EXHIBIT 13.3
EQUIFAX INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
--------------------------------------------------------------------------------------
December 31 1998 1997
--------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 90,617 $ 52,251
Trade accounts receivable, net of allowance for doubtful
accounts of $12,811 in 1998 and $6,188 in 1997 298,201 245,341
Other receivables 54,904 38,318
Deferred income tax assets 26,223 39,221
Other current assets 50,420 25,801
----------- -----------
Total current assets 520,365 400,932
----------- -----------
Property and Equipment:
Land, buildings and improvements 30,963 24,870
Data processing equipment and furniture 239,391 194,553
----------- -----------
270,354 219,423
Less accumulated depreciation 151,016 124,689
----------- -----------
119,338 94,734
----------- -----------
Goodwill 719,662 365,427
----------- -----------
Purchased Data Files 173,473 103,282
----------- -----------
Other Assets 295,957 212,729
----------- -----------
$ 1,828,795 $ 1,177,104
=========== ===========
The accompanying notes are an integral part of
these consolidated balance sheets.
(In thousands, except par values)
- -----------------------------------------------------------------------------------------------------
December 31 1998 1997
- -----------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term debt and current maturities of long-term debt $ 47,387 $ 12,984
Accounts payable 107,346 94,682
Accrued salaries and bonuses 37,973 26,404
Income taxes payable 9,518 13,827
Other current liabilities 216,955 179,712
----------- -----------
Total current liabilities 419,179 327,609
----------- -----------
Long-Term Debt, Less Current Maturities 869,486 339,301
----------- -----------
Long-Term Deferred Revenue 32,465 42,848
----------- -----------
Deferred Income Tax Liabilities 50,132 24,417
----------- -----------
Other Long-Term Liabilities 91,067 93,532
----------- -----------
Commitments and Contingencies (Note 10)
Shareholders' Equity:
Common stock, $1.25 par value; shares
authorized - 300,000; issued - 173,722 in 1998
and 172,465 in 1997; outstanding - 140,042 in
1998 and 142,609 in 1997 217,153 215,581
Preferred stock, $0.01 par value; shares
authorized - 10,000; issued and outstanding -
none in 1998 or 1997 -- --
Paid-in capital 286,511 244,496
Retained earnings 562,911 421,541
Accumulated other comprehensive income (Note 8) (35,063) (20,076)
Treasury stock, at cost, 27,698 shares in 1998
and 23,304 shares in 1997 (Note 8) (606,092) (447,578)
Stock held by employee benefits trusts, at cost,
5,983 shares in 1998 and 6,553 shares in 1997 (Note 8) (58,954) (64,567)
----------- -----------
Total shareholders' equity 366,466 349,397
----------- -----------
$ 1,828,795 $ 1,177,104
=========== ===========
EQUIFAX INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Operating revenue $ 1,620,978 $ 1,366,087 $ 1,222,798
----------- ----------- -----------
Costs and expenses:
Costs of services 943,833 778,936 697,168
Selling, general and administrative expenses 311,493 263,243 258,729
Unusual charges (Note 3) -- 25,000 10,313
----------- ----------- -----------
Total costs and expenses 1,255,326 1,067,179 966,210
----------- ----------- -----------
Operating income 365,652 298,908 256,588
Other income, net 4,294 45,027 22,400
Interest expense 42,701 20,797 16,439
----------- ----------- -----------
Income from continuing operations before income
taxes and cumulative effect of accounting change 327,245 323,138 262,549
Provision for income taxes 133,812 137,613 109,452
----------- ----------- -----------
Income from continuing operations before
cumulative effect of accounting change 193,433 185,525 153,097
----------- ----------- -----------
Discontinued operations (Note 2):
Income from discontinued operations, net of income
taxes of $10,179 in 1997 and $16,494 in 1996 -- 14,336 24,520
Costs associated with effecting the spinoff, net of
income tax benefit of $2,154 -- (12,887) --
----------- ----------- -----------
Total discontinued operations -- 1,449 24,520
----------- ----------- -----------
Income before cumulative effect of accounting change 193,433 186,974 177,617
Cumulative effect of change in accounting for
business process reengineering, net of income
tax benefit of $2,061 (Note 3) -- (3,237) --
----------- ----------- -----------
Net income $ 193,433 $ 183,737 $ 177,617
=========== =========== ===========
Per common share (basic):
Income from continuing operations before
cumulative effect of accounting change $ 1.37 $ 1.29 $ 1.05
Discontinued operations -- 0.01 0.17
Cumulative effect of accounting change -- (0.02) --
----------- ----------- -----------
Net income $ 1.37 $ 1.27 $ 1.22
=========== =========== ===========
Shares used in computing basic earnings per share 141,397 144,233 145,518
=========== =========== ===========
Per common share (diluted):
Income from continuing operations before
cumulative effect of accounting change $ 1.34 $ 1.26 $ 1.03
Discontinued operations -- 0.01 0.16
Cumulative effect of accounting change -- (0.02) --
----------- ----------- -----------
Net income $ 1.34 $ 1.24 $ 1.19
=========== =========== ===========
Shares used in computing diluted earnings per share 144,403 147,818 149,207
=========== =========== ===========
Dividends per common share $ 0.353 $ 0.345 $ 0.330
=========== =========== ===========
The accompanying notes are an integral part
of these consolidated statements.
EQUIFAX INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Accumulated Other
Comprehensive
Income
Common Stock: ----------------
---------------------------- Foreign
Shares Paid-In Retained Currency
(In thousands) Outstanding Amount Capital Earnings Translation
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 147,245 $ 211,015 $ 171,020 $ 273,320 $ (13,734)
1996 changes:
Net income -- -- -- 177,617 --
Foreign currency translation adjustment -- -- -- -- 9,821
Adjustment for minimum liability under
supplemental retirement plan -- -- -- -- --
Shares issued under stock plans 2,214 2,558 25,795 -- --
Treasury shares purchased (4,614) -- -- -- --
Treasury stock reissued for acquisitions 31 -- 360 -- --
Cash dividends -- -- -- (49,704) --
Income tax benefit from stock plans -- -- 7,805 -- --
Dividends from employee benefits trusts -- -- 2,162 -- --
--------- --------- --------- --------- ---------
Balance, December 31, 1996 144,876 213,573 207,142 401,233 (3,913)
1997 changes:
Net income -- -- -- 183,737 --
Foreign currency translation adjustment -- -- -- -- (9,771)
Adjustment for minimum liability under
supplemental retirement plan -- -- -- -- --
Shares issued under stock plans 1,606 2,008 22,800 -- --
Treasury shares purchased (4,143) -- -- -- --
Treasury stock reissued for acquisitions 270 -- 3,468 -- --
Cash dividends -- -- -- (52,030) --
Spinoff dividend -- -- -- (111,396) --
Income tax benefit from stock plans -- -- 8,825 -- --
Dividends from employee benefits trusts -- -- 2,261 -- --
Other -- -- -- (3) --
--------- --------- --------- --------- ---------
Balance, December 31, 1997 142,609 215,581 244,496 421,541 (13,684)
1998 changes:
Net income -- -- -- 193,433
Foreign currency translation adjustment -- -- -- -- --
Adjustment for minimum liability under (15,313)
supplemental retirement plan -- -- -- --
Shares issued under stock plans 1,451 1,572 18,952 -- --
Shares contributed to U.S. retirement plan 390 -- 10,392 -- --
Treasury shares purchased (4,555) -- -- -- --
Treasury stock reissued for acquisitions 147 -- 2,346 -- --
Cash dividends -- -- -- (52,063) --
Income tax benefit from stock plans -- -- 8,085 -- --
Dividends from employee benefits trusts -- -- 2,240 -- --
--------- --------- --------- --------- ---------
Balance, December 31, 1998 140,042 $ 217,153 $ 286,511 $ 562,911 $ (28,997)
========= ========= ========= ========= =========
Accumulated Other
Comprehensive Income:
---------------------------
Minimum Stock Held
Liability Under By Employee Total
Supplemental Treasury Benefits Shareholders' Comprehensive
Retirement Plan Total Stock Trusts Equity Income
- -------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $ (3,334) $ (17,068) $(218,613) $ (66,209) $ 353,465
1996 changes:
Net income -- -- -- -- 177,617 $ 177,617
Foreign currency translation adjustment -- 9,821 -- -- 9,821 9,821
Adjustment for minimum liability under
