EXHIBIT 13.3 ------------ Consolidated Balance Sheets
(in thousands) - -------------------------------------------------------------------------------- December 31 1996 1995 - -------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $49,886 $26,136 Accounts receivable, net of allowance for doubtful accounts of $7,714 in 1996 and $7,077 in 1995 305,678 258,335 Deferred income tax assets 36,999 30,594 Other current assets 44,475 51,611 - -------------------------------------------------------------------------------- Total current assets 437,038 366,676 - -------------------------------------------------------------------------------- Property and Equipment: Land, building and improvements 29,563 18,050 Data processing equipment and furniture 257,321 218,699 - -------------------------------------------------------------------------------- 286,884 236,749 Less accumulated depreciation 164,613 148,901 - -------------------------------------------------------------------------------- 122,271 87,848 - -------------------------------------------------------------------------------- Goodwill 433,758 353,571 - -------------------------------------------------------------------------------- Purchased Data Files 87,025 74,828 - -------------------------------------------------------------------------------- Other Assets 222,692 170,772 - -------------------------------------------------------------------------------- $1,302,784 $1,053,695 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated balance sheets.
(in thousands, except par values) - -------------------------------------------------------------------------------- December 31 1996 1995 - -------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt and current maturities of long-term debt $ 60,490 $ 20,384 Accounts payable 84,628 62,194 Accrued salaries and bonuses 39,276 27,919 Income taxes payable 17,659 -- Other current liabilities 172,626 140,123 - -------------------------------------------------------------------------------- Total current liabilities 374,679 250,620 - -------------------------------------------------------------------------------- Long-Term Debt, Less Current Maturities 305,992 302,665 - -------------------------------------------------------------------------------- Postretirement Benefit Obligations 79,400 80,885 - -------------------------------------------------------------------------------- Long-Term Deferred Revenue 42,964 -- - -------------------------------------------------------------------------------- Other Long-Term Liabilities 74,884 66,103 - -------------------------------------------------------------------------------- Commitments and Contingencies (Note 9) Shareholders' Equity: Common stock, $1.25 par value; shares authorized - 300,000; issued - 170,859 in 1996 and 168,812 in 1995; outstanding - 144,876 in 1996 and 147,245 in 1995 213,573 211,015 Preferred stock, $0.01 par value; shares authorized - 10,000; issued and outstanding - none in 1996 or 1995 -- -- Paid-in capital 207,142 171,020 Retained earnings 396,340 269,986 Cumulative foreign currency translation adjustment (3,998) (13,777) Treasury stock, at cost, 19,430 shares in 1996 and 14,847 shares in 1995 (Note 7) (323,625) (218,613) Stock held by employee benefits trusts, at cost, 6,553 shares in 1996 and 6,719 shares in 1995 (Note 7) (64,567) (66,209) - -------------------------------------------------------------------------------- Total shareholders' equity 424,865 353,422 - -------------------------------------------------------------------------------- $1,302,784 $1,053,695 - --------------------------------------------------------------------------------
-60- Consolidated Statements of Income
(in thousands, except per share amounts) - -------------------------------------------------------------------------------- Year Ended December 31 1996 1995 1994 - -------------------------------------------------------------------------------- Operating revenue $1,811,223 $1,622,958 $1,421,996 - -------------------------------------------------------------------------------- Costs and expenses: Costs of services 1,126,741 1,038,881 905,307 Selling, general and administrative expenses 369,751 321,231 302,582 Asset impairment (Note 3) 10,313 -- -- Credit related to lottery contract (Note 4) -- (19,665) -- Restructuring provision (Note 10) -- 19,572 -- - -------------------------------------------------------------------------------- Total costs and expenses 1,506,805 1,360,019 1,207,889 - -------------------------------------------------------------------------------- Operating income 304,418 262,939 214,107 Other income, net 22,181 7,471 8,994 Interest expense 23,036 21,172 15,624 - -------------------------------------------------------------------------------- Income before income taxes 303,563 249,238 207,477 Provision for income taxes 125,946 101,588 87,131 - -------------------------------------------------------------------------------- Net income $177,617 $147,650 $120,346 - -------------------------------------------------------------------------------- Weighted average common shares outstanding 145,518 151,357 148,608 - -------------------------------------------------------------------------------- Per common share: Net income $1.22 $0.98 $0.81 - -------------------------------------------------------------------------------- Dividends $0.330 $0.315 $0.303 - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements. -61- Consolidated Statements of Shareholders' Equity
(in thousands) - -------------------------------------------------------------------------------- Year Ended December 31 1996 1995 1994 - -------------------------------------------------------------------------------- Common Stock: Balance at beginning of year $211,015 $208,471 $206,554 Shares issued under stock plans 2,558 2,544 1,917 - -------------------------------------------------------------------------------- Balance at end of year $213,573 $211,015 $208,471 - -------------------------------------------------------------------------------- Paid-In Capital: Balance at beginning of year $171,020 $145,859 $108,807 Shares issued under stock plans 25,795 17,243 12,930 Adjustment for treasury stock reissued for acquisitions 360 884 20,267 Other 9,967 7,034 3,855 - -------------------------------------------------------------------------------- Balance at end of year $207,142 $171,020 $145,859 - -------------------------------------------------------------------------------- Retained Earnings: Balance at beginning of year $269,986 $175,894 $102,709 Net income 177,617 147,650 120,346 Cash dividends (49,704) (50,223) (47,161) Other (1,559) (3,335) -- - -------------------------------------------------------------------------------- Balance at end of year $396,340 $269,986 $175,894 - -------------------------------------------------------------------------------- Cumulative Foreign Currency Translation Adjustment: Balance at beginning of year $(13,777) $(13,386) $(10,077) Adjustment during year 9,779 (391) (3,309) - -------------------------------------------------------------------------------- Balance at end of year $(3,998) $(13,777) $(13,386) - -------------------------------------------------------------------------------- Treasury Stock: Balance at beginning of year $(218,613) $(87,975) $(92,870) Cost of shares repurchased (105,550) (132,668) (57,985) Cost of shares transferred to employee benefits trusts -- -- 5,912 Cost of shares reissued for acquisitions 538 2,030 56,968 - -------------------------------------------------------------------------------- Balance at end of year $(323,625) $(218,613) $(87,975) - -------------------------------------------------------------------------------- Stock Held By Employee Benefits Trusts: Balance at beginning of year $(66,209) $ (67,004) $(61,092) Cost of shares transferred from treasury stock -- -- (5,912) Cost of shares reissued under stock plans 1,642 795 -- - -------------------------------------------------------------------------------- Balance at end of year $(64,567) $ (66,209) $(67,004) - --------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements. -62- Consolidated Statements of Cash Flows
