EXHIBIT 13.3 EQUIFAX INC. CONSOLIDATED BALANCE SHEETS
(In thousands) ----------------------------------------------------------------------------------- December 31 1997 1996 ----------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 52,251 $ 48,160 Accounts receivable, net of allowance for doubtful accounts of $6,188 in 1997 and $6,136 in 1996 270,665 227,540 Deferred income tax assets 39,221 33,016 Other current assets 38,795 36,392 ----------- ----------- Total current assets 400,932 345,108 ----------- ----------- Property and Equipment: Land, buildings and improvements 24,870 18,739 Data processing equipment and furniture 194,553 191,302 ----------- ----------- 219,423 210,041 Less accumulated depreciation 124,689 123,177 ----------- ----------- 94,734 86,864 ----------- ----------- Goodwill 365,427 313,760 ----------- ----------- Purchased Data Files 103,282 84,025 ----------- ----------- Other Assets 212,729 181,347 ----------- ----------- Net Assets of Discontinued Operations -- 196,414 ----------- ----------- $1,177,104 $1,207,518 =========== ===========
The accompanying notes are an integral part of these consolidated balance sheets. EQUIFAX INC. CONSOLIDATED BALANCE SHEETS
(In Thousands) - --------------------------------------------------------------------------------------------------- December 31 1997 1996 - --------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Short-term debt and current maturities of long-term debt $ 12,984 $ 59,563 Accounts payable 94,682 71,801 Accrued salaries and bonuses 26,404 27,682 Income taxes payable 13,827 18,321 Other current liabilities 179,712 152,348 ---------- ---------- Total current liabilities 327,609 329,715 ---------- ---------- Long-Term Debt, Less Current Maturities 339,301 304,942 ---------- ---------- Long-Term Deferred Revenue 42,848 42,964 ---------- ---------- Other Long-Term Liabilities 117,949 104,947 ---------- ---------- Commitments and Contingencies (Note 11) Shareholders' Equity: Common stock, $1.25 par value; shares authorized - 300,000; issued - 172,465 in 1997 and 170,859 in 1996; outstanding - 142,609 in 1997 and 144,876 in 1996 215,581 213,573 Preferred stock, $0.01 par value; shares authorized - 10,000; issued and outstanding - none in 1997 or 1996 -- -- Paid-in capital 244,496 207,142 Retained earnings 415,149 396,340 Cumulative foreign currency translation adjustment (13,684) (3,913) Treasury stock at cost, 23,304 shares in 1997 and 19,430 shares in 1996 (Note 9) (447,578) (323,625) Stock held by employee benefits trusts, at cost, 6,553 shares in 1997 and 1996 (Note 9) (64,567) (64,567) ---------- ---------- Total shareholders' equity 349,397 424,950 ---------- ---------- $1,177,104 $1,207,518 ========== ==========
EQUIFAX INC. CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts) -------------------------------------------------------------------------------------------------------------- Year Ended December 31 1997 1996 1995 -------------------------------------------------------------------------------------------------------------- Operating revenue $1,366,087 $1,222,798 $1,105,309 ---------- ---------- ---------- Costs and expenses: Costs of services 778,936 697,168 651,304 Selling, general and administrative expenses 263,243 258,729 232,101 Unusual charges (credits) (Note 3) 25,000 10,313 (9,243) ---------- ---------- ---------- Total costs and expenses 1,067,179 966,210 874,162 ---------- ---------- ---------- Operating income 298,908 256,588 231,147 Other income, net 45,027 22,400 7,335 Interest expense 20,797 16,439 15,342 ---------- ---------- ---------- Income from continuing operations before income taxes and cumulative effect of accounting change 323,138 262,549 223,140 Provision for income taxes 137,613 109,452 90,355 ---------- ---------- ---------- Income from continuing operations before cumulative effect of accounting change 185,525 153,097 132,785 ---------- ---------- ---------- Discontinued operations (Note 2): Income from discontinued operations, net of income taxes of $10,179, $16,494 and $11,233 respectively 14,336 24,520 14,865 Costs associated with effecting the spinoff, net of income tax benefit of $2,154 (12,887) -- -- ---------- ---------- ---------- Total discontinued operations 1,449 24,520 14,865 ---------- ---------- ---------- Income before cumulative effect of accounting change 186,974 177,617 147,650 Cumulative effect of change in accounting for business process reengineering, net of income tax benefit of $2,061 (Note 3) (3,237) -- -- ---------- ---------- ---------- Net income $ 183,737 $ 177,617 $ 147,650 ========== ========== ========== Per common share (basic): Income from continuing operations before cumulative effect of accounting change $ 1.29 $ 1.05 $ 0.88 Discontinued operations 0.01 0.17 0.10 Cumulative effect of accounting change (0.02) -- -- ---------- ---------- ---------- Net income $ 1.27 $ 1.22 $ 0.98 ========== ========== ========== Shares used in computing basic earnings per share 144,233 145,518 151,357 ========== ========== ========== Per common share (diluted): Income from continuing operations before cumulative effect of accounting change $ 1.26 $ 1.03 $ 0.86 Discontinued operations 0.01 0.16 0.10 Cumulative effect of accounting change (0.02) -- -- ---------- ---------- ---------- Net income $ 1.24 $ 1.19 $ 0.96 ========== ========== ========== Shares used in computing diluted earnings per share 147,818 149,207 154,375 ========== ========== ========== Dividends per common share $ 0.345 $ 0.330 $ 0.315 ========== ========== ========== The accompanying notes are an integral part of these consolidated statements.