supplemental retirement plan (1,559) (1,559) -- -- (1,559) (1,559)
Shares issued under stock plans -- -- -- 1,642 29,995 --
Treasury shares purchased -- -- (105,550) -- (105,550) --
Treasury stock reissued for acquisitions -- -- 538 -- 898 --
Cash dividends -- -- -- -- (49,704) --
Income tax benefit from stock plans -- -- -- -- 7,805 --
Dividends from employee benefits trusts -- -- -- -- 2,162 --
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1996 (4,893) (8,806) (323,625) (64,567) 424,950 $ 185,879
1997 changes:
Net income -- -- -- -- 183,737 $ 183,737
Foreign currency translation adjustment -- (9,771) -- -- (9,771) (9,771)
Adjustment for minimum liability under
supplemental retirement plan (1,499) (1,499) -- -- (1,499) (1,499)
Shares issued under stock plans -- -- -- -- 24,808 --
Treasury shares purchased -- -- (129,085) -- (129,085) --
Treasury stock reissued for acquisitions -- -- 5,132 -- 8,600 --
Cash dividends -- -- -- -- (52,030) --
Spinoff dividend -- -- -- -- (111,396) --
Income tax benefit from stock plans -- -- -- -- 8,825 --
Dividends from employee benefits trusts -- -- -- -- 2,261 --
Other -- -- -- -- (3) --
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1997 (6,392) (20,076) (447,578) (64,567) 349,397 $ 172,467
1998 changes:
Net income -- -- -- -- 193,433 $ 193,433
Foreign currency translation adjustment -- (15,313) -- -- (15,313) (15,313)
Adjustment for minimum liability under
supplemental retirement plan 326 326 -- -- 326 326
Shares issued under stock plans -- -- 279 1,770 22,573 --
Shares contributed to U.S. retirement plan -- -- -- 3,843 14,235 --
Treasury shares purchased -- -- (161,797) -- (161,797) --
Treasury stock reissued for acquisitions -- -- 3,004 -- 5,350 --
Cash dividends -- -- -- -- (52,063) --
Income tax benefit from stock plans -- -- -- -- 8,085 --
Dividends from employee benefits trusts -- -- -- -- 2,240 --
--------- -------- --------- --------- --------- ---------
Balance, December 31, 1998 $ (6,066) $(35,063) $(606,092) $ (58,954) $ 366,466 $ 178,446
========= ======== ========= ========= ========= =========
The accompanying notes are an integral part
of these consolidated statements.
EQUIFAX INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 193,433 $ 183,737 $ 177,617
Adjustments to reconcile net income to net cash provided
by operating activities of continuing operations:
Depreciation and amortization 103,825 77,069 67,475
Gain from sale of businesses -- (42,798) (11,564)
Income from discontinued operations -- (14,336) (24,520)
Costs associated with effecting the spinoff -- 12,887 --
Cumulative effect of accounting change -- 3,237 --
Valuation loss on pending acquisition -- 25,000 --
Asset impairment write-off -- -- 10,313
Gain from sale of long-term investments -- -- (8,232)
Changes in assets and liabilities, excluding effects of acquisitions:
Accounts receivable, net (40,179) (45,982) (26,674)
Current liabilities, excluding debt 38,949 11,909 55,134
Other current assets (336) (3,827) 13,141
Deferred income taxes 34,595 9,726 (22,162)
Other long-term liabilities, excluding debt (16,831) 4,894 51,554
Other assets (24,328) (11,431) (11,053)
--------- --------- ---------
Net cash provided by operating activities of continuing operations 289,128 210,085 271,029
--------- --------- ---------
Cash flows from investing activities:
Additions to property and equipment (44,921) (34,587) (38,099)
Additions to other assets, net (74,411) (51,452) (40,191)
Acquisitions, net of cash acquired (478,463) (96,630) (83,109)
Investments in unconsolidated affiliates (22,752) (18,839) --
Proceeds from sale of long-term investments -- -- 18,356
Proceeds from sale of businesses 12,874 80,998 49,081
--------- --------- ---------
Net cash used by investing activities of continuing operations (607,673) (120,510) (93,962)
--------- --------- ---------
Cash flows from financing activities:
Net short-term borrowings 28,988 8,556 31,998
Additions to long-term debt 524,068 67,285 12,820
Payments on long-term debt (3,692) (92,582) (11,933)
Treasury stock purchases (161,797) (129,085) (105,550)
Dividends paid (52,063) (52,030) (49,704)
Proceeds from exercise of stock options 12,245 18,343 25,945
Other 11,704 11,085 9,967
--------- --------- ---------
Net cash provided (used) by financing activities
of continuing operations 359,453 (168,428) (86,457)
--------- --------- ---------
Effect of foreign currency exchange rates on cash (2,542) 196 (1,023)
Net cash provided (used) by discontinued operations -- 82,748 (66,918)
--------- --------- ---------
Net cash provided 38,366 4,091 22,669
Cash and cash equivalents, beginning of year 52,251 48,160 25,491
--------- --------- ---------
Cash and cash equivalents, end of year $ 90,617 $ 52,251 $ 48,160
========= ========= =========
The accompanying notes are an integral part
of these consolidated statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Principles of Consolidation The consolidated financial statements include the
accounts of the Company and its majority-owned and controlled subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Certain prior year amounts have been reclassified to conform with the current
year presentation. The historical financial statements presented reflect the
spinoff of ChoicePoint Inc. as a discontinued operation (Note 2).
Nature of Operations The Company principally provides information services to
businesses to help them grant credit and authorize and process credit card and
check transactions. The principal lines of business are information services and
payment services (see Note 12 for segment information). The principal markets
for both information and payment services are retailers, banks, and other
financial institutions, with information services also serving the
telecommunication and utility industries. The Company's operations are
predominately located within the United States, with foreign operations
principally located within Canada, the United Kingdom, and Brazil.
Use of Estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements as well as reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Revenue Recognition Revenue is recognized principally as services are provided
to customers. Amounts billed in advance are recorded as current or long-term
deferred revenue on the balance sheet, with current deferred revenue reflecting
services expected to be provided within the next twelve months. Current deferred
revenue is included with other current liabilities in the accompanying
consolidated balance sheets, and as of December 31, 1998 and 1997 totaled
$45,140,000 and $29,345,000, respectively. In 1996 the Company received a one-
time payment of $58,000,000 related to a lottery subcontract and recognized
$5,400,000 in revenue. The remaining balance is being recognized as revenue over
the term of the contract, with $9,636,000 recognized as revenue in both 1998 and
1997. The unrecognized balance at December 31,1998 totaled $33,328,000, with
$23,692,000 included in long-term deferred revenue in the accompanying
consolidated balance sheets.
Earnings Per Share Basic EPS is calculated as income available to common
stockholders divided by the weighted average number of common shares outstanding
during the period. Diluted EPS is calculated to reflect the potential dilution
that would occur if stock options or other contracts to issue common stock were
exercised and resulted in additional common shares outstanding. The income
amount used in the Company's EPS calculations is the same for both basic and
diluted EPS. A reconciliation of the average outstanding shares used in the two
calculations is as follows:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (basic) 141,397 144,233 145,518
Effect of dilutive securities:
Stock options 2,714 3,099 3,154
Performance share plan 292 486 535
- ------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding (diluted) 144,403 147,818 149,207
- ------------------------------------------------------------------------------------------------------------------
Property and Equipment The cost of property and equipment is depreciated
primarily on the straight-line basis over estimated asset lives of 30 to 50
years for buildings; useful lives, not to exceed lease terms, for leasehold
improvements; three to five years for data processing equipment, and eight to 20
years for furniture.
