UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
( Mark one)
þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2004
OR
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
1-14037
Commission file number
MOODYS CORPORATION
Delaware
13-3998945
(State of Incorporation)
(I.R.S. Employer Identification No.)
99 CHURCH STREET, NEW YORK, N.Y.
10007
(Address of principal executive offices)
(Zip Code)
Registrants telephone number, including area code: (212) 553-0300
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date:
Shares Outstanding
Title of Class
at September 30, 2004
Common Stock, par value $0.01 per share
147.9 million
MOODYS CORPORATION
INDEX TO FORM 10-Q
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MOODYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of the condensed consolidated financial statements.
3
MOODYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
MOODYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(AMOUNTS IN MILLIONS)
The accompanying notes are an integral part of the condensed consolidated financial statements.
5
MOODYS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Moodys Corporation (Moodys or the Company) is a provider of credit
ratings, research and analysis covering debt instruments and securities in the
global capital markets and a provider of quantitative credit assessment
services, credit training services and credit process software to banks and
other financial institutions. Moodys operates in two reportable segments:
Moodys Investors Service and Moodys KMV. Moodys Investors Service publishes
rating opinions on a broad range of credit obligations issued in domestic and
international markets, including various corporate and governmental
obligations, structured finance securities and commercial paper programs as
well as rating opinions on issuers of credit obligations. It also publishes
investor-oriented credit research, including in-depth research on major
issuers, industry studies, special comments and credit opinion handbooks. The
Moodys KMV business, which consists of the combined businesses of KMV LLC and
KMV Corporation (KMV), acquired in April 2002, and Moodys Risk Management
Services, develops and distributes quantitative credit assessment services for
banks and investors in credit-sensitive assets, credit training services and
credit process software.
The Company operated as part of The Dun & Bradstreet Corporation (Old D&B)
until September 30, 2000 (the Distribution Date), when Old D&B separated into
two publicly traded companies Moodys Corporation and The New D&B Corporation
(New D&B). At that time, Old D&B distributed to its shareholders shares of
New D&B stock. New D&B comprised the business of Old D&Bs Dun & Bradstreet
operating company (the D&B Business). The remaining business of Old D&B
consisted solely of the business of providing credit ratings and related
research and credit risk management services (the Moodys Business) and was
renamed Moodys Corporation. The method by which Old D&B distributed to its
shareholders its shares of New D&B stock is hereinafter referred to as the
2000 Distribution.
These interim financial statements have been prepared in accordance with the
instructions to Form 10-Q and should be read in conjunction with the Companys
consolidated financial statements and related notes in the Companys 2003
annual report on Form 10-K filed with the Securities and Exchange Commission on
March 12, 2004. The results of interim periods are not necessarily indicative
of results for the full year or any subsequent period. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of financial position, results of
operations and cash flows at the dates and for the periods presented have been
included. Certain prior year amounts have been reclassified to conform to the
current year presentation.
2. STOCK-BASED COMPENSATION
In 2002 and prior years, the Company measured the cost of stock-based
compensation using the intrinsic value approach under Accounting Principles
Board (APB) Opinion No. 25 rather than applying the fair value method
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation as amended by SFAS No. 148,
Accounting for Stock-Based Compensation Transition and Disclosure an
amendment of FASB Statement No. 123. Accordingly, the Company did not
recognize compensation expense related to grants of employee stock options and
shares issued to participants in its employee stock purchase plan.
On January 1, 2003, the Company adopted, on a prospective basis, the fair value
method of accounting for stock-based compensation under SFAS No. 123.
Therefore, employee stock options granted on and after January 1, 2003 are
being expensed by the Company over the option vesting period, based on the
estimated fair value of the award on the date of grant. In addition, shares
issued to participants in the Companys employee stock purchase plan are being
expensed by the Company based on the discount from the market price received by
the participants.
The condensed consolidated statements of operations include compensation
expense in the following amounts, related to restricted stock and related to
stock options granted and stock issued under the employee stock purchase plan
since January 1, 2003 for the three months ended September 30, 2004 and 2003,
$6.7 million and $3.0 million, respectively; and for the nine months ended
September 30, 2004 and 2003, $19.1 million and $8.0 million, respectively. In
addition, the 2004 and 2003 expense is less than that which would have been
recognized if the fair value method had been applied to all awards since the
original effective date of SFAS No. 123 rather than being applied
prospectively. Had the Company determined such stock-based compensation expense
using the fair value method provisions of SFAS No. 123 since its original
effective date, Moodys net income and earnings per share would have been
reduced to the pro forma amounts shown below.
6
The pro forma disclosures shown above are not representative of the effects on
net income and earnings per share in future years.
The fair value of stock options used to compute the pro forma net income and
earnings per share disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model. The following weighted average
assumptions were used for options granted during the three and nine months
ended September 30, 2004 and 2003.
The estimated weighted average fair value of Moodys options granted was $20.92
and $15.38, respectively, for the three months ended September 30, 2004 and
2003 and $19.98 and $13.02, respectively, for the nine months ended September
30, 2004 and 2003.
At the Distribution Date, all unexercised Old D&B stock options were converted
into separately exercisable options of Moodys and New D&B. The distribution
agreement relating to the 2000 Distribution (the 2000 Distribution Agreement)
provided that, for subsequent exercises of those options, the issuer of the
stock rather than the employer would be entitled to the related tax deduction.
Accordingly, since the Distribution Date and through the filing of its income
tax returns for 2002, Moodys has claimed tax deductions when employees of New
D&B have exercised Moodys stock options.
Effective with its recently filed 2003 tax returns, Moodys has changed its tax
deductions to conform to an IRS ruling, which clarified that the employer
should take the tax deduction for option exercises rather than the issuer. The
Distribution Agreement entitles Moodys to reimbursement from New D&B for the
resulting loss of the issuer-based tax deductions. Accordingly, Moodys has
reflected a receivable from New D&B within other current assets in the
condensed consolidated balance sheet in the amount of $21.7 million at
September 30, 2004, consisting of $10.8 million related to the nine months
ended September 30, 2004 and $10.9 million related to the year ended December
31, 2003. This accounting had no impact on the results of operations.
The condensed consolidated balance sheet and statement of cash flows as of and
for the year ended December 31, 2003 have been reclassified to reflect the
above treatment.
7
3. RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
Below is a reconciliation of basic weighted average shares outstanding to
diluted weighted average shares outstanding:
Options to purchase 5.6 million common shares in each of the 2004 periods shown
above, and 3.5 million common shares in each of the 2003 periods, were
outstanding but were not included in the computation of diluted weighted
average shares outstanding because they were antidilutive.
4. ACQUISITIONS
Korea Investors Service
In August 1998, the Company made a 10% cost-basis investment in Korea Investors
Service (KIS), a Korean rating agency. In December 2001, the Company entered
into a definitive agreement to increase its investment to just over 50%, at a
cost of $9.6 million with a contingent payment of up to 6.9 billion Korean Won
(approximately $6.0 million as of September 30, 2004) in 2005, based on KIS net
income for the three-year period ended December 31, 2004. The Company currently
estimates that this payment will be approximately $3 million, and will be made
in the first quarter of 2005.
In March 2004, KIS increased its ownership in an equity-basis investment to
just over 50%, at a cost of 0.6 billion Korean Won, net of cash acquired
(approximately $0.6 million). As a result, starting in March 2004 this entity
is being consolidated in Moodys financial statements and $0.7 million of
goodwill was recorded related to this entity.
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the activity in goodwill for the periods
indicated (in millions):
The following table summarizes intangible assets subject to amortization at the
dates indicated:
8
Amortization expense for intangible assets subject to amortization in each of
the three and nine month periods ended September 30, 2004 and 2003 was $1.7
million and $5.2 million, respectively.
Estimated future annual amortization expense for intangible assets subject to
amortization is as follows:
As of September 30, 2004, $25.5 million in trade secrets acquired with the
April 2002 acquisition of KMV were not subject to amortization. Current
circumstances and conditions continue to support an indefinite useful life.
6. PENSION AND OTHER POST-RETIREMENT BENEFITS
Moodys maintains both funded and unfunded noncontributory defined benefit
pension plans in which substantially all U.S. employees of the Company are
eligible to participate. The plans provide defined benefits using a cash
balance formula based on years of service and career average salary.
The Company also provides certain healthcare and life insurance benefits for
retired U.S. employees. The health care plans are contributory with
participants contributions adjusted annually; the life insurance plans are
noncontributory. The accounting for the health care plans anticipates future
cost-sharing changes to the written plans that are consistent with Moodys
expressed intent to fix the Companys share of costs and require retirees to
pay for all future increases in plan costs in excess of the amount of the per
person company contribution in the year 2005.
Effective at the Distribution Date, Moodys assumed responsibility for pension
and other post-retirement benefits relating to its active employees. New D&B
has assumed responsibility for the Companys retirees and vested terminated
employees as of the Distribution Date.
Following are the components of net periodic expense related to pension and
other post-retirement plans for the three and nine months ended September 30,
2004 and 2003 (in millions):
9
For the first nine months of 2004, Moodys made $0.2 million of contributions
to its other post-retirement plans. The Company presently anticipates
contributing an additional $0.1 million in 2004 for a total of $0.3 million.
In May 2004, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position (FSP) No. FAS 106-2, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act
(Medicare Act) of 2003 which supersedes FSP No. FAS 106-1 of the same title.
FSP No. FAS 106-2 clarifies the accounting for the benefits attributable to
new government subsidies for companies that provide prescription drug benefits
to retirees. FSP 106-2 is effective as of the first interim annual period
beginning after June 15, 2004. In accordance with FSP No. FAS 106-1, the
Company elected to defer accounting for the economic effects of the Medicare
Act, and is in the process of evaluating the effects of the Medicare Act on its
post-retirement benefits. The impact of adoption of this standard is not
anticipated to have a material effect on the Companys financial statements and
will be adopted as of the next measurement date.
7. INDEBTEDNESS
In connection with the 2000 Distribution, Moodys was allocated $195.5 million
of debt at September 30, 2000. Moodys funded this debt with borrowings under a
$160 million unsecured bank revolving credit facility and a bank bridge line of
credit.
On October 3, 2000 the Company issued $300 million of notes payable (the
Notes) in a private placement. The cash proceeds from the Notes were used in
part to repay the outstanding balance on the revolving credit facility and to
repay the bridge line of credit. The Notes have a five-year term and bear
interest at an annual rate of 7.61%, payable semi-annually. In the event that
Moodys pays all or part of the Notes in advance of their maturity (the
prepaid principal), such prepayment will be subject to a penalty calculated
based on the excess, if any, of the discounted value of the remaining scheduled
payments, as defined in the agreement, over the prepaid principal. Interest
paid under the Notes was $5.7 million for each of the three month periods ended
September 30, 2004 and 2003 and $17.1 million for each of the nine month
periods ended September 30, 2004 and 2003.
On September 1, 2004, Moodys entered into a five-year senior, unsecured
revolving credit facility (the Facility) in an aggregate principal amount of
$160 million that expires in September 2009. This Facility replaced the $80
million 5-year facility that was scheduled to expire in September 2005 and the
$80 million 364-day facility that expired in September 2004. Interest on
borrowings under the Facility is payable at rates that are based on the London
InterBank Offered Rate plus a premium that can range from 17 basis points to
47.5 basis points depending on the Companys ratio of total indebtedness to
earnings before interest, taxes, depreciation and amortization (Earnings
Coverage Ratio), as defined in the related agreement. At September 30, 2004,
such premium was 17 basis points. The Company also pays quarterly facility
fees, regardless of borrowing activity under the Facility. The quarterly fees
for the Facility can range from 8 basis points of the Facility amount to 15
basis points, depending on the Companys Earnings Coverage Ratio, and were 8
basis points at September 30, 2004. Under the Facility, the Company also pays a
utilization fee of 12.5 basis points on borrowings outstanding when the
aggregate amount outstanding under the Facility exceeds 50% of the Facility.
Interest paid under Moodys previous revolving credit facilities for the nine
months ended September 30, 2003 was $0.6 million. No interest was paid under
the Companys facilities for the three months ended September 30, 2003 or the
three and nine month periods ended September 30, 2004 as no borrowings were
outstanding during those periods.
The Notes and the Facility (the Agreements) contain covenants that, among
other things, restrict the ability of the Company and its subsidiaries, without
the approval of the lenders, to engage in mergers, consolidations, asset sales,
transactions with affiliates and sale-leaseback transactions or to incur liens,
as defined in the related agreements. The Agreements also contain financial
covenants that, among other things, require the Company to maintain an interest
coverage ratio, as defined in the related agreements, of not less than 3
10
to 1 for any period of four consecutive fiscal quarters, and an Earnings
Coverage Ratio, as defined in the related agreements, of not more than 4 to 1
at the end of any fiscal quarter. At September 30, 2004, the Company was in
compliance with such covenants. Upon the occurrence of certain financial or
economic events, significant corporate events or certain other events
constituting an event of default under the Agreements, all loans outstanding
under the Agreements (including accrued interest and fees payable thereunder)
may be declared immediately due and payable and all commitments under the
Agreements may be terminated. In addition, certain other events of default
under the Agreements would automatically result in amounts due becoming
immediately due and payable and all commitments being terminated.