(in thousands) - ------------------------------------------------------------------------------------------------- Year Ended December 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 177,617 $ 147,650 $ 120,346 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 85,896 77,045 66,496 Asset impairment write-off 10,313 -- -- Gain from sale of long-term investments (8,232) -- -- Gain from sale of businesses (11,564) -- -- Restructuring provision, net of cash payments -- 16,136 -- Changes in assets and liabilities, excluding effects of acquisitions: Accounts receivable, net (34,037) (20,618) (28,018) Current liabilities, excluding debt 55,074 (40,585) 23,972 Other current assets 11,559 (22,479) (5,035) Deferred income taxes (20,110) 10,373 (15,725) Other long-term liabilities, excluding debt 53,351 450 569 Other assets (11,053) (8,024) -- - ------------------------------------------------------------------------------------------------- Net cash provided by operating activities 308,814 159,948 162,605 - ------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to property and equipment (55,991) (31,687) (20,173) Additions to other assets, net (44,198) (27,344) (12,163) Acquisitions, net of cash acquired (152,763) (14,716) (144,528) Investments in unconsolidated affiliates -- (14,066) (15,303) Deferred payments on prior year acquisitions -- (8,743) -- Proceeds from sale of long-term investments 18,356 -- -- Proceeds from sale of businesses 49,081 14,868 -- Proceeds from sale of land and buildings -- -- 57,079 - ------------------------------------------------------------------------------------------------- Net cash used by investing activities (185,515) (81,688) (135,088) - ------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net short-term borrowings (payments) 20,220 (44,274) 62,227 Additions to long-term debt 12,820 82,402 -- Payments on long-term debt (12,248) (11,462) (2,375) Treasury stock purchases (105,550) (132,668) (57,985) Dividends paid (49,704) (50,223) (47,161) Proceeds from exercise of stock options 25,945 16,596 11,786 Other 9,967 7,034 3,855 - ------------------------------------------------------------------------------------------------- Net cash used by financing activities (98,550) (132,595) (29,653) - ------------------------------------------------------------------------------------------------- Effect of foreign currency exchange rates on cash (999) 1,062 (4,059) - ------------------------------------------------------------------------------------------------- Net cash provided (used) 23,750 (53,273) (6,195) Cash and cash equivalents, beginning of year 26,136 79,409 85,604 - ------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 49,886 $ 26,136 $ 79,409 - -------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements. -63- 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 subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform with the current year presentation. Nature of operations. The Company principally provides information services to businesses to help them grant credit, authorize and process credit card and check transactions, and insure lives and property. The principal lines of business are credit services, payment services and insurance services (see Note 12 for industry segment information). The principal markets for credit and payment services are retailers, banks and financial institutions, while those for insurance services are life and health and property and casualty insurance companies. The Company's operations are predominantly located within the United States. 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. The spinoff will be effected through a pro rata tax-free dividend of stock in the new company to existing Equifax shareholders and is contingent on receiving a favorable ruling from the IRS, among other things. The timing of the distribution has not yet been finalized but is currently expected to occur mid-1997. 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. Property and equipment. The cost of property and equipment is depreciated primarily on a 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 predominantly over periods from 20 to 40 years. Amortization expense was $13,111,000 in 1996, $11,033,000 in 1995 and $7,380,000 in 1994. As of December 31, 1996 and 1995, accumulated amortization was $44,066,000 and $33,761,000, respectively. The Company regularly evaluates whether events and circumstances have occurred that indicate 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 $10,294,000 in 1996, $11,029,000 in 1995 and $11,331,000 in 1994. As of December 31, 1996 and 1995, accumulated amortization was $74,546,000 and $63,528,000, respectively. -64- Other assets. Other assets at December 31, 1996 and 1995 consist of the following:
(in thousands) 1996 1995 - -------------------------------------------------------------------------------- Purchased software $57,281 $43,692 Systems development and other deferred costs 69,351 42,826 Investments in unconsolidated affiliates 42,615 39,998 Deferred income tax assets 15,323 4,455 Other 38,122 39,801 - -------------------------------------------------------------------------------- $222,692 $170,772 - --------------------------------------------------------------------------------
Purchased software, 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 $26,249,000 in 1996, $22,390,000 in 1995 and $18,138,000 in 1994. As of December 31, 1996 and 1995, accumulated amortization was $92,071,000 and $82,164,000, 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 is as follows:
(in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Income taxes, net of amounts refunded $106,460 $118,645 $91,643 Interest $23,553 $21,127 $14,604
In 1996, 1995 and 1994, the Company acquired various businesses that were accounted for as purchases (Note 2). In conjunction with these transactions, liabilities were assumed as follows:
(in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Fair value of assets acquired $201,589 $60,187 $330,898 Cash paid for acquisitions 154,874 14,836 153,143 Value of treasury shares reissued for acquisitions -- -- 77,235 Notes and deferred payments 1,542 13,369 16,974 - -------------------------------------------------------------------------------- Liabilities assumed $45,173 $31,982 $83,546 - --------------------------------------------------------------------------------
