in 100 countries. ItsMoody’s customers includeinvestors;a wide range of corporate and governmental issuers of securities as well as institutional investors, depositors, creditors, investment banks, commercial banks, and other financialintermediaries; and a wide range of corporate and governmental issuers of securities. Moody'sintermediaries. Moody’s is not dependent on a single customer or a few customers, such that a loss of any oneor morewould have a material adverse effect on its business.Moody'sMoody’s operates in two reportable segments: Moody’s Investors Service and Moody’s KMV.
Moody’s Investors Service publishes rating opinions on a broad range of credit
obligations. These includeobligations issued in domestic and international markets, including variousUnited Statescorporate and governmental obligations,international cross-border notes and bonds, domestic obligations in foreign local markets,structured finance securities and commercial paperissuers. In recent years, Moody's has moved beyond its traditional 1113 bondprograms. It3
also publishes investor-oriented credit research, including in-depth research on major debt issuers, industry studies, special comments and credit opinion handbooks. Moody’s credit ratings
activity, assigningand research help investors analyze the credit risks associated with fixed-income securities. Such independent credit ratings and research also contribute toinsurance companies' obligations, bank loans, derivative product companies, bank depositsefficiencies in markets for fixed-income and otherbank debt, managed funds,obligations, such as insurance policies andderivatives.derivative transactions, by providing credible and independent assessments of credit risk. Moody’s provides ratings and credit research on governmental and commercial entities in approximately 100 countries. Moody’s global and increasingly diverse services are designed to increase market efficiency and may reduce transaction costs. At the end of1998, Moody's2003, Moody’s hadoutstandingprovided credit ratings and analysis onapproximately 100,000more than $30 trillion in debt, covering over 150,000 securities, including industrial corporations, financial institutions, governmental entities and structured finance issuers with more than 10,000 corporate relationships and over68,00075,000 public financeobligations.obligations issued in the U.S. market.Ratings are disseminated via press releases to the public through a variety of print and electronic media, including the Internet and real-time information systems widely used by securities traders and investors.Beyond credit rating services for issuers, Moody’s provides research services, data, and analytic tools that are utilized by institutional investors and other credit and capital markets professionals. Moody’s services cover various segments of the debt capital markets, and are sold to more than 3,000 institutions worldwide. Within these institutions, over 22,000 users accessed Moody’s research web site (www.moodys.com) during calendar year 2003. In addition to
its rating activities, Moody's publishes investor-orientedthese clients, more than 130,000 other individuals visited Moody’s web site to retrieve current ratings and other information made freely available to the public.The Moody’s KMV business consists of the combined businesses of KMV LLC and KMV Corporation (“KMV”), acquired in April 2002, and Moody’s Risk Management Services. Moody’s KMV is a provider of credit
researchrisk management products for banks and investors in credit-sensitive assets, and serves over 1,500 clients operating in over 80 countries, including most of the world’s largest financial institutions. Moody’s KMV’s quantitative credit analysis tools include models that estimate the probability of default for over15,600 subscribers globally. Moody's publishes more than 100 research products, including in-depth research on major issuers, industry studies, special comments, and summary credit opinion handbooks. Detailed descriptions26,000 publicly traded firms globally, updated daily. In addition, Moody’s KMV’s RiskCalcTM models extend the availability ofboth the rated issue and issuer, along with a summarythese probabilities to privately held firms in many of therationale forworld’s economies. Moody’s KMV also offers services to value and improve theassignmentperformance ofthe specific rating, also appearcredit-sensitive portfolios. Other services include credit training and software products to assist financial institutions invarious Moody's credit research products. Product selection includes insurance, utilities, speculative grade instruments, bank and global credit research. Moody's Risk Management Services, Inc. (formerly known as Financial Proformas, Inc.), a wholly owned subsidiary of Moody's, develops and distributes credit education materials, seminars and computer-based lending simulations, which it complements with financial and risk assessment software for thecommercial lendingcommunity. In July 1998, Moody's completed the sale of its Financial Information Services (FIS) unit, which provides current and historical business and financial informationactivities.Prospects for
investment research and reference uses. Moody's is registered as an investment adviser under the Investment Advisers Act of 1940. Moody's has been designated as a Nationally Recognized Statistical Rating Organization ("NRSRO") by the SEC. The SEC is currently engaged in a rule-making process to establish the criteria for designation as an NRSRO; such criteria may impose operating requirements upon Moody's. Moody's is also subject to regulation in certain countries outside the United States. PROSPECTS FOR GROWTHGrowthOver the past decade,
theglobal public and private fixed-income markets havemore than doubledgrown significantly in terms of outstanding principalamount. Moody'samount and types of securities. While there is potential for periodic cyclical disruption in these developments, Moody’s believes that thesize ofoverall trend and outlook remain favorable for theglobal credit markets will continue to increase.continued growth in capital market activity worldwide. In addition, the securities being issued in the global fixed-income markets are becoming more complex.Moody'sMoody’s expects that these trends willincrease theprovide continued long-term demand for high-quality, independent creditopinions from Moody's. The size of the world capital markets is increasing because, in general, the global political and economic climate has promoted economic growth and productive capital investment. Moody's believes that the outlook is generally favorable for the continued growth of the world capital markets, particularlyopinions. These phenomena are especially apparent in Europe, where economic and monetary union is driving increased use of public fixed-income markets for corporate financing activities, and factors such asa consequence of financial market integration underincreased adoption and enabling regulation have driven growth in structured finance issuance.Technology, such as the
European Monetary Union (EMU). Lower-cost information technologyInternet, makes information about investment alternatives widely available throughout the world.Investors are ableThis technology facilitates issuers’ ability to place securities outside their national markets and investors’ capacity to obtain information about securities issued outside their national markets.InvestorsIssuers and investors are also more readily able to obtain information about new financing techniques and new types of securities that they may wish to purchase orsell.sell, many of which may be unfamiliar to them. This availability of information promotesglobalizationworldwide financial markets andintegration of financial markets. Aa greater need for credible and globally comparable credit ratings. As a result, a number of new"emerging"capital markets havebeen created. There is investoremerged. In addition, more issuers andintermediary interest in domestic currency debt obligations from such markets thatinvestors arenow being sold cross-border in unprecedented volumes. 1214accessing traditional capital markets.Another trend that is increasing the size of the world capital markets is the ongoing disintermediation of
the world'sfinancialsystem.systems. Issuers are increasingly financing in the global public capital markets,rather than throughin addition to, or in substitution for, traditional financial intermediaries.In addition,Moreover, financial intermediaries are selling assets in the global public capital markets, in addition to or instead of retaining those assets. Structured finance securities markets for many types of assets have developed in many countries and are contributing tothosethese trends.4
The complexity of capital market instruments is also growing. Consequently, assessing the credit risk of such instruments
isbecomes more of a challenge for financial intermediaries and asset managers. In the credit markets, reliable third-party ratingsrepresent anincreasinglyviable alternative tosupplement or substitute for traditional in-house research as the geographic scope and complexity ofmarket instrumentsfinancial markets grow.Growth in issuance of structured finance securities has been stronger than growth in corporate and financial institutions issuance, and Moody’s expects that trend to continue. Growth in structured finance has reflected increased adoption of structured finance as an acceptable financing mechanism, regulatory changes that facilitate the use of structured finance, and increases in consumer debt that forms collateral for structured securities.
Rating fees paid by debt issuers account for most of
Moody's revenues.the revenue of Moody’s Investors Service. Therefore, a substantial portion ofMoody's revenuesMoody’s revenue is dependent upon the volume and number of debt securities issued in the global capital markets.Accordingly, Moody'sMoody’s isdependent ontherefore affected by themacro-economicperformance of, and the prospectsoffor, the major world economies and by the fiscal and monetary policies pursued by their governments.Fees fromHowever, annual fee arrangements with frequent debt issuers, and annual fees from commercial paper andmedium termmedium-term note programs, bank and insurance company financial strength ratings,andmutual fund ratings, subscription-based research and other areas are less dependent on, or independent of, the volume or number of debt securities issued in the global capital markets.Moody's non-U.S.Moody’s operations are also subject to
the usualvarious risks inherent in carrying on businessin certain countries outside the United States, includinginternationally. Such risks include currency fluctuations and possible nationalization, expropriation, exchange and price controls, changes in the availability of data from public sector sources, limits on providing information across bordersorand other restrictive governmental actions. Management believes that the risks of nationalization or expropriation are reduced becauseitsthe Company’s basic service is thedeliverycreation and dissemination of information, rather than the production of products that require manufacturing facilities or the use of natural resources.COMPETITION Moody'sNationalization in the form of a new government-sponsored regional or global rating agency also poses a risk to Moody’s growth prospects. However, management believes the risk is reduced because of the likelihood that substantial investments over a sustained period would be required, compared to other regulatory changes under consideration for the credit rating industry.Legislative bodies and regulators in both U.S. and Europe continue to conduct regulatory reviews of credit rating agencies, which may result in an increased number of competitors, restrictions on certain business expansion activities or increased costs of doing business for Moody’s. At present, Moody’s is unable to assess the nature and effect any regulatory changes may have on future growth opportunities. See “Regulation” below.
Growth in Moody’s KMV is expected from increased adoption of quantitative credit management techniques and of integrated risk-management solutions by financial institutions globally and by corporations managing trade receivables. Increased use of credit models is expected under the forthcoming revised international bank regulatory regime, known as “Basel II”. Moody’s KMV also expects to introduce new products.
Competition
The Moody’s Investors Service business competes with other credit rating agencies and with
credit opinions offered byinvestment banks and brokeragefirms.firms that offer credit opinions and research. Institutional investors also have in-house credit research capabilities.Credit rating agencies compete, in addition, with other methods of addressing credit risk, such as credit insurance and credit derivatives. Moody's most directMoody’s largest competitor in the global credit rating business is Standardand Poor's Corporation ("& Poor’s Ratings (“S&P"&P”), a division of The McGraw-Hill Companies, Inc. There are some rating markets, based on industry, geography and/or instrument type, in whichMoody'sMoody’s has made investments and obtained market positions superior to S&P's.&P’s. In other markets the reverse is true.Moody's believes that its rating revenues for 1998 are similar to S&P's. OtherAnother rating agency
competitorscompetitor ofMoody's are Duff & Phelps andMoody’s is Fitch,IBCA. Fitch IBCA isarecent combinationsubsidiary ofthe U.S. rating agency, Fitch, and the British-French rating agency, IBCA.Fimalac S.A. AlthoughMoody'sMoody’s and S&P are each larger thanDuff & Phelps andFitch,IBCA, increasedcompetitionfrom those twois expected to increase. One or more additional significant rating agenciescan be expected.also may emerge in the United States if the Securities and Exchange Commission (“SEC”) expands the number of Nationally Recognized Statistical Rating Organizations (“NRSRO”). In February 2003, the SEC designated Dominion Bond Rating Service, Ltd. of Canada (“DBRS”) a NRSRO. Competition may also emerge from niche companies that provide ratings for particular types of financial products or issuers, such as A.M. Best Company in the insurance industry. Competition may also emerge in developed markets outside the United States over the next few years, for example, in response to the growth in the European capital markets, and in developing markets. Any such rating agencies that may emerge may receive support from local governments or other institutions.5
Over the last decade, additional rating agencies have been established, primarily in emerging markets and
primarilyas a result of local capital market regulation. Regulators worldwide haverecognizedperceived thatcredible, independentcredit ratings can further regulatory objectives for the development of public fixed-income securities markets. The result of such regulatory activity has been the creation of a number of primarily nationalratingsrating agencies in variouscountries aroundcountries. Certain of these regulatory efforts may have theworld. Regulation may stimulate the productionunintended effect of1315producing less credible ratings overtime and tendstime. Attempts to standardize ratings systems or criteria may make all rating systems and agencies appear undifferentiated,--obscuring variations in the quality of the ratings providers. In addition, since Moody’s believes that some of its most significant challenges and opportunities will arise outside the United States, it will have tothe detriment of Moody's high-qualitycompete with ratingopinions. Regulators of financial institutionsagencies that may have a stronger local presence or a longer operating history in those markets.Financial regulators are
attempting to improvereviewing their approach tosupervision. Theysupervision and areshifting away from rule-basedseeking comments on changes to the global regulatory framework. Bank regulators, under the oversight of the Basel Committee on Banking Supervision, have proposed using refined risk assessments as the basis for minimum capital requirements. The proposed Standardized Approach relies on rating agency opinions, while the proposed Internal Ratings Based Approach relies on systemsthat address only specificand processes maintained by the regulated bank. The increased regulatory focus on credit riskcomponentspresents both opportunities andinstitution-specific protections -- toward more sophisticated, prudential supervision. The regulators' evolving approach includes their making qualitative judgments about the sophistication of each financial institution'schallenges for Moody’s. Global demand for credit ratings and risk managementprocessesservices may rise, but regulatory actions may result in a greater number of rating agencies and/or additional regulation of Moody’s andsystems, in terms of bothits competitors. Alternatively, banking or securities marketand credit risk. While such regulatory trends present additional opportunities forregulators could seek to reduce the use ofMoody'sratingstheyin regulations, thereby reducing certain elements of demand for ratings, or otherwise seek to control the analysis or business of rating agencies.Credit rating agencies such as Moody’s also compete with other means of managing credit risk, such as credit insurance. Competitors that develop quantitative methodologies for assessing credit risk also may
also resultpose a competitive threat to Moody’s.Moody’s KMV’s main competitors for quantitative measures of default risk include the RiskMetrics Group, S&P, CreditSights, R&I’s Financial Technology Institute (in Japan), and other smaller vendors. Other firms may compete in
additional competition for Moody's. MOODY'S STRATEGY Moody'sthe future. Baker Hill, a privately held company, is Moody’s KMV’s main competitor in the software market to assist banks in their commercial lending activities. Moody’s KMV’s training products have two main competitors: Omega Performance, a privately held firm; and Risk Management Association (formerly Robert Morris Associates), a trade association serving the financial services industry. In addition, Moody’s KMV competes with niche training organizations.Moody’s Strategy
Moody’s intends to focus
its business strategyon the followingopportunities: - CONTINUE INTERNATIONAL EXPANSION. Moody's maintains aopportunities.Expansion in Financial Centers. Moody’s serves its customers through its global network of offices and business
affiliations, includingaffiliations. Moody’s currently maintains full-service rating and marketing operations inthe majorglobal financial centersofsuch as Frankfurt, Hong Kong, London, Madrid, Milan, New York, Paris, Singapore and Tokyo.Moody'sMoody’s expects thatthese centersits global network will position it to benefit from the expansionin globalof worldwide capital markets andoffer the greatest potential for its revenue growth. Moody'sthereby increase revenue. Moody’s also expectsacceleratedthat the growth of itsratings activitiesMoody’s Investors Service business as a consequence of financial market integration under the European Monetary Union(EMU) and from ongoing global development of non-traditional financial instruments (e.g., derivatives, credit-linked bonds and catastrophe bonds). Moody'swill continue. Moody’s expects to continue its expansion into developing markets either directly or through jointventures or affiliations. - FOCUS ON NATURAL ADJACENCIES. Moody'sventures.New Rating Products. Moody’s is pursuing numerous initiatives
thatto expand credit ratings from public fixed-income securities markets to other sectors with credit risk exposures.Moody'sAs the loan and capital markets converge, Moody’s expects to continue to expand its rating coverage of bank loans and project finance loans and securities. Moody’s has a committed effort to extend its credit opinion franchise to the global bank counterparty universe through ratings of emerging marketratings,banks, including bank financial strength ratings. Insurance financial strength ratings in the property and casualty, reinsurance, and life insurance markets represent additional growth opportunities.Moody'sMoody’s has also introduced issuer ratings formid-sizedcorporations not active in the debt markets.Moody's is investigating numerous non-traditional opportunitiesFor company ratings, Moody’s seeks toextend its opinion franchise. - PURSUE OPPORTUNITIES IN NEW SECTORS. The enhancementcontinue to add value by providing greater scope and depth of analysis of issues related to company creditworthiness, including enhanced liquidity and cash flow analysis, and evaluation of accounting, corporate governance and riskmanagement processes will hasten the convergence of the loan and capital markets as intermediaries and investors seek additional opportunities for the development of financial markets and a consistent standard of relative risk comparison. Moody's intends to expand coverage for ratings of bank loans. Moody'stransference issues. Moody’s has also introducedequitymutual fund indices and style-based analytical tools to assist in evaluating fundanalyzers for institutional fund managers. - PURSUE OPPORTUNITIES IN SECURITIZATION.portfolio characteristics and their performance.Additional Opportunities in Securitization. The repackaging of financial assets has had a profound effect on the
U.S.fixed-incomemarket.markets. New patterns of securitizationwillare expected to emerge in the next decade.TheAlthough the bulk of assets securitized in the past five yearsare6
have been consumer assets owned by
banks. Now,banks, commercial assets — principally commercial mortgages, term receivables and corporateloans,obligations — are now increasingly being securitized. Securitizationconcepts are rapidly being exported to Europe and Asia. In addition, securitization is evolvinghas evolved into a strategic corporate financetool. Moody'stool in North America, Europe and Japan, and isaggressively pursuing opportunitiesevolving elsewhere internationally. Ongoing global development of non-traditional financial instruments, such as derivatives, future flow securities, hybrids, credit-linked bonds and catastrophe bonds should continue to support growth. Moody’s has introduced new services enabling investors to monitor the performance of their investments in structured finance, covering asset-backed finance, commercial mortgage finance, residential mortgage finance and credit derivatives.Internet-Enhanced Products and Services. Moody’s is expanding its use of the Internet and other electronic media to enhance client service. Moody’s website provides the public with instant access to ratings, and provides subscribers with credit research. Internet delivery also enables Moody’s to provide services to more individuals within a client organization than paper-based products and to offer higher-value services because of more timely delivery. Moody’s expects that access to these
areas. 1416 INTELLECTUAL PROPERTYapplications will increase client use of Moody’s services. Moody’s expects to continue to invest in electronic media to capitalize on these and other opportunities.Expansion of Credit Research Products and Investment Analytic Tools. Moody’s plans to continue to expand its research and analytic products by producing additional products through internal development and by acquiring products. Recent initiatives that have been well-received by clients include new services providing analysis of default rates and default probabilities, on-line facilities for retrieving current rating information on demand and risk analytics and performance data for several structured finance market sectors. Moody’s plans to develop services for other financial markets, such as credit default swaps and equity. Finally, the Company is improving its capability to deliver its research to new customer segments by creating more targeted and customized research offerings and by licensing Moody’s credit analysis and research for re-distribution by third party providers.
New Quantitative Credit Assessment Services. Moody’s will continue to provide banks and other financial institutions with quantitative credit assessment services. Moody’s believes that there will be increased demand for such services because they enable customers trading or holding credit-sensitive assets to produce better performance. Also recent proposals by international bank regulatory authorities to recognize banks’ internal credit risk management systems for the purpose of determining regulatory capital will encourage adoption of such services. Moody’s also expects to provide extensions to existing services and new services, such as valuations of credit-sensitive assets.
Regulation
Moody’s Investors Service registers as an investment adviser under the Investment Advisers Act of 1940, as amended. Moody’s has also been designated as a Nationally Recognized Statistical Rating Organization (“NRSRO”) by the SEC. The SEC first applied the NRSRO designation in 1975 to agencies whose credit ratings could be used by broker-dealers for purposes of determining their net capital requirements. Since that time, Congress (in certain mortgage-related legislation), the SEC (in its regulations under the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended and the Investment Company Act of 1940, as amended) and other governmental and private bodies have used the ratings of NRSROs to distinguish between, among other things, “investment grade” and “non-investment grade” securities.
Recently, there has been discussion in the U.S. regarding the continued use of ratings for regulatory purposes under federal securities laws, and the potential need for either greater or lesser regulation and oversight of credit rating agencies. In January 2003, the SEC released a report on the role and function of credit rating agencies in the operation of the securities markets. The report considered a number of issues that the SEC was required to examine under the Sarbanes-Oxley Act of 2002, and other issues arising from an SEC-initiated review of credit rating agencies. More specifically, the SEC identified five broad areas that deserved further examination:
Information Flow in the Credit Rating ProcessPotential Conflicts of InterestAlleged Anticompetitive or Unfair PracticesReducing Potential Regulatory Barriers to EntryThe Appropriate Degree of Regulatory Oversight7
In the report, the SEC further stated that it intended to publish a Concept Release to solicit comments on issues affecting the role and operation of credit rating agencies and expected thereafter to propose rules in response to those comments. Subsequent to releasing its report, in February 2003 the SEC designated Dominion Bond Rating Service, Ltd. of Canada as a fourth NRSRO, together with Moody’s, Standard & Poor’s and Fitch.
On June 4th the SEC issued its Concept Release regarding the credit ratings industry. The Release restated many questions first raised in the Commission’s January 2003 report, and requested public comment on those questions. Questions were grouped under three broad themes:
Whether credit rating agencies should continue to be used for regulatory purposes under the federal securities laws?If ratings continue to be used in federal securities laws, what should be the process for approving rating agencies?If ratings continue to be used in federal securities laws, what should be the nature and extent of oversight?Numerous market participants, including Moody’s, responded to the call for comment. Moody’s response can be found on the Company’s website atwww.moodys.com. At present, Moody’s is unable to assess the likelihood of any regulatory changes that may result from the SEC’s ongoing review, nor the nature and effect of any such regulatory changes.
Moody’s is also subject to regulation in certain non-U.S. jurisdictions in which it operates.
First, as a consequence of the new French Securities Law, rating agencies operating in France have a new document retention obligation and will be required annually to produce and submit a report to the newly established French regulatory authority on their operation. Secondly, implementation guidelines proposed by the Committee of European Securities Regulators (“CESR”), and implemented by the European Commission (“Commission”) for the Commission’s Market Abuse Directive (“Directive”) are applicable to all participants in the European capital markets. Credit rating agencies, however, have been explicitly carved out of the Directive’s provisions which address the manner of production and presentation of research. However, when the Directive is incorporated into individual national legislation, depending on the form in which the implementation guidelines are ultimately adopted at the national level, such guidelines could be interpreted by some European Union countries to control the functioning of credit rating agencies in their jurisdiction. If so, new regulation may, among other things, alter rating agencies’ communications with issuers as part of the rating assignment process, and increase Moody’s cost of doing business in Europe and the legal risk associated with such business.
Finally, in February 2004 the European Parliament (“Parliament”) adopted resolutions regarding rating agencies in Europe pursuant to an internal study and report. The resolutions call on the Commission to conduct an analysis for registration of rating agencies in Europe, and possible registration criteria. The resolutions further ask the Commission and certain other European authorities to make specific recommendations by July 31, 2005 in light of any further developments or conclusions reached by the Financial Services Forum, the International Organization of Securities Commissions (“IOSCO”), and the U.S. SEC. Also in February 2004, a Technical Committee of the IOSCO announced that under the Chairmanship of U.S. SEC Commissioner Roel Campos it would develop, with the contribution of the credit rating agencies, a code of conduct for credit rating agencies.
The Basel Committee on Banking Supervision is preparing a new capital adequacy framework to replace the framework proposed in 1988. Under this framework as now proposed, ratings assigned by a credit rating agency would be an alternative available to certain banks to determine the risk weights for many of their credit exposures. The Basel Committee’s proposal would institutionalize ratings of certain rating agencies as an alternative in the credit measurement processes of internationally active financial institutions and subject rating agencies to a broader range of oversight. Because the content of the proposal is not yet finalized, Moody’s cannot predict at this time the final form of any such regulation. However, Moody’s does not believe that this proposal, if adopted in its present form, would materially affect Moody’s Investors Service’s financial position or results of operations, or the manner in which it conducts its business.
Other legislation and regulation relating to credit rating and research services has been considered from time to time by local, national and multinational bodies and is likely to be considered in the future. In certain countries, governments may provide financial or other
8
support to locally-based rating agencies. In addition, governments may from time to time establish official rating agencies or credit ratings criteria or procedures for evaluating local issuers. If enacted, any such legislation and regulation could significantly change the competitive landscape in which Moody’s operates. In addition, the legal status of rating agencies has been addressed by courts in various decisions and is likely to be considered and addressed in legal proceedings from time to time in the future. Management of Moody’s cannot predict whether these or any other proposals will be enacted, the outcome of any pending or possible future legal proceedings, or the ultimate impact of any such matters on the competitive position, financial position or results of operations of Moody’s.
Intellectual Property
Moody’s owns and controls a
numbervariety of trade secrets, confidential information, trademarks, trade names, copyrights, patents and other intellectual property rightswhich,that, in the aggregate, are of material importance tothe Company'sMoody’s business. Management ofthe CompanyMoody’s believes that each of the"Dun & Bradstreet"“Moody’s”, “Moody’s KMV” and"Moody's" names“KMV” name and related names, marks and logos are of material importance tothe Company. The CompanyMoody’s. Moody’s is licensed to use certain technology and other intellectual property rights owned and controlled by others, and, similarly, other companies are licensed to use certain technology and other intellectual property rights owned and controlled bythe Company. The CompanyMoody’s. Moody’s considers its trademarks, service marks, databases, software and other intellectual property to be proprietary, andthe CompanyMoody’s relies on a combination of copyright, trademark, trade secret, patent, non-disclosure and contract safeguards for protection. In 2002 Moody’s formed a new subsidiary, MIS Quality Management Corp., to own, manage, protect, and license the trademarks of Moody’s and its affiliates.The names of
the Company'sMoody’s products and services referred to herein are trademarks, service marks or registered trademarks or service marks owned by or licensed tothe CompanyMoody’s or one or more of its subsidiaries.(d) Financial information about foreignEmployees
As of December 31, 2003, the number of full-time equivalent employees of Moody’s was approximately 2,300.
Available Information
Moody’s investor relations Internet website is http://ir.moodys.com/. Under the “SEC Filings” tab at this website, the Company makes available free of charge its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
domestic markets is included in Note 15 (Segment Information) in Part II, Item 8 on Pages 67-70 of this Form 10-K.amendments to those reports as soon as reasonably practicable after they are filed with the SEC.9
EXECUTIVE OFFICERS OF THE REGISTRANT
Name, Age and Position Biographical Data John Rutherfurd, Jr., 64
Chairman and Chief Executive OfficerMr. Rutherfurd has served as Chairman of the Board since October 2003 and the Company’s Chief Executive Officer since October 1, 2000 and has been a member of the Board of Directors since May 30, 2000. Mr. Rutherfurd served as President of Moody’s Corporation from October 2000 until October 2003 and President of Moody’s Investors Service, Inc. from January 1998 until November 2001. Prior thereto, he was the Chief Administrative Officer from 1996 until January 1998. Mr. Rutherfurd also served as Managing Director of Moody’s Holdings Inc. from 1995 until 1996, and served as President of Interactive Data Corporation (“IDC”), a wholly owned subsidiary of Old D&B, from 1985 to 1989 and from 1990 until IDC was sold by Old D&B in September 1995. Mr. Rutherfurd is also a director of NASD and ICRA Limited, a credit rating agency in India. Jeanne M. Dering, 48
Senior Vice President and Chief Financial OfficerMs. Dering has served as the Company’s Senior Vice President and Chief Financial Officer since October 1, 2000 and has had senior management responsibility for Moody’s Information Technology group since January 2004. Ms. Dering joined Moody’s Investors Service, Inc., in 1997 as Managing Director, Finance Officer, and became its Chief Financial Officer in 1998. Prior thereto, she spent over 10 years at Old D&B in a number of financial management positions, including Director of Budgets & Financial Analysis and Director of Financial Planning — Acquisitions and New Business Development. John J. Goggins, 43
Senior Vice President and General CounselMr. Goggins has served as the Company’s Senior Vice President and General Counsel since October 1, 2000. Mr. Goggins joined Moody’s Investors Service, Inc., in February 1999 as Vice President and Associate General Counsel and became General Counsel in 2000. Prior thereto, he served as counsel at Dow Jones & Company from 1995 to 1999, where he was responsible for securities, acquisitions and general corporate matters. Prior to Dow Jones, he was an associate at Cadwalader, Wickersham, & Taft from 1985 to 1995, where he specialized in mergers and acquisitions. Raymond W. McDaniel, Jr., 46
Chief Operating Officer, Moody’s Corporation and President, Moody’s Investors Service, Inc.Mr. McDaniel has served as Chief Operating Officer of Moody’s Corporation since January 2004, a member of the Board of Directors since April 2003 and President of Moody’s Investors Service, Inc. since November 2001. Mr. McDaniel also served as Executive Vice President of the Company from April 10
Name, Age and Position Biographical Data 2003 to January 2004 and Senior Vice President from October 1, 2000 until January 2004. He served as Senior Managing Director, Global Ratings and Research, of Moody’s Investors Service, Inc., from November 2000 until November 2001. Prior thereto, he had served as Managing Director, International, since 1996 and served as Managing Director, Europe, from 1993 until 1996. He also served as Associate Director in Moody’s Structured Finance Group from 1989 until 1993, and as Senior Analyst in the Mortgage Securitization Group from 1988 to 1989. Chester V. A. Murray, 48
Senior Vice President and Chief Human Resources OfficerMr. Murray has served as the Company’s Senior Vice President and Chief Human Resources Officer since October 2002 and has served as Executive Vice President-International of Moody’s Investors Service since January 2004. Mr. Murray served as Senior Managing Director of Moody’s Investors Service, Inc., from November 2001 until October 2002; Group Managing Director-Europe from 1996 until November 2001; Managing Director of the Financial Institutions Group from 1993 until 1996; and Associate Director of the Financial Institutions Group from 1990 until 1993. He was a Senior Analyst for the Financial Institutions Group from 1985 until 1990. Prior thereto, Mr. Murray was a lending officer in the Latin American division of Irving Trust Company from 1981 until 1985. Douglas M. Woodham, 47
Senior Vice President, Moody’s Corporation and President, Moody’s KMVMr. Woodham has served as the Company’s Senior Vice President since October 2001. In January 2003, Mr. Woodham was also appointed President, Moody’s KMV. Prior to joining Moody’s, he served as managing director for EFINANCEWORKS from 2000 to October 2001. Mr. Woodham was a partner, member of the Operating Committee and east coast manager for the Business Technology Office at McKinsey & Company from 1997 to 2000. He served as vice president for Enron from 1994 to 1997 and was a partner at McKinsey & Company from 1985 to 1994. Mr. Woodham was an economist at the Federal Reserve Bank of New York from 1982 to 1985. ITEM 2. PROPERTIES
The executive offices of
the CompanyMoody’s are located atOne Diamond Hill Road, Murray Hill,99 Church Street, NewJerseyYork, New York, in a184,000 square foot297,000-square-foot property owned bythe Company. This propertyMoody’s. Moody’s operations are alsoserves as the executiveconducted from 8 other U.S. offices and 21 non-U.S. office locations, all ofD&B U.S. and D&B APCLA. The Company'swhich are leased. These other properties are geographically distributed to meet sales and operating requirements worldwide. These properties are generally considered to be both suitable and adequate to meet current operating requirements, and virtually all space is being utilized.The most important of these other properties include the following sites that are owned by the Company: (i) a 300,000 square foot office building in New York, New York that serves as the executive offices of Moody's; (ii) two commercial office buildings (totaling 114,200 square feet) in Berkeley Heights, New Jersey used as data processing facilities for the U.S. operations of the D&B operating company and Moody's; (iii) a 147,000 square foot office building in Parsippany, New Jersey housing personnel from the sales, marketing and technology groups of the D&B operating company; and (iv) a 236,000 square foot office building in High Wycombe, England that serves as the executive offices of D&B Europe. The Company's operations are also conducted from 81 other offices located throughout the U.S. (all of which are leased) and 101 non-U.S. office locations (95 of which are leased).11
ITEM 3. LEGAL PROCEEDINGS
InformationFrom time to time, Moody’s is involved in
responselegal and tax proceedings, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by Moody’s. Management periodically assesses the Company’s liabilities and contingencies in connection with these matters, based upon the latest information available. For those matters where the probable amount of loss can be reasonably estimated, the Company believes it has recorded appropriate reserves in the consolidated financial statements. In other instances, because of the uncertainties related to both the probable outcome and amount or range of loss, management is unable to make a reasonable estimate of a liability, if any. As additional information becomes available, the Company adjusts its assessments and estimates of such liabilities accordingly.The discussion of the litigation under the heading “Legacy Contingencies” under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, commencing at page 30 of this annual report on Form 10-K, is incorporated into this Item
is included3 by reference.Based on its review of the latest information available, in
Note 13 (Contingencies)the opinion of management, the ultimate liability of the Company in connection with pending legal and tax proceedings, claims and litigation will not have a material adverse effect on Moody’s financial position, results of operations or cash flows, subject to the contingencies described below and in Part II, Item8 on Pages 63-657. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Contingencies”.L’Association Francaise des Porteurs d’ Emprunts Russes
On June 20, 2001 a summons was served in an action brought by L’Association Francaise des Porteurs d’ Emprunts Russes (“AFPER”) against Moody’s France SA (a subsidiary of the Company) and filed in the Court of First Instance of Paris, France. In this suit, AFPER, a group of holders of bonds issued by the Russian government prior to the 1917 Bolshevik Revolution, makes claims against Moody’s France SA and Standard & Poor’s SA for lack of diligence and prudence in their ratings of Russia and Russian debt since 1996. AFPER alleges that, by failing to take into account the post-Revolutionary repudiation of pre-Revolutionary Czarist debt by the Soviet government in rating Russia and new issues of Russian debt beginning in 1996, the rating agencies enabled the Russian Federation to issue new debt without repaying the old obligations of the Czarist government. Alleging joint and several liability, AFPER seeks damages of Euro 2.8 billion (approximately U.S. $3.5 billion as of December 31, 2003) plus legal costs. Moody’s believes the allegations lack legal or factual merit and intends to vigorously contest the action. As such, no amount in respect of this
Form 10-K.matter has been accrued in the financial statements of the Company. However, if the plaintiffs in this action were to prevail, then the outcome of this matter could have a material adverse effect on Moody’s financial position, results of operations and cash flows. The case has been fully briefed, oral argument was heard before the Court on January 20, 2004, and the Court announced that judgment would be rendered on April 6, 2004.ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable. 1517 EXECUTIVE OFFICERS OF THE REGISTRANT* Officers are elected byDuring the
Board of Directors to hold office until their respective successors are chosen and qualified. Listed below are the executive officersfourth quarter of theRegistrant at February 16, 1999 and brief summariesfiscal year covered by this annual report on Form 10-K, no matter was submitted to a vote oftheir business experience during the past five years. Information concerning officer titles at The Dun & Bradstreet Corporation reflect titles with (i) Old D&B and Historical D&B, as applicable, for periods prior to the 1998 Distribution Date and (ii) the Company for periods after the 1998 Distribution Date.
NAME TITLE AGE - ---- ----- ---Volney Taylor**.................... Chairman of the Board and Chief Executive Officer 59 William F. Doescher................ Senior Vice President and Chief Communications Officer 61 Nancy L. Henry..................... Senior Vice President and Chief Legal Counsel 53 Elahe Hessamfar.................... Senior Vice President and Chief Technology Officer 45 Peter J. Ross...................... Senior Vice President and Chief Human Resources Officer 53 Frank S. Sowinski.................. Senior Vice President and Chief Financial Officer 42 Chester J. Geveda, Jr.............. Vice President and Controller 52- ------------------------- * Set forth as a separate item pursuant to Items 401(b) and (e) of Regulation S-K. ** Member of the Board of Directors since December 19, 1984. Mr. Taylor has served as chairman and chief executive officer of The Dun & Bradstreet Corporation since November 1996 and has served as a director since 1984. He served as executive vice president of The Dun & Bradstreet Corporation from February 1982 to November 1996. Since January 1991, he has also served as chairman of the Dun & Bradstreet operating company. Mr. Doescher has served as senior vice president and chief communications officer of The Dun & Bradstreet Corporation since November 1996. He is also senior vice president -- global communications of the Dun & Bradstreet operating company, a position he has held since April 1992. Ms. Henry has served as senior vice president and chief legal counsel of The Dun & Bradstreet Corporation since March 1997. Prior thereto, she was special counsel at the law firm of Skadden, Arps, Slate, Meagher & Flom LLP from April 1985. Ms. Hessamfar has served as senior vice president and chief technology officer of The Dun & Bradstreet Corporation since August 1997. Prior thereto, she served as chief information officer of Turner Broadcasting System from July 1993 to July 1997 and as vice president -- information systems of PAC Bell Directories from May 1987 to June 1993. Mr. Ross has served as senior vice president and chief human resources officer of The Dun & Bradstreet Corporation since November 1996. He is also senior vice president -- human 1618 resources of the Dun & Bradstreet operating company, a position he has held since June 1988. Mr. Sowinski has served as senior vice president and chief financial officer of The Dun & Bradstreet Corporation since November 1996. He is also executive vice president -- global marketing of the Dun & Bradstreet operating company, a position he has held since October 1997. Prior thereto, Mr. Sowinski served the Dun & Bradstreet operating company as executive vice president -- applications and alliances from November 1996 to September 1997, as executive vice president -- applications, mass marketing and alliances from October 1994 to October 1996, as executive vice president -- marketing from April 1993 to September 1994 and as senior vice president -- finance & planning from August 1989 to March 1993. Mr. Geveda has served as vice president and controller of The Dun & Bradstreet Corporation and as senior vice president -- finance of the Dun & Bradstreet operating company since November 1996. Prior thereto, he served as senior vice president -- finance and planning of the Dun & Bradstreet operating company from April 1993 to October 1996 and as senior vice president -- finance and administration of Dun & Bradstreet Europe/Africa/Middle East from September 1990 to March 1993.Security Holders.PART II
ITEM 5. MARKET FOR THE
REGISTRANT'SREGISTRANT’S COMMON EQUITY AND RELATEDSTOCKHOLDERSHAREHOLDER MATTERSInformation in response to this Item is set forth under the captions
"Dividends"“Common Stock Information” and"Common Stock Information"“Dividends” inPart II,Item 7on Page 31of this annual report on Form 10-K.171912
ITEM 6. SELECTED FINANCIAL DATA
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES FIVE-YEAR SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)RESULTS OF OPERATIONS Operating Revenues.................... $1,934.5 $1,811.0 $1,782.5 $1,735.3 $1,685.0 Costs and Expenses(1)................. 1,513.8 1,407.3 1,725.3 1,522.4 1,337.9 -------- -------- -------- -------- -------- Operating Income...................... 420.7 403.7 57.2 212.9 347.1 Non-Operating Expense -- Net(2)....... (20.9) (71.3) (71.2) (68.0) (35.1) -------- -------- -------- -------- -------- Income from Continuing Operations before Provision for Income Taxes... 399.8 332.4 (14.0) 144.9 312.0 Provision for Income Taxes............ 153.4 113.4 102.1 49.6 110.4 -------- -------- -------- -------- -------- Income (Loss) from: Continuing Operations................. 246.4 219.0 (116.1) 95.3 201.6 Discontinued Operations, Net of Income Taxes(3)............................ 33.7 92.0 72.3 225.9 428.0 -------- -------- -------- -------- -------- Income (Loss) before Cumulative Effect of Accounting Changes............... 280.1 311.0 (43.8) 321.2 629.6 Cumulative Effect of Accounting Changes, Net of Income Tax Benefit(4).......................... -- (127.0) -- -- -- -------- -------- -------- -------- -------- Net Income (Loss)..................... $ 280.1 $ 184.0 $ (43.8) $ 321.2 $ 629.6 ======== ======== ======== ======== ======== BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK Continuing Operations................. $ 1.45 $ 1.28 $ (.69) $ .56 $ 1.18 Discontinued Operations............... .20 .54 .43 1.33 2.52 -------- -------- -------- -------- -------- Before Cumulative Effect of Accounting Changes............................. 1.65 1.82 (.26) 1.89 3.70 Cumulative Effect of Accounting Changes, Net of Income Tax Benefit(4).......................... -- (.74) -- -- -- -------- -------- -------- -------- -------- Basic Earnings (Loss) Per Share of Common Stock........................ $ 1.65 $ 1.08 $ (.26) $ 1.89 $ 3.70 ======== ======== ======== ======== ========1820
1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK Continuing Operations................. $ 1.44 $ 1.27 $ (.69) $ .55 $ 1.17 Discontinued Operations............... .19 .53 .43 1.32 2.50 -------- -------- -------- -------- -------- Before Cumulative Effect of Accounting Changes............................. 1.63 1.80 (.26) 1.87 3.67 Cumulative Effect of Accounting Changes, Net of Income Tax Benefit(4).......................... -- (.73) -- -- -- -------- -------- -------- -------- -------- Diluted Earnings (Loss) Per Share of Common Stock........................ $ 1.63 $ 1.07 $ (.26) $ 1.87 $ 3.67 ======== ======== ======== ======== ======== OTHER DATA Dividends Paid Per Share.............. $ .81 $ .88 $ 1.82 $ 2.63 $ 2.56 ======== ======== ======== ======== ======== Dividends Declared Per Share.......... $ .775 $ 1.10 $ 1.82 $ 2.63 $ 2.56 ======== ======== ======== ======== ======== Weighted Average Number of Shares Outstanding -- Basic................ 169.5 170.8 170.0 169.5 169.9 ======== ======== ======== ======== ======== Weighted Average Number of Shares Outstanding -- Diluted(5)........... 171.7 172.6 170.0 171.6 171.7 ======== ======== ======== ======== ======== BALANCE SHEET Total Assets(6)....................... $1,789.2 $2,086.0 $2,225.4 $3,644.9 $3,759.8 ======== ======== ======== ======== ========- ------------------------- (1) 1998The Company’s selected consolidated financial data should be read in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Moody’s Corporation consolidated financial statements and notes thereto.
The Company’s consolidated financial statements are presented as if the Company were a separate entity for all periods presented. Through September 30, 2000, the Distribution Date, Moody’s expenses included
a one-time chargeallocations of$28.0 millioncosts from Old D&B forreorganization costs associated with the separationemployee benefits, centralized services and other corporate overhead. Expenses related to these services were allocated to Moody’s based on utilization of specific services or, where such an estimate could not be determined, based on Moody’s revenue in proportion to Old D&B’s total revenue. Although management believes these expense allocations are reasonable, they are not necessarily indicative of the costs that would have been incurred if the Companyand Donnelley. 1996had performed or obtained these services as a separate entity. The allocations includedone-time chargesin expenses in the consolidated statements of$161.2 million for reorganization costs associated with the 1996 Distribution and loss on sale of $68.2 million for American Credit Indemnity. 1995 included a fourth-quarter non-recurring charge of $188.5 million partially offset by gains of $90.0 million and $28.0 million for the sale of Interactive Data Corporation and warrants received in connection with the sale of Donnelley Marketing, respectively. (2) 1998 included a one-time gain on the sale of Financial Information Services, the publishing unit of Moody's Investors Service, of $9.6 million. (3) Income taxes on Discontinued Operationsoperations were$22.5 million, $52.2 million, $145.1 million, $73.4 million and $139.4$13.3 million in1998, 1997, 1996, 19952000 and1994, respectively. (4) 1997 included the impact of a change$17.2 million inrevenue recognition policies (see Note 11999. There were no such allocations subsequent to theconsolidatedDistribution Date. The financialstatements). (5) The exercisedata included herein may not necessarily reflect the results ofdiluted shares has notoperations and financial position of Moody’s in the future or what they would have beenassumed for the year ended December 31, 1996, since the result is antidilutive. (6) Included Net Assets of Discontinued Operations of $296.5 million, $430.6 million, $1,652.2 million and $1,809.3 million in 1997, 1996, 1995 and 1994, respectively. 1921had it been a separate entity.