Moodys total interest expense was $5.8 million and $5.7 million, respectively,
for the three months ended September 30, 2004 and 2003 and $17.3 million and
$17.7 million, respectively, for the nine months ended September 30, 2004 and
2003. Total interest income on cash and cash equivalents was $1.7 million and
$0.5 million, respectively, for the three months ended September 30, 2004 and
2003 and $3.8 million and $1.0 million, respectively, for the nine months ended
September 30, 2004 and 2003.
8. CONTINGENCIES
From time to time, Moodys is involved in legal and tax proceedings, claims and
litigation that are incidental to the Companys business, including claims
based on ratings assigned by Moodys. Management periodically assesses the
Companys liabilities and contingencies in connection with these matters, based
upon the latest information available. For those matters where the probable
amount of loss can be reasonably estimated, the Company believes it has
recorded appropriate reserves in the consolidated financial statements and
periodically adjusts these reserves as appropriate. In other instances, because
of the uncertainties related to both the probable outcome and amount or range
of loss, management is unable to make a reasonable estimate of a liability, if
any. As additional information becomes available, the Company adjusts its
assessments and estimates of such liabilities accordingly.
Based on its review of the latest information available, in the opinion of
management, the ultimate liability of the Company in connection with pending
legal and tax proceedings, claims and litigation will not have a material
adverse effect on Moodys financial position, results of operations or cash
flows, subject to the contingencies described below.
Legacy Contingencies
To understand the Companys exposure to the potential liabilities described
below, it is important to understand the relationship between Moodys and New
D&B, and the relationship among New D&B and its predecessors and other parties
who, through various corporate reorganizations and related contractual
commitments, have assumed varying degrees of responsibility with respect to
such matters.
In November 1996, The Dun & Bradstreet Corporation through a spin-off separated
into three separate public companies: The Dun & Bradstreet Corporation,
ACNielsen Corporation (ACNielsen) and Cognizant Corporation (Cognizant)
(the 1996 Distribution). Under the terms of the distribution agreement
relating to the 1996 Distribution, each party thereto is prohibited from
distributing to its stockholders any business that had been allocated to it in
connection with the 1996 Distribution, unless the distributed business delivers
an undertaking agreeing to be jointly and severally liable to the other parties
under the 1996 distribution agreement for the liabilities of the distributing
parent company under the 1996 distribution agreement.
In June 1998, The Dun & Bradstreet Corporation through a spin-off separated
into two separate public companies: The Dun & Bradstreet Corporation and R.H.
Donnelley Corporation (Donnelley) (the 1998 Distribution). During 1998,
Cognizant through a spin-off separated into two separate public companies: IMS
Health Incorporated (IMS Health) and Nielsen Media Research, Inc. (NMR). In
September 2000, The Dun & Bradstreet Corporation (Old D&B) through a spin-off
separated into two separate public companies: New D&B and Moodys, as further
described in note 1 to the condensed consolidated financial statements.
Information Resources, Inc.
The following is a description of an antitrust lawsuit filed in 1996 by
Information Resources, Inc. (IRI). As more fully described below, VNU N.V., a
publicly traded Dutch company, and its U.S. subsidiaries, VNU, Inc., ACNielsen
Corporation (ACNielsen), AC Nielsen (US), Inc. (ACN (US)), and Nielsen
Media Research, Inc. (NMR) (collectively, the VNU Parties), have assumed
exclusive joint and several liability for any judgment or settlement of this
antitrust lawsuit. As a result of the indemnity obligation, Moodys does not
have any exposure to a judgment or settlement of this lawsuit unless the VNU
Parties default on their obligations. However, in the event of such a default,
contractual commitments undertaken by Moodys in connection with various
corporate reorganizations since 1996 would require the Company to bear a
portion of any amount not paid by the VNU Parties.
11
In July 1996, IRI filed a complaint, subsequently amended in 1997, in the
U.S. District Court for the Southern District of New York, naming as defendants
the corporation then known as The Dun & Bradstreet Corporation, A.C. Nielsen
Company (a subsidiary of ACNielsen) and IMS International, Inc. (a subsidiary
of the company then known as Cognizant). At the time of the filing of the
complaint, each of the other defendants was a subsidiary of The Dun &
Bradstreet Corporation.
The amended complaint alleges various violations of United States antitrust
laws under Sections 1 and 2 of the Sherman Act. The amended complaint also
alleges a claim of tortious interference with a contract and a claim of
tortious interference with a prospective business relationship. These claims
relate to the acquisition by defendants of Survey Research Group Limited
(SRG). IRI alleged SRG violated an alleged agreement with IRI when it agreed
to be acquired by defendants and that defendants induced SRG to breach that
agreement.
IRIs antitrust claims allege that defendants developed and implemented a plan
to undermine IRIs ability to compete within the United States and foreign
markets in North America, Latin America, Asia, Europe and Australia/New Zealand
through a series of anti-competitive practices, including: unlawfully
tying/bundling services in the markets in which defendants allegedly had
monopoly power with services in markets in which ACNielsen competed with IRI;
entering into exclusionary contracts with retailers in certain countries to
deny IRIs access to sales data necessary to provide retail tracking services
or to artificially raise the cost of that data; predatory pricing; acquiring
foreign market competitors with the intent of impeding IRIs efforts to expand;
disparaging IRI to financial analysts and clients; and denying IRI access to
capital necessary for it to compete.
IRIs amended complaint originally alleged damages in excess of $350 million,
which IRI asked to be trebled under antitrust laws. IRI has since revised its
allegation of damages to exceed $650 million, which IRI also asked to be
trebled. IRI has filed with the court the report of its expert who has opined
that IRI suffered damages of between $581.6 million and $651.7 million from the
defendants alleged practices. IRI also sought punitive damages in an
unspecified amount.
In April 2003, the court denied a motion for partial summary judgment by
defendants that sought to dismiss certain of IRIs claims and granted in part a
motion by IRI seeking reconsideration of certain summary judgment rulings the
Court had previously made in favor of defendants. The motion granted by the
Court concerns IRIs claims of injuries from defendants alleged conduct in
certain foreign markets.
Pursuant to a scheduling order entered by the Court on April 8, 2004, discovery
ended on November 1, 2004, and trial is scheduled to begin on April 18, 2005.
On June 21, 2004, pursuant to a stipulation between IRI and defendants, the
Court ordered that certain of IRIs claims be dismissed with prejudice from the
lawsuit, including the claims that defendants tortiously interfered with the
SRG acquisition. The Company believes that the dismissal of the tortious
interference claims also precludes any claim for punitive damages.
In connection with the 1996 Distribution, NMR (then known as Cognizant
Corporation), ACNielsen and Donnelley (then known as The Dun & Bradstreet
Corporation) entered into an Indemnity and Joint Defense Agreement (the
Original Indemnity and Joint Defense Agreement), pursuant to which they
agreed to:
In particular, the Original Indemnity and Joint Defense Agreement provided
that:
The Original Indemnity and Joint Defense Agreement also provided that if it
becomes necessary to post any bond pending an appeal of an adverse judgment,
then NMR and Donnelley shall obtain the bond required for the appeal, and each
shall pay 50% of the costs of such bond, if any, which cost will be added to
IRI Liabilities.
12
In 2001, ACNielsen was acquired by VNU N.V., which assumed ACNielsens
obligations under the Original Indemnity and Joint Defense Agreement. Pursuant
to the Original Indemnity and Joint Defense Agreement, VNU N.V. was to be
included with ACNielsen for purposes of determining the ACN Maximum Amount.
In connection with the 1998 Distribution, Old D&B and Donnelley (then known as
The Dun & Bradstreet Corporation) entered into an agreement (the 1998
Distribution Agreement) whereby Old D&B assumed all potential liabilities of
Donnelley arising from the IRI action and agreed to indemnify Donnelley in
connection with such potential liabilities. Under the terms of the 2000
Distribution, New D&B undertook to be jointly and severally liable with Moodys
for Old D&Bs obligations to Donnelley under the 1998 Distribution Agreement,
including any liabilities arising under the Original Indemnity and Joint
Defense Agreement, and any liabilities arising from the IRI action itself.
However, as between New D&B and Moodys, it was agreed that under the 2000
Distribution, each of New D&B and Moodys will be responsible for 50% of any
payments required to be made to or on behalf of Donnelley with respect to the
IRI action under the terms of the 1998 Distribution Agreement, including legal
fees or expenses related to the IRI action.
On July 30, 2004, the VNU Parties, Donnelley, Moodys, New D&B and IMS Health
entered into an Amended and Restated Indemnity and Joint Defense Agreement (the
Amended Indemnity and Joint Defense Agreement).
Pursuant to the Amended Indemnity and Joint Defense Agreement, any and all IRI
Liabilities incurred by Donnelley, Moodys, New D&B or IMS Health relating to a
judgment (even if not final) or any settlement entered into in the IRI action
will be jointly and severally assumed, and fully discharged, exclusively by the
VNU Parties. Under the Amended Indemnity and Joint Defense Agreement, the VNU
Parties have agreed to, jointly and severally, indemnify Donnelley, Moodys,
New D&B and IMS Health from and against all IRI Liabilities to which they
become subject. As a result, the concept of ACN Maximum Amount which used to
cap ACNielsens liability for the IRI Liabilities no longer exists and all such
liabilities are the responsibility of the VNU Parties pursuant to the Amended
Indemnity and Joint Defense Agreement.
In addition, the Amended Indemnity and Joint Defense Agreement provides that if
it becomes necessary to post any bond pending an appeal of an adverse judgment,
the VNU Parties shall obtain the bond required for the appeal and shall pay the
full cost of such bond.
In connection with entering into the Amended Indemnity and Joint Defense
Agreement, Donnelley, Moodys, New D&B and IMS Health agreed to amend certain
covenants of the Original Indemnity and Joint Defense Agreement to provide
operational flexibility for ACNielsen going forward. In addition, the Amended
Indemnity and Joint Defense Agreement includes certain amendments to the
covenants of ACNielsen (which, under the Amended Indemnity and Joint Defense
Agreement, are now also applicable to ACN (US)), which are designed to preserve
such parties claims-paying ability and protect Donnelley, Moodys, New D&B and
IMS Health. Among other covenants, ACNielsen and ACN (US) agreed that neither
they nor any of their respective subsidiaries will incur any indebtedness to
any affiliated person, except indebtedness which its payment will, after a
payment obligation under the Amended Indemnity and Joint Defense Agreement
comes due, be conditioned on, and subordinated to, the payment and performance
of the obligations of such parties under the Amended Indemnity and Joint
Defense Agreement. VNU N.V. has agreed to having a process agent in New York to
receive on its behalf service of any process concerning the Amended Indemnity
and Joint Defense Agreement.
As described above, the VNU Parties have assumed exclusive responsibility for
the payment of all IRI Liabilities. Provided that the VNU Parties are able to
fulfill their obligations under the Amended Indemnity and Joint Defense
Agreement, and that they ultimately do fulfill such obligations, Moodys
believes that the resolution of the IRI action should not materially affect the
Companys financial position, results of operations, or cash flows.
However, because liability for violations of the antitrust laws is joint and
several and because the rights and obligations relating to the Amended
Indemnity and Joint Defense Agreement are based on contractual relationships,
the failure of the VNU Parties to fulfill their obligations under the Amended
Indemnity and Joint Defense Agreement could result in the other parties bearing
all or a portion of the IRI Liabilities. Joint and several liability for the
IRI action means that even where more than one defendant is determined to have
been responsible for an alleged wrongdoing, the plaintiff can collect all or
part of the judgment from just one of the defendants. This is true regardless
of whatever contractual allocation of responsibility the defendants and any
other indemnifying parties may have made, including the allocations described
above between the VNU Parties, Donnelley, Moodys, New D&B and IMS Health.
Accordingly, and as a result of the allocations of liability described above,
in the event the VNU Parties default on their obligations under the Amended
Indemnity and Joint Defense Agreement, each of Moodys and New D&B will be
responsible for the payment of 50% of the portion of any judgment or settlement
ultimately paid by Donnelley (which is a defendant in the IRI action), which
can be as high as all the IRI Liabilities.
13
The Company is unable to predict at this time the outcome of the IRI action,
the financial condition of any of the VNU parties or the other defendants at
the time of any such outcome, or whether the VNU Parties or the other
defendants will fulfill their obligations under the Amended Indemnity and Joint
Defense Agreement or other related contractual agreements. Hence, the Company
cannot estimate such parties ability to pay the IRI Liabilities pursuant to
the Amended Indemnity and Joint Defense Agreement or the amount of the judgment
or settlement in the IRI action. Accordingly, no amount in respect of this
matter has been accrued in the Companys consolidated financial statements. As
discussed above, provided that the VNU Parties ultimately fulfill their
obligations under the Amended Indemnity and Joint Defense Agreement, Moodys
believes that the resolution of the IRI action should not materially affect the
Companys financial position, results of operations, or cash flows. If,
however, IRI were to prevail in whole or in part in this action and Moodys is
required to pay, notwithstanding such contractual obligations, a portion of any
significant settlement or judgment, the outcome of this matter could have a
material adverse effect on Moodys financial position, results of operations,
and cash flows.