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 value due to their short maturity. As of December 31, 1996, the fair value of the Company's long-term debt (determined primarily by broker quotes) was $307,759,000 compared to its carrying value of $310,976,000. During 1996, the Company did not hold any material derivative financial instruments. -65- 2. ACQUISITIONS AND INVESTMENTS IN UNCONSOLIDATED AFFILIATES. During 1996, 1995 and 1994, the Company acquired or made equity investments in the following businesses:
Date Industry Percentage Business Acquired Segment Ownership - ------------------------------------------------------------------------------------------------------------- CUNA Service Group, Inc. December 1996 Payment Services 100.0% Creditel of Canada Limited September 1996 International 100.0% CDB Infotek August 1996 Insurance 70.0% Transax plc (U.K.) June 1996 International 100.0% /1/ Collective Credit Bureaus Ltd. (Canada) May 1996 International 100.0% Professional Test Administrators, Inc. April 1996 Insurance 100.0% Market Knowledge, Inc. January 1996 Credit 100.0% DICOM S.A. (Chile) December 1995 International 50.0% /2/ TecniCob S.A. (France) July 1995 Payment Services 100.0% The Infocheck Group Limited (U.K.) July 1995 International 100.0% UCB Services, Inc. April 1995 Credit 100.0% Medical Review Systems, L.P. March 1995 General 100.0% /4/ Vallance and Associates, Inc. February 1995 Insurance 100.0% Osborn Laboratories, Inc. November 1994 Insurance 100.0% UAPT-Infolink plc (U.K.) October 1994 International 100.0% Electronic Tabulating Service September 1994 General 100.0% /4/ DICOM S.A. (Chile) August 1994 International 25.0% Canadian Bonded Credits August 1994 International 100.0% FBS Software (First Bankcard Systems, Inc.) July 1994 Payment Services 100.0% First Security Processing Services July 1994 Payment Services 100.0% Organizacion Veraz (Argentina) May 1994 International 33.3% ASNEF-Equifax Servicios de Informacion de Credito, S.L. (Spain) May 1994 International 49.0% HealthChex May 1994 General 100.0% /4/ Programming Resources Company April 1994 Insurance 100.0% Transax plc (U.K.) April 1994 International 50.1% /3/ Charlotte Credit Bureau February 1994 Credit 100.0% Cooperative Healthcare Networks January 1994 General 100.0% /4/
/1/Increased to 100.0% from the 50.1% ownership position acquired in 1994 and 1992. /2/Increased to 50.0% from the 25.0% ownership position acquired in 1994. /3/Increased to 50.1% from the 20.0% ownership position acquired in 1992. /4/Divested in the fourth quarter, 1996 (Note 3). In 1996, in addition to the businesses above, the Company acquired the credit files of seven credit bureaus located in the United States. These business and credit file acquisitions were accounted for as purchases, and had an aggregate purchase price of $156,416,000, with $102,847,000 allocated to goodwill, $21,531,000 to purchased data files, and $35,903,000 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 $154,874,000 and notes payable to sellers of $1,542,000. Additional consideration may be paid for certain of the acquisitions based on their future operating performance. -66- The 1995 acquisitions of greater than 50% ownership were accounted for as purchases, and had an aggregate purchase price of $28,205,000, with $33,147,000 allocated to goodwill and $11,337,000 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 $14,836,000 and notes payable to sellers of $13,369,000. Additional consideration may be paid for certain of the acquisitions based on their future operating performance. During 1995, the Company increased its investment in DICOM S.A. from 25% to 50% at a total cost of $11,502,000, and made investments in several other unconsolidated affiliates totaling $2,564,000. These investments, accounted for under the equity method, were purchased with cash and recorded as other assets. The 1994 acquisitions of greater than 50% ownership were accounted for as purchases, and had an aggregate purchase price of $247,352,000, with $212,765,000 allocated to goodwill, $19,987,000 to purchased data files, and $37,883,000 to other assets (primarily purchased software). Their results of operations have been included in the consolidated statements of income from the dates of acquisition. They were purchased using a combination of cash totaling $153,143,000, notes and deferred payments of $16,974,000, and the reissuance of treasury shares with a market value of $77,235,000. The 1994 acquisitions of less than 50% ownership were accounted for under the equity method and had an aggregate purchase price of $15,303,000. They were purchased with cash and recorded as other assets. 3. ASSET IMPAIRMENT AND DIVESTITURES. 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 General Information Services segment. During the fourth quarter of 1996, the Company sold all of the healthcare information business units from its General Information Services industry 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). During the third quarter of 1995, the Company sold its two market research businesses in the General Information Services segment, Elrick & Lavidge and Quick Test. Cash proceeds from these sales totaled $14,868,000 and resulted in an immaterial gain, recorded in other income. 4. LOTTERY CONTRACT DISPUTE, LITIGATION AND SETTLEMENT. High Integrity Systems, Inc. (HISI), a Company subsidiary, entered into a contract in July 1992 to provide lottery services to the state of California, whereby HISI agreed to provide a system to automate the processing of instant lottery tickets and a system to sell on-line game tickets through 10,000 low- volume terminals. On April 26, 1993, the California State Lottery (CSL) filed suit against HISI in Superior Court, Sacramento -67- County, California, with said complaint amended May 7, 1993, naming Equifax Inc., et al. and Federal Insurance Company as additional defendants. The CSL sought unspecified damages for alleged breach of contract and injunctive relief. On May 7, 1993, HISI filed a cross-complaint against the CSL seeking compensatory and general damages in an amount not less than $65 million and special and consequential damages in an amount not less than $100 million alleging breach of contract and seeking recovery of the reasonable value of the labor and materials expended on behalf of the CSL based on the theory of quantum meruit and unjust enrichment. In September 1993, the Company recorded a provision of $48,438,000 ($30,939,000 after tax, or $.21 per share) related to the lottery contract to write down data processing equipment and other assets to their estimated net realizable value and to accrue for estimated costs related to litigation with the CSL. On July 14, 1995, the CSL and HISI jointly announced a renewed business agreement which allowed the litigation between the parties to be settled pending execution of the terms of the contract. On November 9, 1995, the CSL and HISI finalized the terms of the reinstated contract. The final settlement was approved by the trial court on December 19, 1995, and provides that the CSL and HISI shall file dismissals with prejudice of their respective claims no later than 365 days following the trial courts approval. The CSL and HISI dismissals with prejudice of their respective claims were entered by the court on December 17, 1996. The settlement provides for a reinstated contract whereby HISI will install its system to automate the processing of instant lottery tickets, with the CSL purchasing 6,700 terminals and related security hardware, and licensing various software applications developed