Year Ended December 31, amounts in millions, except per share data 2003 2002 2001 2000 1999 Revenue $ 1,246.6 $ 1,023.3 $ 796.7 $ 602.3 $ 564.2 Expenses 583.5 485.2 398.2 313.8 293.8
Operating income 663.1 538.1 398.5 288.5 270.4 Non-operating (expense) income, net (1) (2) (6.7 ) (20.7 ) (16.6 ) (4.5 ) 8.5
Income before provision for income taxes 656.4 517.4 381.9 284.0 278.9 Provision for income taxes 292.5 228.5 169.7 125.5 123.3
Net income $ 363.9 $ 288.9 $ 212.2 $ 158.5 $ 155.6
Basic $ 2.44 $ 1.88 $ 1.35 $ 0.98 $ 0.96 Diluted $ 2.39 $ 1.83 $ 1.32 $ 0.97 $ 0.95
Basic 148.9 153.9 157.6 161.7 162.3 Diluted 152.3 157.5 160.2 163.0 164.3
$ 0.180 $ 0.180 $ 0.180 $ 0.045 $ —
As of December 31, 2003 2002 2001 2000 1999 Total assets $ 941.4 $ 630.8 $ 505.4 $ 398.3 $ 274.8 Long-term debt $ 300.0 $ 300.0 $ 300.0 $ 300.0 — Shareholders’ equity $ (32.1 ) $ (327.0 ) $ (304.1 ) $ (282.5 ) $ (223.1 )
(1) Included in 1999 non-operating (expense) income, net is a pre-tax gain of $9.2 million ($0.03 per basic and diluted share) related to the Financial Information Services (“FIS”) business that was sold in July 1998. (2) Non-operating (expense) income, net includes $23.5 million, $23.5 million, $22.9 million and $5.8 million, in 2003, 2002, 2001 and 2000 respectively, of interest expense that principally relates to the Company’s $300 million of notes payable issued in October 2000. Interest expense was immaterial in 1999. The 2003 amount also includes a gain of $13.6 million on an insurance recovery related to the September 11th tragedy. (3) The 2002 results of operations include revenue of $42.1 million, expenses of $42.8 million and an operating loss of $0.7 million related to KMV, which was acquired in April 2002. 13
ITEM 7.
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOVERVIEW On June 30, 1998,This discussion and analysis of financial condition and results of operations should be read in conjunction with the Moody’s Corporation consolidated financial statements and notes thereto included elsewhere in this annual report on Form 10-K.
Certain of the statements below are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, any projections of future results of operations and cash flows are subject to substantial uncertainty. See “Forward-Looking Statements” on page 37 and “Additional Factors That May Affect Future Results” on page 27.
The Company
Except where otherwise indicated, the terms “Moody’s” and the “Company” refer to Moody’s Corporation and its subsidiaries. Moody’s is a provider of credit ratings, research and analysis covering debt instruments and securities in the global capital markets and a provider of quantitative credit assessment services, credit training services and credit process software to banks and other financial institutions. Moody’s operates in two reportable segments: Moody’s Investors Service and Moody’s KMV.
Moody’s Investors Service publishes rating opinions on a broad range of credit obligations issued in domestic and international markets, including various corporate and governmental obligations, structured finance securities and commercial paper programs, as well as rating opinions on issuers of credit obligations. It also publishes investor-oriented credit research, including in-depth research on major issuers, industry studies, special comments and credit opinion handbooks.
The Moody’s KMV business consists of the combined businesses of KMV LLC and KMV Corporation (“KMV”), acquired in April 2002, and Moody’s Risk Management Services. Moody’s KMV develops and distributes quantitative credit assessment products and services for banks and investors in credit-sensitive assets, credit training services and credit process software.
The Company operated as part of The Dun & Bradstreet Corporation
("(“Old D&B"&B”) until September 30, 2000 (the “Distribution Date”), when Old D&B separated into two publicly traded companies--— Moody’s Corporation and The NewDun & BradstreetD&B Corporation("(“New D&B" or the "Company"&B”)and R.H. Donnelley Corporation. The separation (the "1998 Distribution") of the two companies was accomplished through a tax-free dividend by. At that time, Old D&B distributed to its shareholders shares of New D&B stock. New D&B comprised theCompany, which is a new entity comprisedbusiness ofMoody's Investors Service ("Moody's") and theOld D&B’s Dun & Bradstreet operating company("D&B"(the “D&B Business”). The remaining business of Old D&B consisted solely of the business of providing ratings and related research and credit risk management services (the “Moody’s Business”) and was renamed “Moody’s Corporation”. The method by which Old D&B distributed to its shareholders its shares of New D&Bchangedstock is hereinafter referred to as the “2000 Distribution”.Critical Accounting Estimates
Moody’s discussion and analysis of its
name to "The Dun & Bradstreet Corporation,"financial condition and results of operations are based on thecontinuing entity (i.e., Old D&B) consisting of R.H. Donnelley Inc., the operating company and the DonTech partnership changed its name to "R.H. Donnelley Corporation" ("Donnelley"). The tax-free stock dividend was issued on June 30, 1998, to shareholders of record at the close of business on June 17, 1998. Due to the relative significance of Moody's and D&B, the transaction has been accounted for as a reverse spin-off and, as such, Moody's and D&B have been classified as continuing operations and R.H. Donnelley Inc. and DonTech have been classified as discontinued operations. For purposes of effecting the 1998 Distribution and of governing certain of the continuing relationships between the Company and Donnelley after the transaction, the two companies have entered into various agreements as described in Note 2 to the Company'sCompany’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Moody’s to make estimates and judgments that affect reported amounts of assets, liabilities and related disclosures of contingent assets and liabilities at the dates of the financial statements and revenue and expenses during the reporting periods. These estimates are based onPages 47-49historical experience and on other assumptions that are believed to be reasonable under the circumstances. On an ongoing basis, Moody’s evaluates its estimates, including those related to revenue recognition, accounts receivable allowances, contingencies, goodwill, pension and other post-retirement benefits and stock-based compensation. Actual results may differ from these estimates under different assumptions or conditions. The following accounting estimates are considered critical because they are particularly dependent on management’s judgment about matters that are uncertain at the time the accounting estimates are made and changes to those estimates could have a material impact on the Company’s consolidated results of operations or financial condition.Revenue Recognition
In recognizing revenue related to ratings, Moody’s uses judgments to allocate billed revenue between ratings and the future monitoring of ratings in cases where the Company does not charge ongoing monitoring fees for a particular issuer. These judgments are not dependent on the outcome of future uncertainties, but rather relate to allocating revenue across accounting periods. In such
14
cases, the Company defers portions of rating fees that will be attributed to future monitoring activities and recognizes the deferred revenue ratably over the estimated monitoring periods.
The portion of the revenue to be deferred is determined based on annual monitoring fees charged for similar securities or issuers and the level of monitoring effort required for a type of security or issuer. The estimated monitoring period over which the deferred revenue will be recognized is determined based on factors such as the frequency of issuance by the issuers and the lives of the rated securities. Currently, the estimated monitoring periods range from three to ten years. At December 31, 2003 and 2002, deferred revenue included approximately $26 million and $20 million, respectively, related to such deferred monitoring fees.
Moody’s estimates revenue for ratings of commercial paper for which, in addition to a fixed annual monitoring fee, issuers are billed quarterly based on amounts outstanding. Related revenue is accrued each quarter based on estimated amounts outstanding, and is billed subsequently when actual data is available. The estimate is determined based on the issuers’ most recent reported quarterly data. At December 31, 2003 and 2002, accounts receivable included approximately $26 million and $22 million, respectively, of accrued commercial paper revenue. Historically, the Company has not had material differences between the estimated revenue and the actual billings.
Accounts Receivable Allowance
Moody’s records as reductions of revenue provisions for estimated future adjustments to customer billings based on historical experience and current conditions. Such provisions are reflected as additions to the accounts receivable allowance. Adjustments to and write-offs of accounts receivable are charged against the allowance. Moody’s evaluates its accounts receivable by reviewing and assessing historical collection experience and the current status of customer accounts. Moody’s also considers the economic environment of the customers, both from a marketplace and geographic perspective, in evaluating the need for allowances. Based on its reviews, Moody’s establishes or adjusts allowances for specific customers and the accounts receivable balance as a whole, as considered appropriate. This process involves a high degree of judgment and estimation and frequently involves significant dollar amounts. Accordingly, Moody’s results of operations can be affected by adjustments to the allowance. Management believes that the allowance for uncollectible accounts is adequate to cover anticipated adjustments and write-offs under current conditions. However, significant changes in any of the above-noted factors, or actual write-offs or adjustments that differ from the estimated amounts, could result in allowances that are greater or less than Moody’s estimates. In each of 2003 and 2002, the Company reduced its provision rates and its allowances to reflect its current estimate of the appropriate level of accounts receivable allowance.
Contingencies
Accounting for contingencies, including those matters described in the “Contingencies” section of this
Form 10-K. On November 1, 1996,management’s discussion and analysis, requires thecompany then knownuse of judgments and estimates in assessing their magnitude and likely outcome. In many cases, the outcomes of such matters will be determined by third parties, including governmental or judicial bodies. The provisions made in the consolidated financial statements, as well as the related disclosures, represent management’s best estimates of the current status of such matters and their potential outcome based on a review of the facts and in consultation with outside legal counsel where deemed appropriate.For the year ended December 31, 2003, the provision for income taxes reflected an increase of $16.2 million in reserves for legacy income tax exposures that were assumed by Moody’s in connection with its separation from The Dun & Bradstreet Corporationreorganized into three publicly traded independent companies by spinning off throughin October 2000. These tax matters are discussed under “Legacy Tax Matters” below. Since the potential exposure on many of these matters is material, and it is possible that these matters could be resolved in amounts that are greater than the Company has reserved, their resolution could have atax-free dividend (the "1996 Distribution") two of its businesses to shareholders. The 1996 Distribution resulted in the following three companies: (1) Old D&B, (2) Cognizant Corporation ("Cognizant")material effect on Moody’s future reported results and(3) ACNielsen Corporation ("ACNielsen").financial position. Inconjunction with the 1996 Distribution, Dun & Bradstreet Software ("DBS") and NCH Promotional Services ("NCH") also were disposed of. After the transaction was completed, Old D&B's continuing operations consisted of D&B, Moody's and Donnelley. For purposes of effecting the 1996 Distribution and governing certain of the ongoing relationships among Old D&B, Cognizant and ACNielsen after the 1996 Distribution, Old D&B, Cognizant and ACNielsen entered into various agreements, as described in Note 2addition, potential cash outlays related to theCompany's consolidated financial statements on Pages 47-49 of this Form 10-K. Pursuant to Accounting Principles Board Opinion ("APB") No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the consolidated financial statements of the Company have been reclassified to reflect both the 1998 Distribution and the 1996 Distribution. Accordingly, revenues, costs and expenses, and cash flows of Donnelley, Cognizant, ACNielsen, DBS and NCH have been excluded from the respective captions in the Consolidated Statements of Operations and Consolidated Statements of Cash Flows. The net operating resultsresolution of theseentities have been reported, net of applicable income taxes, as "Income from Discontinued Operations," and the net cash flows of these entities have been reported as "Net Cash (Used in) Provided by Discontinued Operations." The assets and liabilities of Donnelley have been excluded from the respective captionsexposures could be material.Goodwill
Moody’s evaluates its goodwill for impairment annually or more frequently if impairment indicators arise in
the Consolidated Balance Sheets and have been reported as "Net Assets of Discontinued Operations." 2022 RESULTS OF OPERATIONS As of December 31, 1998, the Company adopted the provisions ofaccordance with Statement of Financial Accounting Standards("SFAS"(“SFAS”) No.131, "Disclosures142, “Goodwill and Other Intangible Assets”. Moody’s goodwill balance is material ($126.4 million at December 31, 2003), and the evaluation of goodwill requires that the Company make important assumptions and judgments aboutSegmentsfuture operating results and cash flows as well as terminal values and discount rates. In estimating future operating results and cash flows, Moody’s considers internal budgets and strategic plans, expected long term growth rates, and the effects of external factors and market conditions. If actual future operating results and cash flows or external conditions differ from15
the Company’s judgments, or if changes in assumed terminal values or discount rates are made, an
Enterpriseimpairment charge may be necessary to reduce the carrying value of goodwill, which charge could be material to the Company’s financial position andRelated Information."results of operations.Pension and Other Post-Retirement Benefits
The expenses, assets, liabilities and obligations that Moody’s reports for pension and other post-retirement benefits are dependent on many assumptions concerning the outcome of future events and circumstances. These assumptions include the following:
Future compensation increases, based on the Company’s long-term actual experience and future outlook.Discount rates, based on current yields on high grade corporate long-term bonds.Long-term return on pension plan assets, based on the expected future average annual return for each major asset class within the plan’s portfolio (which is principally comprised of equity and fixed-income investments).In determining such assumptions, the Company consults with outside actuaries and other advisors where deemed appropriate. In accordance with relevant accounting standards, if actual results differ from the Company’s assumptions, such differences are deferred and amortized over the estimated future working life of the plan participants. While the Company believes that the assumptions used in its calculations are reasonable, differences in actual experience or changes in assumptions could have a significant effect on the expenses, assets and liabilities related to the Company’s pension and other post-retirement benefits.
The table below shows the estimated effect that a one percentage point increase in each of these assumptions would have had on Moody’s pre-tax expense in 2003 (dollars in millions):
Estimated Impact on Pre- Assumption Used for tax Expense in 2003 2003 (decrease)/increase Discount Rate 6.75 % ($ 2.5 ) Weighted Average Assumed Compensation Growth Rate 3.91 % $ 1.0 Assumed Long-Term Rate of Return on Pension Assets 8.10 % ($ 1.0 ) Stock-Based Compensation
On January 1, 2003, the Company adopted, on a prospective basis, the fair value method of accounting for stock-based compensation under the provisions of SFAS No.
131,123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123”. Therefore, employee stock options granted on and after January 1, 2003 are being expensed by the Company over the option vesting period, based on the estimated fair value of the option award on the date of grant. The estimated fair value is calculated based on a Black-Scholes option pricing model using assumptions and estimates that the Company believes are reasonable. Some of the assumptions and estimates, such as share price volatility and expected option holding period, are based in part on Moody’s experience during the period since becoming a public company, which is limited. The use of different assumptions and estimates in the Black-Scholes option pricing model could produce materially different estimated fair values for option awards and related expense to be recognized over the option vesting period.16
An increase in the following assumptions would have had the following estimated effect on pre-tax expense in 2003 (dollars in millions):
Estimated Impact on Assumption Used for Amount of Increase in Pre-tax Expense in 2003 2003 Assumption (decrease)/increase Expected Dividend Yield 0.41 % 0.10 % ($ 0.1 ) Expected Share Price Volatility 30 % 5 % $ 1.2 Expected Option Holding Period 5.0 years 1.0 year $ 1.1 Other Estimates
In addition, there are other accounting estimates within Moody’s consolidated financial statements, including recoverability of deferred tax assets, anticipated distributions from non-U.S. subsidiaries, realizability of long-lived and intangible assets and valuation of investments in affiliates. Management believes the current assumptions and other considerations used to estimate amounts reflected in Moody’s consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in Moody’s consolidated financial statements, the resulting changes could have a material adverse effect on Moody’s consolidated results of operations or financial condition.
See Note 2 to the Company’s consolidated financial statements for further information on key accounting policies that impact Moody’s.
Operating Segments
Prior to 2002, the Company operated in one reportable business segment – Ratings, which accounted for approximately 90% of the Company’s total revenue. With the April 2002 acquisition of KMV and its combination with Moody’s Risk Management Services to form Moody’s KMV, Moody’s now operates in two reportable business segments: Moody’s Investors Service and Moody’s KMV. Accordingly, in the second quarter of 2002, the Company restated its segment information for corresponding prior periods to conform to the current presentation. In discussing periods prior to 2002, the Moody’s KMV segment is
being reportedreferred to as Moody’s Risk Management Services (“MRMS”), the predecessor business. In order to provide additional information relating to Moody’s operating results, the discussion below includes information analyzing operating results as if the acquisition of KMV had been consummated as of January 1, 2002. This information is presented in a manner consistent with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and is described in more detail in Note 5 to theCompany's methodconsolidated financial statements.The Moody’s Investors Service business consists of
internal reporting. The prior years' segment information has been restated accordingly. The Company's reportable segments are Dun & Bradstreet United States ("D&B U.S."), Dun & Bradstreet Europe/ Africa/Middle East ("D&B Europe"), Dun & Bradstreet Asia Pacific/Canada/Latin America ("D&B APCLA")four rating groups — structured finance, corporate finance, financial institutions andMoody's. The three Dun & Bradstreet segments, managed on a geographical basis, provide business-to-business credit, marketingsovereign risk, andpurchasing information and receivables management services. The Moody's segment provides credit opinions on investment securities and assigns ratings to fixed-income securities and other credit obligations. The Company evaluates performance and allocates resources based on segment operating income. YEAR ENDED DECEMBER 31, 1998, COMPARED WITH YEAR ENDED DECEMBER 31, 1997 The Company's basic earnings per share from continuing operations were $1.45 in 1998, up $.17 from $1.28 in 1997. On a diluted basis, the Company reported earnings per share from continuing operations of $1.44 in 1998, compared to earnings per share from continuing operations of $1.27 in 1997. The Company's basic earnings per share for 1998 were $1.65 compared to $1.08 per share in 1997, including earnings per share from discontinued operations of $.20 and $.54 in 1998 and 1997, respectively. On a diluted basis, the Company's earnings per share in 1998 of $1.63 were uppublic finance — that generate revenue principally from the1997 diluted earnings per shareassignment of$1.07, including diluted earnings per sharecredit ratings on fixed-income instruments in the debt markets, and research, which primarily generates revenue fromdiscontinued operations of $.19 and $.53 in 1998 and 1997, respectively. The 1998 results include one-time reorganization costs associated with the 1998 Distribution of $28.0 million ($23.2 million after-tax, $.14 per share basic, $.13 per share diluted) and a gain of $9.6 million ($5.3 million after-tax, $.03 per share basic and diluted) onthe sale ofFinancial Information Services ("FIS"),investor-oriented credit research, principally produced by thefinancial publishing unitrating groups. Given the dominance ofMoody's. The 1997Moody’s Investors Service to Moody’s overall results,include a one-time, non-cash charge forthecumulative effect of accounting changes ($.74 per share basic, $.73 per share diluted), with respectCompany does not separately measure or report corporate expenses, nor are they allocated tocertainthe Company’s business segments. Accordingly, all corporate expenses are included in operating income of theCompany'sMoody’s Investors Service segment and none have been allocated to the Moody’s KMV segment.The Moody’s KMV business develops and distributes quantitative credit assessment products and services for banks and investors in credit-sensitive assets, credit training services and credit process software.
Certain prior year amounts have been reclassified to conform to the current presentation.
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Results of Operations
Year Ended December 31, 2003 Compared With Year Ended December 31, 2002
Total Company Results
Moody’s revenue
recognition methods. Operating revenues grew 6.8% to $1,934.5for 2003 was $1,246.6 million, an increase of $223.3 million or 21.8% from $1,023.3 million in1998 from $1,811.0the prior year. Assuming that Moody’s had acquired KMV on January 1, 2002, Moody’s pro forma 2002 revenue would have been $1,038.4 million and year-to-year pro forma growth in1997. Excluding2003 would have been 20.1%. Moody’s strong revenue growth was achieved despite expectations early in theresults of FIS, which was sold in July 1998, revenue increased 7.8%. Revenue growth for 1998 reflects significant growth at Moody's and strong growth at D&B U.S. offset by a decline at D&B APCLA. D&B Europe was essentially unchanged. Excluding the impact of foreign exchange, operating revenues foryear that the Companygrew 8.2%would encounter a difficult macroeconomic and capital markets environment. The Company benefited from better-than-expected revenue in1998a number of U.S. ratings sectors, including residential mortgage-backed securities, home equity loan securitizations and the high yield segment of the corporate bond market, and from1997. 1998 operating costs increased 16.7% to $568.2 million, largely attributable to increased Year 2000 spending, costs incurred by D&Bstrong corporate issuance in Europefor new systems and technology, and costs associated with the introduction of new products and services. Selling and administrative expenses decreased slightly. Operating income in 1998 of $420.7 million increased 4.2% from $403.7 million in 1997. 1998 operating income included $28.0 million in reorganization costs incurred in conjunction with the 1998 Distribution. Excluding reorganization costs, operating income increased 11.1%. Operating income growth reflected strong growth at Moody's and D&B U.S. 2123 Non-operating expense -- net of $20.9 million in 1998, primarily comprised of interest income and expense and minority interest expense (included in other expense -- net), decreased by $50.4 million compared to 1997. The sharp decrease was due to significantly lower interest expense and higher interest income, as 1998 debt levels were lower than 1997 levels (see further discussionin theLiquidity and Financial Position section). In 1998, the Company's effective tax rate from continuing operations was 38.4%, compared to 34.1% in 1997. This increase resulted from an increase in the estimated underlying effective tax rate to 36.8% and the non-deductibility of certain reorganization costs. Income from discontinued operations, net of income taxes, was $33.7 million in 1998 and $92.0 million in 1997. Discontinued operations represents six months of Donnelley operating results in 1998, compared to the full year of Donnelley operating results reported as discontinued operations in 1997. Donnelley's operating income was historically lower during the firstsecond half of the year.SEGMENT RESULTS D&B U.S. revenues were $902.5Moody’s research business produced very strong results and Moody’s KMV also generated good growth. In addition, foreign currency translation accounted for approximately 200 basis points of reported revenue growth.Revenue in the United States was $795.3 million for 2003, an increase of $114.5 million or 16.8% from $680.8 million in
1998,2002. Assuming that Moody’s had acquired KMV on January 1, 2002, pro forma United States revenue for 2002 would have been $688.4 million and year-to-year pro forma growth would have been 15.5%. Strong growth was achieved within Moody’s Investors Service, led by structured finance, corporate finance and research.
Moody’s international revenue was $451.3 million in 2003, an increase of $108.8 million or 31.8% over $342.5 million in 2002. Assuming that Moody’s had acquired KMV on January 1, 2002, pro forma international revenue for 2002 would have been $350.0 million and year-to-year pro forma growth would have been 28.9%. Growth was driven by strong performance in Europe and several other regions, and foreign currency translation accounted for approximately 650 basis points of reported revenue growth. International revenue accounted for 36% of Moody’s total revenue in 2003, compared with 33% in the prior year.Overall, Moody’s expenses of $550.9 million in 2003 were $90.3 million or 19.6% greater than $460.6 million in 2002. Compensation and benefits continues to be Moody’s largest expense, accounting for approximately two-thirds of total expenses in 2003 and 2002. Moody’s increased its overall staffing by almost 200 people, or 9%, during 2003 to support continued growth in the business. The table below shows Moody’s staffing at year-end 2003 compared with year-end 2002.
December 31, 2003 December 31, 2002 United States International Total United States International Total Moody’s Investors Service 1,258 655 1,913 1,171 606 1,777 Moody’s KMV 318 69 387 276 57 333
Total 1,576 724 2,300 1,447 663 2,110
Operating expenses were $347.3 million in 2003, an increase of $62.0 million or 21.7% from $285.3 million in 2002. Assuming that Moody’s had owned KMV for all of 2002, pro forma operating expenses would have been $290.1 million in 2002, and year-to-year growth would have been $57.2 million or 19.7%. The largest contributor to this increase was growth in compensation and benefits expense of $48 million. This reflected compensation increases as well as increased staffing in Europe, the global structured finance business, the specialist teams that support Moody’s enhanced analysis initiative, and MKMV. The year-to-year operating expense increase also reflected $8 million related to the Company’s change in accounting for stock-based compensation, mainly for options granted in February 2003.
Selling, general and administrative (“SG&A”) expenses were $203.6 million in 2003, an increase of $28.3 million or 16.1% from $175.3 million in 2002. Assuming that Moody’s had owned KMV for all of 2002, pro forma SG&A expenses would have been $183.1 million in 2002, and year-to-year growth would have been $20.5 million or 11.2%. Year-to-year expense increases included higher professional fees of $4 million, mainly for legal costs, increased compensation and benefits of approximately $4 million and higher rent and occupancy costs to support business expansion, and $2 million related to the Company’s change in accounting for stock-based compensation, mainly for options granted in February 2003.
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Depreciation and amortization expense increased to $32.6 million in 2003 from $24.6 million in 2002. Amortization of acquired software and intangible assets related to the KMV acquisition was $8.8 million in 2003 compared with $6.3 million in 2002. If the acquisition of KMV had been completed as of January 1, 2002, pro forma depreciation and amortization would have been $27.7 million in 2002 and the pro forma year-to-year increase would have been $4.9 million. This increase was principally related to computer hardware and software placed into service during 2003.
Operating income of $663.1 million in 2003 rose $125.0 million or 23.2% from $538.1 million in 2002. This increase was primarily the result of the revenue growth mentioned above. The strength of foreign currencies, especially the Euro, relative to the U.S. dollar accounted for approximately 150 basis points of reported operating income growth. Moody’s operating margin for 2003 was 53.2% compared to 52.6% in 2002. The increase reflected the strong growth in revenue in the Moody’s Investors Service business without a proportional increase in expenses. Partially offsetting this impact were: (1) growth in Moody’s KMV revenue at a lower incremental margin than the Moody’s Investors Service business; and (2) 2003 expense of $10.5 million related to stock-based compensation with no counterpart in 2002.
Interest and other non-operating expense, net was $6.7 million in 2003 compared with $20.7 million in 2002. The 2003 amount included a gain of $13.6 million on an insurance recovery related to the September 11th tragedy, as discussed in Note 17 to the consolidated financial statements. Interest expense was $23.5 million in 2003 and 2002. The amounts in both periods included $22.8 million of interest expense on Moody’s $300 million of private placement debt. Interest income was $1.7 million in 2003, down from $2.3 million in 2002 despite higher invested cash, due to lower U.S. interest rates in 2003 compared to 2002. Foreign exchange gains were $2.2 million in 2003 and $0.3 million in 2002.
Moody’s effective tax rate was 44.6% in 2003 compared to 44.2% in 2002. The 2003 effective tax rate included the impact of a $16.2 million increase in reserves related to legacy income tax exposures that were assumed by Moody’s in connection with its separation from The Dun & Bradstreet Corporation in October, 2000 (see Contingencies – Legacy Tax Matters, below). This item accounted for a 250 basis point increase in the effective rate in 2003. This increase was partially offset by the favorable impacts of continued operating growth in jurisdictions with lower tax rates than New York and tax benefits from the establishment of a New York captive insurance company during 2002.
Net income was $363.9 million in 2003, an increase of $75.0 million or 26.0% from $288.9 million in 2002. Earnings per share were $2.44 basic and $2.39 diluted in 2003, compared with $1.88 basic and $1.83 diluted in 2002.
Segment Results
Moody’s Investors Service
Revenue at Moody’s Investors Service for 2003 was $1,134.7 million, up
8.4%$192.9 million or 20.5% from1997,$941.8 million in 2002. Good growth was achieved in a number of ratings sectors as well as in research. Foreign currency translation accounted for approximately 225 basis points of reported revenue growth. Price increases also contributed to year-to-year growth in reported revenue.Structured finance revenue was $460.6 million for 2003, an increase of $76.3 million or 19.9% from $384.3 million in 2002. Approximately $48 million of this increase was in United States revenue, which grew in the mid-teens percent range, and $28 million was in international, which grew in the low twenty percent range. In the United States, the residential mortgage sector contributed $15 million of revenue growth, as low interest rates drove strong refinancing activity. Refinancing activity has slowed significantly in recent months, and Moody’s expects a decline in this sector in 2004 as discussed below. Good growth was also achieved in revenue from ratings of asset backed securities, reflecting year-to-year growth of about 10% in issuance volumes, particularly student loans, and higher average prices due to more complex transactions. Revenue from ratings of credit derivatives also grew year-to-year. Outside the United States, European structured finance was the main growth driver, contributing $24 million of year-to-year revenue growth. This principally reflected growth in collateralized debt obligations and residential mortgage backed securities. Foreign currency translation and price increases also contributed to year-to-year growth in global structured finance revenue.
Corporate finance revenue was $278.8 million in 2003, up $51.1 million or 22.4% from $227.7 million in 2002. Revenue grew by $27 million in the United States, where the number of speculative grade issues rose significantly year-to-year due to refinancings and new issuers. In addition, the number of investment grade issuance transactions increased nearly 10% year-to-year although dollar issuance
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declined. U.S. revenue growth was also derived from areas not related to public debt issuance such as syndicated bank loan ratings and relationship-based fees. In Europe, revenue grew by $19 million year-to-year. The dollar volume of issuance was up nearly 40% due primarily to refinancing activity, as spreads tightened and new issuers accessed the market. Price increases also contributed to year-to-year growth in global corporate finance revenue.
Revenue in the financial institutions and sovereign risk group was $181.2 million for 2003, an increase of $26.2 million or 16.9% from $155.0 million for 2002. The year-to-year growth was almost wholly due to Europe, where revenue growth exceeded 40%. This reflected a substantial year-to-year increase in issuance and the addition of new issuers. In the U.S., revenue was flat versus strong prior year comparisons. Price increases also contributed to global financial institutions revenue growth over the prior year period.
Public finance revenue of $87.2 million for 2003 was up $6.0 million or 7.4% from $81.2 million in 2002. Dollar issuance in the municipal bond market grew 5% versus 2002, but issuance of short-term notes declined year-to-year. Refinancings represented 34% of total dollar issuance in 2003 versus 33% in 2002. Moody’s expects that public finance issuance and revenue will decline in 2004, as discussed below.
Research revenue increased $33.3 million or 35.6% to $126.9 million for 2003, compared with $93.6 million for 2002. Revenue grew by $18 million in the U.S. and $13 million in Europe. The strong performance was driven by growth in licensing of Moody’s information to financial customers for internal use and redistribution, sales of new products to existing clients and new clients. Foreign currency translation also contributed to year-to-year growth in reported revenue.
Moody’s Investors Service operating, selling, general and administrative expenses, including corporate expenses, were $462.2 million in 2003, an increase of $76.5 million or 19.8% from $385.7 million in 2002. Compensation and benefits expense accounted for $52 million of the total expense growth. This reflected compensation increases and staffing growth in Europe and the global structured finance business as well as the specialist teams that support Moody’s enhanced analysis initiative. Despite the increase in staffing, incentive compensation decreased slightly year-to-year due to lower growth in the Company’s operating results in 2003 compared with 2002. Other year-to-year expense increases included: $9 million related to the Company’s change in accounting for stock-based compensation (mainly for options granted in February 2003); $7 million for increased professional fees, mainly for legal fees and technology consulting costs; and $4 million related to rent, occupancy and travel related costs in connection with business expansion. Foreign currency translation also contributed to year-to-year growth in reported expenses. Depreciation and amortization expense was $15.4 million in 2003 versus $12.7 million in 2002. The year-to-year increase of $2.7 million principally related to computer hardware and software placed into service during 2003.
Moody’s Investors Service operating income of $657.1 million in 2003 was up $113.7 million or 20.9% from $543.4 million in 2002.
Moody’s KMV
The following table shows Moody’s KMV reported results for 2003 compared with the reported results for 2002 (the “reported comparisons”), and compared with 2002 on a pro forma basis presented as if Moody’s had acquired KMV on January 1, 2002 (the “pro forma comparisons”), in a manner consistent with SFAS No. 141 and as further described in Note 5 to the consolidated financial statements. The discussion of MKMV results of operations that follows is based on the pro forma comparisons.
Reported Comparisons Pro Forma Comparisons 2003 Variance to 2002 2003 Variance to 2002 (dollars in millions) 2003 2002 $ % 2002 $ % Revenue $ 111.9 $ 81.5 $ 30.4 37.3 % $ 96.6 $ 15.3 15.8 % Operating expenses 88.7 74.9 13.8 18.4 % 87.5 1.2 1.4 % Depreciation and amortization 17.2 11.9 5.3 44.5 % 15.0 2.2 14.7 %
Operating income (loss) $ 6.0 ($5.3 ) $ 11.3 ($5.9 ) $ 11.9
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MKMV’s pro forma year-to-year revenue increase in 2003 principally reflected $12 million of growth in subscription revenue from credit risk assessment products, including Credit EdgeTM, RiskCalcTM, and Portfolio ManagerTM. Revenue from license fees and maintenance related to credit decisioning software grew $2 million year-to-year.
Operating, selling, general and administrative expenses in 2003 increased slightly compared to pro forma 2002 expenses. Compensation and benefits expense was flat year to year. The impacts of compensation increases and higher staffing to support the continued growth of the business were offset by lower expenses for incentive compensation due to below target operating performance in 2003 whereas performance was above target in 2002. Commission expense for third party distributors declined due to lower sales from this source in 2003. Expenses in 2003 included $1 million related to the Company’s change in accounting for stock-based compensation, mainly for options granted in February 2003. Pro forma depreciation and amortization expense reflected $8.8 million of amortization of acquired KMV software and intangible assets in each period. The pro forma year-to-year increase in depreciation and amortization expense was primarily due to increased amortization of capitalized software development costs.
Year Ended December 31, 2002 Compared With Year Ended December 31, 2001
Total Company Results
Moody’s revenue for 2002 was $1,023.3 million, an increase of $226.6 million or 28.4% from $796.7 million in the prior year. The Company’s revenue performance reflected strong gains in a number of sectors of the ratings business, with global structured finance contributing nearly half of the year-to-year growth. MKMV accounted for $50.7 million of year-to-year growth, including $42.1 million of revenue from the April 2002 acquisition of KMV.
Revenue in the United States was $680.8 million in 2002, an increase of $120.1 million or 21.4% from $560.7 million in 2001. The 2002 increase reflected $85 million of growth in ratings revenue, with higher issuance volumes in several market sectors due to the favorable interest rate environment. Structured finance contributed $66 million of the U.S. ratings revenue growth, with the residential mortgage sector increasing approximately $29 million and other sectors contributing to growth as well. MKMV contributed $23 million of growth, including $19 million of post-acquisition revenue from KMV.
Moody’s international revenue was $342.5 million in 2002, an increase of 45.1% from $236.0 million in 2001. International growth was primarily driven by structured finance, with European structured finance growing by over $30 million. MKMV contributed $28 million of growth, including $23 million of post-acquisition revenue from KMV. In 2002, international revenue accounted for 33% of total Moody’s revenue, up from 30% in 2001.
Operating expenses of $285.3 million in 2002 grew $45.7 million or 19.1% from $239.6 million in 2001. The largest driver of the increase was compensation and benefits expense, which grew by $26 million year-to-year. This reflected compensation increases, higher benefits expenses, and increases in
Credit Information Services ("Credit"staffing. Staffing increases principally occurred to support business expansion in Europe and the global structured finance business. In addition, the April 2002 acquisition of KMV resulted in an increase in operating expenses of $12.2 million compared with the prior year. Operating expense increases also included consulting costs to support new product development, and higher occupancy and travel related costs in connection with business expansion.Selling, general and administrative (“SG&A”) expenses of
4.1%$175.3 million in 2002 were up $33.7 million or 23.8% versus $141.6 million in 2001. This increase was principally due to$615.1$23.1 millionMarketing Information Services ("Marketing")of17.7%expenses related to$198.5KMV, which was acquired in April 2002. Other increases included higher compensation and benefits of $3 millionPurchasing Information Services ("Purchasing")to support business expansion; higher professional fees of46.7%$4 million primarily for technology infrastructure and financial systems; and higher legal fees of $3 million primarily due to$23.0U.S. and European regulatory inquiries.Depreciation and amortization expense increased to $24.6 million in 2002 from $17.0 million in 2001. The increase was principally due to $7.5 million of KMV-related expenses, including $6.3 million for amortization of acquired software and
Receivables Management Services ("RMS")intangible assets. The 2001 amount included $2.1 million for amortization of16.0%goodwill, which was discontinued in 2002 with the implementation of SFAS No. 142.21
Operating income of $538.1 million in 2002 was up 35.0% from $398.5 million in 2001. Moody’s operating margin for 2002 was 52.6%, up from 50.0% in 2001. The strong operating income growth in 2002 principally reflected the Company’s high revenue growth without a proportional increase in expenses.
Interest and other non-operating expense was $20.7 million in 2002 compared with $16.6 million in 2001. The amount in each year included interest expense of $22.8 million related to
$65.9Moody’s $300 million of private placement debt. Interest income was $2.3 million in 2002 compared with $6.5 million in 2001. The lower interest income in 2002 was principally due to lower interest rates, and the use of cash on hand to fund the KMV acquisition and greater share repurchases.Moody’s effective tax rate was 44.2% in 2002 compared to 44.4% in 2001. Net income was $288.9 million in 2002 compared with $212.2 million in 2001. Earnings per share were $1.88 basic and $1.83 diluted in 2002, compared with $1.35 basic and $1.32 diluted in 2001.
Segment Results
Moody’s Investors Service
Moody’s Investors Service revenue was $941.8 million in 2002, up 23.0% from $765.9 million in 2001. The increase was principally driven by strong growth in global structured finance, financial institutions and research revenue, as well as in U.S. public finance.
Structured finance revenue was $384.3 million in 2002, an increase of $110.5 million or 40.4% from $273.8 million in 2001. The U.S. structured finance business accounted for $66 million of this growth, with nearly $29 million of growth in the residential mortgage sector and over $10 million of growth in revenue from credit derivatives. The largest component of international structured finance revenue growth was Europe, with a year-to-year increase of over $30 million. The credit derivatives sector was the largest growth
rates are largely attributable todriver in Europe. Structured finance revenue in Japan grew approximately $7 million year-to-year, principally in commercial mortgage-backed securities.Corporate finance revenue was $227.7 million in 2002, up 0.9% from $225.7 million in 2001. U.S. corporate finance revenue declined $9 million year-to-year. This reflected a year-to-year decline of 17% in the number of issues, with weakness in corporate investment spending, lower merger and acquisition activity and slower refinancing activity. Price increases and growth in
revenuesrelationship-based revenue partially offset the impact of this decline. European corporate finance contributed approximately $4 million of revenue growth in 2002 despite lower issuance volumes, primarily due to new rating customers and growth in relationship-based revenue. The consolidation of Korea Investors Service starting in January 2002 added approximately $5 million of year-to-year revenue growth.Revenue in the financial institutions and sovereign risk sector was $155.0 million in 2002, an increase of $24.3 million or 18.6% from
value-added products, which$130.7 million in 2001. In the U.S., growth of $11 million reflected a 6% increase in the number of financial institutions issues in 2002 compared to 2001, due to refinancing of short-term debt to long-term debt and increasedby 60.6% to $198.0investor demand for issues in this sector. In Europe, revenue increased $8 million as the number of transactions in this sector was up 17% from the prior year.D&B U.S. operating income was $269.9Public finance revenue increased 26.5% to $81.2 million in
1998,2002, from $64.2 million in 2001. Year-to-year growth of 25% in the dollar volume of U.S. municipal bond issuance was the main driver of this performance. Issuance volumes were strong for both new issues and refinancings, reflecting the favorable interest rate environment as well as less pay-as-you-go financing by municipal borrowers.Research revenue grew 30.9% to $93.6 million in 2002, up
6.7%from $71.5 million in 2001. Revenue in theprior year, drivenUnited States grew $12 million year-to-year, and international revenue increased $10 million, mainly in Europe. Increased investor focus on credit risk helped to drive higher sales of products to current customers and the addition of new customers. In addition, increased revenue from licensing Moody’s information to financial customers for internal use and redistribution contributed to the growth.Moody’s Investors Service operating, selling, general and administrative expenses, including corporate expenses, were $385.7 million in 2002, an increase of $32.8 million or 9.3% over 2001. The largest driver of the increase was compensation and benefits expense, which grew by $24 million year-to-year. This reflected compensation increases, higher benefits expenses, and increases in staffing. Staffing increases principally occurred to support business expansion in Europe and the global structured finance business. Other
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expense increases included $4 million for consulting costs related to investments in technology infrastructure and financial systems, $3 million for legal fees related to U.S. and European regulatory inquiries and higher
revenue,rent, occupancy and travel related costs in connection with business expansion. Included in 2001 expenses was a $3.4 million write-down of investments in two Argentine rating agencies due to the currency devaluation and the unstable economic and political situation. The expense increases were partially offset by lower costs for production and delivery of research products due to the continued shift to Internet delivery. Depreciation and amortization expense was $12.7 million in 2002 versus $11.5 million in 2001.Moody’s Investors Service operating income of $543.4 million in 2002 was up 35.3% from $401.5 million in 2001.
Moody’s KMV
Moody’s KMV reported revenue of $81.5 million in 2002 compared to $30.8 million in 2001. The April 2002 acquisition of KMV accounted for $42.1 million of the year-to-year revenue growth. The remaining $8.6 million of revenue growth reflected increased subscriptions for RiskCalc™ credit assessment products as additional country-specific models were introduced, and license fees for new sales and upgrades of credit decisioning software.