Goodwill Goodwill is amortized on a straight-line basis predominately over
periods from 20 to 40 years. Amortization expense was $21,536,000 in 1998,
$12,221,000 in 1997, and $10,238,000 in 1996. As of December 31, 1998 and 1997,
accumulated amortization was $62,352,000 and $42,996,000, respectively. The
Company regularly evaluates whether events and circumstances have occurred which
indicate that the carrying amount of goodwill may warrant revision or may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the future undiscounted net
cash flows of the related business over the remaining life of the goodwill in
measuring whether the goodwill is recoverable.
Purchased Data Files Purchased data files are amortized on a straight-line
basis primarily over 15 years. Amortization expense was $14,982,000 in 1998,
$11,506,000 in 1997, and $9,961,000 in 1996. As of December 31, 1998 and 1997,
accumulated amortization was $91,235,000 and $77,587,000, respectively.
Other Assets Other assets at December 31, 1998 and 1997 consist of the
following:
(In thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Systems development and other deferred costs $127,912 $ 81,927
Purchased software 47,691 40,627
Prepaid pension cost 58,518 40,171
Investments in unconsolidated affiliates 21,027 28,200
Other 40,809 21,804
- ----------------------------------------------------------------------------------------------------------------------------
$295,957 $212,729
- ----------------------------------------------------------------------------------------------------------------------------
Purchased software and systems development and other deferred costs are being
amortized on a straight-line basis over five to ten years. Amortization expense
for other assets was $32,078,000 in 1998, $23,018,000 in 1997, and $20,139,000
in 1996. As of December 31, 1998 and 1997, accumulated amortization was
$120,286,000 and $91,915,000, respectively.
Foreign Currency Translation The assets and liabilities of foreign subsidiaries
are translated at the year-end rate of exchange, and income statement items are
translated at the average rates prevailing during the year. The resulting
translation adjustment is recorded as a component of shareholders' equity.
Exchange gains and losses on intercompany balances of a long-term investment
nature are also recorded as a component of shareholders' equity. Other foreign
currency translation gains and losses, which are not material, are recorded in
the consolidated statements of income.
Consolidated Statements of Cash Flows The Company considers cash equivalents to
be short-term cash investments with original maturities of three months or less.
Cash paid for income taxes and interest from continuing operations is as
follows:
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Income taxes, net of amounts refunded $98,905 $123,670 $92,276
Interest $28,885 $ 21,593 $16,922
In 1998, 1997, and 1996, the Company acquired various businesses that were
accounted for as purchases (Note 4). In conjunction with these transactions,
liabilities were assumed as follows:
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Fair value of assets acquired $540,078 $127,724 $104,385
Cash paid for acquisitions 485,076 102,903 83,214
Value of treasury shares reissued
for acquisitions 6,000 8,600 --
Notes and deferred payments -- 5,800 1,542
- ---------------------------------------------------------------------------------------------------------------------
Liabilities assumed $ 49,002 $ 10,421 $ 19,629
- ---------------------------------------------------------------------------------------------------------------------
Financial Instruments The Company's financial instruments consist primarily of
cash and cash equivalents, accounts and notes receivable, accounts payable, and
short-term and long-term debt. The carrying amounts of these items, other than
long-term debt, approximate their fair market values due to their short
maturity. As of December 31, 1998, the fair value of the Company's long-term
debt (determined primarily by broker quotes) was $896,609,000 compared to its
carrying value of $869,486,000. During 1998, the Company did not hold any
material derivative financial instruments.
Recent Accounting Pronouncement In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging Activities". SFAS 133
establishes accounting and reporting standards for derivative instruments and
hedging activities and is effective January 1, 2000 for the Company. Based on
its current level of derivative instruments and hedging activities, the Company
does not believe the adoption of SFAS 133 will have a significant impact on its
financial statements or reported earnings.
2. DISCONTINUED OPERATIONS
On December 9, 1996, the Company announced its intention to split into two
independent, publicly traded companies by spinning off its Insurance Services
industry segment, contingent on receiving a favorable ruling from the IRS
regarding the tax-free status of the dividend for U.S. shareholders. In July
1997, the Company received the favorable IRS ruling and on August 7, 1997,
completed the spinoff of its Insurance Services industry segment. The spinoff
was accomplished by the Company's contribution of the business units that
comprised the Insurance Services segment into one wholly owned subsidiary,
ChoicePoint Inc. All of the common stock of ChoicePoint was then distributed to
Equifax shareholders as a dividend, with one share of ChoicePoint common stock
distributed for each ten shares of Equifax common stock held.
As a result of the spinoff, the Company's December 31, 1997 financial statements
have been prepared with the Insurance Services segment results of operations and
cash flows shown as "discontinued operations". All historical financial
statements presented conform to this presentation. During the second quarter of
1997, the Company recorded an expense of $15,041,000 to reflect the net costs
associated with effecting the spinoff ($12,887,000 after tax, or $.09 per
share). These costs include duplicate software licenses, severance, legal and
investment banker fees, and other related costs, partially offset by a $17.1
million curtailment gain related to the U.S. retirement plan caused by the
spinoff and the pretax earnings of ChoicePoint for July.
Summarized financial information for the discontinued operation is as follows:
(In thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue $340,251 $588,425
Income before income taxes 24,515 41,014
Net income 14,336 24,520
The results of operations of ChoicePoint in the table above include its
operations only through June 30, 1997. ChoicePoint's results after June 30, 1997
through the spinoff date (July 31, 1997 for accounting purposes) are included
with "Costs associated with effecting the spinoff" in the accompanying
consolidated statements of income. These July results totaled $4.5 million of
income before income taxes and $2.6 million of net income.
The Company's intercompany receivable from ChoicePoint totaled $85.6 million at
July 31, 1997, and was repaid to the Company by ChoicePoint in August 1997.
Other significant spinoff-related transactions occurring near the date of the
spinoff included ChoicePoint's assumption of $29.0 million of the Company's
long-term debt and a $13.0 million capital contribution made by the Company to
ChoicePoint. These transactions, net of cash
payments related to spinoff costs, have been included in "Net cash provided by
discontinued operations" in the accompanying consolidated statements of cash
flows.
3. UNUSUAL ITEMS AND ACCOUNTING CHANGE
Unusual items consisted of the following charges:
(In thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Valuation loss accrued for pending acquisition (Note 10) $25,000 $ --
Asset impairment write-off (Note 5) -- 10,313
- ---------------------------------------------------------------------------------------------------------------------------------
$25,000 $10,313
- ---------------------------------------------------------------------------------------------------------------------------------
In November 1997, the Financial Accounting Standards Board Emerging Issues Task
Force released Issue No. 97-13 "Accounting for Costs Incurred in Connection with
a Consulting Contract or an Internal Project That Combines Business Process
Reengineering and Information Technology Transformation" (EITF 97-13). This
issue requires that the cost of business process reengineering activities that
are a part of a systems development project be expensed as incurred, and that
any costs previously capitalized be written off net of tax as a change in
accounting principle in the current period. Prior to the issuance of EITF 97-13,
the Company had capitalized certain costs of business process reengineering
related to several of its systems development projects. Accordingly, during the
fourth quarter, 1997, the Company recorded an expense of $5,298,000 ($3,237,000
after tax, or $.02 per share) to reflect the write off of these previously
capitalized costs in accordance with EITF 97-13.