Legacy Tax Matters
Old D&B and its predecessors entered into global tax planning initiatives in
the normal course of business, including through tax-free restructurings of
both their foreign and domestic operations. These initiatives are subject to
normal review by tax authorities.
Pursuant to a series of agreements, as between themselves, IMS Health and NMR
are jointly and severally liable to pay one-half, and New D&B and Moodys are
jointly and severally liable to pay the other half, of any payments for taxes,
penalties and accrued interest resulting from unfavorable IRS rulings on
certain tax matters as described in such agreements (excluding the matter
described below as Amortization Expense Deductions for which New D&B and
Moodys are solely responsible) and certain other potential tax liabilities,
also as described in such agreements, after New D&B and/or Moodys pays the
first $137 million, which amount was paid in connection with the matter
described below as Utilization of Capital Losses.
In connection with the 2000 Distribution and pursuant to the terms of the 2000
Distribution Agreement, New D&B and Moodys have, between themselves, agreed to
each be financially responsible for 50% of any potential liabilities that may
arise to the extent such potential liabilities are not directly attributable to
their respective business operations.
Without limiting the generality of the foregoing, three specific tax matters
are discussed below.
Royalty Expense Deductions
During the second quarter of 2003, New D&B received an Examination Report from
the IRS with respect to a partnership transaction entered into in 1993. In this
Report, the IRS stated its intention to disallow certain royalty expense
deductions claimed by Old D&B on its tax returns for the years 1993 through
1996 (the Royalty Report). In the first quarter of 2004, New D&B received a
similar Examination Report (the Second Royalty Report) relating to the first
quarter of 1997.
During the second quarter of 2003, New D&B also received an Examination Report
from the IRS stating its intention to ignore the partnership structure that had
been established in 1993 in connection with the above transaction, and to
reallocate to Old D&B income and expense items that had been reported in the
partnership tax return for 1996 (the Reallocation Report). New D&B also
received a similar Examination Report (the Second Reallocation Report) issued
to the partnership with respect to the first quarter of 1997.
In June 2004, New D&B and the IRS conducted a mediation of these issues, at
which New D&B and the IRS reached a basis for settlement with regard to the
Royalty Report for 1995 and 1996, the Reallocation Report and certain tax
refund claims made by Old D&B related to 1995 and 1996 (the Preliminary
Settlement). The Preliminary Settlement was subject to the execution of a
formal settlement agreement. In addition, the IRS
maintains its position that certain tax refund claims made by Old D&B related to 1993 and 1994
may be offset by tax liabilities relating to the above mentioned partnership
formed in 1993. New D&B disagrees with the position taken by the IRS for 1993
and 1994 and plans to file a protest with the IRS Appeals Office. If the
protest is unsuccessful New D&B can either: (1) abandon its tax refund claims;
or (2) challenge the IRS claim in U.S. District Court or the U.S. Court of
Federal Claims. Moodys estimates that its exposure for the write-off of
deferred tax assets related to these tax refund claims could be up to $9
million.
As of June 30, 2004, Moodys had adjusted its reserve for the Royalty Expense
Deductions matter and recorded write-offs of deferred tax assets to reflect the
Companys estimates of probable exposure for the Preliminary Settlement and the
other matters discussed in the preceding paragraph. However, the IRS and New
D&B were not able to agree on the terms of a formal settlement agreement by the
November 1st deadline imposed by the IRS. As a result, the IRS has
withdrawn the preliminary settlement agreement. In accordance with the 1996
Agreements, New D&B was required to obtain the consent of Moodys, IMS Health
and NMR as a condition to executing the formal settlement agreement, but was
unable to obtain IMS
14
Health and NMRs consent. We believe that in accordance with the 1996
Distribution Agreement, NMR, by withholding its consent, would be
contractually responsible to pay any excess amounts above the Preliminary
Settlement that may ultimately be owing with respect to tax years 1995-1996.
IMS Health has alleged various breaches of New DNBs obligations under the 1996
Agreements related to New D&Bs management and attempted settlement of this
matter. If the parties fail to resolve their dispute, we understand that New
D&B anticipates commencing arbitration proceedings against IMS Health and NMR.
Based on our current understanding of the positions of New D&B and IMS Health,
we believe it is likely that New DNB should prevail, but we cannot predict with
certainty the outcome.
In addition, the Second Royalty Report and the Second Reallocation Report,
which were not part of New D&Bs preliminary settlement with the IRS, have not
been resolved. New D&B disagrees with the positions taken by the IRS in these
reports and previously had filed a protest with the IRS Appeals Office. If the
IRS Appeals Office were to uphold these reports, then New D&B could either: (1)
accept and pay the IRS assessment; (2) challenge the assessment in U.S. Tax
Court; or (3) challenge the assessment in U.S. District Court or the U.S. Court
of Federal Claims, where in either case payment of the assessment would be
required in connection with such challenge. Should any such payments be made by
New D&B, then pursuant to the terms of the 2000 Distribution Agreement, Moodys
would have to pay to New D&B its 50% share. Moodys believes that the positions
taken by the IRS in the Second Royalty Report and the Second Reallocation
Report are inconsistent with each other. Accordingly, while it is possible that
the IRS could ultimately prevail in whole or in part on one of such positions,
Moodys believes that it is unlikely that the IRS will prevail on both. Moodys
estimates that its share of the required payment to the IRS for this matter
could be up to $2 million (including penalties and interest, and net of tax
benefits).
Moodys has reassessed its exposure for the Royalty Expense Deductions matter
taking into consideration: (1) all of the original Examination Reports
discussed above (for which the Companys share of the required payments to the
IRS could be up to $102 million, including penalties and interest, and net of
tax benefits); and (2) the potential write-off of deferred tax assets (for
which the Companys exposure could be up to $9 million as discussed above).
Based on this assessment, during the third quarter of 2004 the Company
increased its reserve for this matter by $18.4 million to reflect the current
estimate of probable exposure.
Amortization Expense Deductions
In April 2004, New D&B received Examination Reports (the April Examination
Reports) from the IRS with respect to a partnership transaction. This
transaction was entered into in 1997 and could result in amortization expense
deductions on the tax returns of Old D&B and New D&B from 1997 through 2012. In
the April Examination Reports, the IRS stated its intention to disallow the
amortization expense deductions related to this partnership that were claimed
by Old D&B on its 1997 and 1998 tax returns. New D&B disagrees with the
position taken by the IRS and can either: (1) accept and pay the IRS
assessment; (2) challenge the assessment in U.S Tax Court; or (3) challenge the
assessment in U.S. District Court or the U.S. Court of Federal Claims, where in
either case payment of the disputed amount would be required in connection with
such challenge. IRS audits of Old D&Bs or New D&Bs tax returns for years
subsequent to 1998 could result in the issuance of similar Examination Reports,
in which case New D&B would also have the aforementioned three courses of
action. Should any such payments be made by New D&B related to either the
April Examination Reports or any potential Examination Reports for future
years, including years subsequent to the separation of Moodys from New D&B,
then pursuant to the terms of the 2000 Distribution Agreement, Moodys would
have to pay to New D&B its 50% share. In addition, should New D&B discontinue
claiming the amortization deductions on future tax returns, Moodys would be
required to repay to New D&B an amount equal to the discounted value of its 50%
share of the related future tax benefits. New D&B had paid the discounted value
of 50% of the future tax benefits from this transaction in cash to Moodys at
the Distribution Date. Moodys estimates that the Companys current potential
exposure could be up to $94 million (including penalties and interest, and net
of tax benefits). This exposure could increase by approximately $3 million to
$6 million per year, depending on actions that the IRS may take and on whether
New D&B continues claiming the amortization deductions on its tax returns.
In the April Examination Reports, the IRS also stated its intention to disallow
certain royalty expense deductions claimed by Old D&B on its 1997 and 1998 tax
returns with respect to the partnership transaction. In addition, the IRS
stated its intention to disregard the partnership structure and to reallocate
to Old D&B certain partnership income and expense items that had been reported
in the partnership tax returns for 1997 and 1998. New D&B disagrees with the
positions taken by the IRS and can take any of the three courses of action
described in the second paragraph. IRS audits of Old D&Bs or New D&Bs tax
returns for years subsequent to 1998 could result in the issuance of similar
Examination Reports for the subsequent years. Should any such payments be made
by New D&B related to either the April Examination Reports or any potential
Examination Reports for future years, then pursuant to the terms of the 2000
Distribution Agreement, Moodys would have to pay to New D&B its 50% share of
New D&Bs payments to the IRS for the period from 1997 through the Distribution
Date. Moodys estimates that its share of the potential exposure to the IRS
could be up
15
to $127 million (including penalties and interest, and net of tax benefits).
Moodys also could be obligated for future interest payments on its share of
such liability.
New D&B had filed protests with the IRS Appeals Office regarding the April
Examination Reports. In September 2004 the IRS Appeals Office remanded the case
to the IRS examination office for further development of the issues. New D&B
has reopened discussion of the issues with the examination office.
Moodys believes that the IRSs proposed assessments of tax against Old D&B and
the proposed reallocations of partnership income and expense to Old D&B are
inconsistent with each other. Accordingly, while it is possible that the IRS
could ultimately prevail in whole or in part on one of such positions, Moodys
believes that it is unlikely that the IRS will prevail on both.
Utilization of Capital Losses
The IRS has completed its review of the utilization of certain capital losses
generated by Old D&B during 1989 and 1990. On June 26, 2000, the IRS, as part
of its audit process, issued a formal assessment with respect to the
utilization of these capital losses.
On May 12, 2000, an amended tax return was filed by Old D&B for the 1989 and
1990 tax years, which reflected $561.6 million of tax and interest due. Old D&B
paid the IRS approximately $349.3 million of this amount on May 12, 2000; 50%
of such payment was allocated to Moodys and had previously been accrued by the
Company. IMS Health informed Old D&B that it paid to the IRS approximately
$212.3 million on May 17, 2000. The payments were made to the IRS to stop
further interest from accruing, and on September 20, 2000, Old D&B filed a
petition for a refund in the U.S. District Court.
Pre-trial proceedings on this matter have been ongoing, and in July 2004, New
D&B and the IRS reached a basis for settlement of all outstanding issues
related to this matter. Moodys estimates that its share of the cost of this
tentative settlement will be $12 million, reflecting anticipated cash payments
of $2 million and the write-off of deferred tax assets of $10 million. The
tentative settlement will not be finalized until a formal agreement is
executed, which is expected to be during the fourth quarter of 2004, and it is
possible that Moodys share of the related cost could differ from the Companys
current estimate.
Summary of Moodys Exposure to Three Legacy Tax Matters
The Company considers from time to time the range and probability of potential
outcomes related to the three legacy tax matters discussed above and
establishes reserves that it believes are appropriate in light of the relevant
facts and circumstances. In doing so, Moodys makes estimates and judgments as
to future events and conditions and evaluates its estimates and judgments on an
ongoing basis.
In the third quarter of 2004, the Company recorded provisions of approximately
$19 million to increase its reserves for the three legacy tax matters, to
reflect its current estimates of the probable exposures on these matters. As a
result, at September 30, 2004, Moodys total legacy tax reserves were $131
million, representing approximately $44 million of current liabilities
(reflecting the estimated cash payments related to the Royalty Expense
Deductions and Utilization of Capital Losses matters that are expected to be
made over the next twelve months) and $87 million of non-current liabilities.
It is possible that the legacy tax matters could be resolved in amounts that
are greater than the amounts reserved by the Company, which could result in
additional charges that may be material to Moodys future reported results,
financial position and cash flows. Although Moodys does not believe it is
likely that the Company will ultimately be required to pay the full amounts
presently being sought by the IRS, potential future outlays resulting from
these matters could be as much as $346 million and could increase with time as
described above.
16
9. COMPREHENSIVE INCOME
Total comprehensive income was as follows:
10. SEGMENT INFORMATION
The Company reports segment information in accordance with SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 defines operating segments as components of an enterprise for which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and in
assessing performance.
Moodys Investors Service consists of four rating groups structured finance,
corporate finance, financial institutions and sovereign risk, and public
finance that generate revenue principally from the assignment of credit
ratings on fixed-income instruments in the debt markets, and research, which
primarily generates revenue from the sale of investor-oriented credit research,
principally produced by the rating groups. Given the dominance of Moodys
Investors Service to Moodys overall results, the Company does not separately
measure or report corporate expenses, nor are they allocated to the Companys
business segments. Accordingly, all corporate expenses are included in
operating income of the Moodys Investors Service segment and none have been
allocated to the Moodys KMV segment.
The Moodys KMV business consists of the combined businesses of KMV, acquired
in April 2002, and Moodys Risk Management Services. Moodys KMV develops and
distributes quantitative credit assessment services for banks and investors in
credit-sensitive assets, credit training services and credit process software.