Operating, selling, general and administrative expenses of Moody’s KMV were $74.9 million in 2002 compared with $28.3 million in 2001, an increase of $46.6 million. Post-acquisition operating expenses of KMV accounted for $35.3 million of the year-to-year expense growth. The remaining increase principally reflected growth of $5 million in compensation and benefit costs to support growth in the legacy MRMS business, and higher
expenses incurred for selling, advertising,consulting costs related to new productdevelopmentdevelopment. Moody’s KMV depreciation andYear 2000 remediation. D&B Europe's 1998 revenues of $427.7 million were flat compared to 1997, due largely to the strengthening of the U.S. dollar. European Credit revenues decreased .8% to $312.9amortization expense was $11.9 million in1998, while Marketing revenues increased 16.8% to $65.22002 versus $5.5 million in19982001; the year-to-year increase primarily reflected $6.3 million of amortization expense related to acquired KMV software andRMS decreased 9.3% to $49.6intangible assets. The 2001 amount included $1.5 million of goodwill amortization, which was discontinued in1998. Excluding2002 with theimpactimplementation offoreign exchange, D&B Europe would have reported a 3.9% increase in revenues in 1998, including an increase in Credit revenues of 2.8%, an increase in Marketing of 19.5% and a decrease in RMS of 6.3% from 1997. Increases in product usage have been partially offset by price erosion resulting from the competitive environment in Europe. D&B EuropeSFAS No. 142.Moody’s KMV reported an operating loss of
$4.2 million, reflecting the continued investments in new technology and systems in Europe, and increased Year 2000 remediation costs. D&B APCLA reported a 5.5% decrease in operating revenues to $88.6$5.3 million in1998 from $93.8 million in 1997, resulting from the negative impact of foreign exchange rates. In 1998, APCLA Credit revenues decreased 5.6% to $56.5 million, Marketing revenues decreased 6.1% to $19.0 million and RMS revenues decreased 4.2% to $13.1 million. Excluding the impact of foreign exchange, D&B APCLA would have reported a 5.4% increase in revenues in 1998, comprised of an 8.0% increase in Credit, a 2.7% decrease in Marketing and a 4.0% increase in RMS. D&B APCLA reported an operating loss of $9.1 million in 1998,2002, compared to an operating loss of$6.3$3.0 million in1997, due to lower reported operating revenues and higher expenses, including Year 2000 costs and employee-related costs2001.Market Risk
Moody’s maintains operations in
Asia. Moody's revenues (excluding19 countries outside theresults of FIS) of $495.5 million in 1998 were up 17.1% from 1997, driven by gains in corporate and municipal bonds, structured ratings and commercial paper. Despite the market disruptions occurring during the second half of 2224 1998, issuance of high-yield, corporate and municipal bonds increased significantly when compared to 1997. Moody's operating income of $223.5 million in 1998 was up 20.4% from 1997, reflecting strong revenue growth. YEAR ENDED DECEMBER 31, 1997, COMPARED WITH YEAR ENDED DECEMBER 31, 1996 The Company's basic earnings per share from continuing operations were $1.28 in 1997, up $1.97 from a loss of $.69 per share reported in 1996. On a diluted basis, the Company reported earnings per share from continuing operations of $1.27 per share, compared with a loss of $.69 per share reported in 1996. The 1996 loss reflected all corporate overhead expenses associated with the Company prior to the 1996 Distribution and certain reorganization-related expenses. The Company's basic earnings per share in 1997 were $1.08, up $1.34 from a loss of $.26 per share reported in 1996. On a diluted basis, the Company reported earnings per share of $1.07, compared with a loss of $.26 in 1996. The 1997 results include a one-time, non-cash charge for the cumulative effect of accounting changes of $127.0 million, net of an income tax benefit of $87.7 million ($.74 per share basic, $.73 per share diluted), with respect to certainUnited States. Approximately 15% of theCompany'sCompany’s revenuerecognition methods. Effective January 1, 1997,was billed in currencies other than theCompany changed its revenue recognition method for its Credit and Moody's businesses. In accordance with APB No. 20, "Accounting Changes,"U.S. dollar in 2003, principally thecumulative effect of these accounting changes resulted in a pre-tax non-cash charge of $214.7 million ($127.0 million after-tax). Credit revenue is now recognized as products and services are used by customers, which the Company believes is a better measureEuro. Approximately 30% of thebusiness's performance. Prior to 1997, the Company recorded revenue from its Credit business on a straight-line basis over the annual subscription period. Operating revenues grew 1.6% to $1,811.0 million from $1,782.5 million in 1996. Excluding the results of American Credit Indemnity ("ACI"), which was divested in 1996, revenue would have increased 5.3% from 1996. Revenue growth for the Company reflects significant growth at Moody's and moderate growth at D&B U.S., offset by declines at D&B Europe and D&B APCLA. Excluding the impact of foreign exchange, operating revenues increased 3.9% in 1997 from 1996. Operating costs and selling and administrativeCompany’s expensesexcluding corporate expenses in each year, decreased 6.8% to $1,240.4 million from $1,330.6 million. This decrease is largely attributable to the inclusion of ACI in 1996. Operating income in 1997 of $403.7 million increased $346.5 million from $57.2 million in 1996. 1996 operating income reflected $161.2 million in reorganization costswere incurred inconjunction with the 1996 Distribution and a $68.2 million loss attributable to the sale of ACI. Excluding these non-recurring items, 1997 operating income would have been up 40.9% from $286.6 million in 1996. Operating income growth reflected strong growth at Moody's and growth in D&B U.S., partially offset by declines in D&B Europe and D&B APCLA. Non-operating expense -- net of $71.3 million in 1997, which primarily included interest expense on notes payable, and minority interest costs (included incurrencies otherexpense -- net), was essentially unchanged compared with 1996. Interest expense in 1997 included a $3.2 million charge to mark-to-market certain interest rate swaps and a $2.9 million charge as a result of interest rate swap cancellations. These charges were offset by lower financing costs in 1997. 2325 In 1997, the Company's effective tax rate from continuing operations was 34.1%. Due to tax implications of the 1996 Distribution, discussed below, the 1996 effective tax rate was 729.3%. The underlying effective tax rate, excluding one-time items for 1996, was approximately 34%. Income from discontinued operations, net of income taxes, was $92.0 million in 1997 and $230.5 million in 1996. Operating results of Donnelley comprised the income from discontinued operations in 1997, while 1996 included operating results of Donnelley and NCH for the full year and Cognizant, ACNielsen and DBS for the 10 months ended October 31, 1996. Donnelley operating income included a gain on the sale of the East Coast proprietary operations of Donnelley ("P-East") of $9.4 million in 1997 and a loss on the sale of the West Coast proprietary operations of Donnelley ("P-West") of $28.5 million in 1996. Also recorded in 1996 was a loss on the disposition of DBS of $220.6 million ($158.2 million after-tax). Additionally, the Company sold NCH in the fourth quarter of 1996. No gain or loss resulted from the sale. SEGMENT RESULTS D&B U.S. revenues were $832.2 million in 1997, up 6.2% from 1996, including increases in Credit of 3.9% to $591.1 million, Marketing of 13.7% to $168.5 million, Purchasing of 40.7% to $15.7 million and RMS of 2.9% to $56.9 million. The growth rates are largely attributable to revenues for value-added products, which increased 105.5% to $123.3 million in 1997. D&B U.S. operating income was $252.9 million in 1997, up 6.3%, consistent with the increase in revenues. D&B Europe's 1997 revenues of $426.1 million were 4.3% lowerthan1996, resulting from the increased strength ofthe U.S.dollar. Credit revenues decreased 4.9% to $315.5 million, while Marketing increased 4.6% to $55.9 milliondollar in 2003, principally the Euro andRMS decreased 8.7% to $54.7 million in 1997. Excludingtheimpact of foreign exchange, D&B Europe would have reported a 3.9% increase in revenues, including a 3.3% increase in Credit, a 9.1% increase in Marketing and a 1.7% increase in RMS. D&B Europe's operating income was $.6 million in 1997, reflecting the continued investments in new technology and systems in Europe and increased Year 2000 costs. D&B APCLA reported an 8.8% decrease in operating revenues to $93.8 million in 1997 from $102.9 million in 1996, primarily as a result of phasing out certain unprofitable operations in Latin America. Credit revenues decreased 12.3% to $59.9 million, Marketing revenues increased 33.5% to $20.2 million and RMS revenues decreased 29.6% to $13.7 million in 1997. Excluding the impact of foreign exchange, D&B APCLA would have had a 5.1% decrease in revenues, including an 8.3% decrease in Credit, a 9.7% increase in Marketing and a 5.5% decrease in RMS. D&B APCLA reported an operating loss of $6.3 million, a decrease from operating income of $1.5 million in 1996, due to expenses associated with the introduction of new products. Moody's revenues of $423.1 million in 1997, excluding the results of FIS, were up 21.0% from 1996, driven by gains in corporate bonds, increased coverage in the mortgage-backed market and continued expansion outside the U.S. Corporate bonds displayed strong volume growth, especially in the high-yield market, where volumes were 30% above the prior year. Moody's operating income of $185.7 million in 1997 was up 43.6% from 1996, resulting from strong revenue results and reduction in overhead in conjunction with an internal reorganization at Moody's. 2426 RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires recognition of all derivatives as either assets or liabilities on the balance sheet and measurement of those instruments at fair value. If certain conditions are met, a derivative may be designated specifically as: (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment (a fair value hedge); (b) a hedge of the exposure to variable cash flows of a forecasted transaction (a cash flow hedge); or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The Company currently hedges foreign-currency-denominated transactions and will comply with the requirements of SFAS No. 133 when adopted. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company expects to adopt SFAS No. 133 beginning January 1, 2000. The effect of adopting SFAS No. 133 is not expected to be material. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Among other provisions, SOP 98-1 requires that entities capitalize certain internal-use software costs once certain criteria are met. Under SOP 98-1, overhead, general and administrative, and training costs are not to be capitalized. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998; therefore, the Company will adopt the provisions as of January 1, 1999. During 1998, the Company capitalized approximately $10 million of costs incurred in developing internal-use software, which would not be capitalized in the future. MARKET RISK SENSITIVE INSTRUMENTS Because the Company operates in 41 countries,British Pound. As such, the Company is exposed to market risk from changes in foreign exchangerates and interest rates, which could affect its results of operations and financial condition. In order to reduce the risk from fluctuations in foreign currencies and interest rates, the Company sometimes uses forward foreign exchange contracts and in the past has used interest rate swap agreements. These derivative financial instruments are viewed by the Company as risk management tools that are entered into for hedging purposes only. The Company does not use derivative financial instruments for trading or speculative purposes. The Company also has investments in fixed-income marketable securities. Consequently, the Company is exposed to fluctuations in rates on these marketable securities. Market risk associated with investments in marketable securities is immaterial and has been excluded from the sensitivity discussions. A discussion of the Company's accounting policies for derivative financial instruments is included in the Summary of Significant Accounting Policies in Note 1 to the Company's consolidated financial statements, and further disclosure relating to financial instruments is included in Note 5 to the Company's consolidated financial statements on Pages 50-51 of this Form 10-K. 2527 The following analysis presents the sensitivity of the fair value of the Company's market risk sensitive instruments to changes in market rates and prices. INTEREST RATE RISK The Company is exposed to market risk through its commercial paper program, where it borrows at prevailing short-term commercial paperrates.At December 31, 1998, the Company had $35.9 million of commercial paper outstanding and as such the market risk is immaterial when calculated utilizing estimates of the termination value based upon a 10% increase or decrease in interest rates from their December 31, 1998 levels. The Company has in the past entered into interest rate swap agreements to manage exposure to changes in interest rates. Interest rate swaps have allowed the Company to raise funds at floating rates and effectively swap them into fixed rates that are lower than those available to it if fixed-rate borrowings were to be made directly. During 1998, in connection with the 1998 Distribution and repayment of outstanding notes payable, Old D&B canceled all of its interest rate swap agreements. The Company has not entered into any interest rate swap agreements since the 1998 Distribution and therefore is not subject to interest rate risk on interest rate swaps. FOREIGN EXCHANGE RISK The Company's non-U.S. operations generated approximately 30% of total revenues in 1998.As of December 31,
1998,2003, approximately38%10% ofthe Company'sMoody’s assets were located outside the U.S., and no single country had a significant concentration of cash. The Company follows a policy of hedging substantially all cross-border intercompany transactions denominated in a currency other than the functional currency applicable to each of its various subsidiaries. The Company only uses forward foreign exchange contracts to implement its hedging strategy. Typically, these contracts have maturities of six months or less. These forward contracts are executed with creditworthy institutions and are denominated primarily in British pounds sterling, German marks and Swedish krona. The fair value of foreign currency risk is calculated by using estimates of the cost of closing out all outstanding forward foreign exchange contracts, given a 10% increase or decrease in forward rates from their December 31, 1998, levels. At December 31, 1998, the Company had approximately $117 million in forward foreign exchange contracts outstanding, with various expiration dates through March 1999 (see Note 5 to the Company's consolidated financial statements on Pages 50-51 of this Form 10-K). At December 31, 1998, net unrealized gains related to the Company's forward contracts were $.5 million. If forward rates were to increase by 10% from December 31, 1998, levels, the unrealized loss on these contracts would be $5.5 million. If forward rates were to decrease by 10% from December 31, 1998, levels, the unrealized gain on these contracts would be $6.5 million. However, the estimated potential gain or loss on forward contracts is expected to be offset by changes in the underlying transactions. Therefore, the impact of a 10% movement in foreign exchange rates would be immaterial. LIQUIDITY AND FINANCIAL POSITION The Company generates significant cash flows from its business operations. Management believes that these cash flows are sufficient to fund its operating needs, service debt and pay dividends, and will continue to be sufficient in the future. 2628 At December 31, 1998,Of Moody’s aggregate cash and cash equivalentstotaled $90.6of $269.1 millionan increase from $81.8at December 31, 2003, approximately $56.8 million was located outside the United States (with $35.5 million in1997.the U.K.), making the Company susceptible to fluctuations in foreign exchange rates. The effects of changes in the value of foreign currencies relative to the U.S. dollar on assets and liabilities of non-U.S. operations are charged or credited to the cumulative translation adjustment in shareholders’ equity.Moody’s cash equivalents consist of investments in high quality short-term securities within and outside the United States. By policy, the Company limits the amount it can invest with any one issuer and allocates its cash equivalents among various money market mutual funds, short-term certificates of deposit or issuers of high-grade commercial paper.
The Company has not engaged in foreign currency hedging transactions nor does the Company have any derivative financial instruments. However, the Company continues to assess the need to enter into hedging transactions to limit its risk due to fluctuations in exchange rates and may enter into such transactions in the future.
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Liquidity and Capital Resources
Cash Flow Overview
Cash and cash equivalents increased $229.2 million during 2003, to $269.1 million. Moody’s net cash provided by operating activities was $468.4 million, and proceeds from stock plans were $79.0 million. Significant uses of this cash flow were $171.7 million for share repurchases, $107.1 million for the repayment of short-term bank debt outstanding at year-end 2002, dividend payments of $26.8 million and capital expenditures of $17.9 million.
Cash Flow Analysis
The Company is currently financing its operations and capital expenditures through cash flow from operations. Net cash provided by operating activities
of continuing operations decreased by $54.5was $468.4 million,to $325.5$334.8 millionin 1998. This decrease is largely attributable toand $321.4 million for theimpact on the timing of cash flows resulting from the change to the D&B business model implemented effective January 1, 1998, whereby customers now have the option of choosing to purchase Credit productsyears ended December 31, 2003, 2002 andservices on a monthly or annual contract plan, offset by an increase in income from continuing operations. Previously, Credit products and services were generally sold under annual contracts, most of which required payment in full up front. Net2001, respectively.Moody’s net cash provided by operating activities in 2003 increased by $133.6 million compared with 2002. The two largest factors affecting the year-to-year increase were growth in net income of
discontinued operations decreased by $103.7$75.0 million,to $16.7and a year-over-year decrease of $16.0 million in1998, as only six monthsincome tax payments despite an increase ofoperations were included in 1998. Historically, Donnelley generated most of its cash flows$64.0 million in thesecond halfincome tax provision. Income tax payments totaled $210.6 million in 2003 compared to $226.6 million in 2002. The 2002 amount included $50 million of tax payments that were deferred from 2001 to 2002 due to the September 11th tragedy. In addition, the 2003 amount was favorably affected by timing of tax payments. In addition to the two factors noted above, increases in deferred revenue accounted for $21.9 million of theyear. Net cash usedyear-to-year increase ininvesting activities totaled $104.7 million in 1998, compared with $15.9 million in 1997. Cash used in investing activities in 1997 was offset bynet cash provided bydiscontinued operationsoperating activities in 2003, and higher non-cash expenses for depreciation and amortization and stock-based compensation accounted for an additional $18.8 million of$105.7favorable variance. Partially offsetting these impacts, Moody’s investment in accounts receivable increased by $75.2 millionwhich includedyear-to-year. This increase reflected continued growth in theproceeds frombusiness, significant year-to-year growth in billings in thesalefourth quarter ofP-East of $122.0 million, partially offset2003 and an increase in days billings outstanding during 2003.Cash provided by
capital expenditures. This compared to net cash usedoperating activities in 2002 increased byinvesting activities of discontinued operations in 1998 of $3.1 million. 1998 cash flows included proceeds from the sale of FIS of $26.5 million. In 1998, spending for capital expenditures, computer software and other intangibles by continuing operations totaled $147.1$13.4 million comparedto $129.1with 2001, in part reflecting growth in net income of $76.7 millionin 1997. This increase is largely due to investment in new computer hardwareandsoftware. Currently, the Company has no material commitments for capital expenditures. In June 1998, the Company arranged $600 million of bank commitments under two credit facilities. Each facility permits borrowings up to $300 million, with one maturing in June 1999 and one maturing in June 2003. Under these facilities, the Company has the ability to borrow at prevailing short-term interest rates. As of December 31, 1998, the Company did not have any borrowings outstanding under these facilities. The Company had commercial paper borrowings of $35.9 million at December 31, 1998. In connection with the 1998 Distribution, during June 1998, R.H. Donnelley Inc. borrowed $350 million under the R.H. Donnelley Inc. credit facility and issued $150 million of senior subordinated notes under the R.H. Donnelley Inc. indenture. The proceeds of these borrowings were used to repay existing indebtedness (commercial paper and other short-term borrowings) of Old D&B in the amount of $287.1 million at the time of the 1998 Distribution; the Company used the excess proceeds for general corporate purposes, including the payment of reorganization costs. The $500 million of debt became an obligation of Donnelley upon the 1998 Distribution. In connection with the 1998 Distribution and repayment of existing indebtedness, Old D&B canceled all of its interest rate swap agreements and recorded into income the previously unrecognized fair value loss at the time of termination. At the time of the cancellation, the fair value of the interest rate swaps was a loss of $12.7 million, of which $3.8 million ($.6 million in the first quarter of 1998 and $3.2 million in 1997) had been recognized in income relating to swaps which did not qualify for settlement accounting. The previously unrecognized loss of $8.9 million was recorded during the second quarter of 1998 and included in reorganization costs. On April 1, 1997, Old D&B completed a $300 million minority interest financing. Funds raised by this financing were used to repay a portion of the outstanding short-term debt in April 1997. Also during the second quarter of 1997, Old D&B reentered the commercial 2729 paper market and used the proceeds to repay the additional amounts outstanding on the short-term debt facility. The obligation related to the minority interest financing became an obligation of the Company upon the 1998 Distribution. At December 31, 1998, the Company had $300 million of minority interest financing outstanding. On June 30, 1998, the Company announced that its Board of Directors had authorized the repurchase of up to $300 million of common shares from time to time over the next three years in the open market or in negotiated purchases. In addition, the board authorized the Company to repurchase shares as needed to offset awards under the Company's incentive plans. As of December 31, 1998, the Company purchased 5.7 million shares under the repurchase program for a total of $150.0 million. In addition, during 1998, the Company purchased 2.3 million shares to offset awards made under incentive plans for approximately $70.2 million. The Company received net proceedsincreased tax benefits from the exercise of stock options of$41.0$12.4 million. Partially offsetting these impacts were the payment of approximately $50 million of U.S. federal income taxes related to 2001 that were deferred into 2002 as a result of the September 11th tragedy, and higher payments for prior year incentive compensation (approximately $38 million). The increase in other liabilities in 2002 included increased reserves related to pension and other post-retirement benefits.Net cash used in investing activities was $17.1 million, $223.6 million and $30.0 million for the years ended December 31, 2003, 2002 and 2001, respectively. Investing activities in each year principally consisted of acquisitions, capital expenditures and investments in affiliates. The 2003 amount included $1.1 million of cash acquired in connection with an increase in the Company’s ownership of Argentine rating agencies, as described in Note 5 to the consolidated financial statements. Cash used for acquisitions included $205.4 million (net of cash acquired) for KMV in 2002 and $9.6 million for Korea Investors Service during
1998.2001. The Companyentersmade investments in international rating agencies totaling $5.6 million in 2001. Cash used for the purchase of property and equipment and the capitalization of internally developed software costs totaled $17.9 million, $18.1 million and $14.8 million in 2003, 2002 and 2001, respectively.Net cash used in financing activities was $227.7 million, $236.6 million and $248.1 million for the years ended December 31, 2003, 2002 and 2001, respectively. During 2003 the Company repaid $107.1 million of borrowings that were outstanding under the Company’s bank revolving credit facility at December 31, 2002. Spending for share repurchases totaled $171.7 million in 2003, $369.9 million in 2002 and $267.6 million in 2001. These amounts were offset in part by proceeds from stock plans of $79.0 million in 2003, $54.0 million in 2002 and $47.8 million in 2001. In addition, dividends paid were $26.8 million, $27.8 million and $28.3 million in 2003, 2002 and 2001, respectively.
During 2002, Moody’s funded the acquisition of KMV with a combination of cash on hand and short-term borrowings from its bank credit facilities, which were subsequently repaid. During 2002, Moody’s also borrowed under its bank credit facilities to fund share repurchases, and the Company has benefited from favorable short-term borrowing costs. Management may consider pursuing long-term financing when it is appropriate in light of cash requirements for share repurchase and other strategic opportunities, which would
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result in higher financing costs. At December 31, 2003, Moody’s had no outstanding borrowings under its bank credit facilities and $300 million of long-term financing payable in October 2005.
Future Cash Requirements
Moody’s currently expects to fund expenditures as well as liquidity needs created by changes in working capital from internally generated funds. The Company believes that it has the financial resources needed to meet its cash requirements for the next twelve months and expects to have positive operating cash flow for fiscal year 2004. Cash requirements for periods beyond the next twelve months will depend among other things on the Company’s profitability and its ability to manage working capital requirements.
The Company currently intends to use the majority of its cash flow provided by operating activities to continue its share repurchase program. The Company also currently intends to use a portion of its cash flow to pay a quarterly dividend, which the Board of Directors raised from $0.045 per share to $0.075 per share in December 2003. The continued payment of dividends at this rate is subject to the discretion of the Board of Directors. As described above, the Company has borrowed from time to time under its bank revolving credit facility and may obtain more permanent financing when it is appropriate in light of cash requirements for share repurchases and other strategic opportunities.
In addition, the Company will from time to time consider cash outlays for acquisitions of or investments in complementary businesses, products, services and technologies. The Company may also be required to make future cash outlays, including during 2004, to pay to New D&B its share of potential liabilities related to the legacy tax and legal contingencies and to satisfy any adverse judgment rendered in the action in France that, in each instance, are discussed in this Management’s Discussion and Analysis under “Contingencies”. These potential cash outlays could be material and might affect liquidity requirements and cause the Company to pursue additional financing. There can be no assurance that financing to meet cash requirements will be available in amounts or on terms acceptable to the Company, if at all.
Indebtedness
At December 31, 2003 and 2002, the Company had outstanding long-term financing of $300 million and a bank revolving credit facility with no borrowings outstanding at December 31, 2003 and $107.1 million outstanding at December 31, 2002.
The $300 million of long-term financing was secured in connection with the 2000 Distribution, as that term is defined in Note 1 to the consolidated financial statements. In connection with the 2000 Distribution, Moody’s was allocated $195.5 million of debt at September 30, 2000. Moody’s funded this debt with borrowings under a $160 million unsecured bank revolving credit facility and a bank bridge line of credit. On October 3, 2000, the Company issued $300 million of notes payable (the “Notes”) in a private placement. The cash proceeds from the Notes were used in part to repay the outstanding balance on the revolving credit facility and to repay the bridge line of credit. The Notes have a five-year term and bear interest at an annual rate of 7.61%, payable semi-annually. In the event that Moody’s pays all or part of the Notes in advance of their maturity, (the “prepaid principal”), such prepayment will be subject to a penalty calculated based on the excess, if any, of the discounted value of the remaining scheduled payments, as defined in the agreement, over the prepaid principal.
The revolving credit facility (the “Facility”) consists of an $80 million 5-year facility that expires in September 2005 and an $80 million 364-day facility that expires in September 2004. Interest on borrowings under the 5-year facility is payable at rates that are based on the London InterBank Offered Rate (“LIBOR”) plus a premium that can range from 18 basis points to 50 basis points depending on the Company’s ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization (“Earnings Coverage Ratio”), as defined in the related agreement. At December 31, 2003, such premium was 18 basis points. Interest on borrowings under the 364-day facility is payable at rates that are based on LIBOR plus a premium of 30.5 basis points. The Company also pays annual facility fees, regardless of borrowing activity under the Facility. The annual fees for the 5-year facility can range from 7 basis points of the facility amount to 12.5 basis points, depending on the Company’s Earnings Coverage Ratio, and were 7 basis points at December 31, 2003. The annual fees for the 364-day facility are 7 basis points. Under each facility, the Company also pays a utilization fee of 12.5 basis points on borrowings outstanding when the aggregate amount outstanding under such facility exceeds 33% of the facility amount.
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The Company initially borrowed under the revolving credit facility during the second quarter of 2002 to fund a portion of the acquisition price for KMV, and subsequently repaid those borrowings. During 2002, Moody’s also borrowed under the facility to fund share repurchases, and has benefited from favorable short-term borrowing costs. Interest paid under the Facility for the years ended December 31, 2003 and 2002 was $0.6 million and $0.3 million, respectively. Management may consider pursuing long-term financing when it is appropriate in light of cash requirements for share repurchase and other strategic opportunities, which would result in higher financing costs.
The Notes and the Facility (the “Agreements”) contain covenants that, among other things, restrict the ability of the Company and its subsidiaries, without the approval of the lenders, to engage in mergers, consolidations, asset sales and sale-leaseback transactions or to incur liens. The Notes and the Facility also contain financial covenants that, among other things, require the Company to maintain an interest coverage ratio, as defined in the Agreements, of not less than 3 to 1, and an Earnings Coverage Ratio, as defined in the Agreements, of not more than 4 to 1. At December 31, 2003, the Company was in compliance with such covenants. If an event of default were to occur (as defined in the Agreements) and was not remedied by the Company within the stipulated timeframe, an acceleration of the Notes and restrictions on the use of the Facility could occur.
Off-Balance Sheet Arrangements
At December 31, 2003 and 2002, Moody’s did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as special purpose or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, Moody’s is not exposed to any financing, liquidity, market or credit risk that could arise if it had engaged in such relationships.
Share Repurchases
During October 2002, Moody’s completed the $300 million share repurchase program that had been authorized by the Board of Directors in October 2001. On October 22, 2002, the Board of Directors authorized an additional $450 million share repurchase program, which includes both special share repurchases and systematic repurchases of Moody’s common stock to offset the dilutive effect of share issuance under the Company’s employee stock plans.
For the year ended December 31, 2003, Moody’s repurchased 3.5 million shares at a total cost of $171.7 million, including 3.2 million shares to offset issuances under employee stock plans. Since becoming a public company in September 2000 and through the end of 2003, Moody’s has repurchased 23.0 million shares at a total cost of $881.0 million, including 9.3 million shares to offset issuances under employee stock plans.
Contractual Obligations
The following table presents payments due under the Company’s contractual obligations as of December 31, 2003.
Payments Due by Period Less Than 1 (in millions) Total Year 1-3 Years 4-5 Years Over 5 Years Notes payable $ 300.0 $ — $ 300.0 $ — $ — Operating lease obligations 54.5 17.2 21.4 10.8 5.1 Capital lease obligations 2.5 1.2 1.3 — — Contingent payment related to acquisition of Korea Investors Service (1) 4.0 — 4.0 — — Purchase obligations (2) 11.3 5.4 4.8 1.1 —
Total $ 372.3 $ 23.8 $ 331.5 $ 11.9 $ 5.1
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(1) This amount reflects Moody’s current estimate of the contingent payment related to the acquisition of Korea Investors Service, which will be determined based on the net income of Korea Investors Service for the three-year period ending December 31, 2004. See Note 5 to the consolidated financial statements.
(2) Purchase obligations include contracts for telecommunications, data processing services and back-up facilities, and professional services. Outlook
Moody’s outlook for 2004 is based on assumptions about many macroeconomic and capital market factors, including interest rates, consumer spending, corporate profitability and business investment spending, and capital markets issuance activity. There is an important degree of uncertainty surrounding these assumptions and, if actual conditions differ from these assumptions, Moody’s results for the year may differ significantly from the outlook presented below.
The Company expects interest rates in the United States to rise during 2004, with reduced refinancings of debt and continued weak demand for financing to support business investment. As a result, Moody’s expects to see lower issuance in the U.S. corporate bond market, both in the investment grade sector and in the high yield sector, which posted record issuance in 2003. Despite the issuance declines, revenue from new products and growth in relationship-based revenue should produce modest growth in both the U.S. corporate finance and financial institutions sectors. The Company is continuing to introduce the Enhanced Analysis Initiative, consisting of financial reporting, off-balance sheet risk transference and corporate governance assessment reports, and Moody’s plans to cover approximately 350 corporations and financial institutions in North America by the end of 2004.
Moody’s also expects good growth in consumer spending in 2004. As a result, the Company expects that growth in revenue from rating asset-backed securitizations, together with moderate growth in the commercial mortgage securitization and credit derivatives segments of the business, will substantially offset an important decline in revenue from rating residential mortgage-backed securities as the very strong refinancing activity of the past two years declines. In the public finance ratings business Moody’s expects a revenue decline of approximately 20% in 2004, reflecting projected slowing of issuance related to both refinancings and “new money” borrowings. The Company expects continued strong growth in the U.S. research business.
Outside the U.S. Moody’s expects to see double-digit revenue growth in the corporate and financial institutions ratings businesses. The Company is also projecting strong year-over-year growth for structured finance ratings revenue and in the research business, all producing approximately 20% international revenue growth in ratings and research, including the effects of currency translation. Finally, Moody’s expects high teens percent revenue growth globally at Moody’s KMV.
Moody’s expenses for 2004 will likely reflect continued investment spending on improving and increasing the transparency of ratings practices, technology initiatives and product development and continued hiring to support growth areas of the business. The Company will continue investment in the Enhanced Analysis Initiative. Moody’s expects its operating margin to decline about 100 basis points in 2004 from the level achieved in 2003 due to investments being made and the faster growth of the lower margin MKMV business. An additional 100 basis point decline in operating margin is expected due to higher expense for stock-based compensation. Since the Company adopted expensing of stock-based compensation prospectively effective January 1, 2003, the higher expense is due in part to the phasing in of expense over the current four-year option vesting period.
Overall for 2004, Moody’s expects that year-over-year revenue growth will be in the mid- to high single digit percent range. With the impact of a slightly lower effective tax rate and share repurchases, the Company expects that diluted earnings per share will grow in the mid- to high single digit percent range on a reported basis. Reported earnings per share in 2003 included the impacts of the insurance gain, the legacy tax reserve increase and the expensing of stock-based compensation discussed above. The impact of expensing stock-based compensation will also be included in reported earnings per share in 2004, and is expected to be approximately $0.10 to $0.11 per share in 2004 compared with $0.04 per share in 2003.
Additional Factors That May Affect Future Results
The following risk factors and other information included in this annual report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently
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known to the Company or that the Company’s management currently deems immaterial also may impair its business operations. If any of the following risks occur, Moody’s business, financial condition, operating results and cash flows could be materially adversely affected.
Changes in the Volume of Debt Securities Issued in Domestic and/or Global Capital Markets and Changes in Interest Rates and Other Volatility in the Financial Markets
Approximately 80% of Moody’s revenue in 2003 was derived from ratings, a significant portion of which was related to the issuance of credit-sensitive securities in the global capital markets. Moody’s enjoyed revenue growth from these sources in 2003 that was greater than its historical averages, principally due to strong growth in global structured finance and corporate finance issuance volumes, the U.S. components of which were driven by a highly favorable interest rate environment. The Company anticipates that a substantial part of its business will continue to be dependent on the number and dollar volume of debt securities issued in the capital markets. Therefore, the Company’s results could be adversely affected by a reduction in the level of debt issuance.
Unfavorable financial or economic conditions that either reduce investor demand for debt securities or reduce issuers’ willingness or ability to issue such securities could reduce the number and dollar volume of debt issuance for which Moody’s provides ratings services. In addition, increases in interest rates, volatility in financial markets or the interest rate environment, significant political or economic events, defaults of significant issuers and other market and economic factors may negatively impact the general level of debt issuance, the debt issuance plans of certain categories of borrowers, and/or the types of credit-sensitive products being offered. A sustained period of market decline or weakness could also have a material adverse affect on Moody’s business and financial results.
Possible Loss of Market Share or Revenue through Competition or Regulation
The markets for credit ratings, research and credit risk management services are intensely competitive. Moody’s competes on the basis of a number of factors, including quality of ratings, client service, research, reputation, price, geographic scope, range of products and technological innovation. Moody’s faces increasing competition from S&P, Fitch, DBRS, local rating agencies in a number of jurisdictions and niche companies that provide ratings for particular types of financial products or issuers (such as A.M. Best Company in the insurance industry). Since Moody’s believes that some of its most significant challenges and opportunities will arise outside the U.S., it will have to compete with rating agencies that may have a stronger local presence or a longer operating history in those markets. These local providers or comparable competitors that may emerge in the future may receive support from local governments or other institutions.
Currently, Moody’s, S&P, Fitch, and DBRS are designated as NRSROs by the SEC. On June 4, 2003, the SEC issued a Concept Release regarding the credit ratings industry, wherein it posed and requested public comment on a series of questions categorized into three broad areas: 1) should credit ratings continue to be used for regulatory purposes under the federal securities laws; 2) if so, what should be the process for determining whose credit ratings to use; and, 3) if credit ratings continue to be used in federal securities laws, what is the appropriate level of oversight for the agencies whose ratings are used? Elimination of the NRSRO concept, retention of the NRSRO concept with different regulatory oversight, or SEC recognition of additional NRSROs could result in loss of market share or revenue for Moody’s, or higher costs of operations.
Introduction of Competing Products or Technologies by Other Companies
The markets for credit ratings, research and credit risk management services are increasingly competitive. The ability to provide innovative products and technologies that anticipate customers’ changing requirements and utilize emerging technological trends is a key factor in maintaining market share. Competitors may develop quantitative methodologies for assessing credit risk that customers and market participants may deem preferable to or more cost-effective than the credit risk assessment methods currently employed by Moody’s.
Increased Pricing Pressure from Competitors and/or Customers
In the credit rating, research and credit risk management markets, competition for customers and market share has spurred more aggressive tactics by some competitors in areas such as pricing and service. Moody’s intends to continue providing the highest quality
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products and the best service to its customers and the capital markets. However, if its pricing and services are not sufficiently competitive with its current and future competitors, Moody’s may lose market share.
Possible Loss of Key Employees to Investment or Commercial Banks or Elsewhere and Related Compensation Cost Pressures
Moody’s success depends in part upon recruiting and retaining highly skilled, experienced financial analysts and other professionals. Competition for qualified staff in the financial services industry is intense, and Moody’s ability to attract staff could be impaired if it is unable to offer competitive compensation and other incentives. Investment banks and other competitors for analyst talent may be able to offer higher compensation than Moody’s. Moody’s also may not be able to identify and hire employees outside the U.S. with the required experience or skills to perform sophisticated credit analysis. Moody’s ability to effectively compete will continue to depend, among other things, on its ability to attract new employees and to retain and motivate existing employees.
Exposure to Litigation Related to Moody’s Rating Opinions
Moody’s faces litigation from time to time from parties claiming damages relating to ratings actions. In addition, as Moody’s international business expands, these types of claims may increase because foreign jurisdictions may not have legal protections or liability standards comparable to those in the U.S. (such as protections for the expression of credit opinions as is provided by the First Amendment). These risks often may be difficult to assess or quantify and their existence and magnitude often remains unknown for substantial periods of time.
Potential Emergence of Government-Sponsored Credit Rating Agencies
When governments adopt regulations that require debt securities to be rated, establish criteria for credit ratings or authorize only certain entities to provide credit ratings, the competitive balance among rating agencies and the level of demand for ratings may be positively or negatively affected. Government-mandated ratings criteria may also have the effect of displacing objective assessments of creditworthiness. In these circumstances, issuers may be less likely to base their choice of rating agencies on criteria such as independence and credibility, and more likely to base their choice on their assumption as to which credit rating agency might provide a higher rating, which may negatively affect the Company.
Proposed U.S., Foreign, State and Local Legislation and Regulations, Including Those Relating to Nationally Recognized Statistical Rating Organizations
In the U.S. and other countries, the laws and regulations applicable to credit ratings and rating agencies continue to evolve. Recently there has been discussion in the U.S. regarding the potential need for greater regulation of credit rating agencies. In January 2003, the SEC released a report on the role and function of credit rating agencies in the operation of the securities markets. The report considered a number of issues that the SEC was required to examine under the Sarbanes-Oxley Act of 2002 and other issues arising from a SEC-initiated review of credit rating agencies. In June 2003 the SEC released a Concept Release which posed questions about the continued use of credit ratings for regulatory purposes in federal securities laws, the process for determining rating agencies whose ratings could be so used, and the appropriate level of oversight of such rating agencies. In February 2004, the European Parliament adopted resolutions calling on the European Commission to conduct an analysis for registration of rating agencies in Europe and possible registration criteria. At present, Moody’s is unable to assess the nature and effect of any regulatory changes that may result from ongoing reviews by the SEC or other regulatory bodies.
Implementation guidelines proposed by the Committee of European Securities Regulators under the European Commission’s Market Abuse Directive are applicable to all participants in the European capital markets. Credit rating agencies are excluded from control under the guidelines. However, depending on the form in which the implementation guidelines are ultimately adopted by national regulators or lawmakers, such guidelines could include controls over credit rating agencies in some European Union countries. If so, the guidelines could, among other things, alter rating agencies’ communications with issuers as part of the rating assignment process, and increase Moody’s cost of doing business in Europe and the legal risk associated with such business.
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Multinational Operations
Moody’s maintains offices outside the U.S. and derives a significant portion of its revenue from sources outside the U.S. Operations in several different countries expose Moody’s to a number of legal, economic and regulatory risks such as:
changes in legal and regulatory requirements affecting either Moody’s operations or its customers’ use of ratingspossible nationalization, expropriation, price controls and other restrictive governmental actionsrestrictions on the ability to convert local currency into U.S. dollarscurrency fluctuationsexport and import restrictions, tariffs and other trade barriersdifficulty in staffing and managing offices as a result of, among other things, distance, travel, cultural differences and intense competition for trained personnellonger payment cycles and problems in collecting receivablespolitical and economic instabilitypotentially adverse tax consequencesAlthough such factors have not historically had a material adverse effect on the business, financial condition and results of operations of the Company, any of these factors could have such an effect in the future.
Contingencies
From time to time, Moody’s is involved in legal and tax proceedings, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by Moody’s. Management periodically assesses the Company’s liabilities and contingencies in connection with these matters, based upon the latest information available. For those matters where the probable amount of loss can be reasonably estimated, the Company believes it has recorded appropriate reserves in the consolidated financial statements. In other instances, because of the uncertainties related to both the probable outcome and amount or range of loss, management is unable to make a reasonable estimate of a liability, if any. As additional information becomes available, the Company adjusts its assessments and estimates of such liabilities accordingly.
Based on its review of the latest information available, in the opinion of management, the ultimate liability of the Company in connection with pending legal and tax proceedings, claims and litigation will not have a material adverse effect on Moody’s financial position, results of operations or cash flows, subject to the contingencies described below.
Discussion of contingencies is segregated between those matters that relate to Old D&B, its predecessors and their affiliated companies (“Legacy Contingencies”) and those that relate to Moody’s business and operations (“Moody’s Matters”).
Legacy Contingencies
To understand the Company’s exposure to the potential liabilities described below, it is important to understand the relationship between Moody’s and New D&B, and the relationship among New D&B and its predecessors and other parties who, through various corporate reorganizations and related contractual commitments, have assumed varying degrees of responsibility with respect to such matters.
In November 1996, The Dun & Bradstreet Corporation through a spin-off separated into three separate public companies: The Dun & Bradstreet Corporation, ACNielsen Corporation (“ACNielsen”) and Cognizant Corporation (“Cognizant”) (the “1996 Distribution”).
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In June 1998, The Dun & Bradstreet Corporation through a spin-off separated into two separate public companies: The Dun & Bradstreet Corporation and R.H. Donnelley Corporation (“Donnelley”) (the “1998 Distribution”). During 1998, Cognizant through a spin-off separated into two separate public companies: IMS Health Incorporated (“IMS Health”) and Nielsen Media Research, Inc. (“NMR”). In September 2000, The Dun & Bradstreet Corporation (“Old D&B”) through a spin-off separated into two separate public companies: New D&B and Moody’s, as further described in Note 1, Description of Business and Basis of Presentation.
Information Resources, Inc.
In July 1996, Information Resources, Inc. (“IRI”) filed a complaint in the U. S. District Court for the Southern District of New York, naming as defendants the corporation then known as The Dun & Bradstreet Corporation, A.C. Nielsen Company (a subsidiary of ACNielsen) and IMS International, Inc. (a subsidiary of the company then known as Cognizant). At the time of the filing of the complaint, each of the other defendants was a subsidiary of The Dun & Bradstreet Corporation.
The complaint alleges various violations of United States antitrust laws under Sections 1 and 2 of the Sherman Act. The complaint also alleges a claim of tortious interference with a contract and a claim of tortious interference with a prospective business relationship. These claims relate to the acquisition by defendants of Survey Research Group Limited (“SRG”). IRI alleges SRG violated an alleged agreement with IRI when it agreed to be acquired by the defendants and that the defendants induced SRG to breach that agreement.
IRI’s antitrust claims allege that the defendants developed and implemented a plan to undermine IRI’s ability to compete within the U.S. and foreign markets in North America, Latin America, Asia, Europe and Australia/New Zealand through a series of anti-competitive practices, including: unlawfully tying/bundling services in the markets in which defendants allegedly had monopoly power with services in markets in which ACNielsen competed with IRI; entering into exclusionary contracts with retailers in certain countries to deny IRI’s access to sales data necessary to provide retail tracking services or to artificially raise the cost of that data; predatory pricing; acquiring foreign market competitors with the intent of impeding IRI’s efforts to expand; disparaging IRI to financial analysts and clients; and denying IRI access to capital necessary for it to compete.
IRI’s complaint originally alleged damages in excess of $350 million, which IRI asked to be trebled under antitrust laws. IRI has since revised its allegation of damages to exceed $650 million, which IRI also asked to be trebled. IRI also seeks punitive damages of an unspecified amount.
In April 2003, the court denied a motion for partial summary judgment by the defendants that sought to dismiss certain of IRI’s claims and granted in part a motion by IRI seeking reconsideration of certain summary judgment rulings the Court had previously made in favor of the defendants.
In December of 2003, IRI was acquired by the Gingko Acquisition Corporation, an affiliate of Symphony Technology II – A. L. P. and certain other parties. As part of that transaction, a statutory trust called the Information Resources, Inc. Litigation Contingent Payment Rights Trust (the “Trust”) was formed. The Trust was created, in part, to issue contingent value rights certificates (“CVRs”), which represent an interest in the IRI lawsuit. The CVRs are governed by a Contingent Value Rights Agreement among IRI and the acquirers, and are a tradeable security listed on the OTC Bulletin Board. As part of the purchase consideration, each IRI stockholder received one CVR for each share of IRI common stock owned, entitling the selling stockholders to a pro rata portion of the proceeds from the IRI lawsuit, if any, allocated to the Trust. The Trust will be entitled to receive an amount equal to 68% of any proceeds from the IRI lawsuit to the extent that such proceeds are equal to or less than $200 million and 75% of any such proceeds in excess of $200 million. The remaining proceeds, if any, will be the property of IRI. A body consisting of five rights agents was appointed to direct and supervise the IRI Litigation on behalf of IRI and CVR holders. Gingko Corporation named two of the rights agents, IRI named two of the rights agents and these four rights agents selected the fifth “independent” rights agent. Under the Contingent Value Rights Agreement, a majority of the rights agents (other than the independent rights agent) must approve any settlement of the IRI lawsuit. The information contained in this paragraph is solely based on the tender offer statement filed by Gingko Acquisition Corporation and other persons and the registration statement filed by the Trust in connection with the acquisition of IRI.
In connection with the 1996 Distribution, NMR (then known as Cognizant Corporation), ACNielsen and Donnelley (then known as The Dun & Bradstreet Corporation) entered into an Indemnity and Joint Defense Agreement (the “Indemnity and Joint Defense
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Agreement”), pursuant to which they agreed to:
allocate potential liabilities that may relate to, arise out of or result from the IRI lawsuit (“IRI Liabilities”); andconduct a joint defense of such action.In particular, the Indemnity and Joint Defense Agreement provides that:
ACNielsen will assume exclusive liability for IRI Liabilities up to a maximum amount to be calculated at such time as such liabilities become payable as a result of a final non-appealable judgment or any settlement permitted under the Indemnity and Joint Defense Agreement (the “ACN Maximum Amount”); andDonnelley and NMR will share liability equally for any amounts in excess of the ACN Maximum Amount.As noted above, ACNielsen is responsible for the IRI Liabilities up to the ACN Maximum Amount. The Indemnity and Joint Defense Agreement provides that ACNielsen initially is to determine the amount that it will pay at the time of settlement or a final judgment, if any, in IRI’s favor (the “ACN Payment”). The ACN Payment could be less than the ACN Maximum Amount. The Indemnity and Joint Defense Agreement also provides for each of Donnelley and NMR to pay IRI 50% of the difference between the settlement or judgment amount and the ACN Payment, and for ACNielsen to issue a secured note (the “ACN Note”), subject to certain limits, to each of Donnelley and NMR for the amount of their payment. The principal amount of each ACN Note issued to Donnelley and NMR, however, is limited to 50% of the difference between the ACN Maximum Amount and the ACN Payment, and is subject to a further limitation that it cannot exceed 50% of the amount of any proceeds from any recapitalization plan designed to maximize ACNielsen’s claims paying ability. The ACN Notes would become payable upon the completion of any such recapitalization plan.
The Indemnity and Joint Defense Agreement also provides that if it becomes necessary to post any bond pending an appeal of an adverse judgment, then NMR and Donnelley shall obtain the bond required for the appeal, and each shall pay 50% of the costs of such bond, if any, which cost will be added to IRI Liabilities. Under the terms of the 2000 Distribution, Moody’s would be responsible for 25% of the total costs of any bond.
The ACN Maximum Amount will be determined by an investment banking firm as the maximum amount that ACNielsen is able to pay after giving effect to:
any recapitalization plan submitted by such investment bank that is designated to maximize the claims-paying ability of ACNielsen without impairing the investment banking firm’s ability to deliver a viability opinion and without requiring shareholder approval; andpayment of interest on the ACN Notes and related fees and expenses.For these purposes, “viability” means the ability of ACNielsen, after giving effect to such recapitalization plan, the payment of interest on the ACN Notes, the payment of related fees and expenses and the payment of the ACN Maximum Amount, to:
pay its debts as they become due; andfinance the current and anticipated operating and capital requirements of its business, as reconstituted by such recapitalization plan, for two years from the date any such recapitalization plan is expected to be implemented.In 2001, ACNielsen was acquired by VNU N.V. VNU N.V. assumed ACNielsen’s liabilities under the Indemnity and Joint Defense Agreement, and pursuant to the Indemnity and Joint Defense Agreement, VNU N.V. is to be included with ACNielsen for purposes of determining the ACN Maximum Amount.
In connection with the 1998 Distribution, Old D&B and Donnelley (then known as The Dun & Bradstreet Corporation) entered into an agreement (the “1998 Distribution Agreement”) whereby Old D&B assumed all potential liabilities of Donnelley arising from the IRI action and agreed to indemnify Donnelley in connection with such potential liabilities. Under the terms of the 2000 Distribution, New D&B undertook to be jointly and severally liable with Moody’s for Old D&B’s obligations to Donnelley under the 1998 Distribution Agreement, including any liabilities arising under the Indemnity and Joint Defense Agreement, and arising from the IRI action itself. However, as between New D&B and Moody’s, it was agreed that under the 2000 Distribution, each of New D&B and Moody’s will be responsible for 50% of any payments required to be made to or on behalf of Donnelley with respect to the IRI action under the terms of the 1998 Distribution Agreement, including legal fees or expenses related to the IRI action.