to support the system from HISI for $25,000,000. In the fourth quarter of 1995, the Company recorded a credit of $19,665,000 ($11,996,000 after tax, or $.08 per share) to reflect the financial impact of this settlement net of related legal expenses and additional costs to be incurred by the Company to complete the system software and install the terminals. Under the reinstated contract, HISI will initially install a minimum of 6,000 terminals with HISI retaining an option to install up to 4,000 additional terminal locations, with CSL approval. HISI is also guaranteed to receive 66 months of revenue for each of the 6,000 terminals at the rate of 5% on each dollar of lottery ticket sales occurring from each terminal. If HISI completes the system and acceptance testing within specified dates, an incentive payment of up to $4,000,000 may be earned. HISI and the CSL have established an oversight committee and engaged an independent technical adviser who will consult in the design and implementation of acceptance testing and start-up activities. On February 6, 1996, HISI and GTECH Corporation (GTECH) entered into an agreement whereby HISI subcontracted many of its obligations under the reinstated contract to GTECH. This subcontract provides for a one-time payment of $58,000,000 by GTECH to HISI, and also provides that future payments received by HISI from the CSL for lottery ticket sales and incentives earned be paid to GTECH. The Company received the $58,000,000 payment from GTECH and recognized $5,400,000 in revenue related to the subcontract in 1996. The $52,600,000 remaining balance will be recognized as revenue over the term of the reinstated CSL contract, net of related expenses. The current portion of the remaining balance is included in other current liabilities, and the non-current portion is recorded as long-term deferred revenue. -68- 5. LONG-TERM DEBT AND SHORT-TERM BORROWINGS. Long-term debt at December 31, 1996 and 1995 is as follows:
(in thousands) 1996 1995 - -------------------------------------------------------------------------------- Senior Notes, 6.5%, due 2003, net of unamortized discount of $663 in 1996 and $765 in 1995 $199,337 $199,235 Borrowings under revolving credit facility, varying interest rate, 5.89% at December 31, 1996 60,000 -- Term loan, varying interest rate, repaid in 1996 -- 50,000 Term loan, denominated in Pounds Sterling, varying interest rate, 6.63% at December 31, 1996, due 2000 34,250 31,890 Other 17,389 23,541 - -------------------------------------------------------------------------------- 310,976 304,666 Less current maturities 4,984 2,001 - -------------------------------------------------------------------------------- $305,992 $302,665 - --------------------------------------------------------------------------------
The Company has available a committed $550 million revolving credit facility with a group of commercial banks that expires August 2000. The agreement provides interest rate options tied to Base Rate, LIBOR, or Money Market indexes, and contains certain financial covenants related to fixed charge coverage, funded debt to cash flow and limitations on subsidiary indebtedness. Scheduled maturities of long-term debt during the five years subsequent to December 31, 1996, are as follows: $4,984,000 in 1997, $9,960,000 in 1998, $2,164,000 in 1999, $94,361,000 in 2000 and none in 2001. Short-term borrowings at December 31, 1996, consist of $55,506,000 in notes payable to banks, and have a weighted average interest rate of 6.40%. These notes are primarily denominated in Pounds Sterling. 6. 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 consists of the following:
(in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Current: Federal $117,905 $69,274 $75,736 State 18,872 14,548 13,904 Foreign 8,423 7,914 10,713 - -------------------------------------------------------------------------------- 145,200 91,736 100,353 - -------------------------------------------------------------------------------- Deferred: Federal (20,111) 8,161 (10,774) State (827) 1,163 (1,437) Foreign 1,684 528 (1,011) - -------------------------------------------------------------------------------- (19,254) 9,852 (13,222) - -------------------------------------------------------------------------------- Total $125,946 $101,588 $87,131 - --------------------------------------------------------------------------------
-69- The provision for income taxes is based upon income before income taxes as follows: (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------ United States $274,139 $232,871 $191,332 Foreign 29,424 16,367 16,145 - ------------------------------------------------------------------------------ $303,563 $249,238 $207,477 - ------------------------------------------------------------------------------
The provision for income taxes is reconciled with the federal statutory rate as follows: (dollars in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------ Federal statutory rate 35.0% 35.0% 35.0% - ------------------------------------------------------------------------------ Provision computed at federal statutory rate $106,247 $ 87,233 $ 72,617 State and local taxes, net of federal tax benefit 11,729 10,212 8,104 Other 7,970 4,143 6,410 - ------------------------------------------------------------------------------ $125,946 $101,588 $ 87,131 - ------------------------------------------------------------------------------ Components of the Company's deferred income tax assets and liabilities at December 31, 1996 and 1995, are as follows: (in thousands) 1996 1995 - ------------------------------------------------------------------------------ Deferred income tax assets: Reserves and accrued expenses $ 37,312 $ 32,720 Postretirement benefits 31,668 32,868 Employee compensation programs 21,202 15,561 Deferred revenue 20,532 700 Other 15,711 11,757 - ------------------------------------------------------------------------------ 126,425 93,606 - ------------------------------------------------------------------------------ Deferred income tax liabilities: Data files and other assets (53,352) (41,300) Depreciation (4,354) (4,401) Pension expense (5,301) (7,128) Safe harbor lease agreements (1,780) (3,557) Other (15,973) (11,419) - ------------------------------------------------------------------------------ (80,760) (67,805) - ------------------------------------------------------------------------------ Net deferred income tax asset $ 45,665 $ 25,801 - ------------------------------------------------------------------------------ The Company's deferred income tax assets and liabilities at December 31, 1996 and 1995, are included in the balance sheet as follows: (in thousands) 1996 1995 - ------------------------------------------------------------------------------ Deferred income tax assets $36,999 $30,594 Other assets 15,323 4,454 Other long-term liabilities (6,657) (9,247) - ------------------------------------------------------------------------------ Net deferred income tax asset $45,665 $25,801 - ------------------------------------------------------------------------------