4. ACQUISITIONS AND INVESTMENTS IN UNCONSOLIDATED AFFILIATES
During 1998, 1997, and 1996, the Company acquired, made equity investments, or
increased its ownership in the following businesses:
Date Industry Percentage
Business Acquired Segment Ownership
- ----------------------------------------------------------------------------------------------------------------------------
Unnisa Ltda. (Brazil) September 1998 Payment Services 59.3%
Proceda S.A. (Brazil) September 1998 Payment Services 34.0%
Seguranca ao Credito e Informacoes (SCI-Brazil) August 1998 Latin America 80.0%
Credit Bureau of Vancouver (Canada) July 1998 North America 100.0%
Equifax Canada Inc. July 1998 North America 100.0% 1
Decisioneering Group, Inc. July 1998 North America 100.0%
ASNEF-Equifax Servicios de Informacion de Credito, S.L. (Spain) May 1998 Europe 58.0% 2
Infocorp (Peru) April 1998 Latin America 51.0% 3
CCI Group Plc (U.K.) March 1998 Europe 100.0%
Goldleaf Technologies, Inc. December 1997 Payment Services 100.0%
Organizacion VERAZ S.A. (Argentina) December 1997 Latin America 66.7% 4
Equifax Venture Infotek (India) November 1997 Payment Services 50.0%
Group Incresa (Spain) July 1997 Europe 100.0%
DICOM S.A. (Chile) March 1997 Latin America 100.0% 5
HLS Financial Group, Inc. February 1997 North America 100.0%
Foothill Collection Services, Inc. February 1997 North America 100.0%
CUNA Service Group, Inc. December 1996 Payment Services 100.0%
Creditel of Canada Limited September 1996 North America 100.0%
Transax plc (U.K.) June 1996 Europe 100.0% 6
Collective Credit Bureaus Ltd. (Canada) May 1996 North America 100.0%
Market Knowledge, Inc. January 1996 North America 100.0%
1 Increased to 100.0% from 84.4%
2 Increased from 49.0% acquired in 1994
3 Increased from 35.0% acquired with DICOM S.A. in 1994
4 Increased to 66.7% from the 33.3% ownership position acquired in 1994
5 Increased to 100.0% from the 50.0% ownership position acquired in 1995 and
1994
6 Increased to 100.0% from the 50.1% ownership position acquired in 1994 and
1992
In 1998, in addition to the businesses above, the Company acquired the credit
files of fourteen credit affiliates located in the United States and the
collection businesses of Computer Sciences Corporation (CSC), which was
subsequently sold (Note 10). Also, during the first quarter of 1998, the Company
obtained the control necessary and began to consolidate the operations of its
66.7% owned investment in Organizacion VERAZ S.A. in Argentina. The investment
in Proceda S.A., along with increases in certain other equity investments,
totaled $22.8 million and were accounted for under the equity method. They were
purchased with cash and recorded as other assets. The remaining 1998 business
and credit file acquisitions were accounted for as purchases and had an
aggregate purchase price of $491,076,000. They were purchased with a combination
of cash totaling $485,076,000 and the reissuance of treasury stock with a fair
market value of $6,000,000. These acquisitions and the consolidation of VERAZ
resulted in $389,013,000 of goodwill, $86,259,000 of purchased data files, and
$22,170,000 of other assets (primarily software and deferred systems costs).
These allocations include $26.0 million reallocated from other assets related to
investments in companies previously accounted for under the equity method. Their
results of operations have been included in the consolidated statements of
income from the dates of acquisition. The following unaudited pro forma
information has been prepared as if these acquisitions had occurred on January
1, 1997. The information is based on the historical results of the separate
companies, and may not necessarily be indicative of the results that could have
been achieved, or of results that may occur in the future.
(In thousands, except per share amounts) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue $1,751,184 $1,592,264
Net income 181,598 170,588
Net income per common share (diluted) 1.26 1.15
- -----------------------------------------------------------------------------------------------------------------------------------
In 1997, in addition to the businesses above, the Company acquired the credit
files of sixteen credit affiliates located in the United States. The investments
in companies in India and Argentina totaled $18.8 million and were accounted for
under the equity method. They were purchased with cash and recorded as other
assets. The investment in Group Incresa in Spain was made by the Company's 49%-
owned equity investment, ASNEF. The remaining 1997 business and credit file
acquisitions were accounted for as purchases and had an aggregate purchase price
of $117,303,000, with $88,661,000 allocated to goodwill, $32,695,000 to
purchased data files, and $10,096,000 to other assets (primarily purchased
software). These allocations include $25.2 million reallocated from other assets
related to the Company's first 50% ownership in DICOM S.A. Their results of
operations have been included in the consolidated statements of income from the
dates of acquisition and were not material. They were purchased using a
combination of cash totaling $102,903,000, notes payable to sellers of
$5,800,000, and the reissuance of treasury stock with a fair market value of
$8,600,000.
In 1996, in addition to the businesses above, the Company acquired the credit
files of seven credit affiliates located in the United States. These business
and credit file acquisitions were accounted for as purchases and had an
aggregate purchase price of $84,756,000, with $47,389,000 allocated to goodwill,
$18,198,000 to purchased data files, and $14,304,000 to other assets (primarily
purchased software). Their results of operations have been included in the
consolidated statements of income from the dates of acquisition and were not
material. They were purchased using a combination of cash totaling $83,214,000
and notes payable to sellers of $1,542,000.
5. DIVESTITURES AND ASSET IMPAIRMENT
In October 1998, the Company sold the collection businesses it had purchased
from CSC earlier in the year (Note 10). During the second quarter of 1997, the
Company sold its National Decision Systems business unit from its North America
Information Services segment. Cash proceeds, net of related divestiture
expenses, totaled $80,998,000 and resulted in a gain of $42,798,000 recorded in
other income ($17,881,000 after tax, or $.12 per share). During the fourth
quarter of 1996, the Company sold all of the health information business units
from its Other segment. Cash proceeds, net of related divestiture costs, totaled
$49,081,000 and resulted in an $11,564,000 gain recorded in other income
($1,631,000 after tax, or $.01 per share).
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," in June 1996, the Company recorded a pre-tax loss of
$10,313,000 to write off certain intangible assets in the Healthcare
Administrative Services business unit in its Other segment.
6. LONG-TERM DEBT AND SHORT-TERM BORROWINGS
Long-term debt at December 31, 1998 and 1997 is as follows:
(In thousands) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Senior Notes, 6.5%, due 2003, net of unamortized
discount of $459 in 1998 and $561 in 1997 $199,541 $199,439
Senior Notes, 6.3%, due 2005, net of unamortized
discount of $1,089 in 1998 248,911 --
Senior Debentures, 6.9%, due 2028, net of unamortized
discount of $1,475 in 1998 148,525 --
Borrowings under $750 million revolving credit facility,
weighted average rate of 5.73% at December 31, 1998 249,000 125,000
Other 30,584 20,146
- ----------------------------------------------------------------------------------------------------------------------------
876,561 344,585
Less current maturities 7,075 5,284
- ----------------------------------------------------------------------------------------------------------------------------
$869,486 $339,301
- ----------------------------------------------------------------------------------------------------------------------------
In June 1998, the Company issued new 6.3% seven-year notes with a face value of
$250,000,000 in a public offering. The notes were sold at a discount of
$1,172,500. In July 1998, the Company issued new 6.9% thirty-year debentures
with a face value of $150,000,000 in a public offering. The debentures were sold
at a discount of $1,500,000. The discounts and related issuance costs will be
amortized on a straight-line basis over the respective term of the notes and
debentures.
In November 1997, the Company replaced its $550 million revolving credit
facility with a new, committed $750 million revolving credit facility with a
group of commercial banks that expires November 2002. The agreement provides
interest rate options tied to Base Rate, LIBOR, or Money Market indexes and
contains certain financial covenants related to interest coverage, funded debt
to cash flow, and limitations on subsidiary indebtedness.
In 1997, the Company also arranged for a $75 million revolving credit facility
with a commercial bank that expires December 2000. The agreement provides
interest rate options tied to LIBOR, Prime, and Federal Funds indexes and
contains certain financial covenants related to interest coverage, funded debt
to cash flow, and limitations on subsidiary indebtedness. No amounts were
outstanding under this facility at December 31, 1998 or 1997.