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As a result, the Company will be responsible for the payment of 25% of the portion of any judgment or settlement in excess of the ACN Maximum Amount (as adjusted to include VNU N.V.). New D&B will be responsible for the payment of an additional 25% (together constituting Donnelley’s liability under the Indemnity and Joint Defense Agreement for 50% of such amount) and NMR will be responsible for payment of the remaining 50% of liability in excess of the ACN Maximum Amount. In addition, each of the above parties, in accordance with the foregoing percentages, may be required to advance a portion of the amount, if any, by which the ACN Maximum Amount exceeds the amount of the ACN Payment. However, because liability for violations of the antitrust laws is joint and several and because many of the rights and obligations relating to the Indemnity and Joint Defense Agreement are based on contractual relationships, the failure of a party to the Indemnity and Joint Defense Agreement to fulfill its obligations could result in the other parties bearing a greater share of the IRI Liabilities.
As a result of their 1998 separation and pursuant to the related distribution agreement, IMS Health and NMR are each jointly and severally liable for all Cognizant liabilities under the Indemnity and Joint Defense Agreement.
Discovery in the lawsuit is ongoing, and although the court earlier set a trial date for September 2004, the court rescinded that date in January 2004 and there is currently no trial date set. Moody’s is unable to predict at this time the outcome of the IRI action or the financial condition of ACNielsen and VNU N.V. at the time of any such outcome (and hence the Company cannot estimate the amount of the ACN Payment, the ACN Maximum Amount and the portion of any judgment to be paid by VNU N.V. and ACNielsen under the Indemnity and Joint Defense Agreement).
Therefore, Moody’s is unable to predict at this time whether the resolution of this matter could materially affect the Company’s financial position, results of operations, or cash flows. Accordingly, no amount in respect of this matter has been accrued in the Company’s consolidated financial statements. If, however, IRI were to prevail in whole or in part in this action or if Moody’s is required to pay or advance a significant portion of any settlement or judgment, the outcome of this matter could have a material adverse effect on Moody’s financial position, results of operations, and cash flows.
Legacy Tax Matters
Old D&B and its predecessors entered into global tax planning initiatives in the normal course of
business. The Internal Revenue Service ("IRS") is currently reviewing the utilizationbusiness, including through tax-free restructurings ofcertain capital losses during 1989both their foreign and1990, and the Company expects that the IRS will challenge the Company's treatment of certain of these losses. If an assessment is made and should the IRS prevail, the total cash obligationdomestic operations. These initiatives are subject tothe IRS would approximate $500 million for taxes and accrued interest as of December 31, 1998.normal review by tax authorities.Pursuant to a series of agreements, as between themselves, IMS Health
Incorporated ("IMS")andNielsen Media Research ("NMR")NMR are jointly and severally liable to pay one-half, andthe CompanyNew D&B and Moody’s are jointly and severally liable to pay the other half, of any payments for taxes, penalties and accrued interestarisingresulting fromthisunfavorable IRS rulings on certain tax matters (excluding the matter described below as “Amortization Expense Deductions” for which New D&B and Moody’s are solely responsible) and certain other potential tax liabilities afterthe CompanyNew D&B and/or Moody’s pays the first $137million.million, which amount was paid in connection with the matter described below as “Utilization of Capital Losses”.In connection with the 2000 Distribution and pursuant to the terms of the related Distribution Agreement, New D&B and Moody’s have, between themselves, agreed to each be financially responsible for 50% of any potential liabilities that may arise to the extent such potential liabilities are not directly attributable to their respective business operations.
Without limiting the generality of the foregoing, three specific tax matters are discussed below.
Royalty Expense Deductions
During the second quarter of 2003, New D&B received an Examination Report from the IRS with respect to a partnership transaction entered into in 1993. In this Report, the IRS stated its intention to disallow certain royalty expense deductions claimed by Old D&B on its tax returns for the years 1993 through 1996. New D&B disagrees with the position taken by the IRS in its Report. During the third quarter of 2003, New D&B filed a protest with the Appeals Office of the IRS to contest the Examination Report. If
assessed,theCompany will consider available alternativesIRS Appeals Office were tovigorously defenduphold the Examination Report, then New D&B could either: (1) accept and pay the IRS assessment; (2) challenge the assessment in U.S. Tax Court; or (3) challenge the assessment in U.S. District Court or the U.S. Court of Federal Claims, where payment of the disputed amount would be required in connection with such challenge. Should any such payments be made by New D&B, then pursuant to the terms of the 2000 Distribution Agreement, Moody’s would have to pay to New D&B itsposition. Certain alternatives50% share.33
Moody’s estimates that its share of the required payment to the IRS could be up to approximately $57 million (including penalties and interest, and net of tax benefits). Moody’s also could be obligated for future interest payments on its share of such liability.
In a related matter, during the second quarter of 2003, New D&B received an Examination Report from the IRS stating its intention to ignore the partnership structure that had been established in 1993 in connection with the above transaction, and to reallocate to Old D&B income and expense items that had been reported in the partnership tax return for 1996. During the third quarter of 2003, the partnership filed a protest with the Appeals Office of the IRS to contest the Examination Report. If the IRS Appeals Office were to uphold the Examination Report, then New D&B could either: (1) accept and pay the IRS assessment; (2) challenge the assessment in U.S. Tax Court; or (3) challenge the assessment in U.S. District Court or the U.S. Court of Federal Claims, where payment of the assessment would
require making abe required in connection with such challenge. Should any such payments be made by New D&B, then pursuant to the terms of the 2000 Distribution Agreement, Moody’s would have to pay to New D&B its 50% share. Moody’s estimates that its share of the required payment to the IRS for this matter could be up to approximately $50 million (including penalties and interest, and net of tax benefits). Such exposure could be in addition to the amount described in the preceding paragraph, and Moody’s also could be obligated for future interest payments on its share of such liability.During the fourth quarter of 2003 and the first quarter of 2004, New D&B participated in meetings with the IRS Appeals Office on the two matters described above.
In addition, in the first quarter of 2004, New D&B received an Examination Report relating to Old D&B’s participation in the partnership structure for the first quarter of 1997. In this Report the IRS stated its intention to disallow certain royalty expense deductions claimed by Old D&B on its tax return for the 1997 tax year. New D&B also received an Examination Report issued to the partnership with respect to its 1997 tax year. In this Examination Report, the IRS stated its intention to ignore the partnership structure that had been established in 1993 in connection with the above transaction, and to reallocate to Old D&B income and expense items that had been reported in the partnership tax return for 1997. New D&B disagrees with the positions taken by the IRS in its Reports and will pursue the same remedies with the same possible consequences described above. Moody’s estimates that its share of the
taxesrequired payment to the IRS in relation to the two Examination Reports could be up to approximately $1.5 million andaccrued$0.3 million, respectively (including penalties and interest,(approximately $320 million,and net ofwhich $160 million represents tax-deductible interest), whichtax benefits).Moody’s believes that the IRS’s proposed assessments of tax against Old D&B and the proposed reallocations of partnership income and expense to Old D&B are inconsistent with each other. Accordingly, while it is possible that the IRS could ultimately prevail in whole or in part on one of such positions, Moody’s believes that it is unlikely that the IRS will prevail on both.
Amortization Expense Deductions
During the fourth quarter of 2003, New D&B received a Notice of Proposed Adjustment from the IRS with respect to a partnership transaction entered into in 1997 that could result in amortization expense deductions from 1997 through 2012. In this Notice the IRS proposed to disallow the amortization expense deductions related to this partnership that were claimed by Old D&B on its 1997 and 1998 tax returns. New D&B disagrees with the position taken by the IRS. IRS audits of Old D&B’s or New D&B’s tax returns for years subsequent to 1998 could result in the issuance of similar Notices of Proposed Adjustment. If the IRS were to issue a formal assessment consistent with the Notices for 1997 and 1998 or for future years, then New D&B could either: (1) accept and pay the IRS assessment; (2) challenge the assessment in U.S Tax Court; or (3) challenge the assessment in U.S. District Court or the U.S. Court of Federal Claims, where payment of the disputed amount would be
repaidrequired in connection with such challenge. Should any such payments be made by New D&B, then pursuant to theCompany if it prevails interms of the 2000 Distribution Agreement, Moody’s would have to pay to New D&B itsposition. The funds that50% share. In addition, should New D&B discontinue claiming the amortization deductions on future tax returns, Moody’s would beneededrequired tomakerepay to New D&B an amount equal to theCompany'sdiscounted value of its 50% share of the related future tax benefits. New D&B had paid the discounted value of future tax benefits from this transaction in cash to Moody’s at the Distribution Date. Moody’s estimates that the Company’s current potential exposure related to this matter is $92 million (including penalties and interest, and net of tax benefits). This exposure could increase by approximately $3 million to $6 million per year, depending on actions that the IRS may take and on whether New D&B continues claiming the amortization deductions on its tax returns.Also during the fourth quarter of 2003, New D&B received a Notice of Proposed Adjustment from the IRS with respect to the partnership transaction entered into in 1997. In this Notice the IRS proposed to disallow certain royalty expense deductions claimed by Old D&B on its 1997 and 1998 tax returns. In addition, the IRS proposed to disregard the partnership structure and to reallocate
34
to Old D&B certain partnership income and expense items that had been reported in the partnership tax returns for 1997 and 1998. New D&B disagrees with the positions taken by the IRS. If the IRS were to issue a formal assessment consistent with the Notices for 1997 and 1998 or for future years, then New D&B could either: (1) accept and pay the IRS assessment; (2) challenge the assessment in U.S. Tax Court; (3) challenge the assessment in U.S. District Court or the U.S Court of Federal Claims, where payment of the assessment would be required in connection with such challenge. Should any such payments be made by New D&B, then pursuant to the terms of the 2000 Distribution Agreement, Moody’s would have to pay to New D&B its 50% share of New D&B’s payments to the IRS for the period from 1997 through the Distribution Date. Moody’s estimates that its share of the potential payment to the IRS could be up to approximately $125 million (including penalties and interest, and net of tax benefits). Moody’s also could be obligated for future interest payments on its share of such
paymentliability.Moody’s believes that the IRS’s proposed assessments of tax against Old D&B and the proposed reallocations of partnership income and expense to Old D&B are inconsistent with each other. Accordingly, while it is possible that the IRS could ultimately prevail in whole or in part on one of such positions, Moody’s believes that it is unlikely that the IRS will prevail on both.
Utilization of Capital Losses
The IRS has completed its review of the utilization of certain capital losses generated during 1989 and 1990. On June 26, 2000, the IRS, as part of its audit process, issued a formal assessment with respect to the utilization of these capital losses and Old D&B responded by filing a petition for a refund in the U.S. District Court on September 21, 2000, after the payments described below were made. The case is expected to
comego to trial in 2005.On May 12, 2000, an amended tax return was filed for the 1989 and 1990 tax periods, which reflected $561.6 million of tax and interest due. Old D&B paid the IRS approximately $349.3 million of this amount on May 12, 2000; 50% of such payment was allocated to Moody’s and had previously been accrued by the Company. IMS Health informed Old D&B that it paid to the IRS approximately $212.3 million on May 17, 2000. The payments were made to the IRS to stop further interest from
external borrowings. YEARaccruing, and New D&B is contesting the IRS’ assessment. New D&B has indicated that it would also contest the assessment of penalties or other amounts, if any, in excess of the amounts paid. With the possible exception of the matter described in the following sentence, Moody’s does not anticipate any further income statement charges or cash payments related to IRS assessments for this matter. If the IRS were to disallow prior deductions of all transaction costs associated with this matter, Moody’s estimates that its exposure for its share of the additional taxes, penalties and interest (net of tax benefits) on this matter would be approximately $5 million.Subsequent to making its May 2000
GENERALpayment to the IRS, IMS Health sought partial reimbursement from NMR under their 1998 distribution agreement (the “IMS/NMR Agreement”). NMR paid IMS Health less than the amount sought by IMS Health under the IMS/NMR Agreement and, in 2001, IMS Health filed an arbitration proceeding against NMR to recover the difference. IMS Health sought to include Old D&B in this arbitration, arguing that if NMR should prevail in its interpretation of the IMS/NMR Agreement, then IMS Health could seek the same interpretation in an alternative claim against Old D&B. Neither Old D&B nor any of its predecessors was a party to the IMS/NMR Agreement. On April 29, 2003, an arbitration panel ruled in favor of IMS Health in the arbitration proceeding, awarding IMS Health its full claim plus interest in a decision binding on all parties. As a result, IMS Health’s contingent claim against Old D&B (and consequently Moody’s and New D&B) in connection with this matter has been rendered moot. As no amount with respect to this matter had been accrued by Moody’s, the arbitration panel ruling is not expected to have an impact on the Company’s consolidated financial statements.Summary of Moody’s Exposure to Three Legacy Tax Matters
The Company
relies on computer hardware, softwareconsiders from time to time the range and probability of potential outcomes relatedinformation technology ("IT Systems"). IT Systemsto the three legacy tax matters discussed above and establishes reserves that it believes areusedappropriate inthe creation and deliverylight of theCompany's productsrelevant facts andservices,circumstances. In doing so, Moody’s makes estimates andalso are used in the Company's internal operations, suchjudgments asbillingto future events andaccounting. IT Systems include systems that use information provided by third-party data suppliers to update the Company's databases. The Company also reliesconditions and evaluates its estimates and judgments onother systems, such as elevators, and on utilities, such as telecommunications and power utilities, to operate ("Non-IT Systems"). The Company has recognized the potential impact of the year 2000 on its business since 1996, when it began actively addressing the information-technology-related components of the Year 2000 issue in its European and U.S. operations. In 1997, the Company created a Corporate Year 2000 Program Office to manage overall risks and to facilitate activities across the Company. The Corporate Year 2000 Program Office reports directly to the Company's Year 2000 Executive Committee (comprised of the Company's Chief Executive Officer, Chief Financial Officer, Chief Technology Officer and Chief Legal Counsel), which sets overall priorities and monitors progress. Since 1997, each operating unit has had business and technology executives and project teams in place to plan and 2830 carry out all Year 2000 efforts within their units. The Company has used the services of outside consultants and subject-area specialists working with the Corporate Year 2000 Program Office to assess the progress of its Year 2000 program. The most important areas of focus of the Company's Year 2000 program are the Company's products and services (including its databases, software that manipulates these databases and software provided to customers); billing, ordering and tracking systems; technical infrastructure (such as LANs, mail systems and web sites); desktop computers; suppliers; business operation support systems (such as payroll); and facilities and equipment. STATE OF READINESS The Company has focused its efforts on becoming "Year 2000 Ready." The Company defines this term to mean that a process will continue to run in the same manner when dealing with dates on or after January 1, 2000, as it did before January 1, 2000. With respect to IT Systems, the Company's Year 2000 program includes the following phases: Inventory, Assessment, Remediation, Year 2000 Ready Testing and Transaction-Based Testing. Year 2000 Ready Testing involves two major tests. A "system test" checks the system's functions in a Year 2000 test environment that uses simulated or forward-dated system clocks and a variety of other simulated forward-dated data or systems interfaces as required. A "production integration" test confirms that the system will continue to perform its current-date processes when put into production. Transaction-Based Testing further tests the Company's most critical work flows at regional and global levels. Early in its Year 2000 program, the Company categorized its IT Systems in terms of criticality to allow the work to be performed consistent with its importance to the Company. Criticality 1 systems are defined as those systems that are most critical to the Company's business and revenue. Criticality 2 systems are defined as those systems that are very important to the Company and would have a severe impact on business and revenue if not made Year 2000 Ready. Criticality 3 systems are not essential but would have some impact on business and revenue if not made Year 2000 Ready. Criticality 4 systems have little or no impact on business and revenue and are scheduled to be decommissioned prior to the year 2000.an ongoing basis. As of December 31,1998,2003, Moody’s had reserves of approximately $126 million with respect to such matters, which reflected an increase of approximately $16 million during the fourth quarter of 2003 relating to the Amortization Expense Deductions matter. Although the matter had previously been under audit, the Companyhad completed more than 90%felt that an increase in the related reserve was appropriate since the Notices of Proposed Adjustment during thesteps required to achieve Year 2000 Readinessfourth quarter of 2003 reflected a formalization by theCompany's approximately 2,000 Criticality 1 and Criticality 2 IT Systems. The Company's current target is for substantially all Criticality 1 and Criticality 2 IT Systems to be Year 2000 Ready by March 31, 1999. Transaction-Based Testing of the Company's most critical work flows, work on Criticality 3 IT Systems and decommissioning of Criticality 4 IT Systems have begun and will continue through 1999. The Corporate Year 2000 Program Office and operating-unit Year 2000 teams are also addressing Year 2000 Readiness issues regarding the Company's Non-IT Systems. As partIRS of itsYear 2000 program,position on the matter. It is possible that the legacy tax matters could be resolved in amounts that are greater than the amounts reserved by the Company,has categorized its supplierswhich could result interms of criticality. Criticality 1 suppliers are those whose productsadditional charges that may be material to Moody’s future reported results, financial position andservices are most critical to the Company. Criticality 2 suppliers are those whose products and services are very important to the Company but for whom workarounds can be established and operable by June 30, 1999, if the products and servicescash35
flows. Although Moody’s does not believe it is likely that the Company
obtainswill ultimately be required to pay the full amounts presently being sought by the IRS, potential cash outlays resulting fromsuch suppliers are not Year 2000 Ready. Criticality 3 suppliers are those whothese matters, which the Company currently estimates could bereplaced easily 2931as much as $331 million, could be material andreasonably inexpensively. In 1998,could increase with time as described above. Such amount does not include potential penalties related to theCompany began its assessmentpayments made in May 2000 concerning Utilization ofits Criticality 1 and Criticality 2 suppliers, and its current target is to substantially complete such assessmentCapital Losses.Moody’s Matters
L’Association Francaise des Porteurs d’ Emprunts Russes
On June 20, 2001 a summons was served in an action brought by
March 31, 1999. Such assessment involves the identification of those suppliers who will be sufficiently Year 2000 Ready; identification of those who will not be sufficiently ready, requiring the Company to switch to an alternate supplier or product; identification of those suppliers who have some issues but with whom it is most prudent for the Company to continue its relationship; and identification of those suppliers for whom testing will be necessary. In instances where such testing is not possible (for example, it may not be possible for the Company to test the operational ability of its telecommunications, electricity or gas service suppliers in a Year 2000 environment) and alternate sources of supply are not feasible, the Company may have to rely on the assurancesL’Association Francaise des Porteurs d’ Emprunts Russes (“AFPER”) against Moody’s France SA (a subsidiary of thesupplier. COSTS ExternalCompany) andinternal costs associated with modifying software for Year 2000 Readiness are expensed as incurred and are funded through operating cash flow. It is currently estimated that the aggregate cost of the Company's Year 2000 program will be approximately $80 million. The increase from the prior estimate of $70 million to $75 million is attributable to the refinement of estimates associated with contingency planning. Through December 31, 1998, the Company had incurred approximately $54 million ($11 million in 1997 and $43 million in 1998) and expects to incur approximately $22 million in 1999 and $4 million in 2000. These estimates do not include the costs of software and systems that are being replaced or upgradedfiled in thenormal courseCourt ofbusiness. RISKS AND CONTINGENCY PLANS The Company believes that it will substantially completeFirst Instance of Paris, France. In this suit, AFPER, a group of holders of bonds issued by theimplementation of its Year 2000 program prior to January 1, 2000. If the Company does not complete its Year 2000 programRussian government prior to thecommencement1917 Bolshevik Revolution, makes claims against Moody’s France SA and Standard & Poor’s SA for lack of diligence and prudence in their ratings of Russia and Russian debt since 1996. AFPER alleges that, by failing to take into account the post-Revolutionary repudiation of pre-Revolutionary Czarist debt by the Soviet government in rating Russia and new issues of Russian debt beginning in 1996, the rating agencies enabled the Russian Federation to issue new debt without repaying the old obligations of theyear 2000,Czarist government. Alleging joint and several liability, AFPER seeks damages of Euro 2.8 billion (approximately U.S. $3.5 billion as of December 31, 2003) plus legal costs. Moody’s believes the allegations lack legal or factual merit and intends to vigorously contest the action. As such, no amount in respect of this matter has been accrued in the financial statements of the Company. However, ifit failsthe plaintiffs in this action were toidentify and remediate all critical Year 2000 problems, or if major suppliers or customers experienceprevail, then the outcome of this matter could have a materialYear 2000 problems, the Company'sadverse effect on Moody’s financial position, results of operationsor financial condition couldand cash flows. The case has been fully briefed, oral argument was heard before the Court on January 20, 2004, and the Court announced that judgment would bematerially affected. Contingency planning is under way in all ofrendered on April 6, 2004.Dividends
During 2003, 2002 and 2001, the
Company's businesses. In addition to supplier-related activities, high-level plans have been developed for facilities and equipment, telecommunications infrastructure, product development and fulfillment, and internal administrative processes. These plans take into account human resources and communications issues that relate to the Company's employees. By the end of June 1999, the Company expects to have detailed contingency plans in place to address the most likely remaining effects on the Company from external risks. As more information emerges about companies upon which the Company is critically reliant, these plans will be adjusted accordingly. NEW EUROPEAN CURRENCY On January 1, 1999, eleven of the countries in the European Union began a three-year transition to a single European currency ("euro") to replace the national currency of each participating country. The Company intends to phase in the transition to the euro over the next three years. The Company has established a task force to address issues related to the euro. The Company believes that the euro conversion may have a material impact on its operations and financial condition if it fails to successfully address such issues. The task force has prepared a project plan and is proceeding with the implementation of that plan. 3032 The Company's project plan includes the following: ensuring that the Company's information technology systems that process data for inclusion in the Company's products and services can appropriately handle amounts denominated in euro contained in data provided to the Company by third-party data suppliers; modification of the Company's products and services to deal with euro-related issues; and modification of the Company's internal systems (such as payroll, accounting and financial reporting) to deal with euro-related issues. The Company does not believe that the cost of such modifications will have a material effect on the Company's results of operations or financial condition. There is no guarantee that all problems will be foreseen and corrected, or that no material disruption of the Company's business will occur. The conversion to the euro may have competitive implications for the Company's pricing and marketing strategies, which could be material in nature; however, any such impact is not known at this time. DIVIDENDS TheCompany paid a quarterly dividend of$.1854.5 cents per sharefor the third and fourth quartersof1998. Old D&BMoody’s common stock, resulting in dividends paidquarterly dividends of $.22per shareduringof 18.0 cents in each year.In December 2003, the Company’s Board of Directors declared a first
halfquarter 2004 dividend of1998 and the full year of 1997, resulting in a full-year dividend7.5 cents per share,paidpayable on March 10, 2004 to shareholders of$.81record on February 20, 2004. The payment and$.88 for 1998 and 1997, respectively. Totallevel of cashuseddividends by Moody’s going forward will be subject topay dividends decreased in 1998 to $137.4 million from $150.6 million in 1997. COMMON STOCK INFORMATIONthe discretion of Moody’s Board of Directors.Common Stock Information
The
Company'sCompany’s common stock(symbol DNB) is listedtrades on the New York StockExchange.Exchange under the symbol “MCO”. Thenumbertable below indicates the high and low sales price ofshareholders of record was 10,232 at December 31, 1998. The following table summarizes price and cash dividend information for Old D&B'sthe Company’s common stock and theCompany's common stock as reported individends paid for the periods shown. Thedeclinenumber of registered shareholders of record at January 31, 2004 was 4,781.
Price Per Share Dividends Paid High Low Per Share 2002: First quarter $ 42.00 $ 35.80 $ 0.045 Second quarter 51.74 39.94 0.045 Third quarter 52.40 41.00 0.045 Fourth quarter 50.48 39.80 0.045
Year ended December 31, 2002 $ 52.40 $ 35.80 $ 0.180
2003: First quarter $ 49.70 $ 39.50 $ 0.045 Second quarter 54.85 45.38 0.045 Third quarter 56.80 49.85 0.045 Fourth quarter 60.85 54.85 0.045
Year ended December 31, 2003 $ 60.85 $ 39.50 $ 0.180
36
Forward-Looking Statements
Certain statements contained in
price per share duringthis annual report on Form 10-K are forward-looking statements and are based on future expectations, plans and prospects for Moody’s business and operations that involve a number of risks and uncertainties. Those statements appear in thethird quartersections entitled “Outlook” and “Contingencies” under Item 7. “Management’s Discussion and Analysis of1998 reflects,Financial Condition and Results of Operations,” commencing at page 14 of this annual report on Form 10-K, under “Legal Proceedings” inpart,Item 3, Part I of this Form 10-K, and elsewhere in theseparation from Donnelleycontext of statements containing the words “believes”, “expects”, “anticipates” and other words relating to Moody’s views on future events, trends and contingencies. The forward-looking statements and other information are made as of the date of this annual report on Form 10-K for the year ended December 31, 2003, and the Company disclaims any duty to supplement, update or revise such statements on a going-forward basis, whether as a result ofthe 1998 Distribution. The first-quarter 1998 and 1999 dividend declarations were made in the fourth quarters of 1997 and 1998, respectively, although the record and payment dates are both in the ensuing first quarters.
PRICE PER SHARE ($) DIVIDENDS DIVIDENDS -------------------------------------- DECLARED PAID 1998 1997 PER SHARE ($) PER SHARE ($) --------------- --------------- ---------------- -------------- HIGH LOW HIGH LOW 1998 1997 1998 1997 ---- --- ---- --- ---- ---- ----- -----First Quarter........ 35 3/16 30 1/2 27 1/2 23 1/8 -- .22 .22 .22 Second Quarter....... 36 11/16 32 3/8 27 3/8 23 3/4 .22 .22 .22 .22 Third Quarter........ 34 7/16 21 3/4 29 25 5/8 .185 .22 .185 .22 Fourth Quarter....... 31 13/16 22 29/32 31 1/4 25 1/4 .37 .44 .185 .22 -- -- -- -- ---- ---- ---- --- Year................. 36 11/16 21 3/4 31 1/4 23 1/8 .775 1.10 .81 .88 == == == == ==== ==== ==== ===FORWARD-LOOKING STATEMENTS Certain statements in this Annual Report are forward-looking. These may be identified by the use of forward-looking wordssubsequent developments, changed expectations orphrases, such as "believe," "expect," "anticipate," "should," "planned," "estimated," "potential," "target" and "goal," among others. All such forward-looking statements are based on the Company's reasonable expectations at the time they are made. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for such forward-looking statements. In order to comply with the terms of the safe 3133 harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's businesses include: (1) complexity and uncertainty regarding the development of new high-technology products; (2) possible loss of market share through competition; (3) introduction of competing products or technologies by other companies; (4) pricing pressures from competitors and/or customers; (5) changes in the business information and risk management industries and markets; (6) the Company's ability to protect proprietary information and technology or to obtain necessary licenses on commercially reasonable terms; (7) the Company's ability to complete the implementation of its Year 2000 and euro plans on a timely basis; (8) the possible loss of key employees to investment or commercial banks, or elsewhere; (9) fluctuations in foreign currency exchange rates; (10) changes in the interest-rate environment; and (11) the outcome of the IRS's review of the Company's utilization of capital losses described above under the Liquidity and Financial Position section and the associated cash flow implications. The risks and uncertainties that may affect the Company's assessment of Year 2000 issues and new European currency issues include: (1) the complexity involved in ascertaining all situations in which Year 2000 or new European currency issues may arise; (2) the ability of the Company to obtain the services of sufficient personnel to implement the programs; (3) possible increases in the cost of personnel required to implement the programs; (4) absence of delays in scheduled deliveries of new hardware and software from third-party suppliers; (5) reliability of responses from suppliers and others to whom inquiries are being made; (6) ability of the Company to meet the scheduled dates for completion of the programs; and (7) absence of unforeseen events that could delay timely implementation of the programs. The Company undertakes no obligation to publicly release any revision to any forward-looking statement to reflect any future events or circumstances. The Company may from time to time make oral forward-looking statements.otherwise. In connection with the"safe harbor"“safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company isherebyidentifyingimportantcertain factors that could cause actual results to differ, perhaps materially, from thosecontainedindicated by these forward-looking statements. Those factors include, but are not limited to, changes in the volume of debt securities issued in domestic and/or global capital markets; changes in interest rates and other volatility in the financial markets; possible loss of market share through competition; introduction of competing products or technologies by other companies; pricing pressures from competitors and/or customers; the potential emergence of government-sponsored credit rating agencies; proposed U.S., foreign, state and local legislation and regulations, including those relating to Nationally Recognized Statistical Rating Organizations; possible judicial decisions in various jurisdictions regarding the status of and potential liabilities of rating agencies; the possible loss of key employees to investment or commercial banks or elsewhere and related compensation cost pressures; the outcome of anysuch forward-looking statement madereview byor on behalfcontrolling tax authorities of theCompany. Any such statement is qualifiedCompany’s global tax planning initiatives; the outcome of those tax and legal contingencies that relate to Old D&B, its predecessors and their affiliated companies for which the Company has assumed portions of the financial responsibility; the outcome of other legal actions to which the Company, from time to time, may be named as a party; the ability of the Company to successfully integrate the KMV and MRMS businesses; a decline in the demand for credit risk management tools byreferencefinancial institutions. These factors and other risks and uncertainties that could cause Moody’s actual results to differ significantly from management’s expectations, are described in greater detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Additional Factors That May Affect Future Results” and in other reports of thefactors set forth above.Company filed from time to time with the Securities and Exchange Commission.ITEM
7a.7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKInformation in response to this Item is set forth under the caption
"Market Risk Sensitive Instruments"“Market Risk” in Part II, Item 7on Pages 25-26of this annual report on Form 10-K.3234ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATAINDEX TO FINANCIAL STATEMENTS
AND SCHEDULES
PAGE(S) -------Report of Independent Accountants........................... 34 StatementAuditors38 Consolidated Financial Statements: Consolidated Balance Sheets as of Management Responsibility for Financial Statements................................................ 35 CONSOLIDATED FINANCIAL STATEMENTS AtDecember 31,19982003 and1997: Consolidated Balance Sheets............................... 38-39200240 For the years ended December 31, 1998, 19972003, 2002 and1996:2001:Consolidated Statements of Operations..................... 36-37Operations39 Consolidated Statements of Cash Flows..................... 40-41Flows41 Consolidated Statements of Shareholders' Equity........... 42-43Shareholders’ Equity42 Notes to Consolidated Financial Statements................ 44-74 SCHEDULES Schedules are omitted as not required or inapplicable or because the required information is provided in the consolidated financial statements, including the notes thereto.Statements43-71 3335Schedules are omitted as not required or inapplicable or because the required information is provided in the consolidated financial statements, including the notes thereto.
37
REPORT OF INDEPENDENT
ACCOUNTANTSAUDITORSTo the Shareholders and the Board of Directors of
The Dun & BradstreetMoody’s Corporation:In our opinion, the accompanying consolidated
financialbalance sheets and the related consolidated statementslisted in the accompanying index, after the restatement described in Note 1,of operations, shareholders’ equity and cash flows present fairly, in all material respects, the financial position ofThe Dun & BradstreetMoody’s Corporation andSubsidiariesits subsidiaries at December 31,19982003 and1997,2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31,1998, 1997 and 1996,2003 in conformity with accounting principles generally acceptedaccounting principles.in the United States of America. These financial statements are the responsibility of theCompany'sCompany’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally acceptedauditing standardsin the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.On January 1, 2003, the
opinion expressed above. AsCompany adopted the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of SFAS No. 123”. On January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 141, “Business Combinations” and Statement No. 142, “Goodwill and Other Intangible Assets”. These matters are discussed in Note12 to the consolidated financialstatements, the Company changed certain revenue recognition accounting policies in 1997. /s/statements./s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
February3, 1999 3436 STATEMENT OF MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS To the Shareholders of The Dun & Bradstreet Corporation: Management has prepared and is responsible for the consolidated financial statements and related information that appear in Items 6 and 7 and on pages 36-74 of this Form 10-K. The consolidated financial statements, which include amounts based on the estimates of management, have been prepared in conformity with generally accepted accounting principles. Other financial information in this Annual Report on Form 10-K is consistent with that in the consolidated financial statements. Management believes that the Company's internal control systems provide reasonable assurance at reasonable cost that assets are safeguarded against loss from unauthorized use or disposition, and that the financial records are reliable for preparing financial statements and maintaining accountability for assets. These systems are augmented by written policies, an organizational structure providing division of responsibilities, careful selection and training of qualified financial personnel and a program of internal audits. The independent accountants are engaged to conduct an audit of and render an opinion on the financial statements in accordance with generally accepted auditing standards. These standards include an assessment of the systems of internal controls and tests of transactions to the extent considered necessary by them to support their opinion. The Board of Directors, through its Audit Committee consisting solely of outside directors of the Company, is responsible for reviewing and monitoring the Company's financial reporting and accounting practices. PricewaterhouseCoopers LLP and the internal auditors each have full and free access to the Audit Committee and meet with it regularly, with and without management. /s/ VOLNEY TAYLOR ---------------------------------- Volney Taylor Chairman and Chief Executive Officer /s/ FRANK S. SOWINSKI ---------------------------------- Frank S. Sowinski Senior Vice President and Chief Financial Officer 3537 THE DUN & BRADSTREET27, 200438
MOODY’S CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, --------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATARESULTS OF OPERATIONS Operating Revenues..................... $ 1,934.5 $ 1,811.0 $ 1,782.5 Operating Costs........................ 568.2 487.0 617.2 Selling and Administrative Expenses.... 776.0 788.4 806.3 Depreciation and Amortization.......... 141.6 131.9 140.6 Reorganization Costs................... 28.0 -- 161.2 ------------ ------------ ------------ Operating Income....................... 420.7 403.7 57.2 ------------ ------------ ------------ Interest Income........................ 6.4 1.8 4.4 Interest Expense....................... (12.1) (53.4) (37.1) Other Expense -- Net................... (15.2) (19.7) (38.5) ------------ ------------ ------------ Non-Operating Expense -- Net........... (20.9) (71.3) (71.2) ------------ ------------ ------------ Income (Loss) from Continuing Operations before Provision for Income Taxes......................... 399.8 332.4 (14.0) Provision for Income Taxes............. 153.4 113.4 102.1 ------------ ------------ ------------ Income (Loss) from Continuing Operations........................... 246.4 219.0 (116.1) ------------ ------------ ------------ Discontinued Operations: Income from Discontinued Operations, Net of Income Taxes of $22.5, $52.2 and $207.5 for 1998, 1997 and 1996, respectively............ 33.7 92.0 230.5 Loss on Disposal, Net of Income Tax Benefit of $62.4 for 1996......... -- -- (158.2) ------------ ------------ ------------ Income from Discontinued Operations.... 33.7 92.0 72.3 ------------ ------------ ------------ Income (Loss) before Cumulative Effect of Accounting Changes................ 280.1 311.0 (43.8) Cumulative Effect of Accounting Changes, Net of Income Tax Benefit of $87.7................................ -- (127.0) -- ------------ ------------ ------------ Net Income (Loss)...................... $ 280.1 $ 184.0 $ (43.8) ============ ============ ============3638
YEARS ENDED DECEMBER 31, --------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATABASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK Continuing Operations.................. $ 1.45 $ 1.28 $ (.69) Discontinued Operations................ .20 .54 .43 ------------ ------------ ------------ Before Cumulative Effect of Accounting Changes.............................. 1.65 1.82 (.26) Cumulative Effect of Accounting Changes, Net of Income Tax Benefit... -- (.74) -- ------------ ------------ ------------ Basic Earnings (Loss) Per Share of Common Stock.............. $ 1.65 $ 1.08 $ (.26) ============ ============ ============ DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK Continuing Operations.................. $ 1.44 $ 1.27 $ (.69) Discontinued Operations................ .19 .53 .43 ------------ ------------ ------------ Before Cumulative Effect of Accounting Changes.............................. 1.63 1.80 (.26) Cumulative Effect of Accounting Changes, Net of Income Tax Benefit... -- (.73) -- ------------ ------------ ------------ Diluted Earnings (Loss) Per Share of Common Stock......................... $ 1.63 $ 1.07 $ (.26) ============ ============ ============ SHARE DATA Weighted Average Number of Shares Outstanding -- Basic................. 169,492,000 170,765,000 170,017,000 ============ ============ ============ Weighted Average Number of Shares Outstanding -- Diluted............... 171,703,000 172,552,000 170,017,000 ============ ============ ============
(amounts in millions, except per share data)
Year Ended December 31, 2003 2002 2001 $ 1,246.6 $ 1,023.3 $ 796.7 Operating 347.3 285.3 239.6 Selling, general and administrative 203.6 175.3 141.6 Depreciation and amortization 32.6 24.6 17.0
Total expenses 583.5 485.2 398.2
663.1 538.1 398.5
Interest expense, net (21.8 ) (21.2 ) (16.5 ) Other non-operating income (expense), net 15.1 0.5 (0.1 )
Non-operating expense, net (6.7 ) (20.7 ) (16.6 )
Income before provision for income taxes 656.4 517.4 381.9 Provision for income taxes 292.5 228.5 169.7
$ 363.9 $ 288.9 $ 212.2
Basic $ 2.44 $ 1.88 $ 1.35
Diluted $ 2.39 $ 1.83 $ 1.32
Basic 148.9 153.9 157.6
Diluted 152.3 157.5 160.2
The accompanying notes are an integral part of the consolidated financial statements.
3739
THE DUN & BRADSTREETMOODY’S CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------- 1998 1997 -------- -------- (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)ASSETS CURRENT ASSETS: Cash and Cash Equivalents................................... $ 90.6 $ 81.8 Accounts Receivable -- Net of Allowance of $39.0 in 1998 and $39.4 in 1997............................................. 445.2 454.5 Other Current Assets........................................ 228.2 269.2 -------- -------- Total Current Assets................................... 764.0 805.5 -------- -------- NON-CURRENT ASSETS: Property, Plant and Equipment............................... 298.3 317.2 Prepaid Pension Costs....................................... 224.3 190.9 Computer Software........................................... 148.6 128.0 Goodwill.................................................... 191.8 194.6 Other Non-Current Assets.................................... 162.2 153.3 -------- -------- Total Non-Current Assets............................... 1,025.2 984.0 -------- -------- Net Assets of Discontinued Operations....................... -- 296.5 -------- -------- Total Assets................................................ $1,789.2 $2,086.0 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Notes Payable............................................... $ 36.9 $ 451.5 Accrued Income Taxes........................................ 326.3 4.1 Other Accrued and Current Liabilities....................... 529.9 505.4 Unearned Subscription Income................................ 459.6 573.5 -------- -------- Total Current Liabilities.............................. 1,352.7 1,534.5 -------- -------- Pension and Postretirement Benefits......................... 372.7 389.0 Other Non-Current Liabilities............................... 133.1 388.3 Minority Interest........................................... 301.7... 301.9 SHAREHOLDERS' EQUITY: Preferred Stock, authorized -- 10,000,000 shares; $.01 par value per share -- 1998, outstanding -- none $1.00 par value per share -- 1997, outstanding -- none Series Common Stock, authorized -- 10,000,000 shares; $.01 par value per share -- 1998, outstanding -- none Common Stock, authorized -- 400,000,000 shares; $.01 par value per share -- 1998, issued -- 171,451,136 shares................................................. 1.7 -- $1.00 par value per share -- 1997, issued -- 188,420,996 shares................................................. -- 188.4 Capital Surplus............................................. 251.1 80.2 Retained Earnings........................................... (240.9) 367.73840
DECEMBER 31, -------------------- 1998 1997 -------- -------- (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)Treasury Stock at cost: 6,396,924 shares for 1998................................. (168.1) -- 17,853,652 shares for 1997................................ -- (964.0) Cumulative Translation Adjustment........................... (170.2) (162.6) Minimum Pension Liability................................... (44.6) (37.4) -------- -------- Total Shareholders' Equity............................. (371.0) (527.7) -------- -------- Total Liabilities and Shareholders' Equity.................. $1,789.2 $2,086.0 ======== ========
(dollar amounts in millions, except per share data)
December 31, 2003 2002 Current assets: Cash and cash equivalents $ 269.1 $ 39.9 Accounts receivable, net of allowances of $15.9 in 2003 and $16.4 in 2002 270.3 178.1 Other current assets 29.6 27.8
Total current assets 569.0 245.8 Property and equipment, net 46.8 50.6 Prepaid pension costs 60.2 59.3 Goodwill 126.4 126.3 Intangible assets, net 77.4 84.4 Other assets 61.6 64.4
Total assets $ 941.4 $ 630.8
Current liabilities: Accounts payable and accrued liabilities $ 217.5 $ 184.9 Bank borrowings — 107.1 Deferred revenue 214.6 170.0
Total current liabilities 432.1 462.0 Non-current portion of deferred revenue 41.1 28.5 Notes payable 300.0 300.0 Other liabilities 200.3 167.3
Total liabilities 973.5 957.8
Commitments and contingencies (Notes 13 and 14) Shareholders’ equity: Preferred stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding — — Series common stock, par value $.01 per share; 10,000,000 shares authorized; no shares issued and outstanding — — Common stock, par value $.01 per share; 400,000,000 shares authorized; 171,451,136 shares issued at December 31, 2003 and 2002 1.7 1.7 Capital surplus 76.4 45.5 Retained earnings 558.9 221.8 Treasury stock, at cost; 22,779,500 and 22,560,826 shares of common stock at December 31, 2003 and 2002, respectively (677.2 ) (597.7 ) Cumulative translation adjustment 8.1 1.7
Total shareholders’ equity (32.1 ) (327.0 )
Total liabilities and shareholders’ equity $ 941.4 $ 630.8
The accompanying notes are an integral part of the consolidated financial statements.
3941 THE DUN & BRADSTREET40
MOODY’S CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 ------- -------- -------- (DOLLAR AMOUNTS IN MILLIONS)CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss)............................... $ 280.1 $ 184.0 $ (43.8) Less: Income from Discontinued Operations....... 33.7 92.0 72.3 ------- -------- -------- Income (Loss) from Continuing Operations........ 246.4 92.0 (116.1) Reconciliation of Net Income to Net Cash Provided by Operating Activities: Cumulative Effect of Accounting Changes, Net of Income Tax Benefit...................... -- 127.0 -- Depreciation and Amortization................. 141.6 131.9 140.6 (Gain) Loss from Sale of Businesses, Net of Income Taxes............................... (5.3) -- 68.2 Decrease (Increase) in Notes Receivable....... 2.9 47.5 (55.3) Restructuring Payments........................ -- -- (39.4) Postemployment Benefit Payments............... (16.3) (30.6) (50.3) Net Decrease (Increase) in Accounts Receivable................................. 5.0 (33.8) (52.1) Deferred Income Taxes......................... (49.2) 7.0 83.2 Accrued Income Taxes.......................... 317.8 (38.7) 16.2 (Decrease) Increase in Long-Term Liabilities................................ (213.3) 38.7 105.4 Increase in Other Long-Term Assets............ (18.9) -- -- Net (Increase) Decrease in Other Working Capital Items.............................. (100.1) 84.3 89.5 Other......................................... 14.9 (45.3) (10.0) ------- -------- -------- Net Cash Provided by Operating Activities: Continuing Operations......................... 325.5 380.0 179.9 Discontinued Operations....................... 16.7 120.4 152.1 ------- -------- -------- Net Cash Provided by Operating Activities....... 342.2 500.4 332.0 ------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sales of Marketable Securities.... 50.9 27.2 17.6 Payments for Marketable Securities.............. (50.4) (27.1) (2.4) Proceeds from Sale of Businesses................ 26.5 -- 93.9 Capital Expenditures............................ (55.4) (50.3) (57.9) Additions to Computer Software and Other Intangibles................................... (91.7) (78.8) (94.1) Net Cash (Used in) Provided by Investing Activities of Discontinued Operations......... (3.1) 105.7 (180.5) Other........................................... 18.5 7.4 13.3 ------- -------- -------- Net Cash Used in Investing Activities........... (104.7) (15.9) (210.1) ------- -------- --------4042
YEARS ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 ------- -------- -------- (DOLLAR AMOUNTS IN MILLIONS)CASH FLOWS FROM FINANCING ACTIVITIES Payment of Dividends............................ (137.4) (150.6) (310.8) Payments for Purchase of Treasury Shares........ (220.2) (60.1) (25.6) Net Proceeds from Exercise of Stock Options..... 41.0 40.8 63.7 (Decrease) Increase in Commercial Paper Borrowings.................................... (385.7) 421.6 (405.0) Increase in Minority Interest................... -- 300.0 -- (Decrease) Increase in Other Short-Term Borrowings.................................... (28.9) (1,090.6) 1,116.2 Payment of Redeemable Partnership Interests..... -- -- (575.0) Proceeds from Debt Assumed by R.H. Donnelley.... 500.0 -- -- Other........................................... 3.9 9.2 (1.1) ------- -------- -------- Net Cash Used in Financing Activities........... (227.3) (529.7) (137.6) ------- -------- -------- Effect of Exchange Rate Changes on Cash and Cash Equivalents................................... (1.4) (.8) (2.1) ------- -------- -------- Increase (Decrease) in Cash and Cash Equivalents................................... 8.8 (46.0) (17.8) Cash and Cash Equivalents, Beginning of Year.... 81.8 127.8 145.6 ------- -------- -------- Cash and Cash Equivalents, End of Year.......... $ 90.6 $ 81.8 $ 127.8 ======= ======== ========
(amounts in millions)
Year Ended December 31, 2003 2002 2001 Net income $ 363.9 $ 288.9 $ 212.2 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization 32.6 24.6 17.0 Stock-based compensation expense 10.8 — — Deferred income taxes (0.4 ) (3.6 ) (0.8 ) Tax benefits from exercise of stock options 33.3 27.5 15.1 Write-off of computer software, property and equipment 0.6 1.3 0.6 Write-off of acquired in-process research and development — 1.1 — Impairment of investments in affiliates — — 3.4 Changes in assets and liabilities: Accounts receivable (91.8 ) (16.6 ) (47.6 ) Other current assets — 0.3 (3.7 ) Prepaid pension costs (0.9 ) (2.1 ) (3.4 ) Other assets (0.6 ) (2.9 ) (2.9 ) Accounts payable and accrued liabilities 30.6 (66.8 ) 101.6 Deferred revenue 56.8 34.9 24.8 Other liabilities 33.5 48.2 5.1
Net cash provided by operating activities 468.4 334.8 321.4
Capital additions (17.9 ) (18.1 ) (14.8 ) Net cash (used) acquired in connection with business acquisitions and investments in affiliates 0.8 (205.7 ) (15.2 ) Other — 0.2 —
Net cash used in investing activities (17.1 ) (223.6 ) (30.0 )
Net (repayments of) proceeds from bank borrowings (107.1 ) 107.1 — Proceeds from stock plans 79.0 54.0 47.8 Cost of treasury shares repurchased (171.7 ) (369.9 ) (267.6 ) Payment of dividends (26.8 ) (27.8 ) (28.3 ) Payments under capital lease obligations (1.1 ) — —
Net cash used in financing activities (227.7 ) (236.6 ) (248.1 )
Effect of exchange rate changes on cash and cash equivalents 5.6 2.1 0.8
Increase (decrease) in cash and cash equivalents 229.2 (123.3 ) 44.1 Cash and cash equivalents, beginning of the period 39.9 163.2 119.1
Cash and cash equivalents, end of the period $ 269.1 $ 39.9 $ 163.2
The accompanying notes are an integral part of the consolidated financial statements.