Accumulated undistributed retained earnings of Canadian subsidiaries amounted to approximately $109,047,000 at December 31, 1996. 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 $6,543,000 of deferred income taxes would have been provided. Such taxes, if ultimately paid, may be recoverable as foreign tax credits in the United States. 7. SHAREHOLDERS EQUITY. Common and preferred stock. In May 1996 the Company's shareholders approved a Board of Directors resolution that increased the authorized common stock of the Company from 250 million to 300 million shares. The shareholders also approved another Board of Directors resolution to authorize 10 million shares of blank check preferred stock. Stock split and rights plan. In October 1995, the Company's Board of Directors approved a two-for-one stock split payable December 15, 1995, to shareholders of record on November 24, 1995. Accordingly, all share and per share data have been restated to give effect to this split. Also in October 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 trade 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. Treasury shares. During 1996, 1995 and 1994, the Company repurchased 4,614,000, 6,847,000 and 4,780,000, respectively, of its own common shares through open market transactions at an aggregate cost of $105,550,000, $132,668,000 and $57,985,000, respectively. During 1995, the Company's Board of Directors authorized an additional $250,000,000 in share repurchases, and at December 31, 1996, approximately $52,000,000 remained available for future purchases. During 1994, the Company reissued 5,417,000 treasury shares in connection with four acquisitions (Note 2). In April 1993, the Company established the Equifax Inc. Employee Stock Benefits Trust to fund various employee benefit plans and compensation programs. In November 1993, the Company transferred 6,200,000 treasury shares to the Trust. During the first quarter of 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. During 1996 and 1995, 166,702 and 80,720 shares, respectively, were transferred from the Employee Stock Benefits Trust and used for performance share awards, stock option exercises and restricted share grants. 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 1995 included 2,913,000 options awarded under programs that included essentially all full-time salaried employees. Those grants all vested in 1996 and are exercisable through January 2000. Certain of the plans also provide for awards of restricted shares of the Company's common stock. At December 31, 1996, there were 4,965,000 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 as follows (shares in thousands):
1996 1995 1994 -------- -------- -------- Shares Avg. Price Shares Avg. Price Shares Avg. Price - --------------------------------------------------------------------------------------------------- Balance, beginning of year 7,987 $12.21 5,874 $ 9.98 6,270 $ 9.28 Granted: At market price 915 $18.78 4,799 $14.33 1,376 $12.36 In excess of market price 1,092 $25.14 -- -- -- -- Canceled (382) $14.51 (848) $13.29 (354) $ 9.95 Exercised (2,086) $12.73 (1,838) $10.06 (1,418) $ 9.25 - --------------------------------------------------------------------------------------------------- Balance, end of year 7,526 $14.62 7,987 $12.21 5,874 $ 9.98 - --------------------------------------------------------------------------------------------------- Exercisable at end of year 4,412 $13.30 2,561 $ 9.87 2,670 $ 9.26 - ---------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 1996 (shares in thousands):
Options Outstanding Options Exercisable ----------------------------------- ------------------------- Wgtd. Avg. Remaining Weighted Weighted Contractual Average Average Range of Exercise Prices Shares Life In Years Exercise Price Shares Exercise Price - ---------------------------------------------------------------------------------------------- $5.74-$9.44 1,157 4.2 $ 8.55 1,157 $ 8.55 $9.94-$14.13 2,068 6.0 $11.11 1,411 $10.90 $14.31-$16.25 2,367 6.1 $14.34 1,289 $14.34 $18.63-$27.94 1,934 9.0 $22.34 555 $26.92 - ---------------------------------------------------------------------------------------------- 7,526 6.5 $14.62 4,412 $13.30 - ---------------------------------------------------------------------------------------------- The weighted average grant date fair value per share of options granted in 1996 and 1995 is as follows: 1996 1995 - ---------------------------------------------------------------------------------------------- Grants at market price $ 6.91 $ 3.46 Grants in excess of market price $ 4.21 --
The fair value of each option granted in 1996 and 1995 is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
1996 1995 - -------------------------------------------------------------------------------- Dividend yield 1.8% 2.2% Expected volatility 42.3% 33.1% Risk-free interest rate 5.1% 7.3% Expected life in years 4.1 2.8
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 upon the growth in earnings per share and certain other criteria. Recipients may elect to receive up to 50 percent of their distribution in cash based on the Company's common stock price at the end of the measurement period. The total expense under the plan was $11,200,000 in 1996, $9,870,000 in 1995 and $3,987,000 in 1994. At December 31, 1996, 878,619 shares of common stock were available for future awards under the plan. Other information regarding performance share units is presented below:
1996 1995 - -------------------------------------------------------------------------------- Units awarded 356,000 366,000 Award date fair value per unit $ 18.63 $ 14.31 Units outstanding, end of year 893,028 988,332
Pro forma information. During 1996 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." In accordance with the provisions of 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):
1996 1995 ------------------- ------------------- Reported Pro forma Reported Pro forma - ---------------------------------------------------------------- Net income $177,617 $172,787 $147,650 $140,798 - ---------------------------------------------------------------- Net income per share $ 1.22 $ 1.19 $ 0.98 $ 0.93 - ----------------------------------------------------------------
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. 8. EMPLOYEE BENEFITS. The Company and its subsidiaries have non-contributory qualified retirement plans covering most salaried employees, including certain employees in Canada. Under the plans, retirement benefits are primarily a function of years of service and the level of compensation during the final years of employment. Total pension expense for all qualified plans was $8,350,000 in 1996, $7,275,000 in 1995 and $7,143,000 in 1994. U.S. retirement plan. The following table sets forth the U.S. plan's funded status at December 31, 1996 and 1995:
(in thousands) 1996 1995 - ---------------------------------------------------------------------- Accumulated plan benefits: Vested benefits $328,496 $320,784 Nonvested benefits 9,487 10,286 - ---------------------------------------------------------------------- 337,983 331,070 Effect of projected future compensation levels 27,220 41,680 - ---------------------------------------------------------------------- Projected benefit obligation 365,203 372,750 Plan assets at fair value 373,362 332,726 - ---------------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation 8,159 (40,024) Unrecognized net (gains) losses (3,653) 38,610 Prior service cost not yet recognized in period pension cost 4,850 6,488 Net asset at transition being amortized (62) (528) - ---------------------------------------------------------------------- Prepaid pension cost $ 9,294 $ 4,546 - ----------------------------------------------------------------------