Assets used solely by Moodys KMV are separately disclosed within that segment.
All other Company assets, including corporate assets, are reported as part of
Moodys Investors Service.
Revenue by geographic area is generally based on the location of the customer.
Intersegment sales are insignificant and no single customer accounted for 10%
or more of total revenue.
Below are financial information by segment, Moodys Investors Service revenue
by business unit and revenue information by geographic area, each for the three
and nine month periods ended September 30, 2004 and 2003, and total assets by
segment as of September 30, 2004 and December 31, 2003 (in millions). Certain
prior year amounts have been reclassified to conform to the current
presentation.
17
Financial Information by Segment
Moodys Investors Service Revenue by Business Unit
Revenue Information by Geographic Area
18
Total Assets by Segment
11. INSURANCE RECOVERY
In February 2003, Moodys received a $15.9 million insurance recovery related
to the September 11th tragedy for incremental costs incurred and for lost
profits due to the sharp decline in debt market activity in the weeks following
the disaster. Moodys had previously received a $4.0 million advance payment in
2002, resulting in a total recovery of $19.9 million. Moodys had incurred
incremental costs of $6.3 million for property damage and temporary office
facilities, and had fully accrued for the recovery of these costs in its
financial statements. The remainder of the insurance recovery, $13.6 million,
had not previously been accrued as its realizability was not sufficiently
assured. As a result, in the first quarter of 2003 Moodys recorded a gain of
$13.6 million, included in interest and other non-operating expense, net in the
condensed consolidated statement of operations.
12. SUBSEQUENT EVENT
On October 26, 2004, the Board of Directors of the Company approved a quarterly
dividend of 7.5 cents per share of Moodys common stock, payable on December
10, 2004 to shareholders of record at the close of business on November 20,
2004.
19
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of financial condition and results of operations
should be read in conjunction with the Moodys Corporation condensed
consolidated financial statements and notes thereto included elsewhere in this
quarterly report on Form 10-Q.
Certain of the statements below are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. In addition,
any projections of future results of operations and cash flows are subject to
substantial uncertainty. See Forward-Looking Statements on page 36.
The Company
Except where otherwise indicated, the terms Moodys and the Company refer
to Moodys Corporation and its subsidiaries. Moodys is a provider of credit
ratings, research and analysis covering debt instruments and securities in the
global capital markets and a provider of quantitative credit assessment
services, credit training services and credit process software to banks and
other financial institutions. Moodys operates in two reportable segments:
Moodys Investors Service and Moodys KMV.
Moodys Investors Service publishes rating opinions on a broad range of credit
obligations issued in domestic and international markets, including various
corporate and governmental obligations, structured finance securities and
commercial paper programs, as well as rating opinions on issuers of credit
obligations. It also publishes investor-oriented credit research, including
in-depth research on major issuers, industry studies, special comments and
credit opinion handbooks.
The Moodys KMV business consists of the combined businesses of KMV LLC and KMV
Corporation (KMV), acquired in April 2002, and Moodys Risk Management
Services. Moodys KMV develops and distributes quantitative credit assessment
products and services for banks and investors in credit-sensitive assets,
credit training services and credit process software.
Critical Accounting Estimates
Moodys discussion and analysis of its financial condition and results of
operations are based on the Companys consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
Moodys to make estimates and judgments that affect reported amounts of assets
and liabilities and related disclosures of contingent assets and liabilities at
the dates of the financial statements and revenue and expenses during the
reporting periods. These estimates are based on historical experience and on
other assumptions that are believed to be reasonable under the circumstances.
On an ongoing basis, Moodys evaluates its estimates, including those related
to revenue recognition, accounts receivable allowances, contingencies,
goodwill, pension and other post-retirement benefits and stock-based
compensation. Actual results may differ from these estimates under different
assumptions or conditions. Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, in the Companys annual report
on Form 10-K for the year ended December 31, 2003, includes descriptions of
some of the judgments that Moodys makes in applying its accounting estimates
in these areas. Since the date of the annual report on Form 10-K, there have
been no material changes to the Companys critical accounting estimates.
Operating Segments
The Moodys Investors Service business consists of four rating groups
structured finance, corporate finance, financial institutions and sovereign
risk, and public finance that generate revenue principally from the
assignment of credit ratings on fixed-income instruments in the debt markets,
and research, which primarily generates revenue from the sale of
investor-oriented credit research, principally produced by the rating groups.
Given the dominance of Moodys Investors Service to Moodys overall results,
the Company does not separately measure or report corporate expenses, nor are
they allocated to the Companys business segments. Accordingly, all corporate
expenses are included in operating income of the Moodys Investors Service
segment and none have been allocated to the Moodys KMV segment.
The Moodys KMV business develops and distributes quantitative credit
assessment products and services for banks and investors in credit-sensitive
assets, credit training services and credit process software.
Certain prior year amounts have been reclassified to conform to the current
presentation.
20
Results of Operations
Three Months Ended September 30, 2004 Compared With Three Months Ended
September 30, 2003
Total Company Results
Moodys revenue for the third quarter of 2004 was $357.9 million, an increase
of $52.9 million or 17.3% from $305.0 million for the third quarter of 2003.
Moodys achieved strong revenue growth in several business sectors, including
global structured finance, global research, and U.S. financial institutions.
Revenue in the United States was $228.0 million for the third quarter of 2004,
an increase of $35.6 million or 18.5% from $192.4 million in 2003.
Approximately 60% of the U.S growth was driven by structured finance,
reflecting strong issuance in the residential mortgage backed sector,
particularly securitizations of home equity loans. Year-to-year revenue growth
of approximately $6 million was achieved in research, and the financial
institutions business accounted for approximately $5 million of growth.
Moodys international revenue was $129.9 million in the third quarter, an
increase of $17.3 million or 15.4% over $112.6 million in the third quarter of
2003. The Moodys Investors Service business accounted for approximately $17
million of year-to-year international revenue growth. International ratings
revenue grew approximately $11 million versus the prior year, with
approximately 80% related to Europe, primarily in structured finance where
issuance was up in many asset classes. This was partially offset by a decline
in European corporate finance revenue, reflecting lower issuance volumes.
International research revenue grew approximately $6 million from the third
quarter of 2003, with approximately $5 million of that growth in Europe.
Foreign currency translation accounted for approximately $6 million of reported
international revenue growth.
Operating, selling, general and administrative expenses were $151.8 million in
the third quarter of 2004, an increase of $16.1 million or 11.9% from $135.7
million in the third quarter of 2003. Compensation and benefits expense grew
$11.6 million year-to-year, reflecting compensation increases, increased
staffing, and higher stock-based compensation expense. Moodys global staffing
of approximately 2,451 employees at September 30, 2004 was 10% higher than at
September 30, 2003, and reflected hiring in the specialist teams that support
Moodys Enhanced Analysis Initiative, in Moodys international ratings
businesses, and at Moodys KMV. Stock-based compensation expense increased $3.8
million year-to-year. As more fully discussed in note 2 to the condensed
consolidated financial statements, the Company adopted the fair value method
provisions of Statement of Financial Accounting Standards No. 123 prospectively
beginning on January 1, 2003. The year-to-year increase in expense reflects the
phasing in of expense over the current four-year equity plan vesting period as
annual equity grants are made as well as the effect of a higher share price on
the value of the 2004 equity grants. In addition, foreign currency translation
accounted for approximately $3 million of the year-to-year expense growth.
Depreciation and amortization expense was $8.3 million in the third quarter of
2004 compared with $8.1 million in the prior year period.
Third quarter operating income of $197.8 million rose $36.6 million or 22.7%
from $161.2 million in the same period of 2003. Foreign currency translation
contributed approximately $2 million to operating income growth in the quarter.
Moodys operating margin for the third quarter of 2004 was 55.3% compared to
52.9% a year earlier. The increase in margin was the result of
better-than-expected revenue growth.
Moodys reported $3.5 million of interest and other non-operating expense, net
for the third quarter of 2004 compared with $7.4 million for the same period of
2003. Interest expense was $5.8 million in the third quarter of 2004 compared
to $5.7 million in the third quarter of 2003, principally related to Moodys
$300 million of private placement debt. Interest income was $1.7 million in the
third quarter of 2004 compared to $0.5 million in the third quarter of 2003.
Moodys invested cash increased substantially year-to-year, but the rate of
interest was lower in 2004 than in 2003. Foreign exchange gains (losses) were
$1.2 million in the third quarter of 2004 and ($1.6) million in the third
quarter of 2003.
Moodys effective tax rate was 50.8% in the third quarter of 2004 compared to
44.4% in the same prior year period. The tax rate for the third quarter of 2004
reflected a charge of $18.4 million related to legacy income tax exposures,
which increased the effective rate in the quarter by approximately 950 basis
points. The third quarter 2003 rate included the impact of an adjustment to
reflect a change in New York tax law that was retroactive to January 1, 2003,
which increased the effective rate by 230 basis points in the period.
21
Net income was $95.5 million for the third quarter of 2004, an increase of $9.9
million or 11.6% from $85.6 million for the same period of 2003. Basic and
diluted earnings per share for the third quarter of 2004 were $0.65 and $0.63,
respectively, compared to basic and diluted earnings per share of $0.57 and
$0.56, respectively, for the third quarter of 2003.
Segment Results
Moodys Investors Service
Revenue at Moodys Investors Service for the third quarter of 2004 was $328.1
million, up $50.8 million or 18.3% from $277.3 million in the third quarter of
2003. Ratings revenue accounted for $39.4 million of growth with approximately
$32 million from structured finance. Research contributed $11.4 million of
year-to-year growth. Foreign currency translation accounted for approximately
$6 million of reported revenue growth and price increases also contributed to
year-to-year growth.
Structured finance revenue was $142.6 million for the third quarter of 2004, an
increase of $32.5 million or 29.5% from $110.1 million in the same period of
2003. Approximately $22 million of the increase was in the U.S., with the
residential mortgage and home equity sectors contributing nearly $13 million of
this amount. Low-adjustable-rate mortgages drove growth in mortgage
re-financings and continued strength in the housing market supported
exceptionally strong volumes in home equity lending. The U.S. commercial
mortgage backed sector contributed nearly $5 million of growth on strong
issuance volume. Revenue from rating U.S. collateralized debt obligations rose
about $4 million year to year, as narrowing liability spreads created a
favorable issuance environment. International structured finance revenue grew
approximately $11 million year-to-year, chiefly due to growth in Europe. The
collateralized debt obligation and commercial mortgage backed sectors were the
largest contributors to European growth due to an increased number of
transactions and growth in monitoring fees. Foreign currency translation also
contributed to growth in international structured finance revenue.
Corporate finance revenue was $72.2 million for the third quarter of 2004, up
$2.8 million or 4.0% from $69.4 million in the third quarter of 2003. Revenue
grew approximately $3 million in the United States, as the impact of weak
corporate debt issuance activity was more than offset by strong growth in
revenue from syndicated bank loan ratings (driven primarily by increased
issuance) and other areas not related to public debt issuance. The number of
investment grade issues in the U.S. declined 15% versus the prior year and high
yield issuance declined over 20%. Rising corporate profitability, which
reduces the need for corporations to fund business investment with debt, and a
low stock of debt to be refinanced, have contributed to a weak issuance
environment in the U.S. International corporate finance reported modestly lower
revenue versus the same quarter 2003, principally reflecting a decline in
Europe. European corporate issuance volumes declined over 40% versus the robust
prior year period, as improved profitability reduced the need to borrow
externally, and drivers of issuance such as merger and acquisition activity
remained low. This was partially offset by growth in revenue not related to
public debt issuance primarily frequent issuer annual fees. Price increases
also contributed to year-to-year growth in global corporate finance revenue.
Revenue in the financial institutions and sovereign risk group was $50.1
million for the third quarter of 2004, an increase of $5.3 million or 11.8%
from $44.8 million in the third quarter of 2003. In the U.S., revenue grew
approximately $5 million, principally reflecting strong issuance in the banking
and real estate sector, as narrower spreads encouraged refinancings.
Internationally, revenue was flat compared to the prior year period. In
Europe, growth in the banking sector due to new relationships was largely
offset by the effects of lower issuance in the insurance sector. Price
increases also contributed to year-to-year growth in global financial
institutions revenue.
Public finance revenue was $20.2 million for the third quarter of 2004, a
decline of $1.2 million or 5.6% from $21.4 million for the same period in 2003.
Dollar issuance in the municipal bond market declined approximately 9% versus
the same period in 2003, reflecting reduced borrowing needs as a result of
improved tax receipts. Refinancings represented 35% of total dollar issuance in
the third quarter of 2004, versus 38% in the same period of 2003.
Research revenue of $43.0 million for the third quarter of 2004 was $11.4
million or 36.1% higher than the $31.6 million reported in the third quarter of
2003. Revenue grew by approximately $6 million in the U.S. and approximately $5
million in Europe. The strong performance reflected growth in licensing of
Moodys information to financial customers for internal use and redistribution,
sales of new products to existing clients and new clients. Foreign currency
translation and pricing increases also contributed to year-to-year growth in
reported revenue.