Scheduled maturities of long-term debt during the five years subsequent to
December 31, 1998, are as follows:
$7,075,000 in 1999; $16,313,000 in 2000; $3,282,000 in 2001; $252,896,000 in
2002; and $199,558,000 in 2003.
Short-term borrowings at December 31, 1998 and 1997 consisted of notes payable
to banks totaling $40,312,000 and $7,700,000, respectively. These notes had a
weighted average interest rate of 5.47% at December 31, 1998 and 7.15% at
December 31, 1997.
7. INCOME TAXES
The Company records deferred income taxes using enacted tax laws and rates for
the years in which the taxes are expected to be paid. Deferred income tax
assets and liabilities are recorded based on the differences between the
financial reporting and income tax bases of assets and liabilities.
The provision for income taxes from continuing operations consists of the
following:
(In thousands) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 74,769 $109,804 $104,754
State 10,854 21,408 16,677
Foreign 17,020 9,093 7,979
- ---------------------------------------------------------------------------------------------------------------------
102,643 140,305 129,410
- ---------------------------------------------------------------------------------------------------------------------
Deferred:
Federal 26,309 (8,361) (20,035)
State 4,952 (2,269) (1,612)
Foreign (92) 7,938 1,689
- ---------------------------------------------------------------------------------------------------------------------
31,169 (2,692) (19,958)
- ---------------------------------------------------------------------------------------------------------------------
Total $133,812 $137,613 $109,452
- ---------------------------------------------------------------------------------------------------------------------
The provision for income taxes from continuing operations is based upon income
from continuing operations before income taxes as follows:
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
United States $299,815 $284,116 $235,761
Foreign 27,430 39,022 26,788
- --------------------------------------------------------------------------------------------------------------------
$327,245 $323,138 $262,549
- --------------------------------------------------------------------------------------------------------------------
The provision for income taxes from continuing operations is reconciled with the
federal statutory rate as follows:
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Federal statutory rate 35.0% 35.0% 35.0%
- -----------------------------------------------------------------------------------------------------------------------
Provision computed at federal statutory rate $114,536 $113,098 $ 91,892
State and local taxes, net of federal tax benefit 10,274 12,440 9,792
Nondeductible goodwill from divestitures -- 5,652 4,633
Other 9,002 6,423 3,135
- -----------------------------------------------------------------------------------------------------------------------
$133,812 $137,613 $109,452
- -----------------------------------------------------------------------------------------------------------------------
Components of the Company's deferred income tax assets and liabilities at
December 31, 1998 and 1997 are as follows:
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Deferred income tax assets:
Reserves and accrued expenses $ 24,710 $ 37,821
Postretirement benefits 9,591 9,398
Employee compensation programs 18,205 21,150
Deferred revenue 14,985 18,769
Net operating loss carryforwards of subsidiaries 10,257 7,122
Foreign tax credit carryforwards 13,120 8,994
Other 4,265 5,758
- --------------------------------------------------------------------------------------------------------------------------------
95,133 109,012
- --------------------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Data files and other assets (61,643) (52,752)
Depreciation (3,952) (4,545)
Pension expense (22,989) (15,832)
Undistributed earnings of foreign subsidiaries (20,520) (13,704)
Other (9,938) (7,375)
- --------------------------------------------------------------------------------------------------------------------------------
(119,042) (94,208)
- --------------------------------------------------------------------------------------------------------------------------------
Net deferred income tax (liability) asset $ (23,909) $ 14,804
- --------------------------------------------------------------------------------------------------------------------------------
The Company's deferred income tax assets and liabilities at December 31, 1998
and 1997 are included in the accompanying consolidated balance sheets as
follows:
(In thousands) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Deferred income tax assets $ 26,223 $ 39,221
Deferred income tax liabilities $(50,132) $(24,417)
- --------------------------------------------------------------------------------------------------------------------------------
Net deferred income tax (liability) asset $(23,909) $ 14,804
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated undistributed retained earnings of Canadian subsidiaries amounted to
approximately $105,727,000 at December 31, 1998. No provision for Canadian
withholding taxes or United States federal income taxes is made on these
earnings because they are considered by management to be permanently invested in
those subsidiaries and, under the tax laws, are not subject to such taxes until
distributed as dividends. If the earnings were not considered permanently
invested, approximately $5,286,000 of deferred income taxes would have been
provided. Such taxes, if ultimately paid, may be recoverable as foreign tax
credits in the United States.
8. SHAREHOLDERS' EQUITY
Rights Plan In 1995, the Company's Board of Directors adopted a Shareholder
Rights Plan (Rights Plan). The Rights Plan contains provisions to protect the
Company's shareholders in the event of an unsolicited offer to acquire the
Company, including offers that do not treat all shareholders equally, the
acquisition in the open market of shares constituting control without offering
fair value to all shareholders, and other coercive, unfair or inadequate
takeover bids and practices that could impair the ability of the Board of
Directors to represent shareholders' interests fully. Pursuant to the Rights
Plan, the Board of Directors declared a dividend of one Share Purchase Right (a
Right) for each outstanding share of the Company's common stock, with
distribution to be made to shareholders of record as of November 24, 1995. The
Rights, which will expire in November 2005, initially will be represented by,
and traded together with, the Company's common stock. The Rights are not
currently exercisable and do not become exercisable unless certain triggering
events occur. Among the triggering events is the acquisition of 20% or more of
the Company's common stock by a person or group of affiliated or associated
persons. Unless previously redeemed, upon the occurrence of one of the specified
triggering events, each Right that is not held by the 20% or more shareholder
will entitle its holder to purchase one share of common stock or, under certain
circumstances, additional shares of common stock at a discounted price.
Comprehensive Income Effective with the first quarter 1998, the Company
adopted Statement of Financial Accounting Standards No. 130 (SFAS 130),
"Reporting Comprehensive Income". SFAS 130 requires the disclosures of the
components of comprehensive income (net income plus other changes in equity
accounts from non-owner transactions), and accumulated other comprehensive
income (the accumulated total of comprehensive income transactions other than
net income). The Company has elected to disclose these items in its Consolidated
Statements of Shareholders' Equity and has changed the format of those
statements to meet the requirements of SFAS 130.
Treasury Shares During 1998, 1997, and 1996, the Company repurchased 4,555,000,
4,143,000, and 4,614,000 of its own common shares through open market
transactions at an aggregate cost of $161,797,000, $129,085,000, and
$105,550,000, respectively. During 1997, the Company's Board of Directors
authorized an additional $300,000,000 in share repurchases, and at December 31,
1998, approximately $61 million remained available for future purchases. At its
January 1999 meeting, the Company's Board of Directors authorized an additional
$250 million for future share repurchases. During 1998 and 1997, the Company
reissued approximately 164,000 and 270,000 treasury shares respectively in
connection with acquisitions (Note 4). In 1998, the Company received
approximately 17,000 treasury shares in conjunction with the final settlement of
a prior year acquisition.
In 1993, the Company established the Equifax Inc. Employee Stock Benefits Trust
to fund various employee benefit plans and compensation programs and transferred
6,200,000 treasury shares to the Trust. In 1994, the Company transferred
600,000 treasury shares to another employee benefits trust. Shares held by the
trusts are not considered outstanding for earnings per share calculations until
released to the employee benefit plans or programs. In 1998, 569,655 shares
were used for a contribution to the Company's U.S. Retirement Plan, an employee
stock purchase plan, and an employee bonus plan. The shares contributed to the
U.S. Retirement Plan (390,000 shares) were repurchased by the Company at the
current market price and recorded as treasury stock. In 1996, 166,702 shares
were used for performance share awards and stock option exercises. No shares
were used in 1997.