The plan's assets consist primarily of listed common stocks and fixed income obligations. At December 31, 1996, the plans assets included 980,355 shares of the Company's common stock with a market value of approximately $30,023,000. Pension expense for the plan includes the following components:
(in thousands) 1996 1995 1994 - --------------------------------------------------------------------------------- Service cost $ 7,465 $ 5,627 $ 7,694 Interest cost on projected benefit obligation 26,692 26,805 24,058 Actual return on plan assets (53,065) (58,539) (2,064) Net amortization and deferrals 26,960 32,995 (23,168) - --------------------------------------------------------------------------------- Pension expense $ 8,052 $ 6,888 $ 6,520 - ---------------------------------------------------------------------------------
Assumptions used in the accounting for the U.S. Retirement Plan are as follows:
1996 1995 1994 - ---------------------------------------------------------------------------------- Discount rate used to determine projected benefit obligation at December 31 7.5% 7.25% 8.75% Rate of increase in future compensation levels 4.25% 4.25% 5.0% Expected long-term rate of return on plan assets 9.5% 9.5% 9.0%
Canadian retirement plan. The Company's Canadian subsidiaries also have a retirement plan that covers approximately 800 employees. The plans assets consist primarily of fixed income obligations and equity securities, and their aggregate fair market value approximates the projected benefit obligation at December 31, 1996. 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 $3,517,000 in 1996, $2,982,000 in 1995 and $2,609,000 in 1994. The accrued liability for this plan at December 31, 1996 and 1995, was $24,379,000 and $20,926,000, respectively, and is included in other long-term liabilities in the accompanying balance sheets. Employee retirement savings plans. 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. The expense for these plans was $4,544,000 in 1996, $4,454,000 in 1995 and $4,739,000 in 1994. Postretirement benefits. The Company provides certain healthcare and life insurance benefits for eligible retired employees. Healthcare benefits are provided through a trust, while life insurance benefits are provided through an insurance company. 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 postretirement benefits for medical and life insurance coverage over the active service period of the employee. The following table presents a reconciliation of the plans status at December 31, 1996 and 1995:
(in thousands) 1996 1995 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ 64,097 $ 71,581 Fully eligible active plan participants 6,391 9,730 Other active participants 8,556 10,340 - -------------------------------------------------------------------------------- 79,044 91,651 Plan assets at fair value -- -- - -------------------------------------------------------------------------------- Accumulated benefit obligation in excess of plan assets (79,044) (91,651) Unrecognized prior service credit due to plan amendments (11,930) (10,103) Unrecognized net losses 8,274 17,462 - -------------------------------------------------------------------------------- (82,700) (84,292) Less current portion (3,300) (3,407) - -------------------------------------------------------------------------------- Accrued postretirement benefit obligation $(79,400) $(80,885) - -------------------------------------------------------------------------------- Net periodic postretirement benefit expense includes the following components: (in thousands) 1996 1995 1994 - -------------------------------------------------------------------------------- Service cost $ 1,824 $ 2,079 $ 2,264 Interest cost on accumulated benefit obligation 5,418 6,439 5,908 Amortization of prior service credit (3,913) (3,315) (3,839) Amortization of losses 174 -- 656 - -------------------------------------------------------------------------------- Net periodic postretirement benefit expense $ 3,503 $ 5,203 $ 4,989 - --------------------------------------------------------------------------------
Assumptions used in the computation of postretirement benefit expense and the related obligation are as follows:
1996 1995 1994 - ------------------------------------------------------------------------------ Discount rate used to determine accumulated postretirement benefit obligation at December 31 7.5% 7.25% 8.75% Initial healthcare cost trend rate 10.5% 11.0% 11.0% Ultimate healthcare cost trend rate 6.0% 6.0% 6.0% Year ultimate healthcare cost trend rate reached 2005 2005 2005
If the healthcare cost trend rate were increased 1% for all future years, the accumulated postretirement benefit obligation as of December 31, 1996, would have increased 12.2 percent. The effect of such a change on the aggregate of service and interest cost for 1996 would have been an increase of 8.4 percent. The Company continues to evaluate ways in which it can better manage these benefits and control their costs. Any changes in the plan, revisions to assumptions or changes in the Medicare program that affect the amount of expected future benefits may have a significant effect on the amount of the reported obligation and future annual expense. 9. COMMITMENTS AND CONTINGENCIES. Leases. The Company's operating leases involve principally office space and office equipment. Rental expense relating to these leases was $52,796,000 in 1996, $46,898,000 in 1995 and $46,534,000 in 1994. In March 1994 the Company sold and leased back under operating leases certain land and buildings. The net sales price of $55.1 million approximated the net book value of the related assets. Future minimum payment obligations for noncancelable operating leases exceeding one year are as follows as of December 31, 1996:
(in thousands) Amount - ------------------------------------------------------------------------------- 1997 $ 37,546 1998 31,150 1999 24,928 2000 20,242 2001 16,665 Thereafter 107,931 - ------------------------------------------------------------------------------- $238,462 - -------------------------------------------------------------------------------
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 agreement expires in 1998, is renewable at the option of CSC for successive ten- year periods, and provides CSC with an option to sell its collection and credit reporting businesses to the Company. The option is currently exercisable and expires in 2013. In the event CSC does not exercise its option to sell and does not renew the agreement, or if there is a change in control of CSC, the Company has the option to purchase CSC's collection and credit reporting businesses. The option price is determined, for all purposes, in accordance with the following schedule: on or before July 31, 1998, at the price determined by certain financial formulas, and after July 31, 1998, at appraised value. The Company currently estimates the option price determined by the financial formulas to be approximately $400 million. In its annual report for the fiscal year ended March 29, 1996, CSC stated that the option price "approached $500 million at March 29, 1996." The Company periodically evaluates the estimated fair value of the CSC collection and credit reporting businesses using estimates of their discounted cash flows. Based on this analysis, at December 31, 1996, the fair value of these businesses is not less than their potential purchase price. 