Moodys Investors Service operating, selling, general and administrative
expenses, including corporate expenses, were $126.8 million for the third
quarter of 2004, an increase of $13.1 million or 11.5% from $113.7 million in
the third quarter of 2003. Compensation and benefits expense accounted for $9.3
million of expense growth. The growth also reflected compensation increases and
staffing
22
growth in many areas, including the specialist teams that support Moodys
Enhanced Analysis Initiative. Foreign currency translation contributed
approximately $3 million to year-to-year growth in reported expenses.
Depreciation and amortization expense was $4.0 million in the third quarter of
2004 versus $3.9 million in the third quarter of 2003.
Moodys Investors Service operating income of $197.3 million for the third
quarter of 2004 was up $37.6 million or 23.5% from $159.7 million in the third
quarter of 2003. Foreign currency translation contributed approximately $3
million to year-to-year growth in operating income.
Moodys KMV
Moodys KMV revenue of $29.8 million for the third quarter of 2004 was up $2.1
million or 7.6% from $27.7 million for the same period in 2003. MKMVs global
revenue growth reflected double-digit percent growth in subscriptions for its
credit risk assessment products, including CreditEdge, RiskCalc and Portfolio
Manager. This was partially offset by a decline in revenue from credit process
software, where growth was negatively impacted by sales that closed in the
second quarter of 2004 but had been expected in the second half of the year. By
geography, revenue growth was approximately split evenly between the U.S. and
international.
MKMVs operating, selling, general and administrative expenses were $25.0
million for the third quarter of 2004, an increase of $3.0 million or 13.6%
from $22.0 million in the third quarter of 2003. The year-to-year increase
primarily reflected growth of $2.3 million in compensation and related
expenses. This reflected increased staffing to support the continued growth of
the business. Depreciation and amortization expense was $4.3 million in the
third quarter of 2004 versus $4.2 million in the third quarter of 2003. MKMV
operating income was $0.5 million in the third quarter of 2004 versus $1.5
million in the prior year period.
Nine Months Ended September 30, 2004 Compared With Nine Months Ended September
30, 2003
Total Company Results
Moodys revenue for the first nine months of 2004 was $1,046.7 million, an
increase of $150.8 million or 16.8% from $895.9 million for the first nine
months of 2003. Moodys achieved strong revenue growth in a number of business
sectors.
Revenue in the United States was $670.9 million for the first nine months of
2004, an increase of $92.3 million or 16.0% from $578.6 million for the first
nine months of 2003. Approximately $42 million of this was due to structured
finance growth, with the U.S residential mortgage backed sector the largest
contributor. In addition, over $17 million of Moodys U.S. growth was
contributed by corporate finance, primarily reflecting strong activity in the
ratings of bank credit facilities. The financial institutions and research
businesses also contributed to Moodys strong growth in the United States.
Moodys international revenue was $375.8 million in the first nine months of
2004, an increase of $58.5 million or 18.4% over $317.3 million in the first
nine months of 2003. Ratings revenue grew approximately $35 million, with about
$21 million of that growth coming from structured finance. Europe contributed
approximately 75% of the growth in international structured finance. Research
revenue growth of approximately $18 million was primarily in Europe.
International corporate finance and financial institutions contributed to
growth as well. In addition, foreign currency translation accounted for
approximately $15 million of reported international revenue growth.
Operating, selling, general and administrative expenses were $441.2 million in
the first nine months of 2004, an increase of $56.1 million or 14.6% from
$385.1 million in the first nine months of 2003. Compensation and benefits
expense grew $43.9 million year-to-year, reflecting compensation increases,
increased staffing, and higher stock-based compensation expense. Moodys global
staffing of approximately 2,396 at September 30, 2004 was 9% higher than at
September 30, 2003 and reflected hiring in the specialist teams that support
Moodys Enhanced Analysis Initiative, in Moodys international ratings
businesses, and at Moodys KMV. Stock-based compensation expense increased
$11.2 million year-to-year. As more fully discussed in note 2 to the condensed
consolidated financial statements, the Company adopted the fair value method
provisions of Statement of Financial Accounting Standards No. 123 prospectively
beginning on January 1, 2003. The year-to-year increase in expense reflects the
phasing in of expense over the current four-year equity plan vesting period as
annual equity grants are made as well as the effect of a higher share price on
the value of the 2004 equity grants. In addition, foreign currency translation
contributed approximately $12 million to year-to-year expense growth.
Depreciation and amortization expense was $25.3 million and $23.8 million in
the first nine months of 2004 and 2003, respectively.
Operating income of $580.2 million for the first nine months of 2004 rose $93.2
million or 19.1% from $487.0 million in the same period of 2003. Foreign
currency translation contributed approximately $3 million to operating income
growth. Moodys operating
23
margin for the first nine months of 2004 was 55.4% compared to 54.4% a year
earlier. The increase in margin was the result of better-than-expected revenue
growth.
Moodys reported $14.9 million of interest and other non-operating expense, net
for the first nine months of 2004 compared with $3.6 million for the same
period of 2003. The 2003 amount included a gain of $13.6 million on an
insurance recovery related to the September 11th tragedy, as discussed in note
11 to the condensed consolidated financial statements. Interest expense was
$17.3 million for the first nine months of 2004 compared to $17.7 million in
the 2003 period. The amounts in both periods included $17.1 million of interest
expense on Moodys $300 million of private placement debt. Interest income was
$3.8 million in the first nine months of 2004 compared to $1.0 million in the
first nine months of 2003. Moodys invested cash increased substantially
year-to-year, but the rate of interest was lower in 2004 than in 2003. Foreign
exchange (losses) gains were ($0.3) million in the first nine months 2004 and
$0.2 million in the first nine months of 2003.
Moodys effective tax rate was 46.5% for the first nine months of 2004 compared
to 42.4% in the same period of 2003. The 2004 effective tax rate included
charges aggregating approximately $28 million for increases in reserves related
to legacy income tax exposures that were assumed by Moodys in connection with
its separation from The Dun & Bradstreet Corporation in October 2000 (see
Contingencies Legacy Tax Matters, below). These charges increased the
effective tax rate in the quarter by approximately 500 basis points.
Net income was $302.5 million for the first nine months of 2004, an increase of
$24.1 million or 8.7% from $278.4 million for the same period of 2003. Basic
and diluted earnings per share for the first nine months of 2004 were $2.04 and
$2.00, respectively, compared to basic and diluted earnings per share of $1.87
and $1.83, respectively, for the first nine months of 2003. Moodys net income
and earnings per share in the first nine months of 2004 included the impact of
the legacy tax provisions of approximately $28 million, and the 2003 results
included the impact of the $13.6 million gain on the insurance recovery, both
as discussed above.
Segment Results
Moodys Investors Service
Moodys Investors Service revenue for the first nine months of 2004 was $955.8
million, up $138.6 million or 17.0% from $817.2 million in the first nine
months of 2003. Good growth was achieved in a number of ratings sectors as well
as in research. Foreign currency translation contributed approximately $15
million to reported revenue growth. Price increases also contributed to
year-to-year growth in reported revenue.
Structured finance revenue was $387.4 million for the first nine months of
2004, an increase of $62.6 million or 19.3% from $324.8 million in the same
period of 2003. Approximately $42 million of this increase was in the United
States, primarily due to the residential mortgage backed sector, which
contributed approximately $28 million of revenue growth. In this sector, low
interest rates and a strong housing market drove strong growth in mortgage
lending and home equity loans and related securitizations. Good growth was also
achieved in U.S. revenue from ratings of collateralized debt obligations where
the count of issues was up approximately 16% versus the prior year period.
International structured finance revenue grew approximately $21 million, with
about 75% of the growth attributable to Europe. In Europe, growth was achieved
in several asset class sectors. Foreign currency translation and price
increases also contributed to year-to-year growth in global structured finance
revenue.
Corporate finance revenue was $226.9 million in the first nine months of 2004,
up $24.5 million or 12.1% from $202.4 million in the first nine months of 2003.
Revenue grew by approximately $17 million in the United States, reflecting
strong growth in ratings of syndicated bank loans and from other areas not
related to public debt issuance. Price increases also contributed to revenue
growth in this sector. These positive impacts were partially offset by the
effects of a year-to-year decline in issuance of investment grade and high
yield securities in the U.S. markets. International corporate finance revenue
grew approximately $7 million, primarily reflecting higher issuance volumes in
Asia outside of Japan and Australia. Foreign currency translation and price
increases also contributed to year-to-year growth in global corporate finance
revenue.
Revenue in the financial institutions and sovereign risk group was $154.4
million for the first nine months of 2004, an increase of $19.8 million or
14.7% from $134.6 million in the first nine months of 2003. In the U.S.,
revenue grew $13 million year-to-year, principally reflecting refinancings in
the real estate and insurance sectors, coupled with strong issuance in the U.S.
banking sector as spreads tightened. Revenue from outside the U.S. grew $7
million over the prior year, primarily in Europe. European growth reflected
modest issuance volumes and good growth in fees, primarily frequent issuer
based annual fees. Price increases also contributed to global financial
institutions revenue growth over the prior year period.
24
Public finance revenue was $62.2 million for the first nine months of 2004, a
decrease of $2.8 million or 4.3% from $65.0 million for the same period in
2003. Dollar issuance in the municipal bond market declined 8% versus the same
period in 2003, reflecting higher borrowing costs, a reduced pool of debt that
can be refunded and reduced borrowing needs due to strengthened tax receipts.
Research revenue of $124.9 million for the first nine months of 2004 was $34.5
million or 38.2% higher than the $90.4 million reported in the same period of
2003. Revenue grew by approximately $17 million in the U.S. and nearly $14
million in Europe. The strong performance reflected growth in licensing of
Moodys information to financial customers for internal use and redistribution,
sales of new products to existing clients and new clients. Foreign currency
translation also contributed to year-to-year growth in reported revenue.
Moodys Investors Service operating, selling, general and administrative
expenses, including corporate expenses, were $366.6 million for the first nine
months of 2004, an increase of $45.0 million or 14.0% from $321.6 million for
the first nine months of 2003. Compensation and benefits expense accounted for
$34.8 million of expense growth. The growth also reflected compensation
increases and staffing growth in many areas, including the specialist teams
that support Moodys Enhanced Analysis Initiative. Foreign currency translation
contributed approximately $10 million to year-to-year growth in reported
expenses. Depreciation and amortization expense was $12.5 million in the first
nine months of 2004 versus $11.4 million in the same period of 2003.
Moodys Investors Service operating income of $576.7 million for the first nine
months of 2004 was up $92.5 million or 19.1% from $484.2 million for the first
nine months of 2003. Foreign currency translation contributed approximately $4
million to the year-to-year growth in operating income.
Moodys KMV
Moodys KMV revenue of $90.9 million for the first nine months of 2004 was up
$12.2 million or 15.5% from $78.7 million for the same period in 2003. Revenue
grew by approximately $6 million in the U.S and approximately $4 million in
Europe. About $10 million of MKMVs global revenue growth was related to
subscriptions for its credit risk assessment products, including CreditEdge,
RiskCalc and Portfolio Manager representing strong high teens revenue growth.
Sales of MKMVs credit decisioning software accounted for over $2 million of
revenue growth.
MKMVs operating, selling, general and administrative expenses were $74.6
million for the first nine months of 2004, an increase of $11.1 million or
17.5% from $63.5 million for the first nine months of 2003. The year-to-year
increase primarily reflected growth of $9.1 million in compensation and related
expenses. This reflected higher staffing to support the continued growth of the
business. Depreciation and amortization expense was $12.8 million in the first
nine months of 2004 versus $12.4 million in the same period in 2003. MKMV
operating income was $3.5 million for the first nine months of 2004 compared
with $2.8 million for the 2003 period. Foreign currency translation had a
negative impact of $1 million on year-to-year growth in operating income.
Liquidity and Capital Resources
Cash Flow
The Company is currently financing its operations and capital expenditures
through cash flow from operations. Net cash provided by operating activities
was $378.3 million and $332.0 million for the nine months ended September 30,
2004 and 2003, respectively.
Moodys net cash provided by operating activities for the first nine months of
2004 was $46.3 million higher than the 2003 period. Contributing
to this growth was the increase in net income
of $24.1 million, higher cash tax
benefits from the exercise of stock options of $13.5 million and an increase in legacy tax provisions of approximately $28.4 million.
Decreases in cash from operating activities were primarily due to higher income
tax payments of approximately $25 million due to timing, a smaller increase in
receivables in 2004 compared to 2003 of approximately $14.8 million and an
increase in other current assets in the amount of $8.6 million
primarily due to the amount collectible from New D & B.
25
Net cash used in investing activities was $18.0 million for the nine months
ended September 30, 2004 compared with $11.6 million for the same period of
2003. In each period, this spending mainly related to the purchase of property
and equipment and the capitalization of development costs for MKMVs software
products. The aggregate spending for these two categories was $14.5 million in
the first nine months of 2004 and $12.7 million in the 2003 period. Cash paid
for or acquired in investments in affiliates accounted for the remainder of
each periods amount.