EQUIFAX INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands) -------------------------------------------------------------------------------------------------------------- Year Ended December 31 1997 1996 1995 -------------------------------------------------------------------------------------------------------------- Common Stock: Balance at beginning of year $ 213,573 $ 211,015 $ 208,471 Shares issued under stock plans 2,008 2,558 2,544 --------- --------- --------- Balance at end of year $ 215,581 $ 213,573 $ 211,015 ========= ========= ========= Paid-In Capital: Balance at beginning of year $ 207,142 $ 171,020 $ 145,859 Shares issued under stock plans 22,800 25,795 17,243 Adjustment for treasury stock reissued for acquisitions 3,468 360 884 Other 11,086 9,967 7,034 --------- --------- --------- Balance at end of year $ 244,496 $ 207,142 $ 171,020 ========= ========= ========= Retained Earnings: Balance at beginning of year $ 396,340 $ 269,986 $ 175,894 Net income 183,737 177,617 147,650 Cash dividends (52,030) (49,704) (50,223) Spinoff dividend (111,396) - - Other (1,502) (1,559) (3,335) --------- --------- --------- Balance at end of year $ 415,149 $ 396,340 $ 269,986 ========= ========= ========= Cumulative Foreign Currency Translation Adjustment: Balance at beginning of year $ (3,913) $ (13,734) $ (13,310) Adjustment during year (9,771) 9,821 (424) --------- --------- --------- Balance at end of year $ (13,684) $ (3,913) $ (13,734) ========= ========= ========= Treasury Stock: Balance at beginning of year $(323,625) $(218,613) $ (87,975) Cost of shares repurchased (129,085) (105,550) (132,668) Cost of shares reissued for acquisitions 5,132 538 2,030 --------- --------- --------- Balance at end of year $(447,578) $(323,625) $(218,613) ========= ========= ========= Stock Held By Employee Benefits Trusts: Balance at beginning of year $ (64,567) $ (66,209) $ (67,004) Cost of shares reissued under stock plans - 1,642 795 --------- --------- ---------- Balance at end of year $ (64,567) $ (64,567) $ (66,209) ========= ========= ========== The accompanying notes are an integral part of these consolidated statements.
EQUIFAX INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) ------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31 1997 1996 1995 ------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 183,737 $ 177,617 $ 147,650 Adjustments to reconcile net income to net cash provided by operating activities of continuing operations: Income from discontinued operations (14,336) (24,520) (14,865) Costs associated with effecting the spinoff 12,887 - - Cumulative effect of accounting change 3,237 - - Depreciation and amortization 77,069 67,475 63,724 Valuation loss on pending acquisition 25,000 - - Asset impairment write-off - 10,313 - Gain from sale of long-term investments - (8,232) - Gain from sale of businesses (42,798) (11,564) - Restructuring provision, net of cash payments - - 9,192 Changes in assets and liabilities, excluding effects of acquisitions: Accounts receivable, net (45,982) (26,674) (17,653) Current liabilities, excluding debt 11,909 55,134 (36,000) Other current assets (3,827) 13,141 (21,993) Deferred income taxes 9,726 (22,162) 15,219 Other long-term liabilities, excluding debt 4,894 51,554 2,458 Other assets (11,431) (11,053) (8,024) --------- --------- --------- Net cash provided by operating activities of continuing operations 210,085 271,029 139,708 --------- --------- --------- Cash flows from investing activities: Additions to property and equipment (34,587) (38,099) (26,333) Additions to other assets, net (51,452) (40,191) (22,112) Acquisitions, net of cash acquired (96,630) (83,109) (13,295) Investments in unconsolidated affiliates (18,839) - (14,066) Deferred payments on prior year acquisitions - - (8,743) Proceeds from sale of long-term investments - 18,356 - Proceeds from sale of businesses 80,998 49,081 14,868 --------- --------- --------- Net cash used by investing activities of continuing operations (120,510) (93,962) (69,681) --------- --------- --------- Cash flows from financing activities: Net short-term borrowings (payments) 8,556 31,998 (44,274) Additions to long-term debt 67,285 12,820 82,402 Payments on long-term debt (92,582) (11,933) (11,451) Treasury stock purchases (129,085) (105,550) (132,668) Dividends paid (52,030) (49,704) (50,223) Proceeds from exercise of stock options 18,343 25,945 16,596 Other 11,085 9,967 7,034 --------- --------- --------- Net cash used by financing activities of continuing operations (168,428) (86,457) (132,584) --------- --------- --------- Effect of foreign currency exchange rates on cash 196 (1,023) 1,041 Net cash provided (used) by discontinued operations 82,748 (66,918) 9,875 --------- --------- --------- Net cash provided (used) 4,091 22,669 (51,641) Cash and cash equivalents, beginning of year 48,160 25,491 77,132 --------- --------- --------- Cash and cash equivalents, end of year $ 52,251 $ 48,160 $ 25,491 ========= ========= ========= 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 have been restated to reflect the spinoff of ChoicePoint Inc. (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 credit services and payment services (see Note 14 for industry segment information). The principal markets for both credit and payment services are retailers, banks and other financial institutions, with credit 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 and the United Kingdom. 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, 1997 and 1996 totaled $29,345,000 and $27,935,000, respectively. EARNINGS PER SHARE. - Earnings per share (EPS) is calculated in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share," issued in February 1997, which requires the Company to present both basic and diluted EPS on the face of the income statement. 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) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Weighted average shares outstanding (basic) 144,233 145,518 151,357 Effect of dilutive securities: Stock options 3,099 3,154 2,436 Performance share plan 486 535 582 - ------------------------------------------------------------------------------------------------------------------ Weighted average shares outstanding (diluted) 147,818 149,207 154,375 ==================================================================================================================
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 $12,221,000 in 1997, $10,238,000 in 1996, and $9,020,000 in 1995. As of December 31, 1997 and 1996, accumulated amortization was $42,996,000 and $35,034,000, 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 $11,506,000 in 1997, $9,961,000 in 1996, and $11,029,000 in 1995. As of December 31, 1997 and 1996, accumulated amortization was $77,587,000 and $72,546,000, respectively. OTHER ASSETS. - Other assets at December 31, 1997 and 1996 consist of the following:
(in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Systems development and other deferred costs $ 81,927 $ 63,330 Purchased software 40,627 37,123 Prepaid pension cost 40,171 13,148 Investments in unconsolidated affiliates 28,200 42,505 Deferred income tax assets -- 10,426 Other 21,804 14,815 - ---------------------------------------------------------------------------------------------------------------------------- $212,729 $181,347 ============================================================================================================================