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. The Company currently estimates the future annual obligation under this agreement to be approximately $70,000,000 per year, although this amount could be more or less depending upon 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), the Company may cancel the ISSC agreement; however, the agreement provides that the Company must pay a significant penalty in the event of such a cancellation. Change in control agreements. The Company has agreements with ten of its officers which provide certain severance pay and benefits in the event of a "change in control" of the Company, which is defined as the acquisition of more than 50% of the Company's outstanding common stock by an entity or a concerted group of entities. 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, 1996, the maximum contingent liability under the agreements and plans was approximately $26,146,000. 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. 10. RESTRUCTURING. In the fourth quarter of 1995, the Company initiated a restructuring program designed to streamline operations by reducing staffing levels and consolidating facilities. Staffing levels were reduced by approximately 750 employees primarily in the Insurance Services, General Information Services and Credit Services Segments. The total cost of this program was $19,572,000 ($11,939,000 net of tax, or $.08 per share). Components of the restructuring provision and utilization through December 31, 1996, are as follows:
Severance & Termination Asset Lease (in thousands) Benefits Write-offs Costs Total - ---------------------------------------------------------------------------- Original provision $13,813 $ 2,994 $ 2,765 $ 19,572 Utilized in 1995 (2,521) (2,994) (915) (6,430) - ---------------------------------------------------------------------------- Balance, December 31, 1995 11,292 -- 1,850 13,142 Utilized in 1996 (9,470) -- (1,652) (11,122) - ---------------------------------------------------------------------------- Balance, December 31, 1996 $ 1,822 $ -- $ 198 $ 2,020 - ----------------------------------------------------------------------------
The reserve balance at December 31, 1996, is included in other current liabilities in the accompanying balance sheets. 11. QUARTERLY FINANCIAL DATA (UNAUDITED). Quarterly operating revenue and operating income by industry segment and other summarized quarterly financial data for 1996 and 1995 are as follows (in thousands, except per share amounts):
1996 First Second Third Fourth - ------------------------------------------------------------------------------------------- Revenue: Credit Services $138,690 $146,950 $144,764 $150,501 Payment Services 71,598 79,252 84,732 103,744 International Operations 54,646 57,796 58,992 71,909 Insurance Services 135,755 144,958 151,593 154,810 General Information Services 22,322 16,659 14,905 6,647 - ------------------------------------------------------------------------------------------- $423,011 $445,615 $454,986 $487,611 - ------------------------------------------------------------------------------------------- Operating income (loss): Credit Services $47,539 $51,288 $52,145 $52,836 Payment Services 11,815 14,414 16,051 24,601 International Operations 4,012 7,901 10,764 11,628 Insurance Services 9,858 13,116 14,790 12,942 General Information Services 3,209 (10,586)/1/ (2,299) 496 - ------------------------------------------------------------------------------------------- Operating Contribution 76,433 76,133 91,451 102,503 General Corporate Expense (10,509) (11,490) (10,410) (9,693) - ------------------------------------------------------------------------------------------- $65,924 $64,643 $81,041 $92,810 - ------------------------------------------------------------------------------------------- Income before income taxes $61,133 $68,243 $75,998 $98,189 - ------------------------------------------------------------------------------------------- Net income $36,845 $41,130 $45,804 $53,838 - ------------------------------------------------------------------------------------------- Net income per common share $0.25 $0.28 $0.32 $0.37 - ------------------------------------------------------------------------------------------- 1995 First Second Third Fourth - ------------------------------------------------------------------------------------------- Revenue: Credit Services $119,320 $125,682 $129,836 $137,885 Payment Services 60,878 68,831 72,645 82,028 International Operations 48,932 50,199 55,532 56,381 Insurance Services 127,099 132,439 130,362 127,046 General Information Services 27,964 30,255 23,652 15,992 - ------------------------------------------------------------------------------------------- $384,193 $407,406 $412,027 $419,332 - ------------------------------------------------------------------------------------------- Operating income (loss):/2/ Credit Services $40,615 $42,123 $45,069 $49,057 Payment Services 11,003 15,660 16,090 20,707 International Operations 2,280 4,507 7,939 5,233 Insurance Services 9,558 11,141 11,353 2,669 General Information Services (1,481) (2,275) (3,560) 10,828 - ------------------------------------------------------------------------------------------- Operating Contribution 61,975 71,156 76,891 88,494 General Corporate Expense (8,740) (7,638) (10,791) (8,408) - ------------------------------------------------------------------------------------------- $53,235 $63,518 $66,100 $80,086 - ------------------------------------------------------------------------------------------- Income before income taxes $50,492 $60,586 $62,935 $75,225 - ------------------------------------------------------------------------------------------- Net income $29,472 $35,814 $37,981 $44,383 - ------------------------------------------------------------------------------------------- Net income per common share $0.19 $0.23 $0.25 $0.30
/1/Includes $10,313 loss related to asset impairment (Note 3). /2/See Industry Segment Information (Note 12) regarding the effects of restructuring provision and lottery settlement on fourth quarter 1995 operating income. -79- 12. INDUSTRY SEGMENT INFORMATION. Industry segment information for 1996, 1995 and 1994 is as follows (dollars in thousands):