41
43 THE DUN & BRADSTREETMOODY’S CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OFSHAREHOLDERS'SHAREHOLDERS’ EQUITY(THREE YEARS ENDED DECEMBER 31, 1998)
COMMON STOCK CUMULATIVE ($1 AND $.01 CAPITAL RETAINED TREASURY TRANSLATION PAR VALUE) SURPLUS EARNINGS STOCK ADJUSTMENT ------------ ------- --------- --------- ----------- (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)BALANCE, JANUARY 1, 1996......... $ 188.4 $ 70.0 $ 2,184.5 $(1,107.3) $(177.3) Net Loss......................... (43.8) Dividends Declared ($1.82 per share)..................... (310.8) Stock Dividend to Shareholders of Cognizant and ACNielsen, Including 800,000 Treasury Shares................ (1,370.2) 49.5 79.8 Treasury Shares Reissued Under Stock Options and Deferred Compensation Plans (1,525,935).................... 2.6 59.0 Treasury Shares Reissued Under Restricted Stock Plan (16,410)....................... 4.7 Treasury Shares Acquired (923,199)...................... (25.6) Change in Cumulative Translation Adjustment..................... (55.8) Unrealized Losses on Investments.................... (3.0) ------- ------ --------- --------- ------- Total Comprehensive Loss......... BALANCE, DECEMBER 31, 1996....... 188.4 72.6 456.7 (1,019.7) (153.3) ------- ------ --------- --------- ------- Net Income....................... 184.0 Dividends Declared ($1.10 per share, see Note 1)............. (188.1) Adjustment to Stock Dividend to Shareholders of Cognizant and ACNielsen...................... (11.3) Treasury Shares Reissued Under Stock Options and Deferred Compensation Plans (2,010,091).................... 7.6 (72.4) 115.6 Treasury Shares Reissued Under Restricted Stock Plan (20,884)....................... .2 Treasury Shares Acquired (2,271,851).................... (60.1) Change in Cumulative Translation Adjustment..................... (9.3) Minimum Pension Liability Adjustment..................... Unrealized Losses on Investments.................... (1.2) ------- ------ --------- --------- ------- Total Comprehensive Income....... BALANCE, DECEMBER 31, 1997....... 188.4 80.2 367.7 (964.0) (162.6) ------- ------ --------- --------- -------MINIMUM TOTAL COMPREHENSIVE PENSION SHAREHOLDERS' INCOME LIABILITY EQUITY (LOSS) ---------- ------------- ------------- (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)BALANCE, JANUARY 1, 1996......... $ -- $ 1,158.3 Net Loss......................... (43.8) $ (43.8) Dividends Declared ($1.82 per share)..................... (310.8) Stock Dividend to Shareholders of Cognizant and ACNielsen, Including 800,000 Treasury Shares................ (1,240.9) Treasury Shares Reissued Under Stock Options and Deferred Compensation Plans (1,525,935).................... 61.6 Treasury Shares Reissued Under Restricted Stock Plan (16,410)....................... 4.7 Treasury Shares Acquired (923,199)...................... (25.6) Change in Cumulative Translation Adjustment..................... (55.8) (55.8) Unrealized Losses on Investments.................... (3.0) (3.0) ------ --------- ------- Total Comprehensive Loss......... $(102.6) BALANCE, DECEMBER 31, 1996....... -- (455.3) ------ --------- ======= Net Income....................... 184.0 $ 184.0 Dividends Declared ($1.10 per share, see Note 1)............. (188.1) Adjustment to Stock Dividend to Shareholders of Cognizant and ACNielsen...................... (11.3) Treasury Shares Reissued Under Stock Options and Deferred Compensation Plans (2,010,091).................... 50.8 Treasury Shares Reissued Under Restricted Stock Plan (20,884)....................... .2 Treasury Shares Acquired (2,271,851).................... (60.1) Change in Cumulative Translation Adjustment..................... (9.3) (9.3) Minimum Pension Liability Adjustment..................... (37.4) (37.4) (37.4) Unrealized Losses on Investments.................... (1.2) (1.2) ------ --------- ------- Total Comprehensive Income....... $ 136.1 BALANCE, DECEMBER 31, 1997....... (37.4) (527.7) ------ --------- =======4244
COMMON STOCK CUMULATIVE ($1 AND $.01 CAPITAL RETAINED TREASURY TRANSLATION PAR VALUE) SURPLUS EARNINGS STOCK ADJUSTMENT ------------ ------- --------- --------- ----------- (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)Dollar Par Common Stock: Treasury Shares Reissued Under Stock Options and Deferred Compensation Plans (1,514,773).................. (52.6) 85.3 Treasury Shares Acquired (790,800).................... (27.2) Stock Dividend to Shareholders of R.H. Donnelley................. 183.5 Adjustment to Penny Par Value.... (169.6) 169.6 Recapitalization................. (17.1) .5 (889.3) 905.9 Net Income....................... 280.1 Dividends Declared ($.775 per share)......................... (130.4) Penny Par Common Stock: Treasury Shares Reissued Under Stock Options and Deferred Compensation Plans (837,232).................... (1.3) 24.3 Treasury Shares Earned Under Restricted Stock Plan (5,595)...................... .6 Treasury Shares Acquired (7,239,751).................. (193.0) Common Shares Issued Under Stock Options and Restricted Stock Plan (159,819)......... 2.1 Change in Cumulative Translation Adjustment..................... (7.6) Minimum Pension Liability Adjustment..................... Unrealized Gains on Investments.................... .1 ------- ------ --------- --------- ------- Total Comprehensive Income....... BALANCE, DECEMBER 31, 1998....... $ 1.7 $251.1 $ (240.9) $ (168.1) $(170.2) ======= ====== ========= ========= =======MINIMUM TOTAL COMPREHENSIVE PENSION SHAREHOLDERS' INCOME LIABILITY EQUITY (LOSS) ---------- ------------- ------------- (DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)Dollar Par Common Stock: Treasury Shares Reissued Under Stock Options and Deferred Compensation Plans (1,514,773).................. 32.7 Treasury Shares Acquired (790,800).................... (27.2) Stock Dividend to Shareholders of R.H. Donnelley................. 183.5 Adjustment to Penny Par Value.... -- Recapitalization................. -- Net Income....................... 280.1 $ 280.1 Dividends Declared ($.775 per share)......................... (130.4) Penny Par Common Stock: Treasury Shares Reissued Under Stock Options and Deferred Compensation Plans (837,232).................... 23.0 Treasury Shares Earned Under Restricted Stock Plan (5,595)...................... .6 Treasury Shares Acquired (7,239,751).................. (193.0) Common Shares Issued Under Stock Options and Restricted Stock Plan (159,819)......... 2.1 Change in Cumulative Translation Adjustment..................... (7.6) (7.6) Minimum Pension Liability Adjustment..................... (7.2) (7.2) (7.2) Unrealized Gains on Investments.................... .1 .1 ------ --------- ------- Total Comprehensive Income....... $ 265.4 BALANCE, DECEMBER 31, 1998....... $(44.6) $ (371.0) ====== ========= =======
(amounts in millions)
Common Stock Retained Cumulative Treasury Stock Total Capital Earnings Translation Shareholders’ Comprehensive Shares Amount Surplus (Deficit) Adjustment Shares Amount Equity Income 171.5 $ 1.7 $ 7.9 $ (223.2 ) $ (1.9 ) (11.0 ) $ (67.0 ) $ (282.5 )
Net income 212.2 212.2 $ 212.2 Dividends paid (28.3 ) (28.3 ) Proceeds from stock plans, including tax benefits 62.9 62.9 Net treasury stock activity (27.1 ) (6.0 ) (240.5 ) (267.6 ) Currency translation adjustment (0.8 ) (0.8 ) (0.8 )
Comprehensive income $ 211.4
171.5 1.7 43.7 (39.3 ) (2.7 ) (17.0 ) (307.5 ) (304.1 )
Net income 288.9 288.9 $ 288.9 Dividends paid (27.8 ) (27.8 ) Proceeds from stock plans, including tax benefits 81.5 81.5 Net treasury stock activity (79.7 ) (5.6 ) (290.2 ) (369.9 ) Currency translation adjustment 4.4 4.4 4.4
Comprehensive income $ 293.3
171.5 1.7 45.5 221.8 1.7 (22.6 ) (597.7 ) (327.0 )
Net income 363.9 363.9 $ 363.9 Dividends paid (26.8 ) (26.8 ) Proceeds from stock plans, including tax benefits 112.3 112.3 Stock-based compensation 10.8 10.8 Net treasury stock activity (92.2 ) (0.2 ) (79.5 ) (171.7 ) Currency translation adjustment 6.4 6.4 6.4
Comprehensive income $ 370.3
171.5 $ 1.7 $ 76.4 $ 558.9 $ 8.1 (22.8 ) $ (677.2 ) $ (32.1 )
The accompanying notes are an integral part of the consolidated financial statements.
4345 THE DUN & BRADSTREET42
MOODY’S CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSTabular dollar amounts
TABULAR DOLLAR AND SHARE AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATANote 1 Description of Business and Basis of Presentation
Moody’s Corporation (“Moody’s” or the “Company”) is a provider of credit ratings, research and analysis covering debt instruments and securities in
millions, except per share data NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION.the global capital markets and a provider of quantitative credit assessment services, credit training services and credit process software to banks and other financial institutions. Moody’s operates in two reportable segments: Moody’s Investors Service and Moody’s KMV. Moody’s Investors Service publishes rating opinions on a broad range of credit obligations issued in domestic and international markets, including various corporate and governmental obligations, structured finance securities and commercial paper programs as well as rating opinions on issuers of credit obligations. It also publishes investor-oriented credit research, including in-depth research on major issuers, industry studies, special comments and credit opinion handbooks. The Moody’s KMV business, which consists of the combined businesses of KMV LLC and KMV Corporation (“KMV”), acquired in April 2002, and Moody’s Risk Management Services, develops and distributes quantitative credit assessment services for banks and investors in credit-sensitive assets, credit training services and credit process software.The Company operated as part of The Dun & Bradstreet Corporation (“Old D&B”) until September 30, 2000 (the “Distribution Date”), when Old D&B separated into two publicly traded companies — Moody’s Corporation and The New D&B Corporation (“New D&B”). At that time, Old D&B distributed to its shareholders shares of New D&B stock. New D&B comprised the business of Old D&B’s Dun & Bradstreet operating company (the “D&B Business”). The remaining business of Old D&B consisted solely of the business of providing ratings and related research and credit risk management services (the “Moody’s Business”) and was renamed “Moody’s Corporation”. The method by which Old D&B distributed to its shareholders its shares of New D&B stock is hereinafter referred to as the “2000 Distribution”.
For purposes of governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution and to provide for an orderly transition, the Company and New D&B entered into various agreements including a Distribution Agreement, Tax Allocation Agreement, Employee Benefits Agreement, Shared Transaction Services Agreement, Insurance and Risk Management Services Agreement, Data Services Agreement and Transition Services Agreement.
Note 2 Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include those of
The Dun & BradstreetMoody’s Corporation(the "Company")and itssubsidiariesmajority- andinvestments in which the Company has a controlling interest.wholly-owned subsidiaries. The effects of all intercompany transactions have been eliminated. Investments in companies over which the Company has significant influence but not a controlling interest are carried on an equity basis.The effectsInvestments for which the Company does not have the ability to exercise significant influence over operating and financial policies are carried on the cost basis ofall significant intercompany transactions have been eliminated. The financial statementsaccounting.Cash and Cash Equivalents
Cash equivalents principally consist of
subsidiaries outside the United Statesinvestments in money market funds, short-term certificates of deposit andCanada reflect a fiscal year ended November 30 to facilitate timely reportingcommercial paper with maturities ofthe Company's consolidated financial results. As discussed more thoroughly in Note 2, R.H. Donnelley Corporation, Cognizant Corporation ("Cognizant"), ACNielsen Corporation ("ACNielsen"), Dun & Bradstreet Software ("DBS")three months or less when purchased. Interest income on cash andNCH Promotional Services ("NCH") are presented as discontinued operations. CASH EQUIVALENTS. Marketable securities that mature within 90 days of purchase date are consideredcash equivalents was $1.7 million, $2.3 million and $6.5 million for the years ended December 31, 2003, 2002 and 2001, respectively.43
Property and Equipment
Property and equipment are stated at cost
which approximates fair value. MARKETABLE SECURITIES. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," marketable securities at December 31, 1998 and 1997, are classified as "available for sale"and arereported at fair value, with net unrealized gains and losses reported in shareholders' equity. The fair value of current and non-current marketable securities was estimated based on quoted market prices. Realized gains and losses on marketable securities are determined on the specific identification method. The Company's marketable securities, $49.7 million and $53.0 million at December 31, 1998 and 1997, respectively, consisted primarily of debt securities of the U.S. Government and its agencies. PROPERTY, PLANT AND EQUIPMENT. Buildings, machinery and equipment aredepreciatedprincipallyusing the straight-line method overa period oftheir estimated useful lives, typically three to40 years.ten years for office and computer equipment and office furniture and fixtures, and seven to forty years for buildings and building improvements. Expenditures for maintenance and repairs that do not extend the economic useful life of the related assets are charged to expense as incurred. Gains and losses on disposals of property and equipment are reflected in the consolidated statements of operations. Leasehold improvements are amortizedon a straight-line basisover the shorter of the term of the lease or the estimated useful life of the improvement.COMPUTER SOFTWARE, GOODWILL AND INTANGIBLE ASSETS. CertainComputer Software
Costs for the development of computer software
coststhat will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established in accordance withSFASStatement of Financial Accounting Standards (“SFAS”) No. 86,"Accounting“Accounting for the Costs of Computer Software to Be Sold, Leased, or OtherwiseMarketed,"Marketed”. These assets primarily relate to the development of credit process software and quantitative credit assessment products to be licensed to customers. The capitalized costs generally consist of professional services provided by third parties and compensation costs of employees that develop the software. These costs are amortized on a straight-line basis over three years, which approximates their useful life, and are reported at the lower of unamortized cost or net realizable value.Effective January 1, 1999,At December 31, 2003 and 2002, such amounts, included in other assets in the consolidated balance sheets, were $9.0 million and $9.1 million, respectively, (net of accumulated amortization of $12.1 million and $7.8 million, respectively). Other assets at December 31, 2003 and 2002 also included $10.9 million and $14.2 million (net of accumulated amortization of $6.2 million and $2.9 million, respectively) of acquired software resulting from the April 2002 acquisition of KMV. Amortization expense for all such software for the years ended December 31, 2003, 2002 and 2001 was $7.3 million, $5.3 million and $2.1 million, respectively.The Company
will adoptcapitalizes costs related to software developed or obtained for internal use in accordance with Statement of Position("SOP")98-1,"Accounting“Accounting for the Costs of Computer Software Developed or Obtained for InternalUse." Among other provisions, SOP 98-1 requires that entities capitalize certain internal-use software costs once certain criteria are met. Under SOP 98-1, overhead, generalUse”. These assets, included in property andadministrative, and training costs are not to be capitalized. During 1998, the Company capitalized approximately $10 million of costs incurred in developing internal-use software which would not be capitalizedequipment in thefuture. Costsconsolidated balance sheets, relate to the Company’s accounting, product delivery and other systems. Such costs generally consist of direct costs of third party license fees, professional services provided by third parties and employee compensation, in each case incurred either during the application development stage or in connection withbusiness process reengineeringupgrades and enhancements that increase functionality. Such costs are depreciated over their estimated useful lives, generally three to five years. Costs incurred during the preliminary project stage of development as well as maintenance costs are expensed as incurred.Long-Lived Assets, Including Goodwill and Other
4446 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) intangibles result from acquisitions and database enhancements. Computer softwareAcquired Intangible AssetsIntangible assets and other
intangibles are being amortized, using principally the straight-line method, over three to five years and five to 15 years, respectively. Goodwill represents the excess purchase price over the fair value of identifiable net assets of businesses acquired and is amortized on a straight-line basis over five to 40 years. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company reviews for impairment oflong-lived assetsand certain identifiable intangiblesare reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amountof an assetmay not be recoverable.In general,If theCompany will recognize an impairment loss when the sum ofestimated undiscountedexpectedfuture cash flowsis lessare lower than the carrying amount ofsuch assets. The measurement for such an impairmentthe asset, a loss isthen based onrecognized for the difference between the carrying amount and the estimated fair value of the asset.Effective January 1, 2002, the Company adopted SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 141 requires all business combinations to be accounted for using the purchase method. Under SFAS No. 142, goodwill and other intangible assets with indefinite lives are no longer amortized, but are tested for impairment annually or more frequently if impairment indicators arise. This testing requires the Company to estimate the fair value of
the asset. At each balance sheet date, the Company reviews the recoverability of goodwill, notits applicable identifiedwith long-lived assets,reporting units based onestimated undiscountedthe present value of the expected future cash flowsfrom operating activities compared withof thecarryingunits. If the book value ofgoodwill, and recognizes any impairment ona reporting unit exceeds thebasisestimated fair value ofsuch comparison. The recognition and measurementthe unit, a write-down of goodwillimpairmentisassessed at the business-unit level. REVENUE RECOGNITION.required. The Companyrecognizes revenue as services are performed, information is delivered,completed its transitional impairment testing during the second quarter of 2002 andproductsits annual impairment testing in the fourth quarter of 2002 andservices are used by its customers. Amounts billed for service2003. In each test, the estimated fair values of the reporting units exceeded their book values andsubscriptions are credited to unearned subscription incometherefore no write-down of goodwill was required.Stock-Based Compensation
In 2002 and
reflected in operating revenues as used over the subscription term, which is generally one year. ACCOUNTING CHANGES. Effective January 1, 1997,prior years, the Companychanged its revenue recognition method for its Credit Information Services business to recognize revenue as products and services are used by its customers. Previously,measured theCompany recognized revenue ratably overcost of stock-based compensation using thecontract period. This change is consistent with the Company's change in focus from a sales contract basis to a product usage basis in order to drive revenue growth and increase customer satisfaction. Additionally, the Company changed its revenue recognition method for its Moody's Investors Service ("Moody's") business to recognize revenue over the service period from previously recognizing revenues and costs at the time of billing. In the opinion of management, these accounting changes bring revenue recognition methods more in line with the economics of the business and provide a better measure of operating results. In accordance withintrinsic value approach under Accounting Principles Board (“APB”) Opinion("APB"No. 25 rather than applying the fair value method provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) as amended by SFAS No.20, "Accounting Changes,"148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123”.44
Accordingly, the
cumulative effectCompany did not recognize compensation expense related to grants ofchangingemployee stock options and shares issued to participants in its employee stock purchase plan.On January 1, 2003, the Company adopted, on a prospective basis, the fair value method of accounting for
certainstock-based compensation under SFAS No. 123. Therefore, employee stock options granted on and after January 1, 2003 are being expensed by the Company over the option vesting period, based on the estimated fair value of theCompany's revenue recognition policies resultedaward on the date of grant. In addition, shares issued to participants ina pre-tax non-cash chargethe Company’s employee stock purchase plan are being expensed by the Company based on the discount from the market price received by the participants.The consolidated statement of
$214.7operations for the year ended December 31, 2003 includes compensation expense of $10.5 million($127.0 million after-tax or $.74 per share basic, $.73 per share diluted). On a pro-forma basis, these changesrelated to stock options granted, and stock issued under the employee stock purchase plan, since January 1, 2003. The consolidated statements of operations for the years ended December 31, 2002 and 2001 include no such expense. In addition, the 2003 expense is less than that which would haveincreased 1996been recognized if the fair value method had been applied to all awards since the original effective date of SFAS No. 123 rather than being applied prospectively. Had the Company determined such stock-based compensation expense using the fair value method provisions of SFAS No. 123 since its original effective date, Moody’s net incomeby $3.1 million. The impact on basicanddilutedearnings per share would have been reduced to the pro forma amounts shown below.
Year Ended December 31, 2003 2002 2001 Net income: As reported $ 363.9 $ 288.9 $ 212.2 Add: Stock-based compensation plan expense included in reported net income, net of tax 6.6 0.1 0.2 Deduct: Stock-based compensation plan expense determined under the fair value method, net of tax (20.0 ) (14.3 ) (9.5 )
Pro forma net income $ 350.5 $ 274.7 $ 202.9
Basic earnings per share: As reported $ 2.44 $ 1.88 $ 1.35 Pro forma $ 2.35 $ 1.78 $ 1.29 Diluted earnings per share: As reported $ 2.39 $ 1.83 $ 1.32 Pro forma $ 2.30 $ 1.75 $ 1.27 The pro forma disclosures shown above are not representative of the effects on net income and earnings per share in future years.
The fair value of stock options used to compute the pro forma net income and earnings per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model, with the following weighted average assumptions:
2003 2002 2001 Expected dividend yield 0.41 % 0.41 % 0.56 % Expected stock volatility 30 % 25 % 25 % Risk-free interest rate 3.03 % 4.13 % 4.27 % Expected holding period 5.0 yrs 4.5 yrs 4.5 yrs The estimated weighted average fair value of Moody’s options granted in 2003, 2002 and 2001 was $13.06, $10.97 and $9.38, respectively.
45
The consolidated statement of operations for the year ended December 31, 2003 includes compensation expense of $0.3 million related to shares of restricted stock issued in 2003 to the Company’s Board of Directors under the 1998 Directors Plan. Since no restricted stock was issued in 2002 and prior years, the consolidated statements of operations for the years ended December 31, 2002 and 2001 include no such expense. The Company recorded compensation expense of $0.2 million in 2002 and $0.4 million in 2001, related to outstanding performance share grants for which the performance period ended during 2002. No compensation expense related to performance share grants was recorded for the year ended December 31, 2003.
Employee Benefit Plans
The assets, expenses, liabilities and obligations that Moody’s reports for pension and other post-retirement benefits are dependent on assumptions concerning the outcome of future events and circumstances. These assumptions include the following:
• Future compensation increases, based on the Company’s long-term actual experience and future outlook. • Discount rates, based on current yields on high grade corporate long-term bonds. • Future healthcare cost trends, based on historical market data, near-term outlooks and assessments of likely long-term trends. • Long-term return on pension plan assets, based on the expected future average annual return for each major asset class within the plan’s portfolio (which is principally comprised of equity and fixed-income investments). In determining such assumptions, the Company consults with outside actuaries and other advisors where deemed appropriate. In accordance with relevant accounting standards, if actual results differ from the Company’s assumptions, such differences are deferred and amortized over the estimated future working life of the plan participants. While the Company believes that the assumptions used in these calculations are reasonable, differences in actual experience or changes in assumptions could affect the assets, expenses, liabilities and obligations related to the Company’s pension and other post-retirement benefits.
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition”. As such, revenue is recognized when an
increaseagreement exists, the services have been provided and accepted by the customer, fees are determinable and the collection of resulting receivables is considered probable.Revenue attributed to ratings of issued securities is recognized when the rating is issued. Revenue attributed to monitoring of issuers or issued securities is recognized over the period in
1996which the monitoring is performed. In most areas of$.02 per share. FOREIGN CURRENCY TRANSLATION.the ratings business, the Company charges issuers annual monitoring fees and amortizes such fees ratably over the related one-year period. In the case of commercial mortgaged-backed securities, fees that are charged for future monitoring are amortized over the lives of the related securities, which averaged approximately 26 years for the year ended December 31, 2003.In areas where the Company does not separately charge monitoring fees, the Company defers portions of the rating fees that will be attributed to future monitoring activities and recognizes such fees ratably over the applicable estimated monitoring period. The portion of the revenue to be deferred is determined based on annual monitoring fees charged for similar securities or issuers and the level of monitoring effort required for a given type of security or issuer. The estimated monitoring period is determined based on factors such as the frequency of issuance by the issuers and the lives of the rated securities. Currently, the estimated monitoring periods range from three years to ten years.
Revenue from sales of research products and from credit risk management subscription products is recognized ratably over the related subscription period, which is principally one year. Revenue from licenses of credit risk management software is recognized at the time the product is shipped to customers, or at such other time as the Company’s obligations are complete. Related software maintenance revenue is recognized ratably over the annual maintenance period.
Amounts billed in advance of providing the related products or services are credited to deferred revenue and reflected in revenue when earned. The consolidated balance sheets reflect as current deferred revenue amounts that are expected to be recognized within one year
46
of the balance sheet date, and as non-current deferred revenue amounts that are expected to be recognized over periods greater than one year. The majority of the balance in non-current deferred revenue relates to fees for future monitoring of commercial mortgage-backed securities.
Accounts Receivable Allowances
Moody’s records as reductions of revenue provisions for estimated future adjustments to customer billings, based on historical experience and current conditions. Such provisions are reflected as additions to the accounts receivable allowance; adjustments to and write-offs of receivables are charged against the allowance. Moody’s evaluates its estimates on a regular basis and makes adjustments to its revenue provisions and the accounts receivable allowance as considered appropriate.
Operating Expenses
Operating expenses are charged to income as incurred. These expenses include costs associated with the development and production of the Company’s products and services and their delivery to customers. These expenses principally include employee compensation and benefits and travel costs that are incurred in connection with these activities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses are charged to income as incurred. These expenses include such items as compensation and benefits for corporate officers and staff and compensation and other expenses related to sales of products. They also include items such as office rent, business insurance, professional fees and gains and losses from sales and disposals of assets.
Foreign Currency Translation
For all operations outside the United States where the Company has designated the local currency as the functional currency, assets and liabilities are translated into U.S. dollars using
the end-of-yearend of year exchange rates, andrevenuesrevenue and expenses are4547 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)translated using average exchange rates for the year. For thesecountries,operations, currency translation adjustments are accumulated in a separate component ofshareholders' equity, whereas realized transactionshareholders’ equity. Transaction gains and losses arerecognizedreflected in other non-operating income (expense), net. Transaction gains (losses) were $2.2 million, $0.3 million and ($0.1) million in 2003, 2002 and 2001, respectively.Comprehensive Income
Comprehensive income represents the change in net assets of a business enterprise during a period due to transactions and other events and circumstances from non-owner sources including foreign currency translation impacts. The required disclosures have been included in the consolidated statements of shareholders’ equity. The net effect of income taxes on comprehensive income was not significant for any period presented.
Income Taxes
The Company accounts for income taxes under the liability method in accordance with SFAS No. 109, “Accounting for Income Taxes”. Therefore, income tax expense
-- net. For operations in countries that are considered to be highly inflationary, whereis based on reported income before income taxes, and deferred income taxes reflect theU.S. dollar is designated aseffect of temporary differences between thefunctional currency, monetaryamounts of assets and liabilitiesare translated using end-of-year exchange rates, and nonmonetary accounts are translated using historical exchange rates. Translation and transaction gains of $1.0 million in 1998 and $.9 million in 1997 and losses of $.9 million in 1996that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes.Fair Value of Financial Instruments
The Company’s financial instruments include cash, cash equivalents, trade receivables and payables and bank borrowings, all of which are short-term in
other expense -- net. EARNINGS PER SHARE OF COMMON STOCK.nature and, accordingly, approximate fair value. The fair value of the Company’s long-term notes payable is estimated using discounted cash flow analyses based on the prevailing interests rates available to the Company for borrowings with similar maturities. The carrying amount of the notes payable was $300.0 million at December 31, 2003, 2002 and 2001. The estimated fair value of the Company’s notes payable were $334.6 million, $346.9 million and $324.3 million at December 31, 2003, 2002 and 2001, respectively.47
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk principally consist of cash and cash equivalents and trade receivables.
Cash equivalents consist of investments in high quality investment grade securities within and outside the United States. By policy, the Company limits the amount it can invest with any one issuer. The Company manages its credit risk exposure by allocating its cash equivalents among various money market mutual funds, short-term certificates of deposit or issuers of high-grade commercial paper. As of December 31, 2003, the Company did not maintain any derivative investments or engage in any hedging activities.
Credit is extended to customers based on an evaluation of their financial condition. No customer accounted for 10% or more of accounts receivable at December 31, 2003 or 2002.
Earnings Per Share of Common Stock
In accordance with SFAS No. 128,
"Earnings“Earnings perShare" ("SFAS No. 128")Share”, basic earnings per shareareis calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted earnings per shareareis calculated giving effect to all potentially dilutive common shares, assuming that such shares were outstanding during the reporting period.FINANCIAL INSTRUMENTS. At times, the Company uses forward foreign exchange contracts and interest rate swaps to hedge existing assets, liabilities and firm commitments. The Company does not use any derivatives for trading or speculative purposes. Gains and losses on forward foreign exchange contracts that qualify as hedgesUse of
existing assets or liabilities are included in the carrying amounts of those assets or liabilities and are ultimately recognized in income as part of those carrying amounts. Gains and losses related to qualifying hedges of firm commitments are also deferred and are recognized in income or as adjustments of carrying amounts when the hedged transactions occur. For forward foreign exchange contracts, the risk reduction is assessed on a transaction basis, and contract amounts and terms are matched to existing intercompany transactions. The Company has in the past used interest rate swaps to hedge interest rate risk on commercial paper. Settlement accounting is accorded to the swaps that have contractual, periodic payment terms considered to be aligned to the expected future commercial paper issuances. Periodic swap payments and receipts under interest rate swaps are recorded as part of interest expense. Neither the swap contracts nor the gains or losses on these contracts, which are designated and effective as hedges, are recognized in the financial statements. If a hedging instrument is sold or terminated prior to maturity, gains and losses will continue to be deferred until the hedged item is recognized in income. If a hedging instrument ceases to qualify for settlement accounting, any subsequent gains and losses are recognized currently in income. ESTIMATES.EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted
accounting principlesin the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities,andthe disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts ofrevenuesrevenue and expenses during the period. Actual results could differ from those estimates. Estimates are used for, but not limited to, revenue recognition, accounts receivable allowances, income taxes, contingencies, valuation of investments inthe determination of allowances for doubtful accounts,affiliates, long-lived and intangible assets and goodwill, pension and other post-retirement benefits, stock options, and depreciation and amortization rates for property and equipment and computersoftware, employee benefits plans, taxes and contingencies, among others. 4648 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) RECLASSIFICATIONS AND RESTATEMENT. As discussed in Note 2, the consolidated financial statementssoftware.Reclassifications
Certain reclassifications have been
reclassifiedmade toidentify separatelytheresults of operations, net assets and cash flows of the Company's discontinued operations. In addition, certain prior-yearprior year amountshave been reclassifiedto conform to the1998current year presentation.Recently Issued Accounting Pronouncements
On January 12, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003”. The FSP permits employers that sponsor post-retirement benefit plans that provide prescription drug benefits to retirees to make a one-time election to defer accounting for any effects of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “Act”). Without the FSP, plan sponsors would be required under Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, to account for the effects of the Act in the fiscal period that includes December 8, 2003, the date the President signed the Act into law. If deferral is elected, the deferral must remain in effect until the earlier of (a) the issuance of guidance by the FASB on how to account for the federal subsidy to be provided to plan sponsors under the Act or (b) the remeasurement of plan assets and obligations subsequent to January 31, 2004. In accordance with the FSP, any measures of the accumulated post-retirement benefit obligation or net periodic post-retirement benefit cost in the financial statements or accompanying notes do not reflect the effects of the Act on the Company’s plan and specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require the Company to change previously reported information. The Company
restated retained earningshas elected the deferral described above anddividends payable at December 31, 1997, to record dividends declaredis in the process of evaluating the effects of the Act on its post-retirement benefits.48
On December 17,
1997, to be paid March 10, 1998, to shareholders of record on February 20, 1998, in2003, theamount of $37.5 million. This restatement has no impact on results of operations or cash flows. NOTE 2 REORGANIZATION AND DISCONTINUED OPERATIONS Pursuant to APB No. 30, "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the consolidated financial statementsStaff of theCompany have been reclassifiedSecurities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 104 (“SAB No. 104”), “Revenue Recognition”, which supercedes SAB No. 101, “Revenue Recognition in Financial Statements”. The primary purpose of SAB No. 104 is toreflect as discontinued operations, the companies that comprised the Company's Directory Information Services business segmentrescind accounting guidance contained in SAB No. 101 related to multiple element revenue arrangements, which was superceded as a result of the1998 Distributionissuance of Emerging Issues Task Force (“EITF”) No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Additionally, SAB No. 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions andthe companiesAnswers (the “FAQ”) issued with SAB No. 101 thatcomprised the Company's Marketing Information Services, Software Services and Other Business Services business segments as a resulthad been codified in SEC Topic 13, Revenue Recognition. Selected portions of the1996 Distribution. 1998 DISTRIBUTION On June 30, 1998, The Dun & Bradstreet Corporation ("Old D&B") separated into two publicly traded companies -- The New Dun & Bradstreet Corporation ("New D&B" or the "Company") and R.H. Donnelley Corporation. The separation (the "1998 Distribution") of the two companies was accomplished through a tax-free dividend by Old D&B of the Company, which is a new entity comprised of Moody's and Dun & Bradstreet, the operating company ("D&B"). The new entity is now known as "The Dun & Bradstreet Corporation" and the continuing entity (i.e., Old D&B), consisting of R.H. Donnelley Inc., the operating company, and the DonTech partnership, changed its name to R.H. Donnelley Corporation ("Donnelley"). Due to the relative significance of the new entity, the transaction has been accounted for as a reverse spin-off and, as such, Moody's and D&BFAQ have beenclassified as continuing operations and Donnelley and DonTech have been classified as discontinued operations. On June 3, 1998, following receiptincorporated into SAB No. 104. The revenue recognition principles ofa ruling fromSAB No. 101 remain largely unchanged by theInternal Revenue Service thatissuance of SAB No. 104. Accordingly, thetransaction would be tax-free to Old D&B and its U.S. shareholders, the Boardadoption ofDirectors of Old D&B declared a dividend distribution to shareholders of record on June 17, 1998, consisting of one share of New D&B for each share of Old D&B common stock held as of the record date. The 1998 Distribution was effected on June 30, 1998, and resulted in an increase to shareholders' equity of $188.5 million. During the fourth quarter of 1998, adjustments to the dividend of $5.0 million were recorded, primarily as a result of employee benefits plan revisions. For purposes of governing certain of the ongoing relationships between the Company and Donnelley following the 1998 Distribution, the companies entered into various agreements, including a Distribution Agreement, Tax Allocation Agreement, Employee Benefits Agreement, Intellectual Property Agreement, Shared Transaction Services Agreement, Data Services Agreement and Transition Services Agreements. 4749 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For financial reporting purposes, the assets and liabilities of the Directory Information Services segment have been separately classifiedSAB No. 104 had no effect on thebalance sheet as "Net AssetsCompany’s revenue recognition policies.Note 3 Reconciliation of
Discontinued Operations." A summary of these assets and liabilities at December 31, 1997, was as follows:
Current assets.............................................. $ 92.7 Total assets................................................ 362.3 Current liabilities......................................... 64.6 Total liabilities........................................... 65.8 Net assets of discontinued operations....................... 296.5The net operating results of the Directory Information Services segment have been reported in the caption "Income from Discontinued Operations," in the consolidated statements of operations. Summarized operating results for the Directory Information Services segment for the years ended December 31 were as follows:
1998 1997 1996 ------ ------ ------Operating revenues.......................... $107.8 $343.4 $377.6 Income before provision for income taxes.... 56.2 144.2 141.1 Net income.................................. 33.7 92.0 89.51996 DISTRIBUTION On November 1, 1996, the company then known as The Dun & Bradstreet Corporation reorganized into three publicly traded independent companies by spinning off through a tax-free distribution two of its businesses to shareholders (the "1996 Distribution"). The 1996 Distribution resulted in the following three companies: 1) Old D&B, consisting of D&B, Moody's and Donnelley; 2) ACNielsen; and 3) Cognizant, consisting of IMS International, Inc., Gartner Group, Nielsen Media Research, Pilot Software, Cognizant Technology Solutions Corporation, Cognizant Enterprises and Erisco. During 1998, Cognizant further separated into two new companies, IMS Health Incorporated ("IMS") and Nielsen Media Research, Inc. ("NMR"). In connection with the 1996 Distribution, DBS and NCH were sold. On October 10, 1996, following receipt of a ruling from the Internal Revenue Service that the transaction would be tax-free to the Company and its U.S. shareholders, the Company's Board of Directors declared a dividend distribution to shareholders of record on October 21, 1996, consisting of one share of Cognizant common stock for each share of the Company's common stock and one share of ACNielsen common stock for every three shares of the Company's common stock held on such record date. The 1996 Distribution was effected on November 1, 1996. These transactions resulted in a non-cash dividend that reduced shareholders' equity by $1,240.9 million. During 1997, adjustments to the dividend of $11.3 million were recorded, primarily as a result of employee benefits plan revisions. For purposes of governing certain of the ongoing relationships among the Company, Cognizant and ACNielsen as a result of the 1996 Distribution, the three new companies entered into various agreements, including a Distribution Agreement, Tax Allocation Agreement, Employee Benefits Agreement, Indemnity and Joint Defense Agreement, 4850 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Intellectual Property Agreement, Shared Transaction Services Agreement, Data Services Agreement and Transition Services Agreement. These agreements set forth the principles to be applied in allocating certain related costs and specified portions of contingent liabilities to be shared if certain amounts are exceeded (see Note 13 -- Contingencies). Pursuant to their separation, IMS and NMR are each jointly and severally liable for all Cognizant liabilities under the 1996 agreements. The net operating results of the Company's Marketing Information Services, Software Services and Other Business Services business segments have been included in the consolidated statements of operations in the caption "Income from Discontinued Operations." These segments included the companies that made up Cognizant and ACNielsen, along with DBS and NCH. Summarized operating results for those discontinued operations for the year ended December 31, 1996, were as follows:
Operating revenues.......................................... $2,761.6 Income before provision for income taxes.................... 297.0 Net income.................................................. 141.0The Company completed the sale of DBS on November 1, 1996, for proceeds of $191.3 million, including a note of $41.2 million, resulting in a pre-tax loss of $220.6 million ($158.2 million after-tax). Pursuant to the Distribution Agreement, the cash proceeds from the sale were transferred to Cognizant. During the third quarter of 1997, cash was received from the buyer to satisfy the note receivable, which was due in May 1998. The sale of NCH was completed on December 31, 1996. Pursuant to the Distribution Agreement, the proceeds of $20.5 million from the sale of NCH, which included a note of $8.5 million, were transferred to Cognizant. At December 31, 1996, the Company recorded a receivable of $20.5 million from the buyer of NCH and a corresponding payable to Cognizant. These transactions were settled in January 1997. The Company did not incur a gain or loss on the sale. Also included in 1996 results, within discontinued operations, are tax costs allocated to discontinued operations of $49.1 million. NOTE 3 NON-RECURRING ITEMS In July 1998, the Company sold Financial Information Services, the financial publishing unit of Moody's. The Company received $26.5 million of cash proceeds and recorded within other expense -- net a pre-tax gain of $9.6 million on the transaction. Also in 1998, the Company incurred pre-tax expenses of $28.0 million in connection with the separation of Donnelley (primarily professional fees of $19.1 million and costs resulting from the termination of interest rate swaps of $8.9 million). The 1996 results for the Company reflect after-tax non-recurring charges of $262.3 million, incurred as a result of the 1996 Distribution and the sale of American Credit Indemnity ("ACI"). Of the $262.3 million, $229.4 million was recorded in pre-tax income and a net tax cost of $32.9 million was recorded in the provision for income taxes. The $229.4 million represents reorganization costs of $161.2 million (professional and consulting fees of $75.0 million and settlement of executive compensation plans and retention bonuses of 4951 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $86.2 million) and $68.2 million resulting from the losses incurred on the sale of ACI completed in October 1996. NOTE 4 RECONCILIATION OF WEIGHTED AVERAGE SHARES
1998 1997 1996 ------- ------- ------- (SHARE DATA IN THOUSANDS)Weighted Average Number of Shares -- Basic....... 169,492 170,765 170,017 Dilutive effect of shares issuable under stock options, restricted stock and performance share plans.......................................... 2,017 1,629 -- Adjustment of shares applicable to stock options exercised during the period and performance share plans.................................... 194 158 -- ------- ------- ------- Weighted Average Number of Shares -- Diluted..... 171,703 172,552 170,017 ======= ======= =======As required by SFAS No. 128, the Company has providedWeighted Average Shares OutstandingBelow is a reconciliation of basic weighted average shares outstanding to diluted weighted average shares
within the tables outlined above. The exercise of potentially dilutive shares has not been assumed for the year ended December 31, 1996, since the result is antidilutive.outstanding:
Year Ended December 31, 2003 2002 2001 Weighted average number of shares—Basic 148.9 153.9 157.6 Dilutive effect of shares issuable under stock-based compensation plans 3.4 3.6 2.6
Weighted average number of shares—Diluted 152.3 157.5 160.2
Options to purchase
3.4 million25,500 shares and3.1 million51,800 shares of common stock were outstanding at December 31,19982003 and1997,2001, respectively, but were not included in the computation of diluted earnings per share because theoptions'exercise prices of such options were greater than the average market price of theCompany'sCompany’s commonstock.stock during the applicable period (the “antidilutive options”). There were no antidilutive options outstanding as of December 31, 2002.Note 4 Property and Equipment, Net
Property and equipment, net consisted of:
December 31, 2003 2002 Land, building and building improvements $ 24.6 $ 24.2 Office and computer equipment 41.6 37.3 Office furniture and fixtures 21.3 19.5 Internal-use computer software 23.7 18.9 Leasehold improvements 33.6 31.6
Property and equipment, at cost 144.8 131.5 Less: accumulated depreciation and amortization (98.0 ) (80.9 )
Property and equipment, net $ 46.8 $ 50.6
The
Company's options generally expire 10consolidated statements of operations reflect depreciation and amortization expense related to the above assets of $18.3 million, $14.0 million and $11.8 million for the years ended December 31, 2003, 2002 and 2001, respectively.In 2002, the Company retired fully depreciated assets with an original cost of approximately $18.0 million. There was no income statement impact from such retirement.
49
Note 5 Acquisitions
KMV
On April 12, 2002, Moody’s acquired the businesses comprising KMV. The acquisition expands the product offerings and customer base of Moody’s credit risk assessment business, which was previously operated by Moody’s Risk Management Services. The results of KMV have been included in Moody’s consolidated financial statements since the acquisition date.