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 $23,018,000 in 1997, $20,139,000 in 1996, and $18,579,000 in 1995. As of December 31, 1997 and 1996, accumulated amortization was $91,915,000 and $76,338,000, 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) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Income taxes, net of amounts refunded $123,670 $92,276 $109,842 Interest $ 21,593 $16,922 $ 15,332
In 1997, 1996 and 1995, 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) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Fair value of assets acquired $127,724 $104,385 $58,749 Cash paid for acquisitions 102,903 83,214 13,415 Value of treasury shares reissued for acquisitions 8,600 -- -- Notes and deferred payments 5,800 1,542 13,369 - -------------------------------------------------------------------------------------------------------------------- Liabilities assumed $ 10,421 $ 19,629 $31,965 ====================================================================================================================
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, 1997, the fair value of the Company's long-term debt (determined primarily by broker quotes) was $347,146,000 compared to its carrying value of $344,585,000. During 1997, the Company did not hold any material derivative financial instruments. 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 have been restated to conform to this presentation, with the historical assets and liabilities of that segment presented on the balance sheet as "Net assets of discontinued operations". 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 1995 - --------------------------------------------------------------------------------------------------------------------- Revenue $340,251 $588,425 $517,649 Income before income taxes 24,515 41,014 26,098 Net income 14,336 24,520 14,865
(in thousands) December 31, 1996 - ---------------------------------------------------------------------------------------------------------------------- Current assets $ 91,931 Total assets 301,824 Current liabilities 44,965 Total liabilities 105,410 Net assets of discontinued operations 196,414
The results of operation 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 net assets of discontinued operations include the Company's intercompany receivable from ChoicePoint, which totaled $84.0 million at December 31, 1996. The balance of this intercompany receivable was $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 consist of the following charges (credits):
(in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------- Valuation loss accrued for pending acquisition (Note 11) $25,000 $ -- $ -- Asset impairment write-off (Note 5) -- 10,313 -- Credit related to lottery contract (Note 6) -- -- (19,665) Restructuring provision (Note 12) -- -- 10,422 - ------------------------------------------------------------------------------------------------------------------- $25,000 $10,313 $ (9,243) ===================================================================================================================
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 1997, 1996 and 1995, the Company acquired or made equity investments in the following businesses:
Date Industry Percentage Business Acquired Segment Ownership - ------------------------------------------------------------------------------------------------------------ Goldleaf Technologies, Inc. December 1997 Payment Services 100.0% Organizacion VERAZ S.A. (Argentina) December 1997 Latin America 66.7% 1 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% 2 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% 3 Collective Credit Bureaus Ltd. (Canada) May 1996 North America 100.0% Market Knowledge, Inc. January 1996 North America 100.0% DICOM S.A. (Chile) December 1995 Latin America 50.0% 4 TecniCob S.A. (France) July 1995 Payment Services 100.0% The Infocheck Group Limited (U.K.) July 1995 Europe 100.0% UCB Services, Inc. April 1995 North America 100.0% Medical Review Systems, LP March 1995 Other 100.0% 5
1 Increased to 66.7% from the 33.3% ownership position acquired in 1994. 2 Increased to 100.0% from the 50.0% ownership position acquired in 1995 and 1994. 3 Increased to 100.0% from the 50.1% ownership position acquired in 1994 and 1992. 4 Increased to 50.0% from the 25.0% ownership position acquired in 1994. 5 Divested in the fourth quarter, 1996 (see Note 5). In 1997, in addition to the businesses above, the Company acquired the credit files of sixteen credit bureaus 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 bureaus 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. Additional consideration may be paid for certain of the acquisitions based on their future operating performance. The 1995 acquisitions of greater than 50% ownership were accounted for as purchases and had an aggregate purchase price of $26,784,000, with $31,925,000 allocated to goodwill and $11,121,000 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 $13,415,000 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. Also 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. 5. DIVESTITURES AND ASSET IMPAIRMENT. 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. During the third quarter of 1995, the Company sold Elrick & Lavidge and Quick Test, the market research businesses in its Other segment. Cash proceeds from these sales totaled $14,868,000 and resulted in an immaterial gain, recorded in other income. 6. LOTTERY CONTRACT DISPUTE, LITIGATION, AND SETTLEMENT. In 1992, High Integrity Systems, Inc. (HISI), a Company subsidiary, entered into a contract 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. During 1993, the California State Lottery (CSL) filed suit against HISI for alleged breach of contract and injunctive relief and HISI filed a cross- complaint against the CSL alleging breach of contract and seeking recovery of the reasonable value of the labor and materials expended on behalf of the CSL. In September 1993, the Company recorded a provision of $48,438,000 ($30,939,000 after tax, or $.20 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. During 1995, the CSL and HISI settled the litigation and finalized the terms of a reinstated contract under which HISI agreed to install its system to automate the processing of instant lottery tickets, and the CSL agreed to purchase 6,700 terminals and related security hardware and license 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 expenses. Under the reinstated contract, HISI was also guaranteed to receive 66 months of revenue at the rate of 5% on each dollar of lottery ticket sales occurring from each terminal installed. In 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 provided for a one-time payment of $58,000,000 by GTECH to HISI, and also provided that future payments received by HISI from the CSL for lottery ticket sales 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 remaining balance is being recognized as revenue over the term of the reinstated CSL contract, and $9,636,000 was recognized as revenue in 1997. The unrecognized balance at December 31, 1997 totaled $42,964,000, with $9,636,000 included as deferred revenue in other current liabilities and $33,328,000 included in long-term deferred revenue in the accompanying consolidated balance sheets. 7. LONG-TERM DEBT AND SHORT-TERM BORROWINGS. Long-term debt at December 31, 1997 and 1996 is as follows:
(in thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- Senior Notes, 6.5%, due 2003, net of unamortized discount of $561 in 1997 and $663 in 1996 $199,439 $199,337 Borrowings under $750 million revolving credit facility, varying interest rate, 6.13% at December 31, 1997 125,000 60,000 Term loan, denominated in pounds sterling, paid in 1997 -- 34,250 Other 20,146 15,412 - ---------------------------------------------------------------------------------------------------------------------------- 344,585 308,999 Less current maturities 5,284 4,057 - ---------------------------------------------------------------------------------------------------------------------------- $339,301 $304,942 ============================================================================================================================
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, 1997. Scheduled maturities of long-term debt during the five years subsequent to December 31, 1997 are as follows: $5,284,000 in 1998; $2,888,000 in 1999; $1,886,000 in 2000; $967,000 in 2001; and $125,967,000 in 2002. Short-term borrowings at December 31, 1997 and 1996 consisted of notes payable to banks totaling $7,700,000 and $55,506,000, respectively. These notes had a weighted average interest rate of 7.15% at December 31, 1997 and 6.4% at December 31, 1996. 8. 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) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- Current: Federal $109,804 $104,754 $58,721 State 21,408 16,677 11,936 Foreign 9,093 7,979 7,915 - -------------------------------------------------------------------------------------------------------------------- 140,305 129,410 78,572 - -------------------------------------------------------------------------------------------------------------------- Deferred: Federal (8,361) (20,035) 10,546 State (2,269) (1,612) 710 Foreign 7,938 1,689 527 ------------------------------------------------------------------------------------------------------------------- (2,692) (19,958) 11,783 - -------------------------------------------------------------------------------------------------------------------- Total $137,613 $109,452 $90,355 ====================================================================================================================
The provision for income taxes from continuing operations is based upon income from continuing operations before income taxes as follows:
(in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------- United States $284,116 $235,761 $214,838 Foreign 39,022 26,788 8,302 - -------------------------------------------------------------------------------------------------------------------- $323,138 $262,549 $223,140 ====================================================================================================================
The provision for income taxes from continuing operations is reconciled with the federal statutory rate as follows:
(in thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------- Federal statutory rate 35.0% 35.0% 35.0% - ---------------------------------------------------------------------------------------------------------------------- Provision computed at federal statutory rate $113,098 $ 91,892 $78,099 State and local taxes, net of federal tax benefit 12,440 9,792 8,220 Nondeductible goodwill from divestitures 5,652 4,633 -- Other 6,423 3,135 4,036 - ---------------------------------------------------------------------------------------------------------------------- $137,613 $109,452 $90,355 ====================================================================================================================
Components of the Company's deferred income tax assets and liabilities at December 31, 1997 and 1996 are as follows:
(in thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- Deferred income tax assets: Reserves and accrued expenses $ 37,821 $ 33,171 Postretirement benefits 9,398 8,737 Employee compensation programs 21,150 18,827 Deferred revenue 18,769 20,532 Other 21,874 16,923 - ------------------------------------------------------------------------------------------------------------------------------- 109,012 98,190 - ------------------------------------------------------------------------------------------------------------------------------- Deferred income tax liabilities: Data files and other assets (52,752) (45,244) Depreciation (4,545) (2,635) Pension expense (15,832) (6,057) Other (21,079) (17,614) - -------------------------------------------------------------------------------------------------------------------------------- (94,208) (71,550) - -------------------------------------------------------------------------------------------------------------------------------- Net deferred income tax asset $ 14,804 $ 26,640 ================================================================================================================================
The Company's deferred income tax assets and liabilities at December 31, 1997 and 1996 are included in the accompanying consolidated balance sheets as follows:
(in thousands) 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- Deferred income tax assets $ 39,221 $ 33,016 Other assets -- 10,426 Other long-term liabilities (24,417) (16,802) - -------------------------------------------------------------------------------------------------------------------------------- Net deferred income tax asset $ 14,804 $ 26,640 ================================================================================================================================
Accumulated undistributed retained earnings of Canadian subsidiaries amounted to approximately $107,441,000 at December 31, 1997. 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 $5,372,000 of deferred income taxes would have been provided. Such taxes, if ultimately paid, may be recoverable as foreign tax credits in the United States. 9. 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. RIGHTS PLAN. - 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 1997, 1996, and 1995, the Company repurchased 4,143,000, 4,614,000 and 6,847,000 of its own common shares through open market transactions at an aggregate cost of $129,085,000, $105,550,000 and $132,668,000, respectively. During 1997, the Company's Board of Directors authorized an additional $300,000,000 in share repurchases, and at December 31, 1997, approximately $223 million remained available for future purchases. During 1997, the Company reissued approximately 270,000 treasury shares in connection with an acquisition (Note 4). 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. 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 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, 1997, there were 4,391,000 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.