Net cash used in financing activities was $178.8 million for the nine months
ended September 30, 2004 compared to $184.3 million for the nine months ended
September 30, 2003. Significant year-to-year variances included higher spending
in 2004 for repurchases of the Companys stock ($221.3 million in the first
nine months of 2004 versus $114.5 million in the same period of 2003),
partially offset by higher proceeds from stock plans ($76.8 million in 2004
versus $58.3 million in 2003). In addition, the Company made net repayments of
bank borrowings of $107.1 million in the first nine months of 2003 versus no
such spending in the 2004 period. Dividends paid in the first nine months of
2004 and 2003 were $33.4 million and $20.1 million, respectively. The increase
in 2004 reflects a dividend of $0.075 per share in 2004 versus $0.045 per share
in 2003.
Future Cash Requirements
Moodys currently expects to fund expenditures as well as liquidity needs
created by changes in working capital from internally generated funds. The
Company believes that it has the financial resources needed to meet its cash
requirements for the next twelve months and expects to have positive operating
cash flow for fiscal year 2004. Cash requirements for periods beyond the next
twelve months will depend among other things on the Companys profitability and
its ability to manage working capital requirements.
The Company currently intends to use the majority of its net cash provided by
operating activities to continue its share repurchase program. The Company also
currently intends to use a portion of its cash to pay a quarterly dividend,
which the Board of Directors raised from $0.045 per share to $0.075 per share
in December 2003. The continued payment of dividends at this rate, or at all,
is subject to the discretion of the Board of Directors.
In addition, the Company will from time to time consider cash outlays for
acquisitions of or investments in complementary businesses, products, services
and technologies. The Company may also be required to make future cash outlays,
including during 2004, to pay to New D&B its share of potential liabilities
related to the legacy tax and legal contingencies that are discussed in this
Managements Discussion and Analysis of Financial Condition and Results of
Operations under Contingencies. These potential cash outlays could be
material and might affect liquidity requirements and they could cause the
Company to pursue additional financing. There can be no assurance that
financing to meet cash requirements will be available in amounts or on terms
acceptable to the Company, if at all.
Indebtedness
At September 30, 2004 and 2003, the Company had outstanding long-term financing
of $300 million and $160 million of bank revolving credit facilities with no
borrowings outstanding.
The $300 million of long-term financing was secured in connection with the 2000
Distribution, as that term is defined in note 1 to the condensed consolidated
financial statements. In connection with the 2000 Distribution, Moodys was
allocated $195.5 million of debt at September 30, 2000. Moodys funded this
debt with borrowings under a $160 million unsecured bank revolving credit
facility and a bank bridge line of credit. On October 3, 2000, the Company
issued $300 million of notes payable (the Notes) in a private placement. The
cash proceeds from the Notes were used in part to repay the outstanding balance
on the revolving credit facility and to repay the bridge line of credit. The
Notes have a five-year term and bear interest at an annual rate of 7.61%,
payable semi-annually. In the event that Moodys pays all or part of the Notes
in advance of their maturity, (the prepaid principal), such prepayment will
be subject to a penalty calculated based on the excess, if any, of the
discounted value of the remaining scheduled payments, as defined in the
agreement, over the prepaid principal.
On September 1, 2004, Moodys entered into a five-year senior, unsecured
revolving credit facility (the Facility) in an aggregate principal amount of
$160 million that expires in September 2009. This replaced the $80 million
5-year facility that was scheduled to expire in September 2005 and the $80
million 364-day facility that expired in September 2004. Interest on borrowings
under the Facility is payable at rates that are based on the London InterBank
Offered Rate (LIBOR) plus a premium that can range from 17 basis points to
47.5 basis points depending on the Companys ratio of total indebtedness to
earnings before interest, taxes, depreciation and amortization (Earnings
Coverage Ratio), as defined in the related agreement. At September 30, 2004,
such premium was 17 basis points. The Company also pays quarterly facility
fees, regardless of borrowing activity under the Facility. The quarterly fees
for the Facility can range from 8 basis points of the Facility amount to 15
basis points, depending on the Companys Earnings Coverage
26
Ratio, and were 8 basis points at September 30, 2004. Under the Facility, the
Company also pays a utilization fee of 12.5 basis points on borrowings
outstanding when the aggregate amount outstanding under the Facility exceeds
50% of the Facility. Interest paid under Moodys previous revolving credit
facilities for the nine months ended September 30, 2003 was $0.6 million. No
interest was paid under the Companys facilities for the three months ended
September 30, 2003 or the three and nine month periods ended September 30, 2004
as no borrowings were outstanding during those periods. Management may
consider pursuing additional long-term financing when it is appropriate in
light of cash requirements for share repurchase and other strategic
opportunities, which would result in higher financing costs.
The Notes and the Facility (the Agreements) contain covenants that, among
other things, restrict the ability of the Company and its subsidiaries, without
the approval of the lenders, to engage in mergers, consolidations, asset sales,
transactions with affiliates and sale-leaseback transactions or to incur liens,
as defined in the related agreements. The Agreements also contain financial
covenants that, among other things, require the Company to maintain an interest
coverage ratio, as defined in the related agreements, of not less than 3 to 1
for any period of four consecutive fiscal quarters, and an Earnings Coverage
Ratio, as defined in the related agreements, of not more than 4 to 1 at the end
of any fiscal quarter. At September 30, 2004, the Company was in compliance
with such covenants. Upon the occurrence of certain financial or economic
events, significant corporate events or certain other events constituting an
event of default under the Agreements, all loans outstanding under the
Agreements (including accrued interest and fees payable thereunder) may be
declared immediately due and payable and all commitments under the Agreements
may be terminated. In addition, certain other events of default under the
Agreements would automatically result in amounts due becoming immediately due
and payable and all commitments being terminated.
Off-Balance Sheet Arrangements
At September 30, 2004 Moodys did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as special purpose or variable interest entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As such, Moodys is not
exposed to any financing, liquidity, market or credit risk that could arise if
it had engaged in such relationships.
Contractual Obligations
As of September 30, 2004, there have not been any material changes in Moodys
contractual obligations as presented in its annual report on Form 10-K for the
year ended December 31, 2003.
Dividends
On October 26, 2004, the Board of Directors of the Company approved a quarterly
dividend of 7.5 cents per share of Moodys common stock, payable on December
10, 2004 to shareholders of record at the close of business on November 20,
2004.
Outlook
Moodys outlook for the full year 2004 is based on assumptions about many
macroeconomic and capital market factors, including interest rates, consumer
spending, corporate profitability and business investment spending and capital
markets issuance activity. There is an important degree of uncertainty
surrounding these assumptions and, if actual conditions differ from these
assumptions, Moodys results for the year may differ from the outlook presented
below.
The Company expects revenue in the fourth quarter to reflect a resumption of
many of the macroeconomic and capital markets conditions that Moodys saw at
the beginning of the third quarter and to be generally the same as revenue in
the third quarter. The Company expects that residential mortgage and home
equity securitizations will decline versus the third quarter level, offsetting
seasonal increases in asset-backed securities and credit derivatives. Moodys
also expects that the third quarter declines that occurred in the 10-year
treasury rate, off which many debt securities are priced, will begin to reverse
in the fourth quarter. And the Company anticipates further weakness in public
finance issuance and a seasonally strong fourth quarter at MKMV. Consistent
with Moodys expense pattern in 2003, the Company expects increases in fourth
quarter expenses over third quarter levels. Areas of potential increased
spending in the fourth quarter include improving technology infrastructure and
administrative systems, office relocation and expansion, Sarbanes-Oxley
compliance, marketing programs, and a grant to the Moodys Foundation. Moodys
outlook for the full year 2004 reflects these expectations for the fourth
quarter.
In the U.S., the Company expects low double-digit percent revenue growth for
the ratings and research business for the full year 2004. While the Federal
Reserve has increased its target interest rate three times since June 30th, the
yield on 10-year U.S. treasuries has
27
fallen. Moodys benefited from stronger-than-expected issuance in the third
quarter, in part as a result of this decline, but the Company expects that the
10-year rate will resume rising as had occurred earlier in the year. Moodys
expects that higher borrowing costs, combined with sufficient profits from
current production to reduce the need for corporations to fund business
investment with debt, will result in a continuing weakness in U.S. investment
grade corporate issuance for the remainder of the year. The Company believes
issuance in the high yield bond market for the remainder of 2004 will likely
continue its downward trend from the very strong levels of the second half of
2003 and the first half of 2004, though this may be partly offset by continuing
strong activity in the leveraged loan sector of that market. For the full year
2004, Moodys expects moderate growth in U.S. corporate finance and good growth
in financial institutions revenue versus 2003, including the benefits of new
products, particularly our Enhanced Analysis Initiative.
In the U.S. structured finance market, revenue from rating residential mortgage
and home equity securities has been stronger than last year and much stronger
than the Company anticipated at the start of this year, driven by persistently
low interest rates and the strength of real estate prices. For the full year
2004 Moodys now expects revenue from rating residential mortgage-backed
securities, including home equity loans, to grow approximately 40% compared
with 2003. The Company expects 2004 revenue from rating asset-backed
securitizations, including credit card and vehicle transactions, to decline
slightly compared to 2003. Asset-backed commercial paper should continue to
show flat to modestly negative revenue growth, but Moodys expects good growth
in commercial mortgage-backed securities and credit derivatives. Accordingly,
for the full year the Company expects mid-teens percent revenue growth in U.S.
structured finance.
Moodys continues to expect a year-to-year revenue decline in U.S. public
finance, and is forecasting continued strong growth in the U.S. research
business.
Outside the U.S. the Company continues to expect mid single-digit percent
revenue growth in the combined corporate and financial institutions ratings
businesses. Moodys is also projecting mid-teens percent year-over-year revenue
growth for international structured finance ratings, primarily due to strong
growth in European and Japanese residential and commercial mortgage-backed
securities, European asset-backed commercial paper, and Japanese asset-backed
securities. The Company expects strong growth in international research
revenue to continue. These expectations, which include favorable foreign
currency impacts, should produce mid-teens percent ratings and research revenue
growth in Europe, and mid to high teens percent revenue growth in other
international regions in 2004.
Finally, Moodys continues to expect low teens percent revenue growth at
Moodys KMV on a global basis. This expectation is lower than MKMVs growth
rate in the first half of 2004 due to factors that include earlier than
expected sales of credit process software and longer product development and
sales cycles than anticipated for new, more complex risk analytics products.
For Moodys overall, Moodys now expects low teens percent revenue growth for
the full year, up from the high single-digit growth expectation at the end of
the second quarter. The Company expects the operating margin, including the
effect of stock-based compensation expense, to be slightly higher than 2003.
This reflects the unexpectedly robust revenue growth that the Company has seen
in several of its businesses this year, partially offset by investments Moodys
is making.
For 2004, Moodys expects year-over-year growth in diluted earnings per share
to be in the low double digit percent range. This expected growth includes the
impacts of the insurance gain in 2003, the legacy tax provisions in 2003 and
for the first nine months of 2004, and stock-based compensation expense in both
years. Stock-based compensation expense is expected to be in the range of $26
million pre-tax in 2004, equivalent to $0.10 $0.11 per diluted share,
compared to $10.8 million, or $0.04 per diluted share, in 2003. The outlook
does not include potential additional legacy tax provisions that may be
required.
Contingencies
From time to time, Moodys is involved in legal and tax proceedings, claims and
litigation that are incidental to the Companys business, including claims
based on ratings assigned by Moodys. Management periodically assesses the
Companys liabilities and contingencies in connection with these matters, based
upon the latest information available. For those matters where the probable
amount of loss can be reasonably estimated, the Company believes it has
recorded appropriate reserves in the consolidated financial statements and
periodically adjusts these reserves as appropriate. In other instances, because
of the uncertainties related to both the probable outcome and amount or range
of loss, management is unable to make a reasonable estimate of a liability, if
any. As additional information becomes available, the Company adjusts its
assessments and estimates of such liabilities accordingly.
28
Based on its review of the latest information available, in the opinion of
management, the ultimate liability of the Company in connection with pending
legal and tax proceedings, claims and litigation will not have a material
adverse effect on Moodys financial position, results of operations or cash
flows, subject to the contingencies described below.
Legacy Contingencies
To understand the Companys exposure to the potential liabilities described
below, it is important to understand the relationship between Moodys and New
D&B, and the relationship among New D&B and its predecessors and other parties
who, through various corporate reorganizations and related contractual
commitments, have assumed varying degrees of responsibility with respect to
such matters.
In November 1996, The Dun & Bradstreet Corporation through a spin-off separated
into three separate public companies: The Dun & Bradstreet Corporation,
ACNielsen Corporation (ACNielsen) and Cognizant Corporation (Cognizant)
(the 1996 Distribution). Under the terms of the distribution agreement
relating to the 1996 Distribution, each party thereto is prohibited from
distributing to its stockholders any business that had been allocated to it in
connection with the 1996 Distribution, unless the distributed business delivers
an undertaking agreeing to be jointly and severally liable to the other parties
under the 1996 distribution agreement for the liabilities of the distributing
parent company under the 1996 distribution agreement.