Stock Options The Company's shareholders have approved several stock option
plans which provide that qualified and nonqualified options may be granted to
officers and employees at exercise prices not less than market value on the date
of grant. Generally, options vest proportionately over a four-year period and
are exercisable for ten years from grant date. Grants in 1998 included 1,303,000
options awarded under programs that included essentially all full-time salaried
employees. Those grants all vest in March 2001 and are exercisable through
March 2003. Certain of the plans also provide for awards of restricted shares of
the Company's common stock. At December 31, 1998, there were 4,902,000 shares
available for future option grants and restricted stock awards.
A summary of changes in outstanding options and the related weighted average
exercise price per share is shown in the following table. The number of options
outstanding and their exercise prices were adjusted pursuant to a formula as a
result of the spinoff of ChoicePoint in August 1997. The 1997 grant,
cancellation, and exercise information reflects the impact of this adjustment
back to January 1, 1997, with the adjustment increasing the number of options
outstanding at the beginning of fiscal 1997 by approximately 1,096,000 shares.
1998 1997 1996
------------------------- ------------------------- ------------------------
(Shares in thousands) Shares Average Price Shares Average Price Shares Average Price
- ------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year 6,582 $14.89 7,526 $14.62 7,987 $12.21
Adjustment to beginning balance
due to spinoff -- -- 1,096 -- -- --
Granted:
At market price 2,581 $34.90 968 $26.06 915 $18.78
In excess of market price 271 $45.97 119 $35.44 1,092 $25.14
Canceled (388) $28.61 (1,434) $15.81 (382) $14.51
Exercised (1,226) $11.20 (1,693) $11.45 (2,086) $12.73
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year 7,820 $22.40 6,582 $14.89 7,526 $14.62
- ------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 4,230 $15.35 4,420 $12.53 4,412 $13.30
- ------------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
December 31, 1998 (shares in thousands):
Options Outstanding Options Exercisable
-------------------------------------------------------- --------------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Shares Life in years Price Shares Price
- ------------------------------------------------------------------------------------------------------------
$5.01-$12.49 2,973 3.7 $10.40 2,765 $10.24
13.53-25.75 2,101 6.8 $21.65 1,212 $21.10
26.41-35.25 1,986 6.3 $34.07 40 $32.60
35.87-55.12 760 9.0 $40.87 213 $45.63
- ------------------------------------------------------------------------------------------------------------
7,820 5.7 $22.40 4,230 $15.35
- ------------------------------------------------------------------------------------------------------------
The weighted-average grant-date fair value per share of options granted in 1998,
1997, and 1996 is as follows:
1998 1997 1996
- -------------------------------------------------------------------------------------------
Grants at market price $13.27 $10.05 $6.91
Grants in excess of market price $ 6.63 $ 6.17 $4.21
The fair value of options granted in 1998, 1997, and 1996 is estimated on the
date of grant using the Black-Scholes option-pricing model based on the
following weighted average assumptions:
1998 1997 1996
- -------------------------------------------------------------------------------------------
Dividend yield 1.1% 1.1% 1.8%
Expected volatility 41.9% 41.3% 42.3%
Risk-free interest rate 5.6% 6.3% 5.1%
Expected life in years 4.3 4.3 4.1
Performance Share Plan The Company has a performance share plan for certain key
officers that provides for distribution of the Company's common stock at the end
of three-year measurement periods based on the growth in earnings per share and
certain other criteria. Recipients may elect to receive up to 50% of their
distribution in cash based on the Company's common stock price after the end of
the measurement period. Units outstanding at July 31, 1997, were increased by
approximately 14.6% to reflect the impact of the ChoicePoint spinoff. The total
expense under the plan was $4,213,000 in 1998, $11,022,000 in 1997, and
$11,200,000 in 1996. At December 31, 1998, 904,841 shares of common stock were
available for future awards under the plan. Units awarded during the year were
187,000 in 1998, 190,000 in 1997, and 356,000 in 1996. Award-date fair value per
unit was $32.69 in 1998, $29.50 in 1997, and $18.63 in 1996. Units outstanding
at December 31 were 489,753 in 1998, 809,600 in 1997, and 893,028 in 1996.
Pro Forma Information In accordance with the provisions of Statement of
Financial Accounting Standards, "Accounting for Stock-Based Compensation" (SFAS
No. 123), the Company has elected to apply APB Opinion No. 25 and related
interpretations in accounting for its stock option and performance share plans.
Accordingly, the Company does not recognize compensation cost in connection with
its stock option plans and records compensation expense related to its
performance share plan based on the current market price of the Company's common
stock and the extent to which performance criteria are being met. If the Company
had elected to recognize compensation cost for these plans based on the fair
value at grant date as prescribed by SFAS No. 123, net income and net income per
share would have been reduced to the pro forma amounts indicated in the table
below (in thousands, except per share amounts):
1998 1997 1996
------------------- ------------------- -------------------
Reported Pro forma Reported Pro forma Reported Pro forma
- ----------------------------------------------------------------------------------------------------------
Net income $193,433 $184,690 $183,737 $182,239 $177,617 $172,787
- ----------------------------------------------------------------------------------------------------------
Net income per share (basic) $ 1.37 $ 1.31 $ 1.27 $ 1.26 $ 1.22 $ 1.19
- ----------------------------------------------------------------------------------------------------------
Net income per share (diluted) $ 1.34 $ 1.28 $ 1.24 $ 1.23 $ 1.19 $ 1.16
- ----------------------------------------------------------------------------------------------------------
Because the SFAS No. 123 fair value disclosure requirements apply only to
options and performance share units granted after December 31, 1994, the
resulting pro forma compensation cost may not be representative of that to be
expected in future years.
9. EMPLOYEE BENEFITS
In 1998, the Company adopted Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits."
This statement revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of these plans.
U.S. Retirement Plan The Company has a non-contributory qualified retirement
plan covering most U.S. salaried employees. Benefits are primarily a function of
salary and years of service. A reconciliation of the benefit obligation, plan
assets, and funded status of the plan is as follows (in thousands):
Change in benefit obligation 1998 1997
- -----------------------------------------------------------------------------------------------------------
Benefit obligation at beginning of year $388,859 $365,203
Service cost 4,351 5,266
Interest cost 27,562 26,735
Actuarial loss 21,638 38,942
Curtailments -- (18,803)
Benefits paid (30,721) (28,484)
- -----------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $411,689 $388,859
- -----------------------------------------------------------------------------------------------------------
Change in plan assets 1998 1997
- -----------------------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $435,005 $376,945
Actual return on plan assets 33,443 76,544
Employer contribution 18,000 10,000
Benefits paid (30,721) (28,484)
- -----------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $455,727 $435,005
- -----------------------------------------------------------------------------------------------------------
Funded status $44,038 $ 46,146
Unrecognized actuarial loss (gain) 9,262 (12,003)
Unrecognized prior service cost 1,027 1,872
- -----------------------------------------------------------------------------------------------------------
Prepaid pension cost $54,327 $ 36,015
- -----------------------------------------------------------------------------------------------------------
Assumptions used in accounting for the plan are as follows: 1998 1997
- -----------------------------------------------------------------------------------------------------------
Discount rate 6.75% 7.25%
Expected return on plan assets 9.50% 9.50%
Rate of compensation increase 4.25% 4.25%
Pension expense for the plan includes the following components:
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------
Service cost $ 4,351 $ 5,266 $ 7,465
Interest cost 27,562 26,735 26,692
Expected return on plan assets (34,588) (32,835) (29,559)
Amortization of prior service cost 846 1,293 1,637
Recognized actuarial loss 1,517 -- 2,283
Amortization of transition obligation -- (62) (466)
- -----------------------------------------------------------------------------------------------------------
Pension (credit) expense ($312) $ 397 $ 8,052
- -----------------------------------------------------------------------------------------------------------
Pension expense in 1997 and 1996 includes amounts allocated to discontinued
operations totaling $411,000 and $3,261,000, respectively. As a result of the
spinoff, employees of ChoicePoint ceased accruing benefits under the plan and
the Company recognized a curtailment gain of $17,118,000 in the second quarter
of 1997 (see Note 2).