1997 1996 1995 ------------------------------------------------------------------- (shares in thousands) Shares Avg. Price Shares Avg. Price Shares Avg. Price - ------------------------------------------------------------------------------------------------------------- Balance, Beginning of year 7,526 $14.62 7,987 $12.21 5,874 $ 9.98 Adjustment to beginning balance due to spinoff 1,096 -- -- -- -- -- Granted: At market price 968 $26.06 915 $18.78 4,799 $14.33 In excess of market price 119 $35.44 1,092 $25.14 -- -- Canceled (1,434) $15.81 (382) $14.51 (848) $13.29 Exercised (1,693) $11.45 (2,086) $12.73 (1,838) $10.06 Balance, end of year 6,582 $14.89 7,526 $14.62 7,987 $12.21 - ------------------------------------------------------------------------------------------------------------- Exercisable at end of year 4,420 $12.53 4,412 $13.30 2,561 $ 9.87 =============================================================================================================
The following table summarizes information about stock options outstanding at December 31, 1997 (shares in thousands):
Options Outstanding Options Exercisable -------------------------------------------------------- Wgtd. Avg. Weighted Weighted Range of Remaining Average Average Exercise Contractual Exercise Exercise Prices Shares Life in years Price Shares Price - -------------------------------------------------------------------------------- $5.01-$8.67 1,698 3.6 $ 7.99 1,698 $ 7.99 10.37-12.49 2,378 5.2 $11.90 1,760 $11.84 13.37-25.75 2,343 8.3 $21.61 903 $20.73 26.41-40.59 163 9.4 $33.70 59 $38.07 - -------------------------------------------------------------------------------- 6,582 6.0 $14.89 4,420 $12.53 ================================================================================
The weighted-average grant-date fair value per share of options granted in 1997, 1996 and 1995 is as follows:
1997 1996 1995 - ------------------------------------------------------------------------------------------ Grants at market price $10.05 $6.91 $3.46 Grants in excess of market price $ 6.17 $4.21 --
The fair value of options granted in 1997, 1996 and 1995 is estimated on the date of grant using the Black-Scholes option-pricing model based on the following weighted average assumptions:
1997 1996 1995 - ---------------------------------------------------------------------------------------- Dividend yield 1.1% 1.8% 2.2% Expected volatility 41.3% 42.3% 33.1% Risk-free interest rate 6.3% 5.1% 7.3% Expected life in years 4.3 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 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 at 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 $11,022,000 in 1997, $11,200,000 in 1996, and $9,870,000 in 1995. At December 31, 1997, 672,630 shares of common stock were available for future awards under the plan. Units awarded during the year were 190,000 in 1997, 356,000 in 1996, and 366,000 in 1995. Award-date fair value per unit was $29.50 in 1997, $18.63 in 1996, and $14.31 in 1995. Units outstanding at December 31 were 809,600 in 1997, 893,028 in 1996, and 988,332 in 1995. 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 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):
1997 1996 1995 --------------------------------------------------------------------- Reported Pro Forma Reported Pro forma Reported Pro forma - ---------------------------------------------------------------------------------------------------------- Net income $183,737 $182,239 $177,617 $172,787 $147,650 $140,798 ========================================================================================================== Net income per share (basic) $ 1.27 $ 1.26 $ 1.22 $ 1.19 $ 0.98 $ 0.93 ========================================================================================================== Net income per share (diluted) $ 1.24 $ 1.23 $ 1.19 $ 1.16 $ 0.96 $ 0.91 ==========================================================================================================
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. 10. EMPLOYEE BENEFITS. The Company and its subsidiaries have non-contributory qualified retirement plans covering most salaried employees in the U.S. and 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 $573,000 in 1997, $8,350,000 in 1996 and $7,275,000 in 1995. U.S. RETIREMENT PLAN. - The following table sets forth the U.S. plan's funded status at December 31, 1997 and 1996:
(in thousands) 1997 1996 - ----------------------------------------------------------------------------------------------------------- Accumulated plan benefits: Vested benefits $369,461 $328,496 Nonvested benefits 7,107 9,487 - ----------------------------------------------------------------------------------------------------------- 376,568 337,983 Effect of projected future compensation levels 12,291 27,220 - ----------------------------------------------------------------------------------------------------------- Projected benefit obligation 388,859 365,203 Plan assets at fair value 435,005 373,362 - ----------------------------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 46,146 8,159 Unrecognized net gains (12,003) (3,653) Prior service cost not yet recognized in period pension cost 1,872 4,850 Net asset at transition being amortized through 1996 -- (62) - ----------------------------------------------------------------------------------------------------------- Prepaid pension cost $ 36,015 $ 9,294 ===========================================================================================================