The aggregate purchase price of $212.6 million consisted of $209.3 million in cash payments to the sellers and $3.3 million in direct transaction costs, primarily professional fees. The purchase price was funded by using $128.3 million of Moody’s cash on hand and $81.0 million of borrowings under Moody’s existing bank credit lines. The Company repaid those borrowings in the second quarter of 2002.
The acquisition has been accounted for as a purchase. Shown below is the purchase price allocation, which summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition.
Current assets $ 21.0 Property and equipment, net 4.6 Intangible assets: Customer list (12.0 year life) $ 50.7 Trade secrets (not subject to amortization) 25.5 Other intangibles (5.2 year weighted average life) 6.3
Total intangible assets 82.5 In-process research and development 1.1 Goodwill 118.3 Other assets 17.1 Liabilities assumed (32.0 )
Net assets acquired $ 212.6
In accordance with SFAS No. 142, the acquired goodwill, which has been assigned to the Moody’s KMV segment, will not be amortized. In accordance with FASB Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method”, the $1.1 million allocated to acquired in-process research and development was written off immediately following the acquisition and is included in selling, general and administrative expenses for the year ended December 31, 2002. Current assets above includes acquired cash of $7.2 million. Other assets include acquired software of $16.0 million with a life of 5 years. For income tax purposes, the excess of the purchase price over the acquired net assets is expected to be amortized over 15 years.
The following unaudited pro forma consolidated financial information, for the years ended December 31, 2002 and 2001, reflect the acquisition of KMV as if it had been consummated as of the beginning of each respective period, after giving effect to the
initial grant date. Uponfollowing adjustments: (i) elimination of transaction related charges resulting from the acquisition; (ii) amortization of acquired intangible assets and software; (iii) Moody’s financing costs for the transaction, consisting of interest expense that would have been incurred on the $81.0 million of bank borrowings and interest income that would have been foregone on the balance of the purchase price; and (iv) related income tax effects.
Year Ended December 31, (pro forma) 2003 2002 2001 Revenue $ 1,246.6 $ 1,038.4 $ 840.9 Net income $ 363.9 $ 288.0 $ 205.6 Diluted earnings per share $ 2.39 $ 1.83 $ 1.28 50
The unaudited pro forma consolidated financial information should be read in conjunction with the Company’s Form 8-K/A filed with the Securities and Exchange Commission on June 26, 2002.
The unaudited pro forma consolidated financial information is presented for comparative purposes only and is not intended to be indicative of the actual consolidated results of operations that would have been achieved had the transaction been consummated as of the dates indicated above, nor does it purport to indicate results that may be attained in the future.
Korea Investors Service
In August 1998,
Distribution,the Company made a 10% cost-basis investment in Korea Investors Service (“KIS”), a Korean rating agency. In December 2001, the Company entered into a definitive agreement to increase its investment to just over 50%, at a cost of $9.6 million with a contingent payment of up to 6.9 billion Korean Won (approximately $5.8 million as of December 31, 2003) in 2005, based on KIS net income for the three-year period ended December 31, 2004. The purchase price of $9.6 million was held in escrow pending regulatory approval in Korea, which was received in January 2002.The investment was recorded at cost through December 31, 2001; starting in January 2002, the Company consolidated the results of KIS in its financial statements. The minority shareholder’s interest has been included in other long-term liabilities. The purchase price allocation resulted in amortizable intangible assets of $2.9 million with a weighted average life of 5.6 years and goodwill of $1.9 million that is not being amortized.
Argentine Rating Agencies
From 1999 through 2002, Moody’s made equity investments totaling $4.4 million in two Argentine rating agencies.
In January 2002, the Argentine government announced the creation of a dual currency system in which certain qualifying transactions would be settled at an expected fixed exchange rate of 1.4 Argentine pesos to one U.S. dollar, while non-qualifying transactions would be settled using a free floating market exchange rate. In February 2002, the Argentine government announced a shift to a single free floating market exchange rate. From 1991 until February 2002, the Argentine peso had been pegged to the U.S. dollar at the rate of one to one.
Given the significant adverse change in the economic climate in Argentina, the Company determined that the Argentine ratings businesses and their future operations and cash flows were materially impacted and that this was not a temporary change. Therefore, the recoverability of these investments was reviewed based on a comparison of carrying value to fair value, which was calculated using estimated future discounted cash flows of the businesses. Based on that review, it was determined that the fair values of these investments were $3.4 million less than the aggregate carrying value; this amount was charged to expense in the fourth quarter of 2001.
As a result of the devaluation of the Argentine peso that occurred in 2002, an acquisition-related purchase price adjustment was triggered relating to Moody’s equity-basis investments in the two Argentine rating agencies. The adjustment resulted in Moody’s receiving additional shares in these rating agencies, which increased Moody’s ownership position to over 90%. As a result, starting in January 2003 the Argentine rating agencies are being consolidated in Moody’s financial statements.
51
Note 6 Goodwill and Other Intangible Assets
Effective January 1, 2002, the Company adopted SFAS No. 142, under which goodwill and other intangible assets with indefinite lives are no longer amortized but are reviewed annually for recoverability, or more frequently if impairment indicators arise. The following table reflects net income and basic and diluted earnings per share giving effect to SFAS No. 142 as if it were adopted on January 1, 2001:
Year Ended December 31, 2003 2002 2001 Net income, as reported $ 363.9 $ 288.9 $ 212.2 Add back: goodwill amortization expense, net of tax — — 1.2
Adjusted net income $ 363.9 $ 288.9 $ 213.4
Basic earnings per share: As reported $ 2.44 $ 1.88 $ 1.35 Adjusted $ 2.44 $ 1.88 $ 1.35 Diluted earnings per share: As reported $ 2.39 $ 1.83 $ 1.32 Adjusted $ 2.39 $ 1.83 $ 1.33 In connection with the 2002 acquisition of KMV, Moody’s acquired goodwill and intangible assets, which are described in Note 5.
The following table summarizes the activity in goodwill for the periods indicated:
Year Ended Year Ended December 31, 2003 December 31, 2002 Moody's Moody's Moody's Moody's Investors Service KMV Consolidated Investors Service KMV Consolidated Beginning balance $ 2.3 $ 124.0 $ 126.3 $ 0.4 $ 5.6 $ 6.0 Net change from acquisitions — — — 1.9 118.3 120.2 Other — 0.1 0.1 — 0.1 0.1
Ending balance $ 2.3 $ 124.1 $ 126.4 $ 2.3 $ 124.0 $ 126.3
The following table summarizes intangible assets subject to amortization at the dates indicated:
December 31, 2003 2002 Customer lists (11.3 year original weighted average life) $ 57.8 $ 57.8 Accumulated amortization (10.6 ) (5.3 )
Net customer lists $ 47.2 $ 52.5
Other intangible assets (5.6 year original weighted average life) $ 8.2 $ 8.2 Accumulated amortization (3.5 ) (1.8 )
Net other intangible assets $ 4.7 $ 6.4
Total $ 51.9 $ 58.9
Amortization expense for intangible assets subject to amortization for the years ended December 31, 2003, 2002 and 2001 was $7.0 million, $5.3 million and $1.0 million, respectively.
Estimated future annual amortization expense for intangible assets subject to amortization is as follows:
Year Ending December 31, 2004 $ 6.9 2005 6.5 2006 6.2 2007 5.5 2008 4.5 Thereafter 22.3 52
As of December 31, 2003, $25.5 million in trade secrets acquired with the acquisition of KMV were not subject to amortization. Current circumstances and conditions continue to support an indefinite useful life.
Note 7 Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consisted of the following:
December 31, 2003 2002 Accounts payable $ 4.4 $ 1.3 Accrued income taxes (see Note 10) 36.4 11.3 Accrued compensation and benefits 126.1 117.3 Other 50.6 55.0
Total $ 217.5 $ 184.9
Note 8 Pension and Other Post-Retirement Benefits
Moody’s maintains both funded and unfunded noncontributory defined benefit pension plans in which substantially all U.S. employees of the Company
were granted substitute options, preservingare eligible to participate. The plans provide defined benefits using a cash balance formula based on years of service and career average salary.The Company also provides certain healthcare and life insurance benefits for retired U.S. employees. The health care plans are contributory with participants’ contributions adjusted annually; the
economic value, as closely as possible,life insurance plans are noncontributory. The accounting for the health care plans anticipates future cost-sharing changes to the written plans that are consistent with the Company’s expressed intent to fix the Company’s share of costs and require retirees to pay for all future increases in plan costs in excess of theoptions that existed immediately prioramount of the per person company contribution in the year 2005.Effective at the Distribution Date, Moody’s assumed responsibility for pension and other post-retirement benefits relating to its active employees. New D&B has assumed responsibility for the
1998Company’s retirees and vested terminated employees as of the Distribution Date.53
Following is a summary of the activity related to these benefit plans for the years ended December 31, 2003 and
any awards or options held by them in respect2002, as well as the status ofDonnelley were canceled. NOTE 5 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKSthe plans at December 31, 2003. The Company usesforward foreign exchange contracts and in the past has used interest rate swap agreements to reduce exposure to fluctuations in foreign exchange rates and interest. The Company does not use derivative financial instruments for trading or speculative purposes. Ifahedging instrument ceases to qualify as a hedge, any subsequent gains and losses are recognized currently in income. Collateral is generally not required for these types of instruments. By their nature, all such instruments involve risk, including the credit risk of non-performance by counterparties. However, atDecember 311998measurement date for its pension and1997, in management's opinion there was no significant risk of loss in the event of non-performance of the counterpartiesother post-retirement plans.
Pension Other Post- Plans Retirement Plans 2003 2002 2003 2002 Projected benefit obligation, beginning of the period $ (53.3 ) $ (41.2 ) $ (6.1 ) $ (4.6 ) Service cost (6.9 ) (5.1 ) (0.4 ) (0.3 ) Interest cost (4.1 ) (2.9 ) (0.3 ) (0.3 ) Benefits paid 0.6 0.4 0.1 0.1 Plan amendment (0.5 ) — 0.5 (1.0 ) Curtailment charge 0.6 — — — Special termination benefit charge (1.0 ) — — — Actuarial gain/(loss) (8.4 ) (2.9 ) 0.5 0.3 Assumption change (6.7 ) (1.6 ) (0.4 ) (0.3 )
Projected benefit obligation, end of the period $ (79.7 ) $ (53.3 ) $ (6.1 ) $ (6.1 )
Fair value of plan assets, beginning of the period $ 71.5 $ 79.4 $ — $ — Actual return on plan assets 15.2 (7.5 ) — — Benefits paid (0.6 ) (0.4 ) (0.1 ) (0.1 ) Contributions — — 0.1 0.1
Fair value of plan assets, end of the period $ 86.1 $ 71.5 $ — $ —
Funded status of the plans $ 6.4 $ 18.2 $ (6.1 ) $ (6.1 ) Unrecognized actuarial loss 38.3 32.5 0.4 0.6 Unrecognized prior service cost 2.1 2.1 0.4 1.0
Net amount recognized $ 46.8 $ 52.8 $ (5.3 ) $ (4.5 )
Prepaid pension cost $ 60.2 $ 59.3 $ — $ — Pension and post-retirement benefits liability (15.2 ) (8.0 ) (5.3 ) (4.5 ) Intangible asset 1.8 1.5 — —
Net amount recognized $ 46.8 $ 52.8 $ (5.3 ) $ (4.5 )
The curtailment charge and special termination benefit charge relate to
these financial instruments. The Company controls its exposure to credit risk through monitoring procedures. 5052 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOREIGN EXCHANGE In order to reduce the risk of foreign currency exchange rate fluctuations, the Company followsapolicy of hedging substantially all cross-border intercompany transactions denominated inbenefit enhancement provided under acurrency other than the functional currency applicable to each of its various subsidiaries. The financial instruments used to hedge these cross-border intercompany transactions are forward foreign exchange contracts with maturities of six months or less. These forward contracts are executed with creditworthy institutions and are denominated primarily in the British pound sterling, German mark and Swedish krona. The gains and losses on these forward contracts are recorded to income or expense and are essentially offsetSupplemental Executive Benefit Plan maintained by thegainsCompany.The accumulated benefit obligation related to the pension plans totaled $53.7 million and
losses on the underlying foreign currency transactions. At$36.4 million as of December 31,19982003 and1997, the Company had approximately $117 million of forward foreign exchange contracts outstanding with various expiration dates through March 1999 and March 1998, respectively. At December 31, 1998, unrealized gains on these contracts were $.9 million and the unrealized losses were $.4 million. At December 31, 1997, unrealized gains on these contracts were $1.5 million and the unrealized losses were $.4 million. INTEREST RATE SWAP AGREEMENTS In the past, the Company has entered into interest rate swap agreements to manage exposure to changes in interest rates. Interest rate swaps allowed the Company to raise funds at floating rates and effectively swap them into fixed rates that were lower than those available to it if fixed-rate borrowings were to be made directly. In connection with the 1998 Distribution and repayment of outstanding notes payable, Old D&B canceled all of its interest rate swap agreements (which fixed interest rates on $300.0 million of variable rate debt through January 2005) and recorded into income the previously unrecognized fair value loss at the time of termination. At the time of the cancellation, the fair value of the interest rate swaps was a loss of $12.7 million, of which $3.8 million ($.6 million in the first quarter of 1998 and $3.2 million in 1997) had been recognized in income relating to swaps which did not qualify for settlement accounting. The previously unrecognized loss of $8.9 million was recorded during the second quarter of 1998 and included in reorganization costs.2002.54
Other Post- Pension Plans Retirement Plans 2003 2002 2001 2003 2002 2001 Service cost $ 6.9 $ 5.1 $ 4.4 $ 0.4 $ 0.3 $ 0.4 Interest cost 4.1 2.9 2.4 0.3 0.3 0.2 Expected return on plan assets (7.7 ) (9.0 ) (8.3 ) — — — Amortization of net loss from earlier periods 1.2 0.1 0.3 — — — Amortization of unrecognized prior service costs 0.2 0.2 0.1 0.2 — —
Net periodic (income) expense $ 4.7 $ (0.7 ) $ (1.1 ) $ 0.9 $ 0.6 $ 0.6
The following
table indicates the type of swaps that were in use at December 31, 1997, and their weighted average interest rates.
Variable to fixed swaps -- Notional amount........................................ $300.0 Average pay (fixed) rate............................... 6.84% Average receive (variable) rate........................ 5.75%51: 53 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6 PENSION AND POSTRETIREMENT BENEFITS
POSTRETIREMENT PENSION PLANS BENEFITS ---------------------- ------------------ 1998 1997 1998 1997 --------- --------- ------- -------CHANGE IN BENEFIT OBLIGATIONS Benefit obligation at January 1.... $(1,227.3) $(1,097.1) $(216.6) $(196.6) Service cost....................... (18.2) (18.4) (2.8) (3.5) Interest cost...................... (82.6) (83.4) (14.3) (14.6) Benefits paid...................... 93.8 87.1 17.7 17.5 Impact of 1998 Distribution........ 41.4 -- 6.1 -- Plan amendment..................... -- (9.1) -- -- Actuarial gain..................... (43.3) (106.4) (1.3) (17.2) Plan participant contributions..... -- -- (2.8) (2.2) --------- --------- ------- ------- Benefit obligation at December 31............................... $(1,236.2) $(1,227.3) $(214.0) $(216.6) ========= ========= ======= ======= CHANGE IN PLAN ASSETS Fair value of plan assets at January 1........................ $ 1,330.2 $ 1,145.4 $ -- $ -- Actual return on plan assets....... 264.3 243.8 -- -- Employer contribution.............. 25.3 28.1 14.9 15.3 Impact of 1998 Distribution........ (60.9) -- -- -- Plan participant contributions..... -- -- 2.8 2.2 Benefits paid...................... (93.8) (87.1) (17.7) (17.5) --------- --------- ------- ------- Fair value of plan assets at December 31...................... $ 1,465.1 $ 1,330.2 $ -- $ -- ========= ========= ======= ======= RECONCILIATION OF FUNDED STATUS TO TOTAL AMOUNT RECOGNIZED Funded status of plan.............. $ 228.9 $ 102.9 $(214.0) $(216.6) Unrecognized actuarial (gain) loss............................. (112.1) (3.6) 18.8 18.0 Unrecognized prior service cost.... 29.6 33.8 (2.7) (7.2) Unrecognized net transition asset............................ (24.3) (35.5) -- -- --------- --------- ------- ------- Net amount recognized.............. $ 122.1 $ 97.6 $(197.9) $(205.8) ========= ========= ======= =======5254 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
POSTRETIREMENT PENSION PLANS BENEFITS ---------------------- ------------------ 1998 1997 1998 1997 --------- --------- ------- -------AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEETS Prepaid pension costs.............. $ 224.3 $ 190.9 $ -- $ -- Net assets of discontinued operations....................... -- 9.5 -- (10.7) Pension and postretirement benefits......................... (167.7) (165.4) (197.9) (195.1) Intangible assets.................. 20.9 25.2 -- -- Minimum pension liability.......... 44.6 37.4 -- -- --------- --------- ------- ------- Net amount recognized.............. $ 122.1 $ 97.6 $(197.9) $(205.8) ========= ========= ======= =======1997 benefit obligations and plan assets include amounts attributable to Donnelley. The net amount recognized attributable to Donnelley has been included in the net assets of discontinued operations. The benefit obligation and accumulated benefit obligationinformation is for pension plans with an accumulated benefitobligationsobligation in excess of plan assetswere $185.9 million and $167.7 million, respectively, in 1998, and $183.7 million and $165.4 million, respectively, in 1997. Grantor trusts are
2003 2002 Projected benefit obligation 32.4 13.0 Accumulated benefit obligation 14.6 5.4 Fair value of plan assets — — Additional Information:
Assumptions
Weighted-average assumptions used to
fund these obligations. Atdetermine benefit obligations at December31, 199831:
Other Post- Pension Plans Retirement Plans 2003 2002 2003 2002 Discount rate 6.25 % 6.75 % 6.25 % 6.75 % Rate of compensation increase 3.91 % 3.91 % — — Cash balance accumulation/conversion rate 5.00 % 5.00 % — — Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31:
Pension Plans Other Post-Retirement Plans 2003 2002 2001 2003 2002 2001 Discount rate 6.75 % 7.25 % 7.50 % 6.75 % 7.25 % 7.50 % Expected return on plan assets 8.10 % 9.75 % 9.75 % — — — Rate of compensation increase 3.91 % 4.41 % 4.66 % — — — Cash balance accumulation/conversion rate 5.00 % 5.50 % 5.75 % — — — For 2003, the Company used an assumed return on pension plan assets of approximately 8.1%, which was determined based on explicit long-term return assumptions for each major asset class within the Company’s pension plan portfolio. Moody’s works with third party consultants to determine assumptions for long-term rates of return for the asset classes that are included in its pension plan investment portfolio. These return assumptions reflect a long term time horizon. They also reflect a combination of historical performance analysis and
1997,forward looking views of thebalancefinancial markets including consideration ofthose trusts was $46.9 millioninflation, current yields on long-term bonds and$49.8 million, respectively.
PENSION PLANS POSTRETIREMENT BENEFITS ---------------------------- ----------------------- 1998 1997 1996 1998 1997 1996 ------- ------- ------ ----- ----- -----COMPONENTS OF NET PERIODIC (INCOME) COST Service cost............ $ 18.2 $ 18.4 $ 34.8 $ 2.8 $ 3.5 $ 5.9 Interest cost........... 82.6 83.4 87.4 14.3 14.6 15.4 Expected return on plan assets................ (109.4) (100.9) (107.1) -- -- -- Amortization of transition obligation............ 3.1 1.6 10.1 -- -- -- Amortization of prior service cost.......... 4.4 4.5 3.8 (4.4) (4.5) (5.0) Recognized actuarial gain.................. (10.4) (10.5) (12.7) -- -- .2 ------- ------- ------ ----- ----- ----- Net periodic (income) cost.................. $ (11.5) $ (3.5) $ 16.3 $12.7 $13.6 $16.5 ======= ======= ====== ===== ===== ===== 1997 net periodic cost includes expense attributable to discontinued operations of $1.0 million and $1.7 million for pension plans and postretirement plans, respectively. 1996 net periodic cost includes expense attributable to discontinued operations of $11.5 million and $6.3 million for pension plans and postretirement plans, respectively.5355 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION PLANS POSTRETIREMENT BENEFITS ---------------------------- ----------------------- 1998 1997 1996 1998 1997 1996 ------- ------- ------ ----- ----- -----ASSUMPTIONS AS OF DECEMBER 31 Discount rate........... 6.75% 7.00% 7.75% 6.75% 7.00% 7.75% Expected return on plan assets................ 9.75 9.70 9.75 -- -- -- Rate of compensation increase.............. 3.91 4.46 5.15 3.91 4.46 5.15 Cash balance accumulation conversion rate....... 5.50 5.75 -- -- -- --For measurement purposes, a 6.5% annual rateprice-earnings ratios ofincrease intheper capita cost of covered health-care benefits was assumed for 1999. The rate was assumed to decrease gradually to 5.0% for 2021 and remainmajor stock market indices.55
Assumed Healthcare Cost Trend Rates at
that level thereafter.December 31:
2003 2002 2001 Healthcare cost trend rate assumed for the following year, for both pre-age 65 and post-age 65 10.0 % 11.0 % 8.5 % Ultimate rate to which the cost trend rate is assumed to decline (ultimate trend rate), for both pre-age 65 and post-age 65 6.0 % 6.0 % 5.0 % Year that the rate reaches the ultimate trend rate 2008 2008 2009 Assumed
health-carehealthcare cost trend rates can have a significant effect on the amounts reported for thehealth-carepost-retirement healthcare plans. Aone-percentage-pointone percentage-point change intheassumedhealth-carehealthcare cost trend rates would have had the followingeffects:
1% POINT -------------------- INCREASE DECREASE -------- --------Benefit obligation at end of year................... $18.5 $(16.9) Service cost plus interest cost..................... 1.4 (1.3)PROFIT PARTICIPATION PLANeffects on Moody’s pre-tax expense in 2003:
One Percentage-Point Increase Decrease Effect on total of service and interest cost $ — $ — Effect on post-retirement benefit obligation 0.2 (0.1 ) Plan Assets
Moody’s pension plan assets at December 31, 2003 and 2002 were allocated among the following categories:
Percentage of Plan Assets at December 31, Asset Category 2003 2002 Equity securities 71 % 53 % Debt securities 21 % 38 % Real estate 8 % 9 %
Total 100 % 100 %
Moody’s investment objective for its pension plan assets is to earn total returns that will minimize future contribution requirements over the long run within a prudent level of risk. The
Company alsoCompany’s current pension plan asset allocation targets are for approximately seventy percent of assets to be invested in equity securities, diversified across U.S. and non-U.S. stocks of small, medium and large capitalization, twenty percent in investment grade bonds and the remainder in real estate funds. The use of derivatives to leverage the portfolio or otherwise is not permitted. The Company’s monitoring of its Retirement Plan includes ongoing reviews of investment performance, annual liability measurements, periodic asset/liability studies and investment portfolio reviews.Moody’s other post-retirement plans are unfunded and therefore have no plan assets.
Cash Flows
Future Employer Contributions Pension Plans Other Post-Retirement Plans 2004 (expected) $ — $ 0.1 56
Profit Participation Plan
Moody’s has a profit participation plan (the “Plan”) covering substantially all U.S.
employees, whichemployees. The Plan provides for an employee salary deferral contribution and Company contributions. Employees may contribute up to 16% of theirpay. The Companypay, subject to the federal limit. Moody’s contributes an amount equal to 50% of employee contributions,upwith Moody’s contribution limited to6%3% of theemployee'semployee’s pay.The Company alsoMoody’s makes additional contributions to theplan if certain objectivesPlan that aremet,based onperformance over a two-year period. The Company recognized expensegrowth in the Company’s earnings per share. Expense associated withthethis planof $16.4was $18.3 million,$13.3$15.1 million and$9.5$11.1 million in1998, 19972003, 2002 and1996,2001, respectively.NOTE 7 EMPLOYEE STOCK PLANS Under its 1998 Key Employees' Stock Incentive Plan, the Company has granted options to certain associates to purchase shares of its common stock at the market price on the dateInternational Plans
Certain of the
grant. Options granted under the plan vest 100% after five years with the opportunity for accelerated vesting if certain conditions are met. These options expire 10 years from the date of the grant. The 1998 Key Employees Stock Incentive Plan, adopted upon the 1998 Distribution, provides for the granting of upCompany’s international operations provide pension benefits to16.5 million shares. At the 1998 Distribution date,their employeesof the Company were granted substitute options and other equity-based awards (under the 1998 Dun & Bradstreet Corporation Replacement Plan for Certain Employees Holding Dun & Bradstreet Corporation Equity- 5456 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Based Awards), preserving the economic value, as closely as possible, of the awards that existed immediately prior to the 1998 Distribution, and any awards held by them in respect of Donnelley were surrendered. For employees of Donnelley, awards were adjusted immediately following the 1998 Distribution to preserve, as closely as possible, the economic value of the awards that existed immediately prior to the 1998 Distribution. The remaining holders of unexercised options, including retirees and certain other former employees of the Company, were offered the choice of converting their options to the Company's or continuing to hold Donnelley options. In November 1996, in conjunction with the 1996 Distribution, those individuals who became employees of Cognizant or ACNielsen were granted substitute awardsin thestockform oftheir new employer, and any stock awards or options held by them in respectdefined contribution plans. Company contributions are primarily determined as a percentage ofthe Company were reflected as surrendered in the table on Page 57. For the remaining holders of unexercised options, including employees of the Company, retirees and certain other former employees of the Company, the number of shares subjectemployees’ eligible compensation. Expense related tooptions and the option exercise price were adjusted immediately following the 1996 Distribution to preserve, as closely as possible, the economic value of the options that existed prior to the 1996 Distribution, pursuant to the plans. The Company applies APB No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognizedthese plans for thestock option plans. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in 1998, 1997 and 1996 (excluding awards granted to employees of discontinued operations) consistent with the provisions of SFAS No. 123, the Company's income (loss) from continuing operations and earnings (loss) per share would have been reduced to the pro-forma amounts indicated below:
1998 1997 1996 ------ ------ -------Income (loss) from continuing operations As reported...................................... $246.4 $219.0 $(116.1) Pro-forma........................................ $240.1 $215.4 $(119.7) Basic earnings (loss) per share of common stock from continuing operations As reported...................................... $ 1.45 $ 1.28 $ (.69) Pro-forma........................................ $ 1.42 $ 1.26 $ (.70) Diluted earnings (loss) per share of common stock from continuing operations As reported...................................... $ 1.44 $ 1.27 $ (.69) Pro-forma........................................ $ 1.40 $ 1.25 $ (.70)The pro-forma disclosures shown are not representative of the effects on income (loss) and earnings (loss) per share in future years. 5557 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
AFTER 1996 CONVERSION PRIOR TO DISTRIBUTION PRIOR TO AFTER 1998 AT 1998 1998 AND FOR 1996 DISTRIBUTION DISTRIBUTION DISTRIBUTION 1997 CONVERSION DISTRIBUTION ------------ ------------ ------------ --------- ------------ ------------Expected dividend yield.............. 2.75% 2.75% 3.3% 3.3% 3.7% 4.7% Expected stock volatility......... 20% 20% 20% 20% 17% 15% Risk-free interest rate............... 5.38% 5.42% 5.53% 5.73% 5.85% 6.08% Expected holding period............. 6.0 years 2.3 years 4.5 years 4.5 years 4.5 years 5.0 yearsOptions outstanding at December 31, 1998, were originally granted during the years 1989 through 1998 and are exercisable over periods ending not later than 2008. At December 31, 1998, 1997 and 1996, options for 8,527,343 shares, 8,133,155 shares and 8,313,166 shares of common stock, respectively, were exercisable and 12,427,373 shares, 1,450,195 shares and 4,240,772 shares, respectively, were available for future grants under the plans. 5658 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Changes in stock options for the threeyears ended December 31,1998, are summarized as follows:
WEIGHTED AVERAGE EXERCISE SHARES PRICE ($) ---------- ---------Options outstanding at January 1, 1996.................. 9,147,728 55.90 Granted............................................... 10,704 60.25 Exercised............................................. (977,042) 51.09 Surrendered or expired................................ (689,297) 59.10 ---------- Options outstanding at October 31, 1996................. 7,492,093 56.23 Attributable to 1996 Distribution....................... (2,958,686) 57.08 ---------- Options outstanding at October 31, 1996................. 4,533,407 55.68 ========== Options converted at November 1, 1996................... 11,958,980 21.10 Granted............................................... 4,452,250 22.96 Exercised............................................. (543,354) 21.02 Surrendered or expired................................ (451,416) 22.87 ---------- Options outstanding at December 31, 1996................ 15,416,460 21.59 Granted............................................... 3,151,980 30.01 Exercised............................................. (2,008,234) 20.38 Surrendered or expired................................ (840,878) 22.97 ---------- Options outstanding at December 31, 1997................ 15,719,328 23.36 Granted............................................... 87,390 32.84 Exercised............................................. (1,305,111) 20.77 Surrendered or expired................................ (336,444) 24.53 ---------- Options outstanding at June 30, 1998.................... 14,165,163 23.63 Attributable to 1998 Distribution....................... (1,206,985) 24.78 ---------- Options outstanding at June 30, 1998.................... 12,958,178 23.52 ========== Options converted at July 1, 1998....................... 13,734,489 22.19 Granted............................................... 4,171,907 32.47 Exercised............................................. (1,095,003) 18.84 Surrendered or expired................................ (432,396) 26.35 ---------- Options outstanding at December 31, 1998................ 16,378,997 24.92 ==========The weighted average fair value2003, 2002 and 2001 was approximately $2.4 million, $1.6 million and $1.2 million, respectively.Note 9 Stock-Based Compensation Plans
Prior to the 2000 Distribution, certain employees of
options granted during 1998, 1997 and 1996 was $7.13, $5.52 and $3.61, respectively. 5759 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 1998:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS -------------------------------------- EXERCISABLE WEIGHTED ---------------------- AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE CONTRACTUAL EXERCISE EXERCISE RANGE OF EXERCISE PRICES SHARES LIFE PRICE ($) SHARES PRICE ($) - ------------------------ ---------- ----------- --------- --------- ---------$14.84-$23.35......... 9,548,923 5.9 years 20.71 7,859,474 20.49 $24.00-$34.22......... 6,830,074 9.3 years 30.82 667,869 28.37 ---------- --------- 16,378,997 8,527,343 ========== =========The plans also provide for the grantingMoody’s received grants ofstock appreciation rights and limited stock appreciation rights in tandem with stock options to certain key employees. Upon the 1998 Distribution, theOld D&B stockappreciation rights and limited stock appreciation rights were adjusted or converted in substantiallyoptions under Old D&B’s 1998 Key Employees’ Stock Option Plan (the “1998 Plan”). At thesame manner as theDistribution Date, all unexercised Old D&B stockoptions. At December 31, 1998, thereoptions held by Moody’s employees were30,400converted into separately exercisable options to acquire Moody’s common stockappreciation rightsand1,518,215 limitedseparately exercisable options to acquire New D&B common stock,appreciation rights ("LSARs") attached to stock options, which are exercisable only if, andsuch that each option had the same ratio of the exercise price per option to theextent that,market value per share, therelatedsame aggregate difference between market value and exercise price, and the same vesting provisions, optionis exercisableperiods andin the case of LSARs, only upon the occurrence of specified contingent events. Upon the 1998 Distribution, Old D&B restricted stock which had been granted to key associates of the Company under the 1989 Key Employees Restricted Stock Plan was forfeitedother terms andreplaced with New D&B stock, preserving the economic value that existed immediatelyconditions applicable prior to the 2000 Distribution. Old D&B stock options held by employees and retirees of Old D&B were converted in the same manner. Immediately after the 2000 Distribution, the 1998Distribution. DuringPlan was amended and adopted by the Company.Under the 1998
no new awardsPlan, 16,500,000 shares ofrestrictedthe Company’s common stock weregranted and 36,620 shares were replaced. During 1997 and 1996, restricted share grants of 20,000 and 19,779, respectively, were awardedreserved for issuance. The 1998 Plan provides that options are exercisable not later than ten years from the grant date. The vesting period for awards under theplan. Forfeitures in 1996 totaled 6,877 shares. There were no forfeitures during1998and 1997. The restrictions onPlan is determined by themajorityBoard ofsuch shares lapse over a period of three years fromDirectors at the date of the grant and has principally been four years. Options may not be granted at less than thecostfair market value of the Company’s common stock at the date of grant. For incentive stock options granted to a shareholder of more than 10% of the Company’s outstanding stock, the exercise price per share cannot be less than 110% of the fair market value of the Company’s common stock at the date of grant. The 1998 Plan also provides for the granting of restricted stock.The 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan (the “2001 Plan”) was approved by the Board of Directors in February 2001 and approved by the Company’s shareholders in April 2001. Under the 2001 plan, 5,800,000 shares of common stock have been reserved for issuance. Options may not be granted at less than the fair market value of the Company’s common stock at the date of grant. The 2001 Plan provides that options are exercisable not later than ten years from the grant date. The vesting period for awards under the 2001 Plan is
chargeddetermined by the Board of Directors at the date of the grant and has been four years. Unlike the 1998 Plan, the 2001 Plan also provides that consultants tocompensation expense ratably.the Company or any of its subsidiaries are eligible to be granted options. The 2001 Plan also provides for the granting of restricted stock.Under the 1998
Key Employees' Stock Incentive Plan,and 2001 Plans, keyassociatesemployees of the Company may be granted shares ofthe Company'scommon stock based on the achievement oftwo-yearrevenue growth goals or otherkeyoperating objectiveswhere appropriate.(“Performance Shares”). At the end of the performance period, Company performance at target will yield the targeted amount of shares, whereas Company performance above or below target will yield larger or smaller share awards, respectively.AwardsAs a result of the 2000 Distribution, outstanding Performance Share grants were converted such that the Company’s employees would receive a combination of Moody’s shares and cash in lieu of New D&B shares. In 2001, approximately 100,000 shares of Moody’s common stock wereoutstanding atawarded based on the1998 DistributionCompany’s revenue performance for 1999 and 2000. Cash payments aggregating $2.5 million werecanceled and replaced, preserving the economic value that existed prior to the 1998 Distribution. Recordedmade inselling and administrative expenses waslieu of New D&B shares. There were no new Performance Share grants in 2003, 2002 or 2001. The Company recorded compensation expense of$16.0 million and $14.6$0.2 million in19982002 and1997, respectively,$0.4 million in 2001, relating to performance shares granted in 1999, for which the performance period ended in 2002. No compensation expense relating to performance share grants was recorded for theplans.year ended December 31, 2003.The Company maintains a stock plan for its Board of Directors, the 1998 Directors Plan (the “Directors Plan”), which permits the granting of awards in the form of non-qualified stock options, restricted stock or performance shares. The Directors Plan provides that
57
options are exercisable not later than ten years from the grant date. The vesting period is determined at the date of the grant and is generally one year. Under the Directors Plan, 400,000 shares of common stock were reserved for issuance. Any director of the Company who is not an employee of the Company or any of its subsidiaries as of the date that an award is granted is eligible to participate in the Directors Plan. During the year ended December 31, 2003, the Company granted approximately 16,000 shares of restricted stock pursuant to the Directors Plan, with an aggregate grant date fair value of $675,000.
In February 2004, Moody’s awarded long-term, equity-based compensation as a mix of stock options and restricted stock, rather than exclusively as stock options as the Company has done in the past. The aggregate grants were approximately 2.2 million options and 0.4 million shares of restricted stock, all under the 2001 Plan. The options and a portion of the restricted stock vest ratably over four years. The remaining restricted stock will vest over a period of three to five years, depending on growth in the Company’s operating income.
Also in February 2004, Directors of the Company were granted approximately 7,000 shares of restricted stock under the Directors Plan.
Changes in stock options for the three years ended December 31, 2003 are summarized below:
Weighted Number Average Outstanding Exercise Price Options outstanding, December 31, 2000 19.3 $ 22.30
Granted 0.1 34.77 Exercised (2.5 ) 17.04 Surrendered or retired (2.2 ) 24.24
Options outstanding, December 31, 2001 14.7 23.00
Granted 3.8 40.01 Exercised (2.5 ) 19.31 Surrendered or retired (0.7 ) 27.43
Options outstanding, December 31, 2002 15.3 27.63
Granted 3.6 42.73 Exercised (3.1 ) 23.87 Surrendered or retired (0.6 ) 32.67
Options outstanding, December 31, 2003 15.2 $ 31.78
Below is a summary of Moody’s stock options held by Moody’s employees and by New D&B employees and retirees as of each date:
New D&B Moody's Employees Employees and Retirees Options outstanding at: December 31, 2001 8.6 6.1 December 31, 2002 11.1 4.2 December 31, 2003 12.6 2.6 58
60 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8 INCOME TAXESThe following table summarizes information about stock options outstanding at December 31, 2003:
Options Outstanding Average Remaining Weighted Number Contractual Average Range of Exercise Prices Outstanding Life in Years Exercise Price $14.54–$19.94 1.3 2.5 $ 16.79 $21.42–$23.96 2.5 5.4 $ 21.79 $25.13–$28.13 4.5 5.1 $ 27.41 $33.92–$39.98 3.1 8.1 $ 39.87 $40.59–$43.55 3.7 9.0 $ 42.43 $52.05–$60.50 0.1 9.9 $ 56.60
Total 15.2
Options Exercisable Weighted Number Average Range of Exercise Prices Exercisable Exercise Price $14.54–$19.94 1.3 $ 16.79 $21.42–$23.96 1.6 $ 21.77 $25.13–$28.13 3.4 $ 27.26 $33.92–$39.98 0.7 $ 39.82 $40.59–$43.55 0.1 $ 40.98 $52.05–$60.50 —
Total 7.1
In addition, the Company also sponsors the Moody’s Corporation Employee Stock Purchase Plan (“ESPP”). The ESPP allows eligible employees to purchase common stock of the Company on a monthly basis at 85% of its fair market value on the first trading day of the month. Plan participants can elect an after-tax payroll deduction of one percent to ten percent of compensation, subject to the federal limit.
Note 10 Income Taxes
Components of the Company’s income tax provision are as follows:
Year Ended December 31, 2003 2002 2001 Current: Federal $ 199.7 $ 150.5 $ 102.4 State and local 63.6 54.4 49.3 Non U.S. 35.3 26.3 16.5
Total current 298.6 231.2 168.2
Deferred: Federal (3.8 ) (3.5 ) 1.2 State and local (1.5 ) 1.4 0.5 Non U.S. (0.8 ) (0.6 ) (0.2 )
Total deferred (6.1 ) (2.7 ) 1.5
Total provision for income taxes $ 292.5 $ 228.5 $ 169.7
59
A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate on income before provision for income taxes
consisted of:
1998 1997 1996 ------ ------ ------U.S......................................... $407.2 $331.5 $(15.3) Non-U.S..................................... (7.4) .9 1.3 ------ ------ ------ $399.8 $332.4 $(14.0) ====== ====== ======The provision (benefit) for income taxes consisted of:
1998 1997 1996 ------ ------ ------Current tax provision: U.S. Federal...................................... $176.0 $ 31.9 $ 40.6 State and local................................... 14.4 52.9 (22.4) Non-U.S........................................... 12.2 21.6 .7 ------ ------ ------ Total current tax provision......................... 202.6 106.4 18.9 ------ ------ ------ Deferred tax (benefit) provision: U.S. Federal...................................... (58.0) 36.5 52.7 State and local................................... 7.6 (23.1) 15.0 Non-U.S........................................... 1.2 (6.4) 15.5 ------ ------ ------ Total deferred tax (benefit) provision.............. (49.2) 7.0 83.2 ------ ------ ------ Provision for income taxes.......................... $153.4 $113.4 $102.1 ====== ====== ======The following table summarizes the significant differences between the U.S. Federal statutory tax rate and the Company's effective tax rate for financial statement purposes.is as follows:
1998 1997 1996 ---- ----- ------Statutory tax rate..................................... 35.0% 35.0% 35.0% State and local taxes, net of U.S. Federal tax benefit.............................................. 3.6 4.9 33.1 Non-U.S. taxes......................................... 3.4 4.6 (110.9) Recognition of capital and ordinary losses............. (5.3) (10.4) 181.4 Non-recurring reorganization costs..................... 1.5 -- (845.5) Repatriation of foreign earnings....................... -- -- (11.5) Other.................................................. .2 -- (10.9) ---- ----- ------ Effective tax rate..................................... 38.4% 34.1% (729.3)% ==== ===== ======
Year Ended December 31, 2003 2002 2001 U.S. statutory tax rate 35.0 % 35.0 % 35.0 % State and local taxes, net of federal tax benefit 6.2 7.0 8.5 U.S. taxes on foreign income 0.3 0.7 1.0 Other 3.1 1.5 (0.1 )
Effective tax rate 44.6 % 44.2 % 44.4 %
Income taxes paid were
$136.5$210.6 million,$170.3$226.6 million and$170.2$98.6 million in1998, 19972003, 2002 and1996,2001, respectively.IncomeTaxes paid in 2002 included approximately $50 million of 2001 income tax payments that were deferred due to the September 11th tragedy.The components of deferred tax assets and liabilities are as follows:
December 31, 2003 2002 Deferred tax assets: Current: Accounts receivable allowances $ 6.9 $ 6.7 Accrued compensation and benefits 5.1 4.5 Other 1.0 0.9
Total current 13.0 12.1
Non-current: Depreciation and amortization 5.3 5.3 Benefit plans 13.5 6.2 State taxes 1.8 7.8 Other 8.0 7.2
Total non-current 28.6 26.5
Total deferred tax assets 41.6 38.6
Deferred tax liabilities: Current: Prepaid expenses (1.4 ) (1.4 )
Total current (1.4 ) (1.4 )
Non-current: Prepaid pension costs (25.1 ) (24.5 ) Amortization of intangibles and capitalized software (6.8 ) (4.8 ) Other (0.1 ) (0.1 )
Total non-current (32.0 ) (29.4 )
Total deferred tax liabilities (33.4 ) (30.8 )
Net deferred tax asset $ 8.2 $ 7.8
The current deferred tax assets, net of current deferred tax liabilities, as well as prepaid taxes
refunded were $32.1 million, $37.6of $0.7 million and$140.9$1.3 million at December 31, 2003 and 2002, respectively, are included in1998, 1997other current assets in the consolidated balance sheets. Non-current tax receivables of $26.5 million at December 31, 2003 and1996, respectively. 5961 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred2002 are included in other assets. Non-current deferred tax liabilities, net of non-current deferred tax assets,(liabilities) consistedare included in other liabilities. Management has determined, based on the Company’s history ofthe following atprior and current levels of operating earnings, that no valuation allowance for deferred tax assets should be provided as of December31:31, 2003 and 2002.