At December 31, 1998, the plan's assets included 980,355 shares of the Company's
common stock with a market value of approximately $33,516,000.
Foreign Retirement Plans The Company maintains a defined benefits plan for most
salaried employees in Canada. The aggregate fair market value of the Canadian
plan assets approximates that plan's projected benefit obligation, which totaled
$26,021,000 and $23,659,000 at December 31, 1998 and 1997, respectively. Prepaid
pension cost for this plan was $4,191,000 and $4,156,000 at December 31, 1998
and 1997, respectively. The Company also maintains defined contribution plans
for certain employees in the United Kingdom.
Supplemental Retirement Plan The Company maintains a supplemental executive
retirement program for certain key employees. The plan, which is unfunded,
provides supplemental retirement payments based on salary and years of service.
The expense for this plan was $4,182,000 in 1998, $3,691,000 in 1997, and
$3,517,000 in 1996. The accrued liability for this plan at December 31, 1998 and
1997, was $28,474,000 and $27,764,000, respectively, and is included in other
long-term liabilities in the accompanying consolidated balance sheets.
Employee Retirement Savings Plan The Company's retirement savings plans provide
for annual contributions, within specified ranges, determined at the discretion
of the Board of Directors for the benefit of eligible employees in the form of
cash or shares of the Company's common stock. Expense for these plans was
$3,346,000 in 1998, $3,294,000 in 1997, and $2,912,000 in 1996.
Postretirement Benefits The Company maintains certain unfunded healthcare and
life insurance benefit plans for eligible retired employees. Substantially all
of the Company's U.S. employees may become eligible for these benefits if they
reach normal retirement age while working for the Company and satisfy certain
years of service requirements. The Company accrues the cost of providing these
benefits over the active service period of the employee. Expense for these plans
was $1,969,000 in 1998, $1,690,000 in 1997 and $1,547,000 in 1996. The accrued
liability for these plans at December 31, 1998 and 1997 was $24,680,000 and
$24,384,000, respectively, and is included in other long-term liabilities in the
accompanying consolidated balance sheets.
10. COMMITMENTS AND CONTINGENCIES
Leases The Company's operating leases involve principally office space and
office equipment. Rental expense relating to these leases was $46,087,000 in
1998, $38,779,000 in 1997, and $39,443,000 in 1996.
Future minimum payment obligations for noncancelable operating leases exceeding
one year are as follows as of December 31, 1998:
(In thousands) Amount
- ------------------------------------------------------------------------------------------------------------------------------------
1999 $ 34,067
2000 31,294
2001 26,713
2002 19,258
2003 17,408
Thereafter 128,448
- ------------------------------------------------------------------------------------------------------------------------------------
$257,188
- ------------------------------------------------------------------------------------------------------------------------------------
Agreement with Computer Sciences Corporation The Company has an agreement with
Computer Sciences Corporation (CSC) under which CSC-owned credit bureaus and
certain CSC affiliate bureaus utilize the Company's credit database service. CSC
and these affiliates retain ownership of their respective credit files and the
revenues generated by their credit reporting activity. The Company receives a
processing fee for maintaining the database and for each report supplied. The
initial term of the agreement expired in July 1998, and was renewable at the
option of CSC for successive ten-year periods. CSC has renewed the agreement for
the ten-year period beginning August 1, 1998. The agreement provides CSC with an
option to sell its credit reporting businesses to the Company and provides the
Company with an option to purchase CSC's credit reporting businesses if CSC does
not elect to renew the agreement or if there is a change in control of CSC while
the agreement is in effect. Both options expire in 2013. As of August 1, 1998,
the option price is determined by appraisal.
On November 25, 1997, CSC exercised an option, also contained in the agreement,
to sell its collection businesses to the Company at a purchase price of
approximately $38 million. Subsequent to November 25, 1997, the Company
determined that the fair value of the business being sold (based on its
estimated discounted cash flows) was less than the contractual purchase price
because a major contract expiring in 1998 would not be renewed. Accordingly, in
the fourth quarter of 1997, the Company recorded a $25,000,000 charge
($14,950,000 after tax, or $.10 per share) to reflect a valuation loss on this
acquisition, with a corresponding $25,000,000 liability included in other
current liabilities. This transaction was finalized in the second quarter of
1998, and the $25,000,000 liability was reclassified to reduce the amount of
goodwill recorded with the acquisition. In October 1998, this business was sold
for approximately the carrying amount of its net assets.
Data Processing Services Agreement In April 1993, the Company entered into a
ten-year agreement to outsource a portion of its computer data processing
operations and related functions to Integrated Systems Solutions Corporation
(ISSC), a subsidiary of IBM. In 1997, IBM assumed ISSC's obligations under this
agreement. Effective January 1998, the Company extended and expanded this
agreement into a new master global technology outsourcing agreement expiring
2008. The Company currently estimates the aggregate contractual obligation under
this renegotiated agreement to be approximately $900 million over the ten year
period. However, this amount could be more or less depending on various factors
such as the inflation rate, the introduction of significant new technologies, or
changes in the Company's data processing needs as a result of acquisitions or
divestitures. Under certain circumstances (e.g., a change in control of the
Company, or for the Company's convenience), the Company may terminate this
agreement; however, the agreement provides that the Company must pay a
significant termination charge in the event of such a termination.
Change in Control Agreements The Company has agreements with eleven of its
officers which provide certain severance pay and benefits in the event of a
termination of the officer's employment under certain circumstances following a
"change in control" of the Company. "Change in control" is defined as the
accumulation by any person, entity or group of 20% or more of the combined
voting power of the Company's voting stock or the occurrence of certain other
specified events. In the event of a "change in control," the Company's
performance share and restricted stock plans provide that all shares designated
for future distribution will become fully vested and payable, subject to the
achievement of certain levels of growth in earnings per share and certain other
criteria. At December 31, 1998, the maximum contingent liability under the
agreements and plans was approximately $23,645,000.
Litigation A number of lawsuits seeking damages are brought against the Company
each year, largely as a result of reports issued by the Company. The Company
provides for estimated legal fees and settlements relating to pending lawsuits.