1996 1995 1994 - ---------------------------------------------------------------------------------------------- (dollars in thousands) Amount % Amount % Amount % - ---------------------------------------------------------------------------------------------- Operating revenue: Credit Services $580,905 32% $512,723 32% $476,397 34% Payment Services 339,326 19 284,382 17 246,597 17 International Operations 243,343 13 211,044 13 143,371 10 Insurance Services 587,116 33 516,946 32 453,409 32 General Information Services 60,533 3 97,863 6 102,222 7 - ---------------------------------------------------------------------------------------------- $1,811,223 100% $1,622,958 100% $1,421,996 100% - ---------------------------------------------------------------------------------------------- Operating income (loss): Credit Services $203,808 59% $176,864 59% $149,867 61% Payment Services 66,881 19 63,460 21 57,460 24 International Operations 34,305 10 19,959 7 16,458 7 Insurance Services 50,706 15 34,721 12 18,504 8 General Information Services (9,180) (3) 3,512 1 1,024 -- - ---------------------------------------------------------------------------------------------- Operating Contribution 346,520 100% 298,516 100% 243,313 100% General Corporate Expense (42,102) (35,577) (29,206) - ---------------------------------------------------------------------------------------------- $304,418 $262,939 $214,107 - ---------------------------------------------------------------------------------------------- Identifiable assets at December 31: Credit Services $345,432 27% $298,095 28% $293,947 29% Payment Services 200,479 15 122,925 12 115,929 11 International Operations 369,430 28 307,864 29 293,318 29 Insurance Services 281,141 22 171,499 16 171,904 17 General Information Services 14,155 1 82,874 8 84,352 8 Corporate 92,147 7 70,438 7 61,724 6 - ---------------------------------------------------------------------------------------------- $1,302,784 100% $1,053,695 100% $1,021,174 100% - ----------------------------------------------------------------------------------------------
Description of Segments: Credit Services: Consumer credit reporting information; credit card marketing services; risk management and collection services; locate services; fraud detection and prevention services; mortgage loan origination information; and PC-based marketing systems, geo-demographic systems and mapping tools. Payment Services: Check warranty and verification services; credit and debit card authorization and processing; credit card marketing enhancement; and software products for managing credit card operations. International Operations: In Canada, consumer and business credit reporting information; accounts receivable; collection services; and check warranty services. In Europe (primarily the United Kingdom), credit reporting and marketing services; credit scoring and modeling services; check warranty services; and auto lien information. In South America, credit information services and commercial, financial and medical information. -80- Insurance Services: Underwriting and claims reporting services; inspection and loss control services; workers' compensation audits; software for commercial insurers; specimen testing for life and health insurance applicants; on-line public record information; and employment evaluation services. General Information Services: Healthcare Information Services, divested in the fourth quarter of 1996, included electronic claims processing; physician profiling; claims auditing; claims analysis, administration and utilization management; electronic remittance; hospital bill audits; and medical credentials verification. Marketing Services, divested in August 1995, included research and analysis and custom opinion surveys. Note to Industry Segment Information: 1. Operating revenue is to unaffiliated customers only. 2. Operating income is operating revenue less operating costs and expenses, excluding interest expense, other income and income taxes. 3. Depreciation and amortization by industry segment are as follows:
(in thousands) 1996 1995 1994 - ------------------------------------------------------------ Credit Services $28,439 $26,624 $29,412 Payment Services 9,522 7,000 4,970 International Operations 19,762 16,844 10,986 Insurance Services 18,456 13,514 10,680 General Information Services 6,306 9,361 6,990 Corporate 3,411 3,702 3,458 - ------------------------------------------------------------ $85,896 $77,045 $66,496 - ------------------------------------------------------------
4. Capital expenditures by industry segment, excluding property and equipment and other assets acquired in acquisitions, are as follows:
(in thousands) 1996 1995 1994 - ------------------------------------------------------------ Credit Services $ 27,849 $ 8,225 $ 7,251 Payment Services 32,581 12,719 9,422 International Operations 7,342 4,125 5,306 Insurance Services 22,243 9,487 5,734 General Information Services 1,740 16,800 3,277 Corporate 8,434 7,675 1,346 - ------------------------------------------------------------ $100,189 $59,031 $32,336 - ------------------------------------------------------------
5. In the second quarter of 1996, the Company recorded a loss related to the impairment of certain assets (Note 3). In the fourth quarter of 1995, the Company recorded a restructuring provision (Note 10) and a settlement with the California State Lottery (Note 4). Operating income by industry segment decreased (increased) as a result of these items as follows: -81-
1996 1995 ---- --------------------------------------------------- Asset Restructuring Lottery (in thousands) Impairment Provision Settlement Total - ------------------------------------------------------------------------------------------------------------------------------------ Credit Services $ -- $3,243 $ -- $3,243 Payment Services -- 521 -- 521 International Operations -- 1,716 -- 1,716 Insurance Services -- 9,150 -- 9,150 General Information Services 10,313 4,442 (19,665) (15,223) Corporate -- 500 -- 500 - ------------------------------------------------------------------------------------------------------------------------------------ $10,313 $19,572 $(19,665) $(93) - ------------------------------------------------------------------------------------------------------------------------------------
6. Financial information by geographic area is as follows:
1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ (dollars in thousands) Amount % Amount % Amount % - ------------------------------------------------------------------------------------------------------------------------------------ Revenue: United States $1,558,656 86% $1,405,560 87% $1,277,196 90% Canada 85,832 5 78,952 5 78,277 5 Europe 166,735 9 138,446 8 66,523 5 - ------------------------------------------------------------------------------------------------------------------------------------ $1,811,223 100% $1,622,958 100% $1,421,996 100% - ------------------------------------------------------------------------------------------------------------------------------------ Operating contribution (loss): United States $308,650 89% $277,070 93% $228,280 94% Canada 16,551 5 15,065 5 15,476 6 Europe 18,077 5 5,389 2 (851) -- South America 4,340 1 992 -- 408 -- Other (1,098) -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ $346,520 100% $298,516 100% $243,313 100% - ------------------------------------------------------------------------------------------------------------------------------------ Identifiable assets at December 31: United States $925,182 71% $737,575 70% $723,466 71% Canada 87,533 7 70,984 7 109,004 11 Europe 257,564 20 217,903 21 173,054 17 South America 31,873 2 27,233 2 15,650 1 Other 632 - ------------------------------------------------------------------------------------------------------------------------------------ $1,302,784 100% $1,053,695 100% $1,021,174 100% - ------------------------------------------------------------------------------------------------------------------------------------
-82- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Equifax Inc.: We have audited the accompanying consolidated balance sheets of Equifax Inc. (a Georgia corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Equifax Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ARTHUR ANDERSEN LLP Atlanta, Georgia February 14, 1997 -83-