The plan's assets consist primarily of listed common stocks and fixed income obligations. At December 31, 1997, the plan's assets included 980,355 shares of the Company's common stock with a market value of approximately $34,741,000. Pension expense for the plan includes the following components:
(in thousands) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------ Service cost $ 5,267 $ 7,465 $ 5,627 Interest cost on projected benefit obligation 26,735 26,692 26,805 Actual return on plan assets (76,544) (53,065) (58,539) Net amortization and deferrals 44,939 26,960 32,995 - ------------------------------------------------------------------------------------------------------------ Pension expense $ 397 $ 8,052 $ 6,888 ============================================================================================================
Pension expense includes amounts allocated to discontinued operations totaling $411,000 in 1997, $3,261,000 in 1996 and $3,296,000 in 1995. 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). Assumptions used in the accounting for the U.S. Retirement Plan are as follows:
1997 1996 1995 - ------------------------------------------------------------------------------------------------ Discount rate used to determine projected benefit obligation at December 31 7.25% 7.5% 7.25% Rate of increase in future compensation levels 4.25% 4.25% 4.25% Expected long-term rate of return on plan assets 9.5% 9.5% 9.5%
FOREIGN RETIREMENT PLANS. - The aggregate fair market value of the Company's Canadian plan assets approximates that plan's projected benefit obligation, which totaled $23,659,000 and $20,809,000 at December 31, 1997 and 1996, respectively. Prepaid pension cost for the Canadian plan was $4,156,000 and $3,854,000 at December 31, 1997 and 1996, 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 $3,691,000 in 1997, $3,517,000 in 1996, and $2,982,000 in 1995. The accrued liability for this plan at December 31, 1997 and 1996, was $27,764,000 and $24,379,000, 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 $3,294,000 in 1997, $2,912,000 in 1996, and $2,854,000 in 1995. 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 $1,690,000 in 1997, $1,547,000 in 1996, and $2,087,000 in 1995. The accrued liability for these plans at December 31, 1997 and 1996 was $24,384,000 and $24,078,000, respectively, and is included in other long-term liabilities in the accompanying consolidated balance sheets. 11. COMMITMENTS AND CONTINGENCIES. LEASES. - The Company's operating leases involve principally office space and office equipment. Rental expense relating to these leases was $38,779,000 in 1997, $39,443,000 in 1996, and $36,243,000 in 1995. Future minimum payment obligations for noncancelable operating leases exceeding one year are as follows as of December 31, 1997:
(in thousands) Amount - ------------------------------------------------------------------------------------------------------------------------------------ 1998 $ 25,927 1999 23,353 2000 20,674 2001 18,402 2002 15,213 Thereafter 132,789 - ------------------------------------------------------------------------------------------------------------------------------------ $236,358 ====================================================================================================================================
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 July 1998 and is renewable at the option of CSC for successive ten-year periods. CSC has elected to allow the term of the agreement to be renewed for the ten-year period beginning August 1, 1998. The agreement provides CSC with an option to sell its collection and credit reporting businesses to the Company, and provides the Company with an option to purchase CSC's collection and 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. The option price is determined through July 31, 1998 by certain financial formulas and after July 31, 1998 by appraised value. On November 25, 1997, CSC exercised its option to sell a portion of its collection and credit reporting businesses to the Company, essentially comprising its collection operations, at a purchase price currently estimated at approximately $38 million. This transaction is expected to be finalized in the second quarter of 1998. 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 pending acquisition, with a corresponding $25,000,000 liability included in other current liabilities at December 31, 1997. CSC's option to sell, and the Company's option to purchase, remain in effect as described above with respect to the remainder of the businesses subject to the option, essentially comprising CSC's credit reporting operations. The Company currently estimates the option price for those businesses, as determined by the financial formulas, to be approximately $375 million. In its annual report for the fiscal year ended March 28, 1997, CSC stated that the option price for both its credit reporting and collection businesses "approximated $538 million at March 28, 1997." The Company continues to periodically evaluate the estimated fair value of the remaining CSC businesses subject to the option, essentially comprising CSC's credit reporting operations, using estimates of its discounted cash flows. Based on this analysis, at December 31, 1997, the fair value of those 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. In 1997, IBM assumed ISSC's obligations under this agreement. The Company currently estimates the future annual obligation under this agreement to be approximately $80,000,000 per year, although 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 ten 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, 1997, the maximum contingent liability under the agreements and plans was approximately $22,545,000. 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. 12. 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 400 employees primarily in the Other and North American Information Services segments. The total cost of this program was $10,422,000 ($6,357,000 net of tax, or $.04 per share). Components of the restructuring provision and utilization through December 31, 1997 are as follows:
Severance and Termination Asset Lease (in thousands) Benefits Write-Offs Costs Total - ------------------------------------------------------------------------------------------------------------- Original provision $ 6,341 $ 2,994 $1,087 $10,422 Utilized in 1995 (1,231) (2,994) -- (4,225) - ------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 5,110 -- 1,087 6,197 Utilized in 1996 (4,494) -- (468) (4,962) - ------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 616 -- 619 1,235 Utilized in 1997 (438) -- (417) (855) - ------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 $ 178 $ -- $ 202 $ 380 =============================================================================================================
The reserve balance at December 31, 1997 is included in other current liabilities in the accompanying consolidated balance sheets. 13. QUARTERLY FINANCIAL DATA (UNAUDITED). Quarterly operating revenue and operating income by industry segment and other summarized quarterly financial data for 1997 and 1996 are as follows (in thousands, except per share amounts):
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 $ 33,875 / 1/ 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 - ------------------------------------------------------------------------------------------------------------------ Operating Contribution 77,536 90,892 92,529 82,056 General Corporate Expense (8,989) (13,128) (9,792) (12,196) - ------------------------------------------------------------------------------------------------------------------ $ 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 / 3/ $ 0.26 $ 0.41 $ 0.32 $ 0.26 ==================================================================================================================== Income before cumulative effect of accounting change / 3/ $ 0.30 $ 0.38 $ 0.32 $ 0.26 ==================================================================================================================== 1996 First Second Third Fourth - ---------------------------------------------------------------------------------------------------------------------- Operating revenue: North American Information Services $158,653 $168,229 $164,671 $177,218 Payment Services 71,598 79,252 84,732 103,744 Equifax Europe 35,385 36,738 39,715 45,673 Equifax Latin America -- -- -- -- Other 21,501 16,593 13,594 5,502 - ---------------------------------------------------------------------------------------------------------------------- $287,137 $300,812 $302,712 $332,137 ==================================================================================================================== Operating income (loss): North American Information Services $ 51,681 $ 56,599 $ 56,449 $ 55,630 Payment Services 11,815 14,414 16,051 24,601 Equifax Europe (339) 1,828 5,624 8,537 Equifax Latin America 475 1,045 1,125 611 Other 3,083 (10,700) /2/ (2,472) 277 - ---------------------------------------------------------------------------------------------------------------------- Operating Contribution 66,715 63,186 76,777 89,656 General Corporate Expense (9,725) (11,344) (9,477) (9,200) - ---------------------------------------------------------------------------------------------------------------------- $ 56,990 $ 51,842 $ 67,300 $ 80,456 ==================================================================================================================== Income from continuing operations before cumulative effect of accounting change $ 32,409 $ 34,585 $ 38,541 $ 47,562 ==================================================================================================================== Income before cumulative effect of accounting change $ 36,845 $ 41,130 $ 45,804 $ 53,838 ==================================================================================================================== Per common share (basic): Income from continuing operations before cumulative effect of accounting change /3/ $ 0.22 $ 0.24 $ 0.27 $ 0.33 ==================================================================================================================== Income before cumulative effect of accounting change $ 0.25 $ 0.28 $ 0.32 $ 0.37 ==================================================================================================================== Per common share (diluted): Income from continuing operations before cumulative effect of accounting change $ 0.22 $ 0.23 $ 0.26 $ 0.32 ==================================================================================================================== Income before cumulative effect of accounting change $ 0.25 $ 0.27 $ 0.31 $ 0.36 ==================================================================================================================== /1/ Includes $25,000 loss related to the valuation of a pending acquisition (Note 11). /2/ Includes $10,313 loss related to asset impairment (Note 5). /3/ Quarterly per share amounts do not add to the amounts shown in the consolidated statements of income due to rounding.