In the opinion of management, the ultimate resolution of these matters will not
have a materially adverse effect on the Company's financial position, liquidity,
or results of operations.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating revenue and operating income by reportable segment (Note 12)
and other summarized quarterly financial data for 1998 and 1997 are as follows
(in thousands, except per share amounts):
1998 First Second Third Fourth
- -----------------------------------------------------------------------------------------------------------------
Operating revenue:
North American Information Services $181,434 $195,441 $201,579 $195,427
Payment Services 107,149 120,975 130,369 159,645
Equifax Europe 46,433 56,673 61,559 50,735
Equifax Latin America 15,669 17,966 29,498 40,790
Other 2,409 2,409 2,409 2,409
- -----------------------------------------------------------------------------------------------------------------
$353,094 $393,464 $425,414 $449,006
- -----------------------------------------------------------------------------------------------------------------
Operating income (loss):
North American Information Services $ 62,366 $ 69,351 $ 70,525 $ 69,820
Payment Services 19,300 22,569 26,501 36,548
Equifax Europe 3,058 6,010 7,578 (15,448)
Equifax Latin America 4,186 4,346 6,046 6,830
Other 2,215 2,217 2,217 2,217
- -----------------------------------------------------------------------------------------------------------------
91,125 104,493 112,867 99,967
General Corporate Expense (10,131) (12,310) (13,220) (7,139)
- -----------------------------------------------------------------------------------------------------------------
$ 80,994 $ 92,183 $ 99,647 $ 92,828
- -----------------------------------------------------------------------------------------------------------------
Net income $ 44,735 $ 50,632 $ 53,529 $ 44,537
- -----------------------------------------------------------------------------------------------------------------
Per common share (basic):
Net income 1 $ 0.32 $ 0.36 $ 0.38 $ 0.32
- -----------------------------------------------------------------------------------------------------------------
Per common share (diluted):
Net income $ 0.31 $ 0.35 $ 0.37 $ 0.31
- -----------------------------------------------------------------------------------------------------------------
1997 First Second Third Fourth
- -----------------------------------------------------------------------------------------------------------------
Operating revenue:
North American Information Services $172,240 $182,296 $178,670 $175,817
Payment Services 98,820 105,519 108,612 127,094
Equifax Europe 38,583 43,127 45,547 51,309
Equifax Latin America 6 9,620 8,848 10,344
Other 2,413 2,404 2,409 2,409
- -----------------------------------------------------------------------------------------------------------------
$312,062 $342,966 $344,086 $366,973
- -----------------------------------------------------------------------------------------------------------------
Operating income:
North American Information Services $ 56,734 $ 62,904 $ 63,064 $ 58,875
Payment Services 16,083 18,476 18,223 28,445
Equifax Europe 1,960 4,705 7,240 13,228
Equifax Latin America 542 2,590 1,785 4,291
Other 2,217 2,217 2,217 2,217
- -----------------------------------------------------------------------------------------------------------------
77,536 90,892 92,529 107,056
General Corporate Expense (8,989) (13,128) (9,792) (12,196)
Unusual Charge (Note 3) -- -- -- (25,000)
- -----------------------------------------------------------------------------------------------------------------
$ 68,547 $ 77,764 $ 82,737 $ 69,860
- -----------------------------------------------------------------------------------------------------------------
Income from continuing operations before
cumulative effect of accounting change $ 38,541 $ 61,190 $ 47,240 $ 38,554
- -----------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change $ 44,717 $ 56,463 $ 47,240 $ 38,554
- -----------------------------------------------------------------------------------------------------------------
Per common share (basic):
Income from continuing operations before
cumulative effect of accounting change $ 0.27 $ 0.42 $ 0.33 $ 0.27
- -----------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change $ 0.31 $ 0.39 $ 0.33 $ 0.27
- -----------------------------------------------------------------------------------------------------------------
Per common share (diluted):
Income from continuing operations before
cumulative effect of accounting change 1 $ 0.26 $ 0.41 $ 0.32 $ 0.26
- -----------------------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 1 $ 0.30 $ 0.38 $ 0.32 $ 0.26
- -----------------------------------------------------------------------------------------------------------------
1 Quarterly per share amounts do not add to the amounts shown in the
consolidated statements of income due to rounding.
12. SEGMENT INFORMATION
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures About Segments of an Enterprise and
Related Information." Certain prior years' amounts have been restated to conform
to the disclosure requirements of SFAS 131.
The Company's operations are primarily organized by its two major product
groups, information services and payment services. Information services are
organized in three reportable segments based on geographic region (North
America, Europe, and Latin America), while payment services are contained in one
reportable segment. The accounting policies of the segments are the same as
those described in the Company's summary of significant accounting and reporting
policies (Note 1). The Company evaluates the segment performance based on its
operating income before unusual items. Intersegment sales and transfers are not
material.
A description of segment product and services is as follows:
North American Information Services Consumer credit information; credit card
marketing services; risk management and collection services; locate services;
fraud detection and prevention services; mortgage loan origination information;
analytics and consulting; commercial credit reporting in Canada; check guarantee
services in Canada; and through May 1997, PC-based marketing systems, geo-
demographic systems, and mapping tools.
Payment Services Credit and debit card authorization and processing; credit
card marketing enhancement; software products to manage credit card, merchant,
and collection processing; and check guarantee and verification services.
Equifax Europe Consumer and commercial credit information and marketing
services, credit scoring and modeling services, check guarantee services and
auto lien information.
Equifax Latin America Consumer and commercial credit information and other
commercial, financial, and consumer information.
Other Lottery services; and Health Information Services, divested in the
fourth quarter of 1996.
Segment information for 1998, 1997, and 1996 is as follows (dollars in
thousands):
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
- -------------------------------------------------------------------------------------------------------------
Operating revenue:
North American Information Services $ 773,881 48% $ 709,023 52% $ 668,771 55%
Payment Services 518,138 32 440,045 32 339,326 28
Equifax Europe 215,400 13 178,566 13 157,511 13
Equifax Latin America 103,923 6 28,818 2 -- -
Other 9,636 1 9,635 1 57,190 4
- -------------------------------------------------------------------------------------------------------------
$1,620,978 100% $1,366,087 100% $1,222,798 100%
- -------------------------------------------------------------------------------------------------------------
Operating income:
North American Information Services $ 272,062 67% $ 241,577 66% $ 220,359 72%
Payment Services 104,918 26 81,227 22 66,881 22
Equifax Europe 1,198 - 27,133 7 15,650 5
Equifax Latin America 21,408 5 9,208 3 3,256 1
Other 8,866 2 8,868 2 501 -
- -------------------------------------------------------------------------------------------------------------
408,452 100% 368,013 100% 306,647 100%
General Corporate Expense (42,800) (44,105) (39,746)
Unusual charges (Note 3) -- (25,000) (10,313)
- -------------------------------------------------------------------------------------------------------------
$ 365,652 $ 298,908 $ 256,588
- -------------------------------------------------------------------------------------------------------------
Total assets at December 31:
North American Information Services $ 555,018 30% $ 453,141 39% $ 433,075 43%
Payment Services 449,491 25 236,921 20 199,957 20
Equifax Europe 366,865 20 261,414 22 241,337 24
Equifax Latin America 341,834 19 115,617 10 32,452 3
Other 3,517 - 4,227 - 12,828 1
Corporate 112,070 6 105,784 9 91,455 9
- -------------------------------------------------------------------------------------------------------------
1,828,795 100% 1,177,104 100% 1,011,104 100%
Net Assets of Discontinued Operations -- -- 196,414
- -------------------------------------------------------------------------------------------------------------
$1,828,795 $1,177,104 $1,207,518
- -------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Depreciation and amortization:
North American Information Services $ 41,891 $38,650 $34,258
Payment Services 23,455 14,965 9,391
Equifax Europe 20,106 13,542 12,894
Equifax Latin America 12,513 4,736 1,108
Other 768 768 6,264
Corporate 5,092 4,408 3,560
- ----------------------------------------------------------------------------------------------------------------
$103,825 $77,069 $67,475
- ----------------------------------------------------------------------------------------------------------------
Capital expenditures excluding property and equipment and other assets
acquired in acquisitions:
North American Information Services $ 35,296 $30,775 $30,112
Payment Services 38,818 21,302 32,581
Equifax Europe 30,028 18,160 4,688
Equifax Latin America 4,874 4,771 405
Other -- -- 1,693
Corporate 10,316 11,031 8,811
- ----------------------------------------------------------------------------------------------------------------
$119,332 $86,039 $78,290
- ----------------------------------------------------------------------------------------------------------------
Financial information by geographic area is as follows:
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------
Operating revenue based on
location of customer:
United States $1,174,733 72% $1,057,032 78% $ 978,575 80%
Canada 96,628 6 100,943 7 85,832 7
United Kingdom 184,161 12 166,099 12 149,099 12
Brazil 62,253 4 -- - -- -
Other 103,203 6 42,013 3 9,292 1
- ------------------------------------------------------------------------------------------------------
$1,620,978 100% $1,366,087 100% $1,222,798 100%
- ------------------------------------------------------------------------------------------------------
Long-lived assets at December 31:
United States $ 511,482 39% $ 421,559 54% $ 369,218 56%
Canada 96,840 7 60,521 8 63,937 10
United Kingdom 215,254 17 184,755 24 179,262 27
Brazil 347,355 27 -- -- -- --
Other 137,499 10 109,337 14 43,153 7
- ------------------------------------------------------------------------------------------------------
$1,308,430 100% $ 776,172 100% $ 655,570 100%
- ------------------------------------------------------------------------------------------------------