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