1998 1997 1996 ------ ------ ------Deferred tax assets: Operating losses.................................. $ 48.3 $ 53.7 $ 33.6 Postretirement benefits........................... 63.0 49.0 79.5 Postemployment benefits........................... 3.7 12.8 22.5 Reorganization and restructuring costs............ 31.0 4.4 11.3 Bad debts......................................... 13.1 12.7 5.7 Other............................................. 3.7 12.3 13.4 ------ ------ ------ Total deferred tax assets........................... 162.8 144.9 166.0 Valuation allowance................................. (48.3) (53.7) (33.6) ------ ------ ------ Net deferred tax asset.............................. 114.5 91.2 132.4 ------ ------ ------ Deferred tax liabilities: Intangibles....................................... (7.9) (31.7) (47.4) Revenue recognition............................... -- -- (12.3) Tax-leasing transactions.......................... (20.4) (22.1) (37.8) Depreciation...................................... (13.1) (13.5) (4.0) ------ ------ ------ Total deferred tax liability........................ (41.4) (67.3) (101.5) ------ ------ ------ Net deferred tax asset.............................. $ 73.1 $ 23.9 $ 30.9 ====== ====== ======60
At December 31,
1998,2003, undistributed earnings of non-U.S. subsidiaries aggregated$115.9$80.8 million. Earnings from the United Kingdom, France and Japan are or will be remitted to the U.S. on a regular basis. As such, taxes related to anticipated distributions have been provided in the consolidated financial statements. Deferred tax liabilities have not been recognized fortheseapproximately $16 million of undistributed foreign earningsbecause it is management's intentionthat management intends to reinvestsuch undistributed earningsoutside the U.S. If all such undistributed earnings were remitted to the U.S., the amount of incremental U.S.Federalfederal and foreign income taxes payable, net of foreign tax credits, would be$44.2approximately $1.7 million.During 1996, $467.9Note 11 Indebtedness
In connection with the 2000 Distribution, Moody’s was allocated $195.5 million of
non-U.S. earnings, primarily from the Cognizant and ACNielsen businesses, was repatriated by the Company in order to facilitate its 1996 reorganization. During the three-year period ended December 31, 1983, the Company invested $304.4 million in tax-leasing transactions, varying in length from 4.5 to 25 years. These leases provided the Companydebt at September 30, 2000. Moody’s funded this debt withbenefits from tax deductions in excess of taxable income for Federal income tax purposes. These amounts are included in deferred income taxes. 6062 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 9 NOTES PAYABLE Notes payable consisted of the following at December 31:
1998 1997 ----- ------Commercial paper...................................... $35.9 $421.6 Bank notes............................................ 1.0 29.9 ----- ------ $36.9 $451.5 ===== ======The Company had commercial paperborrowingsof $35.9 million at December 31, 1998. Interest rates on these borrowings ranged from 5.95% to 6.10%. In June 1998, the Company negotiated $600 million of committed bank lines of creditunder a$300$160 million364-dayunsecured bank revolving credit facility and a bank bridge line of credit.On October 3, 2000 the Company issued $300 million
five-yearof notes payable (the “Notes”) in a private placement. The cash proceeds from the Notes were used in part to repay the outstanding balance on the revolving credit facilitymaturing June 2003. Under these facilities,and to repay theCompany hasbridge line of credit. The Notes have a five-year term and bear interest at an annual rate of 7.61%, payable semi-annually. In theabilityevent that Moody’s pays all or part of the Notes in advance of their maturity (the “prepaid principal”), such prepayment will be subject toborrow at prevailing short-term interest rates. Asa penalty calculated based on the excess, if any, ofDecember 31, 1998,theCompany did not have any borrowings outstanding under these facilities. At December 31, 1998,discounted value of theCompany also had non-committed lines of credit of $41 million against which $1.0 million was borrowed. These arrangements have no material commitment fees or compensating balance requirements. The weighted average interest rates on commercial paper and notes payable at December 31, 1998 and 1997, were 6.06% and 5.97%, respectively.remaining scheduled payments, as defined in the agreement, over the prepaid principal. Interest paidtotaled $12.1under the Notes was $22.8 million,$49.6$22.8 million and$43.2$22.6 million, respectively for the years ended December 31,1998, 19972003, 2002 and1996, respectively. In connection with2001. Total interest expense was $23.5 million, $23.5 million and $22.9 million, respectively for the1998 Distribution, during June 1998, R.H. Donnelley Inc. borrowed $350years ended December 31, 2003, 2002 and 2001.The revolving credit facility (the “Facility”), which had no borrowings outstanding as of December 31, 2003, consists of an $80 million 5-year facility that expires in September 2005 and an $80 million 364-day facility that expires in September 2004. Interest on borrowings under the
R.H. Donnelley Inc. credit5-year facility is payable at rates that are based on the London InterBank Offered Rate (“LIBOR”) plus a premium that can range from 18 basis points to 50 basis points depending on the Company’s ratio of total indebtedness to earnings before interest, taxes, depreciation andissued $150 million of senior subordinated notesamortization (“Earnings Coverage Ratio”), as defined in the related agreement. At December 31, 2003, such premium was 18 basis points. Interest on borrowings under theR.H. Donnelley Inc. indenture. This $500 million364-day facility is payable at rates that are based on LIBOR plus a premium ofdebt remained an obligation30.5 basis points. The Company also pays annual facility fees, regardless ofR.H. Donnelley Inc. afterborrowing activity under the1998 Distribution. AFacility. The annual fees for the 5-year facility can range from 7 basis points of the facility amount to 12.5 basis points, depending on the Company’s Earnings Coverage Ratio, and were 7 basis points at December 31, 2003. The annual fees for the 364-day facility are 7 basis points. Under each facility, the Company also pays a utilization fee of 12.5 basis points on borrowings outstanding when the aggregate amount outstanding under such facility exceeds 33% of the facility.In April 2002, Moody’s used the Facility to initially fund a portion of the
proceedspurchase price for the KMV acquisition; such borrowings were repaid in the second quarter ofthis borrowing2002. During 2002, Moody’s also borrowed under the Facility to fund share repurchases. Interest paid under the Facility wasused by Old D&B to repay outstanding indebtedness at$0.6 million in 2003 and $0.3 million in 2002.The Notes and the
timeFacility (the “Agreements”) contain covenants that, among other things, restrict the ability of the1998 DistributionCompany and its subsidiaries, without the approval of$287.1 million.the lenders, to engage in mergers, consolidations, asset sales and sale-leaseback transactions or to incur liens. TheremainderNotes and the Facility also contain financial covenants that, among other things, require the Company to maintain an interest coverage ratio, as defined in the Agreements, of not less than 3 to 1, and an Earnings Coverage Ratio, as defined in the Agreements, of not more than 4 to 1. At December 31, 2003, the Company wasusedin compliance with such covenants. If an event of default were to occur (as defined in the Agreements) and was not remedied by the Companyfor general corporate purposes, includingwithin thepayment of costs and expenses associated with the reorganization. NOTE 10 INVESTMENT PARTNERSHIPS During 1993, the Company participated in the formation of a limited partnership to invest in various securities, including thosestipulated timeframe, an acceleration of theCompany. Third-party investors held limited-partnerNotes andspecial investors interests totaling $500.0 million. Funds raised byrestrictions on thepartnership provided a sourceuse offinancing fortheCompany's repurchase in 1993Facility could occur.Note 12 Capital Stock
Authorized Capital Stock
The total number of
8.3 millionshares ofits common stock. During the fourth quarterall classes of1996, the Company redeemed these partnership interests. This redemption was financed with short-term borrowings. The partnership is presently engaged in the business of licensing database assets and computer software. One of the Company's subsidiaries serves as managing general partner, and two subsidiaries hold limited-partner interests. In April 1997, the partnership raised 6163 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $300.0 million of minority interest financing from a third-party investor. The Company's subsidiaries contributed assets to the partnership, and the third-party investor contributed cash ($300.0 million) in exchange for a limited-partner interest. Funds raised by the partnership were loaned to the Company and used to repay existing short-term debt in April 1997. The partnership can be terminated by the parties under various circumstances between December 2000 and April 2001. At December 31, 1998, the third-party investment in this partnership was included in minority interest. For financial reporting purposes, the results of operations, assets, liabilities and cash flows of the partnership described above are included in the Company's consolidated financial statements. NOTE 11 CAPITAL STOCK Under the Company's Restated Certificate of Incorporation,stock that the Company has authority to issue under its Restated Certificate of Incorporation is 420,000,000 shares with a par value of$.01 per share$0.01, of which 400,000,000representare shares of common stock, 10,000,000representare shares of preferred stock and 10,000,000representare shares of series common stock. The preferred stock and series common stock can be issued with varying terms, as determined by the Board of Directors.On June 30, 1998, 171,291,317 shares of New D&B common stock were distributed to the shareholders of Old D&B. Since New D&B61
Rights Agreement
The Company has
been treated as the successor entity for accounting purposes, the Company's historical financial statements reflect the recapitalization of New D&B in connection with the 1998 Distribution, including the elimination of treasury shares (which shares became treasury shares of Donnelley); the adjustment of the par value of the preferred stock and the common stock to $.01 per share; and the authorization of the series common stock. In connection with the 1998 Distribution, the Company entered intoa Rights Agreement designed to protect its shareholdersof the Companyin the event of unsolicited offers to acquire the Company andothercoercive takeover tacticswhich,that, in the opinion of the Board of Directors, could impair its ability to represent shareholder interests. Under the Rights Agreement, each share ofthecommon stock has a rightwhichthat trades with the stock until the right becomes exercisable. Each right entitles the registered holder to purchase 1/1000 of a share ofSeriesa series A junior participating preferred stock, par value$.01$0.01 per share, at a price of$150$100 per 1/1000 of a share, subject to adjustment. The rights will generally not be exercisable until a person or group("(“AcquiringPerson"Person”) acquires beneficial ownership of, or commences a tender offer or exchange offerwhichthat would result in such person or group having beneficial ownership of, 15% or more of the outstanding commonstock.stock at such time.In the event that any person or group becomes an Acquiring Person, each right will thereafter entitle its holder (other than the Acquiring Person) to receive, upon exercise and payment, shares of stock having a market value
ofequal to two times the exercise price in the form of theCompany'sCompany’s common stock or, where appropriate, the AcquiringPerson'sPerson’s common stock. The rights are not currently exercisable, as no shareholder is currently an Acquiring Person. The Company may redeem the rights, which expire in June 2008, for$.01$0.01 per right, under certaincircumstances. 6264 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12 LEASE COMMITMENTS Certaincircumstances, including for a Board-approved acquirer either before the acquirer becomes an Acquiring Person or during the window period after the triggering event as specified in the Rights Agreement.Share Repurchase Program
During October 2002, Moody’s completed the $300 million share repurchase program that had been authorized by the Board of Directors in October 2001. On October 22, 2002, the
Company's operations are conductedBoard of Directors authorized an additional $450 million share repurchase program, which includes both special share repurchases and systematic repurchases of Moody’s common stock to offset the dilutive effect of share issuance under the Company’s employee stock plans.For the year ended December 31, 2003, Moody’s repurchased 3.5 million shares at a total cost of $171.7 million, including 3.2 million shares to offset issuances under employee stock plans. Since becoming a public company in September 2000 and through the end of 2003, Moody’s has repurchased 23.0 million shares at a total cost of $881.0 million, including 9.3 million shares to offset issuances under employee stock plans.
Dividends
During 2003, 2002 and 2001, the Company paid a quarterly dividend of 4.5 cents per share of Moody’s common stock, resulting in dividends paid per share of 18.0 cents in each year. In December 2003, the Company’s Board of Directors declared a first quarter 2004 dividend of 7.5 cents per share, payable on March 10, 2004 to shareholders of record on February 20, 2004.
Note 13 Lease Commitments
Moody’s operates its business from various leased facilities, which are under operating leases that expire over the next
10nine years.The CompanyMoody’s also leases certain computer and other equipment under operating and capital leases that expire over the nextfivesix years.These leases are frequently renegotiated or otherwise changed as advancements in computer technology produce opportunities to lower costs and improve performance. Additionally, the Company has agreements with various third parties to purchase certain data processing and telecommunications services extending beyond one year. Rental expensesRent expense under operating leaseswere $66.8 million, $80.9 million and $106.3 millionfor the years ended December 31,1998, 19972003, 2002 and1996,2001 was $13.3 million, $11.3 million and $8.0 million, respectively.Future minimumRent expense for 2002 and 2001 was net of sublease rental income of $0.6 million and $1.0 million, respectively. There was no sublease rental income in 2003.During 2002, Moody’s recorded approximately $3.9 million of computer equipment subject to capital lease
payments under noncancelable leasesobligations. Accumulated amortization at December 31,1998, are2003 includes approximately $1.3 million related to capital lease obligations.62
The approximate minimum rent for leases that have remaining or original noncancelable lease terms in excess of one year at December 31, 2003 is as follows:
THERE- 1999 2000 2001 2002 2003 AFTER TOTAL - ----- ----- ----- ----- ----- ------ ------$57.8 $37.1 $24.9 $13.8 $10.0 $15.2 $158.8 ===== ===== ===== ===== ===== ===== ======NOTE 13 CONTINGENCIES The Company and its subsidiaries are
Capital Operating Year Ending December 31, Leases Leases 2004 $ 1.3 $ 17.2 2005 1.3 12.7 2006 — 8.7 2007 — 6.0 2008 — 4.8 Thereafter — 5.1
Total minimum lease payments 2.6 $ 54.5
Less: amount representing interest (0.1 )
Present value of net minimum lease payments under capital leases $ 2.5
Note 14 Contingencies
From time to time, Moody’s is involved in legal and tax proceedings, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by Moody’s. Management periodically assesses the Company’s liabilities and
taxcontingencies in connection with these matters,arisingbased upon the latest information available. For those matters where the probable amount of loss can be reasonably estimated, the Company believes it has recorded appropriate reserves in theordinary courseconsolidated financial statements. In other instances, because ofbusiness. Inthe uncertainties related to both the probable outcome and amount or range of loss, management is unable to make a reasonable estimate of a liability, if any. As additional information becomes available, the Company adjusts its assessments and estimates of such liabilities accordingly.Based on its review of the latest information available, in the opinion of management, the
outcomeultimate liability ofsuch currentthe Company in connection with pending legal and tax proceedings, claims and litigationand tax matters couldwill not have a material adverse effect onquarterly or annual operatingMoody’s financial position, results of operations or cashflows. However,flows, subject to the contingencies described below.Discussion of contingencies is segregated between those matters that relate to Old D&B, its predecessors and their affiliated companies (“Legacy Contingencies”) and those that relate to Moody’s business and operations (“Moody’s Matters”).
Legacy Contingencies
To understand the Company’s exposure to the potential liabilities described below, it is important to understand the relationship between Moody’s and New D&B, and the relationship among New D&B and its predecessors and other parties who, through various corporate reorganizations and related contractual commitments, have assumed varying degrees of responsibility with respect to such matters.
In November 1996, The Dun & Bradstreet Corporation through a spin-off separated into three separate public companies: The Dun & Bradstreet Corporation, ACNielsen Corporation (“ACNielsen”) and Cognizant Corporation (“Cognizant”) (the “1996 Distribution”).
In June 1998, The Dun & Bradstreet Corporation through a spin-off separated into two separate public companies: The Dun & Bradstreet Corporation and R.H. Donnelley Corporation (“Donnelley”) (the “1998 Distribution”). During 1998, Cognizant through a spin-off separated into two separate public companies: IMS Health Incorporated (“IMS Health”) and Nielsen Media Research, Inc. (“NMR”). In September 2000, The Dun & Bradstreet Corporation (“Old D&B”) through a spin-off separated into two separate public companies: New D&B and Moody’s, as further described in
the opinionNote 1, Description ofmanagement these matters will not materially affect financial position when resolved in a future period.Business and Basis of Presentation.63
Information Resources, Inc.
In
addition, the Company also has certain other contingencies discussed below. INFORMATION RESOURCES, INC. OnJuly29,1996, Information Resources, Inc.("IRI"(“IRI”) filed a complaint in theUnited StatesU. S. District Court for the Southern District of New York, naming as defendantsOld D&B,the corporation then known as The Dun & Bradstreet Corporation, A.C. Nielsen Company (a subsidiary of ACNielsen) and IMS International, Inc.(formerly(a subsidiary of the company then known as Cognizant). At the time of the filing of the complaint, each of the other defendants was a subsidiary ofCognizant and currently a subsidiary of IMS Health Incorporated).The Dun & Bradstreet Corporation.The complaint alleges various violations of United States antitrust laws
including alleged violations ofunder Sections 1 and 2 of the Sherman Act. The complaint also alleges a claim of tortious interference with a contract and a claim of tortious interference with a prospective business relationship. These claims relate to the acquisition by defendants of Survey Research Group Limited("SRG"(“SRG”). IRI alleges SRG violated an alleged agreement with IRI when it agreed to be acquired by the defendants and that the defendants induced SRG to breach that agreement.On October 15, 1996,IRI’s antitrust claims allege that the defendants
moved for an order dismissing all claimsdeveloped and implemented a plan to undermine IRI’s ability to compete within the U.S. and foreign markets in North America, Latin America, Asia, Europe and Australia/New Zealand through a series of anti-competitive practices, including: unlawfully tying/bundling services in thecomplaint. On May 6, 1997,markets in which defendants allegedly had monopoly power with services in markets in which ACNielsen competed with IRI; entering into exclusionary contracts with retailers in certain countries to deny IRI’s access to sales data necessary to provide retail tracking services or to artificially raise theUnited States District Courtcost of that data; predatory pricing; acquiring foreign market competitors with the intent of impeding IRI’s efforts to expand; disparaging IRI to financial analysts and clients; and denying IRI access to capital necessary forthe Southern District of New York issued a decision dismissing IRI's claim of attempted monopolization in the United States, with leaveit toreplead within 60 days. The Court denied defendants' motion with respect to the remaining claims in the complaint. On June 3, 1997, defendants filed 6365 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) an answer denying the material allegations in IRI'scompete.IRI’s complaint
and A.C. Nielsen Company filed a counterclaim alleging that IRI has made false and misleading statements about its services and commercial activities. On July 7, 1997, IRI filed an Amended and Restated Complaint repleading itsoriginally allegedclaim of monopolization in the United States and realleging its other claims. By notice of motion dated August 18, 1997, defendants moved for an order dismissing the amended claim. On December 1, 1997, the Court denied the motion and, on December 16, 1997, defendants filed a supplemental answer denying the remaining material allegations of the amended complaint. IRI's complaint allegesdamages in excess of $350 million, whichamountIRI asked to be trebled under antitrust laws. IRI has since revised its allegation of damages to exceed $650 million, which IRI also asked to be trebled. IRI also seeks punitive damagesinof an unspecified amount.In April 2003, the court denied a motion for partial summary judgment by the defendants that sought to dismiss certain of IRI’s claims and granted in part a motion by IRI seeking reconsideration of certain summary judgment rulings the Court had previously made in favor of the defendants.
In December of 2003, IRI was acquired by the Gingko Acquisition Corporation, an affiliate of Symphony Technology II – A. L. P. and certain other parties. As part of that transaction, a statutory trust called the Information Resources, Inc. Litigation Contingent Payment Rights Trust (the “Trust”) was formed. The Trust was created, in part, to issue contingent value rights certificates (“CVRs”), which represent an interest in the IRI lawsuit. The CVRs are governed by a Contingent Value Rights Agreement among IRI and the acquirers, and are a tradeable security listed on the OTC Bulletin Board. As part of the purchase consideration, each IRI stockholder received one CVR for each share of IRI common stock owned, entitling the selling stockholders to a pro rata portion of the proceeds from the IRI lawsuit, if any, allocated to the Trust. The Trust will be entitled to receive an amount equal to 68% of any proceeds from the IRI lawsuit to the extent that such proceeds are equal to or less than $200 million and 75% of any such proceeds in excess of $200 million. The remaining proceeds, if any, will be the property of IRI. A body consisting of five rights agents was appointed to direct and supervise the IRI Litigation on behalf of IRI and CVR holders. Gingko Corporation named two of the rights agents, IRI named two of the rights agents and these four rights agents selected the fifth “independent” rights agent. Under the Contingent Value Rights Agreement, a majority of the rights agents (other than the independent rights agent) must approve any settlement of the IRI lawsuit. The information contained in this paragraph is solely based on the tender offer statement filed by Gingko Acquisition Corporation and other persons and the registration statement filed by the Trust in connection with the acquisition of IRI.
In connection with the
IRI action, on October 28,1996 Distribution, NMR (then known as Cognizant Corporation), ACNielsen andOld D&BDonnelley (then known as The Dun & Bradstreet Corporation) entered into an Indemnity and Joint Defense Agreement (the"Indemnity“Indemnity and Joint DefenseAgreement"Agreement”), pursuant to which theyhaveagreed(i) to certain arrangements allocating potential liabilities ("IRI Liabilities") that may arise out of or in connection with the IRI action and (ii) to conduct a joint defense of such action.to:
• allocate potential liabilities that may relate to, arise out of or result from the IRI lawsuit (“IRI Liabilities”); and • conduct a joint defense of such action. In particular, the Indemnity and Joint Defense Agreement provides
thatthat:ACNielsen will assume exclusive liability for IRI Liabilities up to a maximum amount to be calculated at such time as such liabilitiesif any,become payable(the "ACN Maximum Amount"),as a result of a final non-appealable judgment or any settlement permitted under the Indemnity andthat Old D&B64
Joint Defense Agreement (the “ACN Maximum Amount”); and Donnelley andCognizantNMR will share liability equally for any amounts in excess of the ACN Maximum Amount.As noted above, ACNielsen is responsible for the IRI Liabilities up to the ACN Maximum Amount. The Indemnity and Joint Defense Agreement provides that ACNielsen initially is to determine the amount that it will pay at the time of settlement or a final judgment, if any, in IRI’s favor (the “ACN Payment”). The ACN Payment could be less than the ACN Maximum Amount. The Indemnity and Joint Defense Agreement also provides for each of Donnelley and NMR to pay IRI 50% of the difference between the settlement or judgment amount and the ACN Payment, and for ACNielsen to issue a secured note (the “ACN Note”), subject to certain limits, to each of Donnelley and NMR for the amount of their payment. The principal amount of each ACN Note issued to Donnelley and NMR, however, is limited to 50% of the difference between the ACN Maximum Amount and the ACN Payment, and is subject to a further limitation that it cannot exceed 50% of the amount of any proceeds from any recapitalization plan designed to maximize ACNielsen’s claims paying ability. The ACN Notes would become payable upon the completion of any such recapitalization plan.
The Indemnity and Joint Defense Agreement also provides that if it becomes necessary to post any bond pending an appeal of an adverse judgment, then NMR and Donnelley shall obtain the bond required for the appeal, and each shall pay 50% of the costs of such bond, if any, which cost will be added to IRI Liabilities. Under the terms of the 2000 Distribution, Moody’s would be responsible for 25% of the total costs of any bond.
The ACN Maximum Amount will be determined by an investment banking firm as the maximum amount
whichthat ACNielsen is able to pay after giving effectto (i)to:any recapitalization plan submitted by such investment bankwhichthat isdesigneddesignated to maximize the claims-paying ability of ACNielsen without impairing the investment bankingfirm'sfirm’s ability to deliver a viability opinion(but which will not require any actionand without requiringstockholder approval),shareholder approval; and(ii)payment of interest on the ACN Notes and related fees and expenses.For these purposes,
financial viability“viability” means the ability of ACNielsen, after giving effect to such recapitalization plan, the payment of interest on the ACN Notes, the payment of related fees and expenses and the payment of the ACN Maximum Amount,toto:pay its debts as they becomeduedue; andtofinance the current and anticipated operating and capital requirements of its business, as reconstituted by such recapitalization plan, for two years from the date any such recapitalization plan is expected to be implemented.In 2001, ACNielsen was acquired by VNU N.V. VNU N.V. assumed ACNielsen’s liabilities under the Indemnity and Joint Defense Agreement, and pursuant to the Indemnity and Joint Defense Agreement, VNU N.V. is to be included with ACNielsen for purposes of determining the ACN Maximum Amount.
In connection with the 1998 Distribution,
the CompanyOld D&B and Donnelley (then known as The Dun & Bradstreet Corporation) entered into an agreement (the “1998 Distribution Agreement”) wherebythe Company hasOld D&B assumed all potential liabilities of Donnelley arising from the IRI action and agreed to indemnify Donnelley in connection with such potential liabilities.DuringUnder the terms of the 2000 Distribution, New D&B undertook to be jointly and severally liable with Moody’s for Old D&B’s obligations to Donnelley under the 1998Cognizant separated into two new companies,Distribution Agreement, including any liabilities arising under the Indemnity and Joint Defense Agreement, and arising from the IRI action itself. However, as between New D&B and Moody’s, it was agreed that under the 2000 Distribution, each of New D&B and Moody’s will be responsible for 50% of any payments required to be made to or on behalf of Donnelley with respect to the IRI action under the terms of the 1998 Distribution Agreement, including legal fees or expenses related to the IRI action.As a result, the Company will be responsible for the payment of 25% of the portion of any judgment or settlement in excess of the ACN Maximum Amount (as adjusted to include VNU N.V.). New D&B will be responsible for the payment of an additional 25% (together constituting Donnelley’s liability under the Indemnity and Joint Defense Agreement for 50% of such amount) and NMR will be responsible for payment of the remaining 50% of liability in excess of the ACN Maximum Amount. In addition, each of the above parties, in accordance with the foregoing percentages, may be required to advance a portion of the amount, if any, by which the ACN Maximum Amount exceeds the amount of the ACN Payment. However, because liability for violations of the antitrust laws is joint and several and because many of the rights and obligations relating to the Indemnity and Joint Defense Agreement are based on
65
contractual relationships, the failure of a party to the Indemnity and Joint Defense Agreement to fulfill its obligations could result in the other parties bearing a greater share of the IRI Liabilities.
As a result of their 1998 separation and pursuant to the related distribution agreement, IMS Health
Incorporated ("IMS") and Nielsen Media Research, Inc. ("NMR"). IMSand NMR are each jointly and severally liable for all Cognizant liabilities under the Indemnity and Joint Defense Agreement.ManagementDiscovery in the lawsuit is ongoing, and although the court earlier set a trial date for September 2004, the court rescinded that date in January 2004 and there is currently no trial date set. Moody’s is unable to predict at this time the
finaloutcome of the IRI action or the financial condition of ACNielsen and VNU N.V. at the time of any such outcome (and hence the Company cannot estimate the amount of the ACN Payment, the ACN Maximum Amount and the portion of any judgment to be paid by VNU N.V. and ACNielsen under the Indemnity and Joint Defense Agreement).Therefore, Moody’s is unable to predict at this time whether the resolution of this matter could materially affect the
Company'sCompany’s financial position, results of operations, or cashflowsflows. Accordingly, no amount in respect of this matter has been accrued in the Company’s consolidated financial statements. If, however, IRI were to prevail in whole or in part in this action or if Moody’s is required to pay or advance a significant portion of any settlement or judgment, the outcome of this matter could have a material adverse effect on Moody’s financialposition. TAX MATTERS The Company entersposition, results of operations, and cash flows.Legacy Tax Matters
Old D&B and its predecessors entered into global tax planning initiatives in the normal course of
business.business, including through tax-free restructurings of both their foreign and domestic operations. These initiatives are subject to normal review by tax authorities.As a result of the review process, 6466 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) uncertainties exist and it is possible that some of these matters could be resolved unfavorably to the Company. The Internal Revenue Service ("IRS"), as part of its audit process, is currently reviewing the Company's utilization of certain capital losses generated during 1989 and 1990. While the Company has not received a formal assessment with respect to these transactions, the Company expects that the IRS will challenge the Company's utilization of these capital losses. Accordingly, at the present time, if assessed, the Company intends to defend its position vigorously. If an assessment is made and the IRS prevails in its view, the total cash obligation to the IRS at December 31, 1998, would approximate $500 million for taxes and accrued interest.Pursuant to a series of agreements, as between themselves, IMS Health and NMR are jointly and severally liable to pay one-half, and
the CompanyNew D&B and Moody’s are jointly and severally liable to pay the other half, of any payments for taxes, penalties and accrued interestarisingresulting fromthisunfavorable IRS rulings on certain tax matters (excluding the matter described below as “Amortization Expense Deductions” for which New D&B and Moody’s are solely responsible) and certain other potential tax liabilities afterthe CompanyNew D&B and/or Moody’s pays the first $137million.million, which amount was paid in connection with the matter described below as “Utilization of Capital Losses”.In connection with the
19982000 Distribution and pursuant to theCompanyterms of the related Distribution Agreement, New D&B andDonnelleyMoody’s have, between themselves, agreed to each be financially responsible for 50% of any potential liabilities that may arise to the extent such potential liabilities are not directly attributable to their respective business operations.Without limiting the generality of the foregoing, three specific tax matters are discussed below.
Royalty Expense Deductions
During the second quarter of 2003, New D&B received an Examination Report from the IRS with respect to a partnership transaction entered into
an agreement wherebyin 1993. In this Report, theCompany has assumed all potential liabilities arising from theseIRS stated its intention to disallow certain royalty expense deductions claimed by Old D&B on its taxmattersreturns for the years 1993 through 1996. New D&B disagrees with the position taken by the IRS in its Report. During the third quarter of 2003, New D&B filed a protest with the Appeals Office of the IRS to contest the Examination Report. If the IRS Appeals Office were to uphold the Examination Report, then New D&B could either: (1) accept andagreed to indemnify Donnelleypay the IRS assessment; (2) challenge the assessment in U.S. Tax Court; or (3) challenge the assessment in U.S. District Court or the U.S. Court of Federal Claims, where payment of the disputed amount would be required in connection with suchpotential liabilities. Aschallenge. Should any such payments be made by New D&B, then pursuant to the terms ofDecember 31, 1998,theCompany has accrued2000 Distribution Agreement, Moody’s would have to pay to New D&B itsanticipated50% share. Moody’s estimates that its share of theprobable liability (approximately $320required payment to the IRS could be up to approximately $57 millionincluding $160 million(including penalties and interest, and net oftax-deductible interest) arisingtax benefits). Moody’s also could be obligated for future interest payments on its share of such liability.In a related matter, during the second quarter of 2003, New D&B received an Examination Report from the
Company'sIRS stating its intention to ignore the partnership structure that had been established in 1993 in connection with the above transaction, and to reallocate to Old D&B income and expense items that had been reported in the partnership tax return for 1996. During the third quarter of 2003, the partnership filed a protest with the Appeals Office of the IRS to contest the Examination Report. If the IRS Appeals Office were to66
uphold the Examination Report, then New D&B could either: (1) accept and pay the IRS assessment; (2) challenge the assessment in U.S. Tax Court; or (3) challenge the assessment in U.S. District Court or the U.S. Court of Federal Claims, where payment of the assessment would be required in connection with such challenge. Should any such payments be made by New D&B, then pursuant to the terms of the 2000 Distribution Agreement, Moody’s would have to pay to New D&B its 50% share. Moody’s estimates that its share of the required payment to the IRS for this matter could be up to approximately $50 million (including penalties and interest, and net of tax benefits). Such exposure could be in addition to the amount described in the preceding paragraph, and Moody’s also could be obligated for future interest payments on its share of such liability.
During the fourth quarter of 2003 and the first quarter of 2004, New D&B participated in meetings with the IRS Appeals Office on the two matters described above.
In addition, in the first quarter of 2004, New D&B received an Examination Report relating to Old D&B’s participation in the partnership structure for the first quarter of 1997. In this Report the IRS stated its intention to disallow certain royalty expense deductions claimed by Old D&B on its tax return for the 1997 tax year. New D&B also received an Examination Report issued to the partnership with respect to its 1997 tax year. In this Examination Report, the IRS stated its intention to ignore the partnership structure that had been established in 1993 in connection with the above transaction, and to reallocate to Old D&B income and expense items that had been reported in the partnership tax return for 1997. New D&B disagrees with the positions taken by the IRS in its Reports and will pursue the same remedies with the same possible consequences described above. Moody’s estimates that its share of the required payment to the IRS in relation to the two Examination Reports could be up to approximately $1.5 million and $0.3 million, respectively (including penalties and interest, and net of tax benefits).
Moody’s believes that the IRS’s proposed assessments of tax against Old D&B and the proposed reallocations of partnership income and expense to Old D&B are inconsistent with each other. Accordingly, while it is possible that the IRS could ultimately prevail in whole or in part on one of such positions, Moody’s believes that it is unlikely that the IRS will prevail on both.
Amortization Expense Deductions
During the fourth quarter of 2003, New D&B received a Notice of Proposed Adjustment from the IRS with respect to a partnership transaction entered into in 1997 that could result in amortization expense deductions from 1997 through 2012. In this Notice the IRS proposed to disallow the amortization expense deductions related to this partnership that were claimed by Old D&B on its 1997 and 1998 tax returns. New D&B disagrees with the position taken by the IRS. IRS audits of Old D&B’s or New D&B’s tax returns for years subsequent to 1998 could result in the issuance of similar Notices of Proposed Adjustment. If the IRS were to issue a formal assessment consistent with the Notices for 1997 and 1998 or for future years, then New D&B could either: (1) accept and pay the IRS assessment; (2) challenge the assessment in U.S Tax Court; or (3) challenge the assessment in U.S. District Court or the U.S. Court of Federal Claims, where payment of the disputed amount would be required in connection with such challenge. Should any such payments be made by New D&B, then pursuant to the terms of the 2000 Distribution Agreement, Moody’s would have to pay to New D&B its 50% share. In addition, should New D&B discontinue claiming the amortization deductions on future tax returns, Moody’s would be required to repay to New D&B an amount equal to the discounted value of its 50% share of the related future tax benefits. New D&B had paid the discounted value of future tax benefits from this transaction in cash to Moody’s at the Distribution Date. Moody’s estimates that the Company’s current potential exposure related to this matter is $92 million (including penalties and interest, and net of tax benefits). This exposure could increase by approximately $3 million to $6 million per year, depending on actions that the IRS may take and on whether New D&B continues claiming the amortization deductions on its tax returns.
Also during the fourth quarter of 2003, New D&B received a Notice of Proposed Adjustment from the IRS with respect to the partnership transaction entered into in 1997. In this Notice the IRS proposed to disallow certain royalty expense deductions claimed by Old D&B on its 1997 and 1998 tax returns. In addition, the IRS proposed to disregard the partnership structure and to reallocate to Old D&B certain partnership income and expense items that had been reported in the partnership tax returns for 1997 and 1998. New D&B disagrees with the positions taken by the IRS. If the IRS were to issue a formal assessment consistent with the Notices for 1997 and 1998 or for future years, then New D&B could either: (1) accept and pay the IRS assessment; (2) challenge the assessment in U.S. Tax Court; (3) challenge the assessment in U.S. District Court or the U.S Court of Federal Claims, where payment of the assessment would be required in connection with such challenge. Should any such payments be made by New D&B, then pursuant to the terms of the 2000 Distribution Agreement, Moody’s would have to pay to New D&B its 50% share of New D&B’s payments to the IRS for the period from 1997 through the Distribution Date. Moody’s estimates that its share of the potential payment
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to the IRS could be up to approximately $125 million (including penalties and interest, and net of tax benefits). Moody’s also could be obligated for future interest payments on its share of such liability.
Moody’s believes that the IRS’s proposed assessments of tax against Old D&B and the proposed reallocations of partnership income and expense to Old D&B are inconsistent with each other. Accordingly, while it is possible that the IRS could ultimately prevail in whole or in part on one of such positions, Moody’s believes that it is unlikely that the IRS will prevail on both.
Utilization of Capital Losses
The IRS has completed its review of the utilization of certain capital losses generated during 1989 and 1990. On June 26, 2000, the IRS, as part of its audit process, issued a formal assessment with respect to the utilization of these capital losses and Old D&B responded by filing a petition for a refund in the U.S. District Court on September 21, 2000, after the payments described below were made. The case is expected to go to trial in 2005.
On May 12, 2000, an amended tax return was filed for the 1989 and
1990.1990 tax periods, which reflected $561.6 million of tax and interest due. Old D&B paid the IRS approximately $349.3 million of this amount on May 12, 2000; 50% of such payment was allocated to Moody’s and had previously been accrued by the Company. IMS Health informed Old D&B that it paid to the IRS approximately $212.3 million on May 17, 2000. The payments were made to the IRS to stop further interest from accruing, and New D&B is contesting the IRS’ assessment. New D&B has indicated that it would also contest the assessment of penalties or other amounts, if any, in excess of the amounts paid. With the possible exception of the matter described in the following sentence, Moody’s does not anticipate any further income statement charges or cash payments related to IRS assessments for this matter. If the IRS were to disallow prior deductions of all transaction costs associated with this matter, Moody’s estimates that its exposure for its share of the additional taxes, penalties and interest (net of tax benefits) on this matter would be approximately $5 million.Subsequent to making its May 2000 payment to the IRS, IMS Health sought partial reimbursement from NMR under their 1998 distribution agreement (the “IMS/NMR Agreement”). NMR paid IMS Health less than the amount sought by IMS Health under the IMS/NMR Agreement and, in 2001, IMS Health filed an arbitration proceeding against NMR to recover the difference. IMS Health sought to include Old D&B in this arbitration, arguing that if NMR should prevail in its interpretation of the IMS/NMR Agreement, then IMS Health could seek the same interpretation in an alternative claim against Old D&B. Neither Old D&B nor any of its predecessors was a party to the IMS/NMR Agreement. On April 29, 2003, an arbitration panel ruled in favor of IMS Health in the arbitration proceeding, awarding IMS Health its full claim plus interest in a decision binding on all parties. As a result, IMS Health’s contingent claim against Old D&B (and consequently Moody’s and New D&B) in connection with this matter has been rendered moot. As no amount with respect to this matter had been accrued by Moody’s, the
final resolutionarbitration panel ruling is not expected to have an impact on the Company’s consolidated financial statements.Summary of Moody’s Exposure to Three Legacy Tax Matters
The Company considers from time to time the range and probability of potential outcomes related to the three legacy tax matters discussed above and establishes reserves that it believes are appropriate in light of the relevant facts and circumstances. In doing so, Moody’s makes estimates and judgments as to future events and conditions and evaluates its estimates and judgments on an ongoing basis. As of December 31, 2003, Moody’s had reserves of approximately $126 million with respect to such matters, which reflected an increase of approximately $16 million during the fourth quarter of 2003 relating to the Amortization Expense Deductions matter. Although the matter had previously been under audit, the Company felt that an increase in the related reserve was appropriate since the Notices of Proposed Adjustment during the fourth quarter of 2003 reflected a formalization by the IRS of its position on the matter. It is possible that the legacy tax matters could be resolved in amounts that are greater than the amounts reserved by the Company, which could result in additional charges that may be material to Moody’s future reported results, financial position and cash flows. Although Moody’s does not believe it is likely that the Company will ultimately be required to pay the full amounts presently being sought by the IRS, potential cash outlays resulting from these matters, which the Company currently estimates could be as much as $331 million, could be material and could increase with time as described above. Such amount does not include potential penalties related to the payments made in May 2000 concerning Utilization of Capital Losses.
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Moody’s Matters
L’Association Francaise des Porteurs d’ Emprunts Russes
On June 20, 2001 a summons was served in an action brought by L’Association Francaise des Porteurs d’ Emprunts Russes (“AFPER”) against Moody’s France SA (a subsidiary of the Company) and filed in the Court of First Instance of Paris, France. In this suit, AFPER, a group of holders of bonds issued by the Russian government prior to the 1917 Bolshevik Revolution, makes claims against Moody’s France SA and Standard & Poor’s SA for lack of diligence and prudence in their ratings of Russia and Russian debt since 1996. AFPER alleges that, by failing to take into account the post-Revolutionary repudiation of pre-Revolutionary Czarist debt by the Soviet government in rating Russia and new issues of Russian debt beginning in 1996, the rating agencies enabled the Russian Federation to issue new debt without repaying the old obligations of the Czarist government. Alleging joint and several liability, AFPER seeks damages of Euro 2.8 billion (approximately U.S. $3.5 billion as of December 31, 2003) plus legal costs. Moody’s believes the allegations lack legal or factual merit and intends to vigorously contest the action. As such, no amount in respect of this matter
will not have a material effect onhas been accrued in theresultsfinancial statements ofoperations, butthe Company. However, if the plaintiffs in this action were to prevail, then the outcome of this matter could have a material adverse effect on Moody’s financial position, results of operations and cashflowsflows. The case has been fully briefed, oral argument was heard before the Court on January 20, 2004, andfinancial position. NOTE 14 SUPPLEMENTAL FINANCIAL DATA Other Current Assets:
AT DECEMBER 31, ---------------- 1998 1997 ------ ------Deferred taxes.............................................. $ 37.0 $ 67.1 Prepaid expenses............................................ 189.7 200.0 Other....................................................... 1.5 2.1 ------ ------ $228.2 $269.2 ====== ======6567 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Property, Plant and Equipment -- Net, carried at cost:
AT DECEMBER 31, ---------------- 1998 1997 ------ ------Buildings................................................... $198.6 $203.1 Machinery and equipment..................................... 426.4 455.1 ------ ------ 625.0 658.2 Less: accumulated depreciation.............................. 382.2 398.6 ------ ------ 242.8 259.6 Leasehold improvements, less: accumulated amortization of $47.9 and $52.6........................................... 26.8 28.7 Land........................................................ 28.7 28.9 ------ ------ $298.3 $317.2 ====== ======Computer Software and Goodwill:
COMPUTER SOFTWARE GOODWILL -------- --------January 1, 1997............................................ $108.7 $216.2 Additions at cost.......................................... 68.7 -- Amortization............................................... (50.6) (5.1) Other deductions and reclassifications..................... 1.2 (16.5)(1) ------ ------ December 31, 1997.......................................... 128.0 194.6 Additions at cost.......................................... 86.0 5.1 Amortization............................................... (55.6) (6.1) Other deductions and reclassifications..................... (9.8) (1.8)(1) ------ ------ December 31, 1998.......................................... $148.6 $191.8 ====== ======- ------------------------- (1) Impact of foreign currency fluctuations. Allowance for Doubtful Accounts:
January 1, 1996............................................. $14.5 Additions charged to costs and expenses..................... 7.2 Recoveries.................................................. 4.8 ----- December 31, 1996........................................... 26.5 Additions charged to costs and expenses..................... 9.0 Recoveries.................................................. 3.9 ----- December 31, 1997........................................... 39.4 Additions charged to costs and expenses..................... 7.5 Write-offs.................................................. (7.9) ----- December 31, 1998........................................... $39.0 =====6668 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Other Expense -- Net:
YEARS ENDED DECEMBER 31, -------------------------- 1998 1997 1996 ------ ------ ------Minority interest...................................... $22.5 $16.9 $33.4 Gain on sale of FIS.................................... (9.6) -- -- Other expense.......................................... 2.3 2.8 5.1 ----- ----- ----- $15.2 $19.7 $38.5 ===== ===== =====NOTEthe Court announced that judgment would be rendered on April 6, 2004.Note 15
SEGMENT INFORMATION At December 31, 1998, theSegment InformationThe Company
adopted the provisions ofreports segment information in accordance with SFAS No. 131,"Disclosures“Disclosures about Segments of an Enterprise and RelatedInformation" ("SFAS No. 131")Information”.In accordance withSFAS No. 131 defines operating segments as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. Prior to 2002, the Company operated in one reportable business segment – Ratings, which accounted for approximately 90% of the Company’s total revenue. With the April 2002 acquisition of KMV, Moody’s now operates in two reportable business segments: Moody’s Investors Service and Moody’s KMV. Accordingly, in the second quarter of 2002, the Company restated its segment informationis being reported consistent withfor corresponding prior periods to conform to theCompany's methodcurrent presentation.Moody’s Investors Service consists of
internal reporting, which excludes divested operationsfour rating groups — structured finance, corporate finance, financial institutions and sovereign risk, and public finance — that generate revenue principally from the assignment of credit ratings on fixed-income instruments in the debt markets, and research, which primarily generates revenue from the sale of investor-oriented credit research, principally produced by the rating groups. Given the dominance of Moody’s Investors Service to Moody’s overall results, the Company does not separately measure or report corporate expenses, nor are they allocated to the Company’s business segments.The prior years' segment information has been restated accordingly. The Company's reportable segmentsAccordingly, all corporate expenses areDun & Bradstreet United States ("U.S."), Dun & Bradstreet Europe/Africa/Middle East ("Europe"), Dun & Bradstreet Asia Pacific, Canada and Latin America and Moody's Investors Service. The three Dun & Bradstreet segments, managed on a geographical basis, provide business-to-business credit, marketing and purchasing information and receivables management services. The Moody'sincluded in operating income of the Moody’s Investors Service segmentprovides credit opinions on investment securitiesandassigns ratingsnone have been allocated tofixed-income securities and other credit obligations.the Moody’s KMV segment.The
accounting policiesMoody’s KMV business consists of thesegmentscombined businesses of KMV, acquired in April 2002, and Moody’s Risk Management Services. Moody’s KMV develops and distributes quantitative credit assessment services for banks and investors in credit-sensitive assets, credit training services and credit process software.Assets used solely by Moody’s KMV are
the sameseparately disclosed within that segment. All other Company assets, including corporate assets, are reported asthose described in Note 1 -- Summarypart ofSignificant Accounting Policies. The Company evaluates performance and allocates resourcesMoody’s Investors Service.Revenue by geographic area is generally based on
segment operating income.the location of the customer.Intersegment sales are
immaterial.
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- --------OPERATING REVENUES Dun & Bradstreet U.S......................... $ 902.5 $ 832.2 $ 783.4 Dun & Bradstreet Europe...................... 427.7 426.1 445.3 Dun & Bradstreet Asia Pacific/Canada/Latin America................................... 88.6 93.8 102.9 -------- -------- -------- Total Dun & Bradstreet Operating Company..... 1,418.8 1,352.1 1,331.6 Moody's Investors Service.................... 495.5 423.1 349.7 All Other(1)................................. 20.2 35.8 101.2 -------- -------- -------- Consolidated Total............................. $1,934.5 $1,811.0 $1,782.5 ======== ======== ========67insignificant and no single customer accounted for 10% or more of total revenue. Below are financial information by segment, Moody’s Investors Service revenue by business unit and revenue and long-lived asset information by geographic area, for the years ended and as of December 31, 2003, 2002 and 2001. Certain prior year amounts have been reclassified to conform to the current presentation.