In June 1998, The Dun & Bradstreet Corporation through a spin-off separated
into two separate public companies: The Dun & Bradstreet Corporation and R.H.
Donnelley Corporation (Donnelley) (the 1998 Distribution). During 1998,
Cognizant through a spin-off separated into two separate public companies: IMS
Health Incorporated (IMS Health) and Nielsen Media Research, Inc. (NMR). In
September 2000, The Dun & Bradstreet Corporation (Old D&B) through a spin-off
separated into two separate public companies: New D&B and Moodys, as further
described in note 1 to the condensed consolidated financial statements.
Information Resources, Inc.
The following is a description of an antitrust lawsuit filed in 1996 by
Information Resources, Inc. (IRI). As more fully described below, VNU N.V., a
publicly traded Dutch company, and its U.S. subsidiaries, VNU, Inc., ACNielsen
Corporation (ACNielsen), AC Nielsen (US), Inc. (ACN (US)), and Nielsen
Media Research, Inc. (NMR) (collectively, the VNU Parties), have assumed
exclusive joint and several liability for any judgment or settlement of this
antitrust lawsuit. As a result of the indemnity obligation, Moodys does not
have any exposure to a judgment or settlement of this lawsuit unless the VNU
Parties default on their obligations. However, in the event of such a default,
contractual commitments undertaken by Moodys in connection with various
corporate reorganizations since 1996 would require the Company to bear a
portion of any amount not paid by the VNU Parties.
In July 1996, IRI filed a complaint, subsequently amended in 1997, in the U.S.
District Court for the Southern District of New York, naming as defendants the
corporation then known as The Dun & Bradstreet Corporation, A.C. Nielsen
Company (a subsidiary of ACNielsen) and IMS International, Inc. (a subsidiary
of the company then known as Cognizant). At the time of the filing of the
complaint, each of the other defendants was a subsidiary of The Dun &
Bradstreet Corporation.
The amended complaint alleges various violations of United States antitrust
laws under Sections 1 and 2 of the Sherman Act. The amended complaint also
alleges a claim of tortious interference with a contract and a claim of
tortious interference with a prospective business relationship. These claims
relate to the acquisition by defendants of Survey Research Group Limited
(SRG). IRI alleged SRG violated an alleged agreement with IRI when it agreed
to be acquired by defendants and that defendants induced SRG to breach that
agreement.
IRIs antitrust claims allege that defendants developed and implemented a plan
to undermine IRIs ability to compete within the United States and foreign
markets in North America, Latin America, Asia, Europe and Australia/New Zealand
through a series of anti-competitive practices, including: unlawfully
tying/bundling services in the markets in which defendants allegedly had
monopoly power with services in markets in which ACNielsen competed with IRI;
entering into exclusionary contracts with retailers in certain countries to
deny IRIs access to sales data necessary to provide retail tracking services
or to artificially raise the cost of that data; predatory pricing; acquiring
foreign market competitors with the intent of impeding IRIs efforts to expand;
disparaging IRI to financial analysts and clients; and denying IRI access to
capital necessary for it to compete.
IRIs amended complaint originally alleged damages in excess of $350 million,
which IRI asked to be trebled under antitrust laws. IRI has since revised its
allegation of damages to exceed $650 million, which IRI also asked to be
trebled. IRI has filed with the court the
29
report of its expert who has opined that IRI suffered damages of between $581.6
million and $651.7 million from the defendants alleged practices. IRI also
sought punitive damages in an unspecified amount.
In April 2003, the court denied a motion for partial summary judgment by
defendants that sought to dismiss certain of IRIs claims and granted in part a
motion by IRI seeking reconsideration of certain summary judgment rulings the
Court had previously made in favor of defendants. The motion granted by the
Court concerns IRIs claims of injuries from defendants alleged conduct in
certain foreign markets.
Pursuant to a scheduling order entered by the Court on April 8, 2004, discovery
ended on November 1, 2004, and trial is scheduled to begin on April 18, 2005.
On June 21, 2004, pursuant to a stipulation between IRI and defendants, the
Court ordered that certain of IRIs claims be dismissed with prejudice from the
lawsuit, including the claims that defendants tortiously interfered with the
SRG acquisition. The Company believes that the dismissal of the tortious
interference claims also precludes any claim for punitive damages.
In connection with the 1996 Distribution, NMR (then known as Cognizant
Corporation), ACNielsen and Donnelley (then known as The Dun & Bradstreet
Corporation) entered into an Indemnity and Joint Defense Agreement (the
Original Indemnity and Joint Defense Agreement), pursuant to which they
agreed to:
In particular, the Original Indemnity and Joint Defense Agreement provided
that:
The Original Indemnity and Joint Defense Agreement also provided that if it
becomes necessary to post any bond pending an appeal of an adverse judgment,
then NMR and Donnelley shall obtain the bond required for the appeal, and each
shall pay 50% of the costs of such bond, if any, which cost will be added to
IRI Liabilities.
In 2001, ACNielsen was acquired by VNU N.V., which assumed ACNielsens
obligations under the Original Indemnity and Joint Defense Agreement. Pursuant
to the Original Indemnity and Joint Defense Agreement, VNU N.V. was to be
included with ACNielsen for purposes of determining the ACN Maximum Amount.
In connection with the 1998 Distribution, Old D&B and Donnelley (then known as
The Dun & Bradstreet Corporation) entered into an agreement (the 1998
Distribution Agreement) whereby Old D&B assumed all potential liabilities of
Donnelley arising from the IRI action and agreed to indemnify Donnelley in
connection with such potential liabilities. Under the terms of the 2000
Distribution, New D&B undertook to be jointly and severally liable with Moodys
for Old D&Bs obligations to Donnelley under the 1998 Distribution Agreement,
including any liabilities arising under the Original Indemnity and Joint
Defense Agreement, and any liabilities arising from the IRI action itself.
However, as between New D&B and Moodys, it was agreed that under the 2000
Distribution, each of New D&B and Moodys will be responsible for 50% of any
payments required to be made to or on behalf of Donnelley with respect to the
IRI action under the terms of the 1998 Distribution Agreement, including legal
fees or expenses related to the IRI action.
On July 30, 2004, the VNU Parties, Donnelley, Moodys, New D&B and IMS Health
entered into an Amended and Restated Indemnity and Joint Defense Agreement (the
Amended Indemnity and Joint Defense Agreement).
Pursuant to the Amended Indemnity and Joint Defense Agreement, any and all IRI
Liabilities incurred by Donnelley, Moodys, New D&B or IMS Health relating to a
judgment (even if not final) or any settlement entered into in the IRI action
will be jointly and severally assumed, and fully discharged, exclusively by the
VNU Parties. Under the Amended Indemnity and Joint Defense Agreement, the VNU
Parties have agreed to, jointly and severally, indemnify Donnelley, Moodys,
New D&B and IMS Health from and against all IRI Liabilities to which they
become subject. As a result, the concept of ACN Maximum Amount which used to
cap
30
ACNielsens liability for the IRI Liabilities no longer exists and all such
liabilities are the responsibility of the VNU Parties pursuant to the Amended
Indemnity and Joint Defense Agreement.
In addition, the Amended Indemnity and Joint Defense Agreement provides that if
it becomes necessary to post any bond pending an appeal of an adverse judgment,
the VNU Parties shall obtain the bond required for the appeal and shall pay the
full cost of such bond.
In connection with entering into the Amended Indemnity and Joint Defense
Agreement, Donnelley, Moodys, New D&B and IMS Health agreed to amend certain
covenants of the Original Indemnity and Joint Defense Agreement to provide
operational flexibility for ACNielsen going forward. In addition, the Amended
Indemnity and Joint Defense Agreement includes certain amendments to the
covenants of ACNielsen (which, under the Amended Indemnity and Joint Defense
Agreement, are now also applicable to ACN (US)), which are designed to preserve
such parties claims-paying ability and protect Donnelley, Moodys, New D&B and
IMS Health. Among other covenants, ACNielsen and ACN (US) agreed that neither
they nor any of their respective subsidiaries will incur any indebtedness to
any affiliated person, except indebtedness which its payment will, after a
payment obligation under the Amended Indemnity and Joint Defense Agreement
comes due, be conditioned on, and subordinated to, the payment and performance
of the obligations of such parties under the Amended Indemnity and Joint
Defense Agreement. VNU N.V. has agreed to having a process agent in New York to
receive on its behalf service of any process concerning the Amended Indemnity
and Joint Defense Agreement.
As described above, the VNU Parties have assumed exclusive responsibility for
the payment of all IRI Liabilities. Provided that the VNU Parties are able to
fulfill their obligations under the Amended Indemnity and Joint Defense
Agreement, and that they ultimately do fulfill such obligations, Moodys
believes that the resolution of the IRI action should not materially affect the
Companys financial position, results of operations, or cash flows.
However, because liability for violations of the antitrust laws is joint and
several and because the rights and obligations relating to the Amended
Indemnity and Joint Defense Agreement are based on contractual relationships,
the failure of the VNU Parties to fulfill their obligations under the Amended
Indemnity and Joint Defense Agreement could result in the other parties bearing
all or a portion of the IRI Liabilities. Joint and several liability for the
IRI action means that even where more than one defendant is determined to have
been responsible for an alleged wrongdoing, the plaintiff can collect all or
part of the judgment from just one of the defendants. This is true regardless
of whatever contractual allocation of responsibility the defendants and any
other indemnifying parties may have made, including the allocations described
above between the VNU Parties, Donnelley, Moodys, New D&B and IMS Health.
Accordingly, and as a result of the allocations of liability described above,
in the event the VNU Parties default on their obligations under the Amended
Indemnity and Joint Defense Agreement, each of Moodys and New D&B will be
responsible for the payment of 50% of the portion of any judgment or settlement
ultimately paid by Donnelley (which is a defendant in the IRI action), which
can be as high as all the IRI Liabilities.
The Company is unable to predict at this time the outcome of the IRI action,
the financial condition of any of the VNU parties or the other defendants at
the time of any such outcome, or whether the VNU Parties or the other
defendants will fulfill their obligations under the Amended Indemnity and Joint
Defense Agreement or other related contractual agreements. Hence, the Company
cannot estimate such parties ability to pay the IRI Liabilities pursuant to
the Amended Indemnity and Joint Defense Agreement or the amount of the judgment
or settlement in the IRI action. Accordingly, no amount in respect of this
matter has been accrued in the Companys consolidated financial statements. As
discussed above, provided that the VNU Parties ultimately fulfill their
obligations under the Amended Indemnity and Joint Defense Agreement, Moodys
believes that the resolution of the IRI action should not materially affect the
Companys financial position, results of operations, or cash flows. If,
however, IRI were to prevail in whole or in part in this action and Moodys is
required to pay, notwithstanding such contractual obligations, a portion of any
significant settlement or judgment, the outcome of this matter could have a
material adverse effect on Moodys financial position, results of operations,
and cash flows.
Legacy Tax Matters
Old D&B and its predecessors entered into global tax planning initiatives in
the normal course of business, including through tax-free restructurings of
both their foreign and domestic operations. These initiatives are subject to
normal review by tax authorities.
Pursuant to a series of agreements, as between themselves, IMS Health and NMR
are jointly and severally liable to pay one-half, and New D&B and Moodys are
jointly and severally liable to pay the other half, of any payments for taxes,
penalties and accrued interest resulting from unfavorable IRS rulings on
certain tax matters as described in such agreements (excluding the matter
described below as Amortization Expense Deductions for which New D&B and
Moodys are solely responsible) and certain other potential tax
31
liabilities, also as described in such agreements, after New D&B and/or Moodys
pays the first $137 million, which amount was paid in connection with the
matter described below as Utilization of Capital Losses.
In connection with the 2000 Distribution and pursuant to the terms of the 2000
Distribution Agreement, New D&B and Moodys have, between themselves, agreed to
each be financially responsible for 50% of any potential liabilities that may
arise to the extent such potential liabilities are not directly attributable to
their respective business operations.
Without limiting the generality of the foregoing, three specific tax matters
are discussed below.
Royalty Expense Deductions
During the second quarter of 2003, New D&B received an Examination Report from
the IRS with respect to a partnership transaction entered into in 1993. In this
Report, the IRS stated its intention to disallow certain royalty expense
deductions claimed by Old D&B on its tax returns for the years 1993 through
1996 (the Royalty Report). In the first quarter of 2004, New D&B received a
similar Examination Report (the Second Royalty Report) relating to the first
quarter of 1997.
During the second quarter of 2003, New D&B also received an Examination Report
from the IRS stating its intention to ignore the partnership structure that had
been established in 1993 in connection with the above transaction, and to
reallocate to Old D&B income and expense items that had been reported in the
partnership tax return for 1996 (the Reallocation Report). New D&B also
received a similar Examination Report (the Second Reallocation Report) issued
to the partnership with respect to the first quarter of 1997.