14. INDUSTRY SEGMENT INFORMATION. In the fourth quarter of 1997, the Company changed its segment reporting structure to more closely match management's internal reporting of business operations. Prior year information has been restated to conform with the 1997 presentation. Industry segment information for 1997, 1996 and 1995 is as follows (dollars in thousands):
1997 1996 1995 - ----------------------------------------------------------------------------------------------------------- Amount % Amount % Amount % - ----------------------------------------------------------------------------------------------------------- Operating revenue: North American Information Services $ 709,023 52% $ 668,771 55% $ 594,363 54% Payment Services 440,045 32 339,326 28 284,382 26 Equifax Europe 178,566 13 157,511 13 132,092 12 Equifax Latin America 28,818 2 -- - -- - Other 9,635 1 57,190 4 94,472 8 - ----------------------------------------------------------------------------------------------------------- $1,366,087 100% $1,222,798 100% $1,105,309 100% ====================================================================================================================
Operating income (loss): North American Information Services $ 216,577 63 % $ 220,359 74% $ 191,929 73% Payment Services 81,227 24 66,881 23 63,460 24 Equifax Europe 27,133 8 15,650 5 4,685 2 Equifax Latin America 9,208 3 3,256 1 992 - Other 8,868 2 (9,812) (3) 2,555 1 - ----------------------------------------------------------------------------------------------------------- Operating Contribution 343,013 100% 296,334 100% 263,621 100% General Corporate Expense (44,105) (39,746) (32,474) - ----------------------------------------------------------------------------------------------------------- $ 298,908 $ 256,588 $ 231,147 =========================================================================================================== Identifiable assets at December 31: North American Information Services $ 453,141 39% $ 433,075 43% $ 369,784 43% Payment Services 236,921 20 199,957 20 122,272 14 Equifax Europe 261,414 22 241,337 24 207,112 24 Equifax Latin America 115,617 10 32,452 3 27,233 3 Other 4,227 - 12,828 1 81,282 9 Corporate 105,784 9 91,455 9 63,806 7 - ----------------------------------------------------------------------------------------------------------- 1,177,104 100% 1,011,104 100% 871,489 100% Net Assets of Discontinued Operations -- 196,414 104,684 - ----------------------------------------------------------------------------------------------------------- $1,177,104 $1,207,518 $ 976,173 ===========================================================================================================
Description of Segments: NORTH AMERICAN INFORMATION SERVICES: Consumer credit reporting information; credit card marketing services; check warranty services in Canada; commercial credit reporting in Canada; risk management and collection services; locate services; fraud detection and prevention services; mortgage loan origination information; analytics and consulting; 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 warranty and verification services. EQUIFAX EUROPE: Consumer and commercial credit reporting and marketing services; credit scoring and modeling services; check warranty services; and auto lien information. EQUIFAX LATIN AMERICA: Credit information services and commercial, financial and consumer information. OTHER: Lottery services; Health Information Services, divested in the fourth quarter of 1996; Marketing Services, divested August 1995. Notes 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) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- North American Information Services $38,650 $34,258 $33,043 Payment Services 14,965 9,391 6,870 Equifax Europe 13,542 12,894 10,163 Equifax Latin America 4,736 1,108 600 Other 768 6,264 9,193 Corporate 4,408 3,560 3,855 - -------------------------------------------------------------------------------------------------------- $77,069 $67,475 $63,724 ========================================================================================================
4. Capital expenditures by industry segment, excluding property and equipment and other assets acquired in acquisitions, are as follows:
(in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------------------------- North American Information Services $30,775 $30,112 $ 9,968 Payment Services 21,302 32,581 12,719 Equifax Europe 18,160 4,688 1,094 Equifax Latin America 4,771 405 321 Other -- 1,693 16,364 Corporate 11,031 8,811 7,979 - -------------------------------------------------------------------------------------------------------- $86,039 $78,290 $48,445 ========================================================================================================
5. In the fourth quarter of 1997, the Company recorded a loss related to the valuation of a pending acquisition (Note 11). In the second quarter of 1996, the Company recorded a loss related to the impairment of certain assets (Note 5). In the fourth quarter of 1995, the Company recorded a restructuring provision (Note 12) and a settlement with the California State Lottery (Note 6). Operating income by industry segment decreased (increased) as a result of these items as follows:
1997 1996 1995 ------------------------------------------------------------------------- ACQUISITION Asset Restructuring Lottery (in thousands) VALUATION Impairment Provision Settlement Total - ---------------------------------------------------------------------------------------------------------------- North American Information Services $25,000 $ -- $ 4,959 $ -- $ 4,959 Payment Services -- -- 521 -- 521 Equifax Europe -- -- -- -- -- Equifax Latin America -- -- -- -- -- Other -- 10,313 4,442 (19,665) (15,223) Corporate -- -- 500 -- 500 - ---------------------------------------------------------------------------------------------------------------- $25,000 $10,313 $10,422 $(19,665) $ (9,243) ================================================================================================================
6. Financial information by geographic area is as follows:
1997 1996 1995 - ---------------------------------------------------------------------------------------------------------- (dollars in thousands) AMOUNT % Amount % Amount % - ---------------------------------------------------------------------------------------------------------- Operating revenue: United States $1,057,032 78% $ 978,575 80% $ 893,311 81% Canada 100,943 7 85,832 7 78,952 7 Europe 179,294 13 158,391 13 133,046 12 Latin America 28,818 2 -- - -- - - ---------------------------------------------------------------------------------------------------------- $1,366,087 100% $1,222,798 100% $1,105,309 100% ========================================================================================================== Operating contribution (loss): United States $ 287,991 84% $ 260,736 88% $ 242,947 92% Canada 19,037 5 16,551 6 15,065 6 Europe 26,908 8 15,805 5 4,617 2 Latin America 9,208 3 3,256 1 992 - Other (131) - (14) - -- - - ---------------------------------------------------------------------------------------------------------- $ 343,013 100 % $ 296,334 100% $ 263,621 100% ========================================================================================================== Identifiable assets from continuing operations at December 31: United States $ 710,462 61% $ 639,373 63% $ 561,262 65% Canada 84,362 7 87,533 9 70,984 8 Europe 263,750 22 251,693 25 212,010 24 Latin America 115,616 10 32,452 3 27,233 3 Other 2,914 - 53 - -- - - ---------------------------------------------------------------------------------------------------------- $1,177,104 100 % $1,011,104 100% $ 871,489 100% ==========================================================================================================