69
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- --------OPERATING INCOME (LOSS) Dun & Bradstreet U.S. ....................... $ 269.9 $ 252.9 $ 237.8 Dun & Bradstreet Europe...................... (4.2) .6 3.7 Dun & Bradstreet Asia Pacific/Canada/Latin America................................... (9.1) (6.3) 1.5 -------- -------- -------- Total Dun & Bradstreet Operating Company..... 256.6 247.2 243.0 Moody's Investors Service.................... 223.5 185.7 129.3 All Other(1)................................. (59.4) (29.2) (315.1) -------- -------- -------- Consolidated Total............................. 420.7 403.7 57.2 Non-Operating Expense -- Net................. (20.9) (71.3) (71.2) -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES................... $ 399.8 $ 332.4 $ (14.0) ======== ======== ======== DEPRECIATION AND AMORTIZATION(2) Dun & Bradstreet U.S. ....................... $ 60.5 $ 54.9 $ 48.0 Dun & Bradstreet Europe...................... 55.1 51.6 59.3 Dun & Bradstreet Asia Pacific/Canada/Latin America................................... 7.0 6.4 6.7 -------- -------- -------- Total Dun & Bradstreet Operating Company..... 122.6 112.9 114.0 Moody's Investors Service.................... 14.3 13.5 17.4 All Other(1)................................. 4.7 5.5 9.2 -------- -------- -------- Consolidated Total............................. $ 141.6 $ 131.9 $ 140.6 ======== ======== ======== CAPITAL EXPENDITURES Dun & Bradstreet U.S. ....................... $ 19.9 $ 19.3 $ 19.7 Dun & Bradstreet Europe...................... 19.9 14.8 17.9 Dun & Bradstreet Asia Pacific/Canada/Latin America................................... 5.9 1.7 1.9 -------- -------- -------- Total Dun & Bradstreet Operating Company..... 45.7 35.8 39.5 Moody's Investors Service.................... 7.5 11.0 10.3 All Other(1)................................. 2.2 3.5 8.1 -------- -------- -------- Consolidated Total............................. $ 55.4 $ 50.3 $ 57.9 ======== ======== ======== COMPUTER SOFTWARE AND OTHER INTANGIBLES Dun & Bradstreet U.S. ....................... $ 44.2 $ 44.7 $ 53.4 Dun & Bradstreet Europe...................... 35.8 28.5 34.1 Dun & Bradstreet Asia Pacific/Canada/Latin America................................... 1.1 2.7 1.3 -------- -------- -------- Total Dun & Bradstreet Operating Company..... 81.1 75.9 88.8 Moody's Investors Service.................... 4.5 2.9 5.3 All Other(1)................................. 6.1 -- -- -------- -------- -------- Consolidated Total............................. $ 91.7 $ 78.8 $ 94.1 ======== ======== ========68Financial Information by Segment
Year Ended December 31, 2003 Moody’s Investors Moody’s Service KMV Consolidated Revenue $ 1,134.7 $ 111.9 $ 1,246.6 Operating expenses 462.2 88.7 550.9 Depreciation and amortization 15.4 17.2 32.6
Operating income 657.1 6.0 663.1
Non-operating expense, net (6.7 )
Income before provision for income taxes 656.4 Provision for income taxes 292.5
Net income $ 363.9
Total assets at December 31 $ 673.0 $ 268.4 $ 941.4
Year Ended December 31, 2002 Year Ended December 31, 2001 Moody’s Moody’s Investors Moody’s Investors Moody’s Service KMV Consolidated Service KMV Consolidated Revenue $ 941.8 $ 81.5 $ 1,023.3 $ 765.9 $ 30.8 $ 796.7 Operating expenses 385.7 74.9 460.6 352.9 28.3 381.2 Depreciation and amortization 12.7 11.9 24.6 11.5 5.5 17.0
Operating income (loss) 543.4 (5.3 ) 538.1 401.5 (3.0 ) 398.5
Non-operating expense, net (20.7 ) (16.6 )
Income before provision for income taxes 517.4 381.9 Provision for income taxes 228.5 169.7
Net income $ 288.9 $ 212.2
Total assets at December 31 $ 364.2 $ 266.6 $ 630.8 $ 475.5 $ 29.9 $ 505.4
Moody’s Investors Service Revenue by Business Unit
Year Ended December 31, 2003 2002 2001 Ratings revenue: Structured finance $ 460.6 $ 384.3 $ 273.8 Corporate finance 278.8 227.7 225.7 Financial institutions and sovereign risk 181.2 155.0 130.7 Public finance 87.2 81.2 64.2
Total ratings revenue 1,007.8 848.2 694.4 Research revenue 126.9 93.6 71.5
Total Moody’s Investors Service $ 1,134.7 $ 941.8 $ 765.9
70
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- --------ASSETS Dun & Bradstreet U.S......................... $ 409.3 $ 415.1 $ 362.5 Dun & Bradstreet Europe...................... 599.9 581.0 658.3 Dun & Bradstreet Asia Pacific/Canada/Latin America................................... 68.9 90.3 112.6 -------- -------- -------- Total Dun & Bradstreet Operating Company..... 1,078.1 1,086.4 1,133.4 Moody's Investors Service.................... 152.4 153.0 151.1 Discontinued Operations...................... -- 296.5 430.6 All Other(1)................................. 558.7 550.1 510.3 -------- -------- -------- Consolidated Total............................. $1,789.2 $2,086.0 $2,225.4 ======== ======== ========SUPPLEMENTAL GEOGRAPHIC AND PRODUCT LINE INFORMATION
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- --------OPERATING REVENUES United States................................ $1,318.0 $1,213.3 $1,171.5 International................................ 616.5 597.7 611.0 -------- -------- -------- Consolidated Total............................. $1,934.5 $1,811.0 $1,782.5 ======== ======== ======== LONG-LIVED ASSETS United States................................ $ 492.4 $ 482.1 $ 515.4 International................................ 446.9 448.8 487.5 -------- -------- -------- Consolidated Total............................. $ 939.3 $ 930.9 $1,002.9 ======== ======== ======== PRODUCT LINE REVENUES Credit Information Services.................. $ 984.5 $ 966.5 $ 968.9 Marketing Information Services............... 282.7 244.7 216.9 Purchasing Information Services.............. 23.0 15.7 11.2 Receivables Management Services.............. 128.6 125.2 134.6 -------- -------- -------- Total Dun & Bradstreet Operating Company....... $1,418.8 $1,352.1 $1,331.6 ======== ======== ========- ------------------------- (1) TheRevenue and Long-lived Asset Information by Geographic Area
2003 2002 2001 Revenue: United States $ 795.3 $ 680.8 $ 560.7 International 451.3 342.5 236.0
Total $ 1,246.6 $ 1,023.3 $ 796.7
Long-lived assets: United States $ 255.9 $ 269.3 $ 50.3 International 14.7 15.4 8.9
Total $ 270.6 $ 284.7 $ 59.2
Note 16 Valuation and Qualifying Accounts
Accounts receivable allowances primarily represent adjustments to customer billings that are estimated when the related revenue is recognized. In 2002, the Company reduced its provision rates and allowance to reflect its current estimate of the appropriate level of accounts receivable allowances. During 2003, the Company reduced its provision rates and in the fourth quarter of 2003, the Company recorded adjustments to the allowances totaling $6.0 million, of which approximately $3.0 million related to 2002 and $3.0 million related to prior quarters of 2003. Below is a summary of activity for each of the three years in the period ended December 31, 2003:
Balance at Additions Write-offs Balance Beginning Charged to and at End of of the Year Revenue Adjustments the Year $ (16.4 ) (16.4 ) 16.9 $ (15.9 ) 2002 (27.3 ) (20.1 ) 31.0 (16.4 ) 2001 (24.4 ) (28.8 ) 25.9 (27.3 ) Note 17 Insurance Recovery
In February 2003, Moody’s received a $15.9 million insurance recovery related to the September 11th tragedy, for incremental costs incurred and for lost profits due to the sharp decline in debt market activity in the weeks following
tables itemize "All Other"
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 ------ -------- --------OPERATING REVENUES Divested Operations: Financial Information Services................ $ 18.5 $ 34.3 $ 35.6 American Credit Indemnity..................... -- -- 62.9 Other Revenues.................................. 1.7 1.5 2.7 ------ -------- -------- Total "All Other"............................... $ 20.2 $ 35.8 $ 101.2 ====== ======== ========6971 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 ------ -------- --------OPERATING INCOME (LOSS) Divested Operations: Financial Information Services................ $ 4.2 $ 5.8 $ 6.7 American Credit Indemnity..................... -- -- .5 Corporate and Other............................. (35.6) (35.0) (92.9) Loss on the sale of American Credit Indemnity... -- -- (68.2) Reorganization Costs............................ (28.0) -- (161.2) ------ -------- -------- Total "All Other"............................... $(59.4) $ (29.2) $ (315.1) ====== ======== ======== DEPRECIATION AND AMORTIZATION Divested Operations: Financial Information Services................ $ 1.1 $ 2.6 $ 2.4 American Credit Indemnity..................... -- -- 1.3 Corporate and Other............................. 3.6 2.9 5.5 ------ -------- -------- Total "All Other"............................... $ 4.7 $ 5.5 $ 9.2 ====== ======== ======== CAPITAL EXPENDITURES Divested Operations: Financial Information Services................ $ .7 $ 3.4 $ 1.3 American Credit Indemnity..................... -- -- .3 Corporate and Other............................. 1.5 .1 6.5 ------ -------- -------- Total "All Other"............................... $ 2.2 $ 3.5 $ 8.1 ====== ======== ======== COMPUTER SOFTWARE AND OTHER INTANGIBLES Corporate....................................... $ 6.1 $ -- $ -- ------ -------- -------- Total "All Other"............................... $ 6.1 $ -- $ -- ====== ======== ======== ASSETS Divested Operations: Financial Information Services................ $ -- $ 6.0 $ 7.4 Corporate and Other (primarily domestic pensions and taxes).................................... 558.7 544.1 502.9 ------ -------- -------- Total "All Other"............................... $558.7 $ 550.1 $ 510.3 ====== ======== ========- ------------------------- (2) Includes depreciation and amortizationthe disaster. Moody’s had previously received a $4.0 million advance payment in 2002, resulting in a total recovery ofProperty, Plant and Equipment, Computer Software, Goodwill and Other Intangibles. 7072 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 16 QUARTERLY FINANCIAL DATA (UNAUDITED)
THREE MONTHS ENDED ---------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR -------- ------- ------------ ----------- --------1998 Operating Revenues Dun & Bradstreet U.S............ $ 225.5 $213.0 $219.8 $244.2 $ 902.5 Dun & Bradstreet Europe......... 92.4 106.6 98.9 129.8 427.7 Dun & Bradstreet Asia Pacific/ Canada/Latin America......... 20.1 23.4 22.3 22.8 88.6 ------- ------ ------ ------ -------- Total Dun & Bradstreet Operating Company...................... 338.0 343.0 341.0 396.8 1,418.8 Moody's Investors Service....... 123.3 133.1 117.1 122.0 495.5 All Other(1).................... 9.8 7.9 1.5 1.0 20.2 ------- ------ ------ ------ -------- Consolidated Operating Revenues... $ 471.1 $484.0 $459.6 $519.8 $1,934.5 ======= ====== ====== ====== ======== Operating Income (Loss) Dun & Bradstreet U.S............ $ 69.9 $ 52.7 $ 63.6 $ 83.7 $ 269.9 Dun & Bradstreet Europe......... (15.2) (2.8) (2.9) 16.7 (4.2) Dun & Bradstreet Asia Pacific/ Canada/Latin America......... (5.1) (1.0) (1.6) (1.4) (9.1) ------- ------ ------ ------ -------- Total Dun & Bradstreet Operating Company...................... 49.6 48.9 59.1 99.0 256.6 Moody's Investors Service....... 55.8 62.3 51.3 54.1 223.5 All Other(1).................... (12.6) (32.7) (7.3) (6.8) (59.4) ------- ------ ------ ------ -------- Consolidated Operating Income (Loss).......................... $ 92.8 $ 78.5 $103.1 $146.3 $ 420.7 ======= ====== ====== ====== ======== Income from: Continuing Operations, Net of Income Taxes(2).............. $ 51.5 $ 39.6 $ 68.7 $ 86.6 $ 246.4 Discontinued Operations, Net of Income Taxes................. 12.0 21.7 -- -- 33.7 ------- ------ ------ ------ -------- Net Income........................ $ 63.5 $ 61.3 $ 68.7 $ 86.6 $ 280.1 ======= ====== ====== ====== ======== Basic Earnings Per Share of Common Stock: Continuing Operations........... $ .30 $ .23 $ .40 $ .52 $ 1.45 Discontinued Operations......... .07 .13 -- -- .20 ------- ------ ------ ------ -------- Basic Earnings Per Share of Common Stock........................... $ .37 $ .36 $ .40 $ .52 $ 1.65 ======= ====== ====== ====== ========7173 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED ---------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR -------- ------- ------------ ----------- --------Diluted Earnings Per Share of Common Stock(3): Continuing Operations........... $ .30 $ .23 $ .40 $ .52 $ 1.44 Discontinued Operations......... .07 .12 -- -- .19 ------- ------ ------ ------ -------- Diluted Earnings Per Share of Common Stock.................... $ .37 $ .35 $ .40 $ .52 $ 1.63 ======= ====== ====== ====== ======== 1997 Operating Revenues Dun & Bradstreet U.S............ $ 208.5 $196.4 $203.9 $223.4 $ 832.2 Dun & Bradstreet Europe......... 100.3 107.8 98.6 119.4 426.1 Dun & Bradstreet Asia Pacific/ Canada/Latin America......... 21.0 24.6 23.8 24.4 93.8 ------- ------ ------ ------ -------- Total Dun & Bradstreet Operating Company...................... 329.8 328.8 326.3 367.2 1,352.1 Moody's Investors Service....... 96.4 103.3 112.9 110.5 423.1 All Other(1).................... 10.2 8.8 8.6 8.2 35.8 ------- ------ ------ ------ -------- Consolidated Operating Revenues... $ 436.4 $440.9 $447.8 $485.9 $1,811.0 ======= ====== ====== ====== ======== Operating Income (Loss) Dun & Bradstreet U.S............ $ 65.2 $ 50.9 $ 58.7 $ 78.1 $ 252.9 Dun & Bradstreet Europe......... (13.7) 1.2 (4.5) 17.6 .6 Dun & Bradstreet Asia Pacific/ Canada/Latin America......... (3.6) (.4) (.8) (1.5) (6.3) ------- ------ ------ ------ -------- Total Dun & Bradstreet Operating Company...................... 47.9 51.7 53.4 94.2 247.2 Moody's Investors Service....... 37.2 46.5 50.3 51.7 185.7 All Other(1).................... (7.2) (9.1) (5.9) (7.0) (29.2) ------- ------ ------ ------ -------- Consolidated Operating Income (Loss).......................... $ 77.9 $ 89.1 $ 97.8 $138.9 $ 403.7 ======= ====== ====== ====== ======== Income (Loss) from: Continuing Operations, Net of Income Taxes................. $ 36.5 $ 47.7 $ 54.6 $ 80.2 $ 219.0 Discontinued Operations, Net of Income Taxes(4).............. (1.6) 6.3 30.6 56.7 92.0 ------- ------ ------ ------ --------7274 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED ---------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR -------- ------- ------------ ----------- --------Income before Cumulative Effect of Accounting Changes.............. 34.9 54.0 85.2 136.9 311.0 Cumulative Effect of Accounting Changes, Net of Income Tax Benefit......................... (127.0) -- -- -- (127.0) ------- ------ ------ ------ -------- Net Income (Loss)................. $ (92.1) $ 54.0 $ 85.2 $136.9 $ 184.0 ======= ====== ====== ====== ======== Basic Earnings (Loss) Per Share of Common Stock: Continuing Operations........... $ .21 $ .28 $ .32 $ .47 $ 1.28 Discontinued Operations......... (.01) .04 .18 .33 .54 ------- ------ ------ ------ -------- Before Cumulative Effect of Accounting Changes........... .20 .32 .50 .80 1.82 Cumulative Effect of Accounting Changes, Net of Income Tax Benefit...................... (.74) -- -- -- (.74) ------- ------ ------ ------ -------- Basic Earnings (Loss) Per Share of Common Stock.................... $ (.54) $ .32 $ .50 $ .80 $ 1.08 ======= ====== ====== ====== ======== Diluted Earnings (Loss) Per Share of Common Stock(3): Continuing Operations........... $ .21 $ .28 $ .31 $ .46 $ 1.27 Discontinued Operations......... (.01) .03 .18 .33 .53 ------- ------ ------ ------ -------- Before Cumulative Effect of Accounting Changes........... .20 .31 .49 .79 1.80 Cumulative Effect of Accounting Changes, Net of Income Tax Benefit...................... (.73) -- -- -- (.73) ------- ------ ------ ------ -------- Diluted Earnings (Loss) Per Share of Common Stock................. $ (.53) $ .31 $ .49 $ .79 $ 1.07 ======= ====== ====== ====== ========- ------------------------- (1) The following tables itemize "All Other" for Operating Revenues and Operating Income:
THREE MONTHS ENDED ---------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR -------- ------- ------------ ----------- --------OPERATING REVENUES 1998 Divested Operations -- Financial Information Services............ $ 9.2 $ 7.6 $ 1.4 $ .3 $ 18.5 Other Revenues.................... .6 .3 .1 .7 1.7 ------ ------ ------ ------ -------- Total........................ $ 9.8 $ 7.9 $ 1.5 $ 1.0 $ 20.2 ====== ====== ====== ====== ========7375 THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED ---------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR -------- ------- ------------ ----------- --------1997 Divested Operations -- Financial Information Services............ $ 9.9 $ 8.5 $ 8.2 $ 7.7 $ 34.3 Other Revenues.................... .3 .3 .4 .5 1.5 ------ ------ ------ ------ -------- Total........................ $ 10.2 $ 8.8 $ 8.6 $ 8.2 $ 35.8 ====== ====== ====== ====== ======== OPERATING INCOME (LOSS) 1998 Divested Operations -- Financial Information Services............ $ 2.8 $ 1.1 $ .3 $ -- $ 4.2 Reorganization Costs.............. (.5) (27.5) -- -- (28.0) Corporate and Other............... (14.9) (6.3) (7.6) (6.8) (35.6) ------ ------ ------ ------ -------- Total........................ $(12.6) $(32.7) $ (7.3) $ (6.8) $ (59.4) ====== ====== ====== ====== ======== 1997 Divested Operations -- Financial Information Services............ $ 2.7 $ 1.4 $ 1.4 $ .3 $ 5.8 Corporate and Other............... (9.9) (10.5) (7.3) (7.3) (35.0) ------ ------ ------ ------ -------- Total........................ $ (7.2) $ (9.1) $ (5.9) $ (7.0) $ (29.2) ====== ====== ====== ====== ========(2) Income from Continuing Operations, Net of Income Taxes included after-tax reorganization$19.9 million. Moody’s had incurred incremental costs of$.5$6.3 million for property damage and$22.7temporary office facilities, and had fully accrued for the recovery of these costs in its financial statements. The remainder of the insurance recovery, $13.6 million,incurredhad not been previously accrued as its realizability was not sufficiently assured. As a result, in thequarters ended March 31 and June 30, respectively, andfirst quarter of 2003 Moody’s recorded aone-time after-taxgainon the saleofFinancial Information Services, the publishing unit of Moody's Investors Service, of $5.3$13.6 million,incurredincluded in other non-operating income (expense), net in thequarter ended September 30. (3)consolidated statements of operations.Note 18 Quarterly Financial Data (Unaudited)
Three Months Ended March 31 June 30 September 30 December 31 Year Revenue $ 278.2 $ 312.7 $ 305.0 $ 350.7 $ 1,246.6 Operating income 149.1 176.7 161.2 176.1 663.1 Net income 91.9 100.9 85.6 85.5 363.9 Basic earnings per share $ 0.62 $ 0.68 $ 0.57 $ 0.57 $ 2.44 Diluted earnings per share $ 0.61 $ 0.66 $ 0.56 $ 0.56 $ 2.39 Revenue $ 231.6 $ 271.5 $ 248.3 $ 271.9 $ 1,023.3 Operating income 134.7 147.0 127.4 129.0 538.1 Net income 72.6 78.7 67.8 69.8 288.9 Basic earnings per share $ 0.47 $ 0.51 $ 0.44 $ 0.46 $ 1.88 Diluted earnings per share $ 0.46 $ 0.49 $ 0.43 $ 0.45 $ 1.83 Basic and diluted earnings per share are computed independently for each of the periods presented. The number of weighted average shares outstanding changes as common shares are issued
forpursuant to employee stock plans and for other purposes or as shares are repurchased.For this reason, the sum of quarterly earnings per common share may not be the same as earnings per common share for the year. (4) Income from Discontinued Operations, Net of Income Taxes included a $9.4 million pre-tax gain on the sale of P-East in the quarter ended December 31, 1997. 747671
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures: The Company carried out an evaluation, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings under the Exchange Act.
During 2003 the Company implemented procedures to improve controls relating to consulting arrangements. The improved procedures were adopted following a review of the Company’s consulting arrangements, and a determination by the Company that it was appropriate to reclassify payments made to certain individuals as salary rather than consulting fees. The Company does not believe that the impacts of these changes are or will be material to its results of operations, cash flows or financial position.
In addition, the Company is adopting procedures to improve controls and processes related to the analysis and determination of accounts receivable allowances and related accounts. The improved procedures are being adopted following reviews and adjustments of such accounts during the fourth quarter of 2003.
PART III
Except for the information relating to the executive officers of the Company set forth in Part I of this annual report on Form 10-K, the information called for by Items 10-13 is contained in the Company’s definitive proxy statement for use in connection with its annual meeting of stockholders scheduled to be held on April 27, 2004, and is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is incorporated herein by reference to the section entitled "Election of Directors" in the Company's Proxy Statement to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 1998, except that "Executive Officers of the Registrant" on Pages 16-17 of this Form 10-K responds to Item 401(b) and (e) of Regulation S-K.ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by reference to the section entitled "Compensation of Executive Officers and Directors" in the Company's Proxy Statement to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 1998.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is incorporated herein by reference to the section entitled "Security Ownership of Management and Others" in the Company's Proxy Statement to be filed with the Securities and Exchange Commission no later than 120 days after December 31, 1998.AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in responseITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Audit Committee has established a policy setting forth the requirements for the pre-approval of audit and permissible non-audit services to
this Item is incorporated hereinbe provided byreferencethe Company’s independent auditors. Under the policy, the Audit Committee pre-approves the annual audit engagement terms and fees, as well as any other audit services and specified categories of non-audit services, subject to certain pre-approved fee levels. In addition, pursuant to thesection entitled "Security Ownershippolicy, the Audit Committee has authorized its chair to pre-approve other audit and permissible non-audit services up to $50,000 per engagement and a maximum ofManagement$250,000 per year. The policy requires that the Audit Committee chair report any pre-approval decisions to the full Audit Committee at its next scheduled meeting. For the year ended December 31, 2003, the Audit Committee approved all of the services provided by the Company’s independent auditors, which are described below.72
Audit Fees
The aggregate fees for professional services rendered for the audit of the Company’s annual financial statements for the years ended December 31, 2003 and
Others"2002, for the review of the financial statements included in theCompany's Proxy StatementCompany’s Reports on Forms 10-Q and 8-K, and for statutory audits of non-U.S. subsidiaries were approximately $1.0 million (including $0.1 million incurred but not billed) in 2003 and $0.9 million (including $0.3 million incurred but not billed) in 2002. All such fees were attributable tobe filed withPricewaterhouseCoopers LLP.Audit-Related Fees
The aggregate fees billed for audit-related services rendered to the
Securities and Exchange Commission no later than 120 days afterCompany by PricewaterhouseCoopers LLP for the years ended December 31,1998.2003 and 2002 were approximately $0.4 million and $0.5 million, respectively. Such services included acquisition due diligence reviews and related audits, employee benefit plan audits, internal control reviews, and consultations concerning financial accounting and reporting standards.Tax Fees
The aggregate fees billed for tax services rendered to the Company by PricewaterhouseCoopers LLP for the years ended December 31, 2003 and 2002 were approximately $0.1 million and $0.6 million, respectively. Tax services rendered by PricewaterhouseCoopers LLP principally related to expatriate tax services and tax consulting and compliance.
All Other Fees
The aggregate fees billed for all other services rendered to the Company by PricewaterhouseCoopers LLP for the years ended December 31, 2003 and 2002 were approximately $3,000 and $150,000, respectively. In 2002, such fees principally related to data entry services provided to the Company’s ratings business. The Company does not anticipate that PricewaterhouseCoopers LLP will provide any future services in this area.
PART IV
ITEM
14.15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K(a) List of documents filed as part of this report. (1) Financial Statements. See Index to Financial Statements and Schedules in Part II, Item 8 on Page 33 of this Form 10-K. (2) Financial Statement Schedules. None. (3) Exhibits. See Index to Exhibits on Pages 78-81 of this Form 10-K. 7577 (b) Reports on Form 8-K. None. (c) Exhibits. See Index to Exhibits on Pages 78-81 of this Form 10-K. (d) Financial Statement Schedules. None. 7678
(a) List of documents filed as part of this report.
(1) Financial Statements. See Index to Financial Statements, Item 8 of this Form 10-K.
(2) Financial Statement Schedules. None.
(3) Exhibits. See Index to Exhibits on pages 75-78 of this Form 10-K.
(b) Reports on Form 8-K. The Company furnished its third quarter earnings press release in a Current Report on Form 8-K on October 29, 2003, on which information was reported under Items 9 and 12. The Company furnished its fourth quarter earnings press release in a Current Report on Form 8-K on February 5, 2004, on which information was reported under Items 9 and 12. 73
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.
THE DUN & BRADSTREET CORPORATION (Registrant) By: /s/ VOLNEY TAYLOR ----------------------------------- (Volney Taylor, Chairman and Chief Executive Officer)
MOODY’S CORPORATION
(Registrant)By: /s/ JOHN RUTHERFURD, JR. John Rutherfurd, Jr.
Chairman and Chief Executive OfficerDate:
February 16, 1999March 12, 2004Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/ VOLNEY TAYLOR /s//s/ JOHN RUTHERFURD, JR. John Rutherfurd, Jr., Chairman of the
Board of Directors and Chief Executive Officer
(principal executive officer)/s/ JEANNE M. DERING Jeanne M. Dering, Senior Vice President
and Chief Financial Officer
(principal financial officer and principal
accounting officer)/s/ HALL ADAMS, JR. /s/ CONNIE MACK Hall Adams, Jr., Director Connie Mack, Director /s/ MARY JOHNSTON EVANS /s/ RAYMOND W. MCDANIEL, JR. Mary Johnston Evans, Director Raymond W. McDaniel, Jr., Director,
Chief Operating Officer/s/ ROBERT R. GLAUBER - -------------------------------------- -------------------------------------- (Volney Taylor, (Robert R. Glauber, Director) Chairman, Chief Executive Officer and Director) (principal executive officer) /s/ FRANK S. SOWINSKI /s/ RONALD L. KUEHN, JR. - -------------------------------------- -------------------------------------- (Frank S. Sowinski, Senior Vice (Ronald L. Kuehn, Jr., Director) President and Chief Financial Officer) (principal financial officer) /s/ CHESTER J. GEVEDA, JR. /s/ ROBERT J. LANIGAN - -------------------------------------- -------------------------------------- (Chester J. Geveda, Jr., Vice (Robert J. Lanigan, Director) President -- Controller) (principal accounting officer) /s/ HALL ADAMS, JR. /s/ VERNON R. LOUCKS JR. - -------------------------------------- -------------------------------------- (Hall Adams, Jr., Director) (Vernon R. Loucks Jr., Director) /s/ CLIFFORD L. ALEXANDER, JR. /s//s/ HENRY A. MCKINNELL, JR. - -------------------------------------- -------------------------------------- (Clifford L. Alexander, Jr., Director) (HenryPH.D.Robert R. Glauber, Director Henry A. McKinnell, Jr. Director) /s/ MARY JOHNSTON EVANS /s/ MICHAEL R. QUINLAN - -------------------------------------- -------------------------------------- (Mary Johnston Evans, Director) (Michael R. Quinlan, Director) Date: February 16, 1999Ph.D., Director7779Date: March 12, 2004
74
INDEX TO EXHIBITS
REGULATIONS-K EXHIBIT NUMBER 3 ARTICLES OF INCORPORATION AND BY-LAWS .1 Restated Certificate of Incorporation of the Registrant dated June 15, 1998, as amended effective June 30, 1998, and as further amended effective October 1, 2000 (incorporated by reference to Exhibit 3.1 to Registrant's Quarterlythe Report on Form10-Q,8-K of the Registrant, file number 1-14037, filedAugust 14, 1998)October 4, 2000)..2 Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to Registrant'sof the Registrant’s RegistrationNo. 001-14037Statement on Form 10, file number 1-14037, filed June 18, 1998).4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES .1 Multi-Year Revolving Credit and Competitive Advance Facility, dated as of June 9, 1998, among the Registrant (p.k.a. The New Dun & Bradstreet Corporation), the Borrowing Subsidiaries parties thereto, the Lenders parties thereto, The Chase Manhattan Bank, Citibank, N.A. and Morgan Guaranty Trust Company (incorporated by reference to Exhibit 4.1 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .2 364-Day Revolving Credit and Competitive Advance Facility, dated as of June 9, 1998, among the Registrant (p.k.a. The New Dun & Bradstreet Corporation), the Borrowing Subsidiaries parties thereto, the Lenders parties thereto, The Chase Manhattan Bank, Citibank, N.A. and Morgan Guaranty Trust Company (incorporated by reference to Exhibit 4.2 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .3Specimen Common Stock certificate (incorporated by reference to Exhibit 4.1 to Registrant's Registration No. 001-14037the Report on Form10,8-K of the Registrant, file number 1-14037, filedJune 18, 1998)October 4, 2000)..4.2 Amended and Restated Rights Agreement between the Registrant, EquiServe Trust Company, N.A., as Rights Agent, and The Bank of New York, as successor Rights Agent, dated as of June 3, 1998, between the Registrant (p.k.a. The New Dun & Bradstreet Corporation) and First Chicago Trust Company of New YorkOctober 22, 2001 (incorporated by reference to Exhibit14.2 toRegistrant's Registration No. 001-14037the Report on Form8-A,10-K of the Registrant, file number 1-14037, filedJune 18, 1998)March 22, 2002)..3 Five-Year Credit Agreement, dated as of September 11, 2000, among the Registrant, certain subsidiaries of the Registrant, the lenders party thereto, The Chase Manhattan Bank, as administrative agent, Citibank, N.A., as syndication agent, and The Bank of New York, as documentation agent (incorporated by reference to Exhibit 4.2 to the Report on Form 8-K of the Registrant, file number 1-14037, filed October 4, 2000). .4 Amended and Restated Credit Agreement, dated as of September 10, 2001, between Moody’s Corporation and certain subsidiaries of the Registrant, the lenders party thereto, The Chase Manhattan Bank, as administrative agent, Citibank, N.A., as syndication agent, and The Bank of New York, as documentation agent (incorporated by reference to Exhibit 10.1 to the Report on Form 10-Q of the Registrant, file number 1-14037, filed November 14, 2001). .5 Amended and Restated 364-Day Credit Agreement, dated as of September 8, 2003, between Moody’s Corporation and certain subsidiaries of the Registrant, the lenders party thereto, JP Morgan Chase Bank, as administrative agent, Citibank, N.A., as syndication agent, and The Bank of New York, as documentation agent (incorporated by reference to Exhibit 10.3 to the Report on Form 10-Q of the Registrant, file number 1-14037, filed November 12, 2003). 10 MATERIAL CONTRACTS .1 Distribution Agreement, dated as of September 30, 2000, between the Registrant and The Dun & Bradstreet Corporation (f.k.a. The New D&B Corporation) (incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the Registrant, file number 1-14037, filed October 4, 2000). .2 Tax Allocation Agreement, dated as of September 30, 2000, between the Registrant and The Dun & Bradstreet Corporation (f.k.a. The New D&B Corporation) (incorporated by reference to Exhibit 10.2 to the Report on Form 8-K of the Registrant, file number 1-14037, filed October 4, 2000). .3 Employee Benefits Agreement, dated as of September 30, 2000, between the Registrant and The Dun & Bradstreet Corporation (f.k.a. The New D&B Corporation) (incorporated by reference to Exhibit 10.3 to the Report on Form 8-K of the Registrant, file number 1-14037, filed October 4, 75
S-K EXHIBIT NUMBER 2000). .4 Supplemental Executive Benefit Plan of Moody’s Corporation, dated as of September 30, 2000 (incorporated by reference to Exhibit 10.4 to the Report on Form 10-K of the Registrant, file number 1-14037, filed March 22, 2002). .5 Intellectual Property Assignments, dated as of September 1, 2000, between the Registrant and The Dun & Bradstreet Corporation (f.k.a. The New D&B Corporation) (incorporated by reference to Exhibit 10.4 to the Report on Form 8-K of the Registrant, file number 1-14037, filed October 4, 2000). .6 Pension Benefit Equalization Plan of Moody’s Corporation (incorporated by reference to Exhibit 10.9 to Registrant’s Quarterly Report on Form 10-Q, file number 1-14037, filed November 14, 2000). .7 Profit Participation Benefit Equalization Plan of Moody’s Corporation (incorporated by reference to Exhibit 10.11 to Registrant’s Quarterly Report on Form 10-Q, file number 1-14037, filed November 14, 2000). .8 The Moody’s Corporation Nonfunded Deferred Compensation Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.12 to Registrant’s Quarterly Report on Form 10-Q, file number 1-14037, filed November 14, 2000). .9 1998 Moody’s Corporation Replacement Plan for Certain Non-Employee Directors Holding Dun & Bradstreet Corporation Equity-Based Awards (incorporated by reference to Exhibit to Registrant’s Quarterly Report on Form 10-Q, file number 1- 14037, filed November 14, 2000). .10 1998 Moody’s Corporation Replacement Plan for Certain Employees Holding Dun & Bradstreet Corporation Equity-Based Awards (incorporated by reference to Exhibit 10.14 to Registrant’s Quarterly Report on Form 10-Q, file number 1-14037, filed November 14, 2000). .11 1998 Moody’s Corporation Non-Employee Directors’ Stock Incentive Plan (as amended on April 23, 2001) (incorporated by reference to Exhibit 10.11 to the Report on Form 10-K of the Registrant, file number 1-14037, filed March 22, 2002). .12 1998 Moody’s Corporation Key Employees’ Stock Incentive Plan (incorporated by reference to Exhibit 10.16 to Registrant’s Quarterly Report on Form 10-Q, file number 1-14037, filed November 14, 2000). .13 Moody’s Corporation Career Transition Plan (incorporated by reference to Exhibit 10.17 to Registrant’s Annual Report on Form 10-K, file number 1-14037, filed March 15, 2001). .14 Distribution Agreement, dated as of June 30, 1998, between R.H. Donnelley Corporation (p.k.a.(f.k.a. The Dun & Bradstreet Corporation) and the Registrant(p.k.a.(f.k.a. The New Dun & Bradstreet Corporation) (incorporated by reference to Exhibit 10.1 toRegistrant'sRegistrant’s Quarterly Report on Form 10-Q, filed August 14, 1998)..2.15 2001 Moody’s Corporation Key Employees Stock Incentive Plan (incorporated by reference to Exhibit 10.15 to the Report on Form 10-K of the Registrant, file number 1-14037, filed March 22, 2002). .16 Tax Allocation Agreement, dated as of June 30, 1998, between R.H. Donnelley Corporation (p.k.a.(f.k.a. The Dun & Bradstreet Corporation) and the Registrant(p.k.a.(f.k.a. The New Dun & Bradstreet Corporation) (incorporated by reference to Exhibit 10.2 toRegistrant'sRegistrant’s Quarterly Report on Form 10-Q, filed August 14, 1998)..376
S-K EXHIBIT NUMBER .17 Employee Benefits Agreement, dated as of June 30, 1998, between R.H. Donnelley Corporation (p.k.a.(f.k.a. The Dun & Bradstreet Corporation) and the Registrant(p.k.a.(f.k.a. The New Dun & Bradstreet Corporation) (incorporated by reference to Exhibit 10.3 toRegistrant'sRegistrant’s Quarterly Report on Form 10-Q, filed August 14, 1998).7880
REGULATION S-K EXHIBIT NUMBER.4 Intellectual Property Agreement dated as of June 30, 1998 between R.H. Donnelley Corporation (p.k.a. The Dun & Bradstreet Corporation) and the Registrant (p.k.a. The New Dun & Bradstreet Corporation) (incorporated by reference to Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .5 Shared Transaction Services Agreement dated as of June 30, 1998 between R.H. Donnelley Corporation (p.k.a. The Dun & Bradstreet Corporation) and the Registrant (p.k.a. The New Dun & Bradstreet Corporation) (incorporated by reference to Exhibit 10.5 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .6 Data Services Agreement dated as of June 30, 1998 between R.H. Donnelley Corporation (p.k.a. The Dun & Bradstreet Corporation) and the Registrant (p.k.a. The New Dun & Bradstreet Corporation) (incorporated by reference to Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .7 Transition Services Agreement dated as of June 30, 1998 between R.H. Donnelley Corporation (p.k.a. The Dun & Bradstreet Corporation) and the Registrant (p.k.a. The New Dun & Bradstreet Corporation) (incorporated by reference to Exhibit 10.7 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .8 Amended and Restated Transition Services Agreement dated as of June 30, 1998 among R.H. Donnelley Corporation (p.k.a. The Dun & Bradstreet Corporation), the Registrant (p.k.a. The New Dun & Bradstreet Corporation), Cognizant Corporation, IMS Health Incorporated, ACNielsen Corporation and Gartner Group, Inc. (incorporated by reference to Exhibit 10.8 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .9 Undertaking of the Registrant (p.k.a. The New Dun & Bradstreet Corporation) dated June 29, 1998 (incorporated by reference to Exhibit 10.9 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .10.18 Distribution Agreement, dated as of October 28, 1996, among R.H. Donnelley Corporation (p.k.a.(f.k.a. The Dun & Bradstreet Corporation), Cognizant Corporation and ACNielsen Corporation (incorporated by reference to Exhibit 10(x) to the Annual Report on Form 10-K of R.H. Donnelley Corporation(p.k.a.(f.k.a. The Dun & Bradstreet Corporation) for the year ended December 31, 1996, file number 1-7155, filed March 27, 1997)..11.19 Tax Allocation Agreement, dated as of October 28, 1996, among R.H. Donnelley Corporation (p.k.a.(f.k.a. The Dun & Bradstreet Corporation), Cognizant Corporation and ACNielsen Corporation (incorporated by reference to Exhibit 10(y) to the Annual Report on Form 10-K of R.H. Donnelley Corporation(p.k.a.(f.k.a. The Dun & Bradstreet Corporation) for the year ended December 31, 1996, file number 1-7155, filed March 27, 1997).7981
REGULATION S-K EXHIBIT NUMBER.12.20 Employee Benefits Agreement, dated as of October 28, 1996, among R.H. Donnelley Corporation (p.k.a.(f.k.a. The Dun & Bradstreet Corporation), Cognizant Corporation and ACNielsen Corporation (incorporated by reference to Exhibit 10(z) to the Annual Report on Form 10-K of R.H. Donnelley Corporation(p.k.a.(f.k.a. The Dun & Bradstreet Corporation) for the year ended December 31, 1996, file number 1-7155, filed March 27, 1997)..13.21 Indemnity and Joint Defense Agreement, dated as of October 28, 1996, among R.H. Donnelley Corporation (p.k.a.(f.k.a. The Dun & Bradstreet Corporation), Cognizant Corporation and ACNielsen Corporation (incorporated by reference to Exhibit 10(aa) to the Annual Report on Form 10-K of R.H. Donnelley Corporation(p.k.a.(f.k.a. The Dun & Bradstreet Corporation) for the year ended December 31, 1996, file number 1-7155, filed March 27, 1997)..14 Amended.22 Separation Agreement and Restated AgreementGeneral Release, dated as ofLimited Partnership of D&BApril 10, 2001, between Moody’s InvestorsL.P. dated April 1, 1997Service, Inc. and Donald Noe (incorporated by reference to Exhibit10.1410.1 toRegistrant's Quarterlythe Report on Form 10-Q of the Registrant, file number 1-14037, filedAugust 14, 1998)May 15, 2001)..15 Amendment No. 1.23 Separation Agreement and General Release, dated July 14, 1997 to the Amendedas of April 10, 2001, between Moody’s Investors Service, Inc. andRestated Agreement of Limited Partnership of D&B Investors L.P. dated April 1, 1997Kenneth J. H. Pinkes (incorporated by reference to Exhibit10.1510.2 toRegistrant's Quarterlythe Report on Form 10-Q of the Registrant, file number 1-14037, filedAugust 14, 1998)May 15, 2001)..16.24 Agreement to Retire General Partner Interestand Plan of Merger and Stock Purchase Agreement, datedOctober 21, 1996as of February 10, 2002, by andbetween D&B Investors L.P.among Moody’s Corporation, XYZ Acquisition LLC, KMV LLC, KMV Corporation andIMS America, Ltd.the principal members of KMV LLC and the shareholders of KMV Corporation identified therein (incorporated by reference to Exhibit10.162.1 toRegistrant's Quarterlythe Report on Form10-Q,8-K of the Registrant, file number 1-14037, filedAugust 14, 1998)February 22, 2002)..17 Assignment Agreements.25 Note Purchase Agreement, dated as of June 15, 1998 relating to rightsOctober 3, 2000, among the Registrant andobligations in respect of D&P Investors L.P. (incorporated by reference to Exhibit 10.17 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .18+ The Dun & Bradstreet Corporation Nonfunded Deferred Compensation Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.18 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .19+ 1998 Dun & Bradstreet Replacement Plan for Certain Non-Employee Directors Holding Dun & Bradstreet Corporation Equity-Based Awards (incorporated by reference to Exhibit 10.19 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .20+ 1998 Dun & Bradstreet Non-Employee Directors' Stock Incentive Plan (incorporated by reference to Exhibit 10.20 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .21+ The Dun & Bradstreet Corporation Cash Incentive Plan (incorporated by reference to Exhibit 10.21 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .22+ The Dun & Bradstreet Corporation Covered Employee Cash Incentive Plan (incorporated by reference to Exhibit 10.22 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998).8082
REGULATION S-K EXHIBIT NUMBER.23+ 1998 Dun & Bradstreet Replacement Plan for Certain Employees Holding Dun & Bradstreet Corporation Equity-Based Awards (incorporated by reference to Exhibit 10.23 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .24+ 1998 Dun & Bradstreet Key Employees' Stock Incentive Plan (incorporated by reference to Exhibit 10.24 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .25+ Form of Limited Stock Appreciation Rights Agreementthe purchasers named therein (incorporated by reference to Exhibit 10.25 toRegistrant's Quarterlythe Report on Form10-Q,10-K of the Registrant, file number 1-14037, filedAugust 14, 1998)March 21, 2003)..26+ Forms.26 Form of Change in Control Severance Agreements7.61% Senior Notes due 2005 (incorporated by reference to Exhibit10.2610.25 toRegistrant's Quarterlythe Report on Form10-Q,10-K of the Registrant, file number 1-14037, filedAugust 14, 1998)March 21, 2003)..27+ Executive Transition Plan (incorporated by reference to Exhibit 10.27 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .28+ Pension Benefit Equalization Plan (incorporated by reference to Exhibit 10.28 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .29+ Supplemental Executive Benefit Plan (incorporated by reference to Exhibit 10.29 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998). .30+ Profit Participation Benefit Equalization Plan (incorporated by reference to Exhibit 10.30 to Registrant's Quarterly Report on Form 10-Q, filed August 14, 1998).21* SUBSIDIARIES OF THE REGISTRANT List of Active Subsidiaries as of January 31, 19992004.23* CONSENTS OF EXPERTS AND COUNSELConsent of PricewaterhouseCoopersLLP 27* FINANCIAL DATA SCHEDULELLP.31 CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - ------------------------- * Filed herewith + Represents a management contract or compensatory plan 8177
S-K EXHIBIT NUMBER 1* Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 2* Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 1* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (The Company has furnished this certification and does not intend for it to be considered filed under the Securities Exchange Act of 1934 or incorporated by reference into future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934.) 2* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (The Company has furnished this certification and does not intend for it to be considered filed under the Securities Exchange Act of 1934 or incorporated by reference into future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934.)
* Filed herewith 78