In June 2004, New D&B and the IRS conducted a mediation of these issues, at
which New D&B and the IRS reached a basis for settlement with regard to the
Royalty Report for 1995 and 1996, the Reallocation Report and certain tax
refund claims made by Old D&B related to 1995 and 1996 (the Preliminary
Settlement). The Preliminary Settlement was subject to the execution of a
formal settlement agreement. In addition, the IRS
maintains its position that certain tax refund claims made by Old D&B related to 1993 and 1994
may be offset by tax liabilities relating to the above mentioned partnership
formed in 1993. New D&B disagrees with the position taken by the IRS for 1993
and 1994 and plans to file a protest with the IRS Appeals Office. If the
protest is unsuccessful New D&B can either: (1) abandon its tax refund claims;
or (2) challenge the IRS claim in U.S. District Court or the U.S. Court of
Federal Claims. Moodys estimates that its exposure for the write-off of
deferred tax assets related to these tax refund claims could be up to $9
million.
As of June 30, 2004, Moodys had adjusted its reserve for the Royalty Expense
Deductions matter and recorded write-offs of deferred tax assets to reflect the
Companys estimates of probable exposure for the Preliminary Settlement and the
other matters discussed in the preceding paragraph. However, the IRS and New
D&B were not able to agree on the terms of a formal settlement agreement by the
November 1st deadline imposed by the IRS. As a result, the IRS has
withdrawn the Preliminary Settlement agreement. In accordance with the 1996
Agreements, New D&B was required to obtain the consent of Moodys, IMS Health
and NMR as a condition to executing the formal settlement agreement, but was
unable to obtain IMS Health and NMRs consent. We believe that in accordance
with the 1996 Distribution Agreement, NMR, by withholding its consent, would
be contractually responsible to pay any excess amounts above the Preliminary
Settlement that may ultimately be owing with respect to tax years 1995-1996.
IMS Health has alleged various breaches of New DNBs obligations under the 1996
Agreements related to New D&Bs management and attempted settlement of this
matter. If the parties fail to resolve their dispute, we understand that New
D&B anticipates commencing arbitration proceedings against IMS Health and NMR.
Based on our current understanding of the positions of New D&B and IMS Health,
we believe it is likely that New DNB should prevail, but we cannot predict with
certainty the outcome.
In addition, the Second Royalty Report and the Second Reallocation Report,
which were not part of New D&Bs preliminary settlement with the IRS, have not
been resolved. New D&B disagrees with the positions taken by the IRS in these
reports and previously had filed a protest with the IRS Appeals Office. If the
IRS Appeals Office were to uphold these reports, then New D&B could either: (1)
accept and pay the IRS assessment; (2) challenge the assessment in U.S. Tax
Court; or (3) challenge the assessment in U.S. District Court or the U.S. Court
of Federal Claims, where in either case payment of the assessment would be
required in connection with such challenge. Should any such payments be made by
New D&B, then pursuant to the terms of the 2000 Distribution Agreement, Moodys
would have to pay to New D&B its 50% share. Moodys believes that the positions
taken by the IRS in the Second Royalty Report and the Second Reallocation
Report are inconsistent with each other. Accordingly, while it is possible that
the IRS could ultimately prevail in whole or in part on one of such positions,
Moodys believes that it is unlikely that the IRS will prevail on both. Moodys
estimates that its share of the required payment to the IRS for this matter
could be up to $2 million (including penalties and interest, and net of tax
benefits).
32
Moodys has reassessed its exposure for the Royalty Expense Deductions matter
taking into consideration: (1) all of the original Examination Reports
discussed above (for which the Companys share of the required payments to the
IRS could be up to $102 million, including penalties and interest, and net of
tax benefits); and (2) the potential write-off of deferred tax assets (for
which the Companys exposure could be up to $9 million as discussed above).
Based on this assessment, during the third quarter of 2004 the Company
increased its reserve for this matter by $18.4 million to reflect the current
estimate of probable exposure.
Amortization Expense Deductions
In April 2004, New D&B received Examination Reports (the April Examination
Reports) from the IRS with respect to a partnership transaction. This
transaction was entered into in 1997 and could result in amortization expense
deductions on the tax returns of Old D&B and New D&B from 1997 through 2012. In
the April Examination Reports, the IRS stated its intention to disallow the
amortization expense deductions related to this partnership that were claimed
by Old D&B on its 1997 and 1998 tax returns. New D&B disagrees with the
position taken by the IRS and can either: (1) accept and pay the IRS
assessment; (2) challenge the assessment in U.S Tax Court; or (3) challenge the
assessment in U.S. District Court or the U.S. Court of Federal Claims, where in
either case payment of the disputed amount would be required in connection with
such challenge. IRS audits of Old D&Bs or New D&Bs tax returns for years
subsequent to 1998 could result in the issuance of similar Examination Reports,
in which case New D&B would also have the aforementioned three courses of
action. Should any such payments be made by New D&B related to either the
April Examination Reports or any potential Examination Reports for future
years, including years subsequent to the separation of Moodys from New D&B,
then pursuant to the terms of the 2000 Distribution Agreement, Moodys would
have to pay to New D&B its 50% share. In addition, should New D&B discontinue
claiming the amortization deductions on future tax returns, Moodys would be
required to repay to New D&B an amount equal to the discounted value of its 50%
share of the related future tax benefits. New D&B had paid the discounted value
of 50% of the future tax benefits from this transaction in cash to Moodys at
the Distribution Date. Moodys estimates that the Companys current potential
exposure could be up to $94 million (including penalties and interest, and net
of tax benefits). This exposure could increase by approximately $3 million to
$6 million per year, depending on actions that the IRS may take and on whether
New D&B continues claiming the amortization deductions on its tax returns.
In the April Examination Reports, the IRS also stated its intention to disallow
certain royalty expense deductions claimed by Old D&B on its 1997 and 1998 tax
returns with respect to the partnership transaction. In addition, the IRS
stated its intention to disregard the partnership structure and to reallocate
to Old D&B certain partnership income and expense items that had been reported
in the partnership tax returns for 1997 and 1998. New D&B disagrees with the
positions taken by the IRS and can take any of the three courses of action
described in the second paragraph. IRS audits of Old D&Bs or New D&Bs tax
returns for years subsequent to 1998 could result in the issuance of similar
Examination Reports for the subsequent years. Should any such payments be made
by New D&B related to either the April Examination Reports or any potential
Examination Reports for future years, then pursuant to the terms of the 2000
Distribution Agreement, Moodys would have to pay to New D&B its 50% share of
New D&Bs payments to the IRS for the period from 1997 through the Distribution
Date. Moodys estimates that its share of the potential exposure to the IRS
could be up to $127 million (including penalties and interest, and net of tax
benefits). Moodys also could be obligated for future interest payments on its
share of such liability.
New D&B had filed protests with the IRS Appeals Office regarding the April
Examination Reports. In September 2004 the IRS Appeals Office remanded the case
to the IRS examination office for further development of the issues. New D&B
has reopened discussion of the issues with the examination office.
Moodys believes that the IRSs proposed assessments of tax against Old D&B and
the proposed reallocations of partnership income and expense to Old D&B are
inconsistent with each other. Accordingly, while it is possible that the IRS
could ultimately prevail in whole or in part on one of such positions, Moodys
believes that it is unlikely that the IRS will prevail on both.
Utilization of Capital Losses
The IRS has completed its review of the utilization of certain capital losses
generated by Old D&B during 1989 and 1990. On June 26, 2000, the IRS, as part
of its audit process, issued a formal assessment with respect to the
utilization of these capital losses.
On May 12, 2000, an amended tax return was filed by Old D&B for the 1989 and
1990 tax years, which reflected $561.6 million of tax and interest due. Old D&B
paid the IRS approximately $349.3 million of this amount on May 12, 2000; 50%
of such payment was allocated to Moodys and had previously been accrued by the
Company. IMS Health informed Old D&B that it paid to the IRS approximately
$212.3 million on May 17, 2000. The payments were made to the IRS to stop
further interest from accruing, and on September 20, 2000, Old D&B filed a
petition for a refund in the U.S. District Court.
33
Pre-trial proceedings on this matter have been ongoing, and in July 2004, New
D&B and the IRS reached a basis for settlement of all outstanding issues
related to this matter. Moodys estimates that its share of the cost of this
tentative settlement will be $12 million, reflecting anticipated cash payments
of $2 million and the write-off of deferred tax assets of $10 million. The
tentative settlement will not be finalized until a formal agreement is
executed, which is expected to be during the fourth quarter of 2004, and it is
possible that Moodys share of the related cost could differ from the Companys
current estimate.
Summary of Moodys Exposure to Three Legacy Tax Matters
The Company considers from time to time the range and probability of potential
outcomes related to the three legacy tax matters discussed above and
establishes reserves that it believes are appropriate in light of the relevant
facts and circumstances. In doing so, Moodys makes estimates and judgments as
to future events and conditions and evaluates its estimates and judgments on an
ongoing basis.
In the third quarter of 2004, the Company recorded provisions of approximately
$19 million to increase its reserves for the three legacy tax matters, to
reflect its current estimates of the probable exposures on these matters. As a
result, at September 30, 2004, Moodys total legacy tax reserves were $131
million, representing approximately $44 million of current liabilities
(reflecting the estimated cash payments related to the Royalty Expense
Deductions and Utilization of Capital Losses matters that are expected to be
made over the next twelve months) and $87 million of non-current liabilities.
It is possible that the legacy tax matters could be resolved in amounts that
are greater than the amounts reserved by the Company, which could result in
additional charges that may be material to Moodys future reported results,
financial position and cash flows. Although Moodys does not believe it is
likely that the Company will ultimately be required to pay the full amounts
presently being sought by the IRS, potential future outlays resulting from
these matters could be as much as $346 million and could increase with time as
described above.
Regulation
In the United States, Moodys Investors Service voluntarily registers as an
investment adviser under the Investment Advisers Act of 1940, as amended.
Moodys has also been designated as a Nationally Recognized Statistical Rating
Organization (NRSRO) by the Securities and Exchange Commission (SEC). The
SEC first applied the NRSRO designation in 1975 to agencies whose credit
ratings could be used by broker-dealers for purposes of determining their net
capital requirements. Since that time, Congress (in certain mortgage-related
legislation), the SEC (in its regulations under the Securities Act of 1933, as
amended, the Securities Exchange Act of 1934, as amended and the Investment
Company Act of 1940, as amended) and other governmental and private bodies have
used the ratings of NRSROs to distinguish between, among other things,
investment grade and non-investment grade securities.
Over the past several years, U.S. regulatory and congressional authorities have
questioned the suitability of employing ratings in federal securities laws; and
if so, the potential need for altering the regulatory framework under which
rating agencies operate. Pursuant to a mandate by the Sarbanes-Oxley Act of
2002 and a series of reports issued by the Congress and the SEC on the rating
agency industry, on June 4, 2003 the SEC published a Concept Release requesting
comment on the following three broad themes:
Numerous market participants, including Moodys, responded to the call for
comment. Moodys response can be found on the Companys website at
www.moodys.com
. At present, Moodys is unable to assess the likelihood of any
regulatory changes that may result from the SECs ongoing review, nor the
nature and effect of any such regulatory changes.
Internationally, several developments have occurred over the past quarter:
First, on October 7, 2004, the Technical Committee of the International
Organization of Securities Commissions (IOSCO) distributed for public
consultation a proposed code of conduct for credit rating agencies entitled,
Code of Conduct Fundamentals for
34
Credit Rating Agencies
(Proposed IOSCO Code). The comment period for the
Proposed IOSCO Code closes on November 8, 2004. Moodys is not yet in a
position to assess the outcome or the impact of such a code of conduct;
however, the Company intends to submit comments to IOSCOs Technical Committee.
Second, in July 2004 the European Commission, as requested by the European
Parliament, mandated the Committee of European Securities Regulators (CESR)
to conduct a review of the credit rating agency industry and provide the
Commission with advice by April 1, 2005 on the following four general areas:
potential conflicts of interest within rating agencies, such as between advisory services and direct rating activities;
transparency of rating agencies methodologies;
legal treatment of rating agencies access to inside information; and
concerns about possible lack of competition in the market for provision of credit ratings.
The CESR may look to such other areas of inquiry that it deems necessary. In
formulating its response to the Parliament, the Commission may reject the
CESRs advice or alternatively adopt it in whole or in part. Moodys is
presently not in a position to assess the outcome of the European assessment
process.
The Basel Committee on Banking Supervision has completed its work on a new
capital adequacy framework (Basel II) to replace its initial framework
proposed in 1988. Under Basel II, ratings assigned by a credit rating agency
would be an alternative available to banks to determine the risk weights for
many of their credit exposures. The Basel Committees new capital adequacy
framework would institutionalize ratings of certain credit rating agencies as
an alternative in the credit measurement processes of internationally active
financial institutions and subject rating agencies to a broader range of
oversight. It is anticipated that Basel II will be implemented by national
regulatory authorities by January 2007. The European Commission has created
the Committee of European Banking Supervisors, (CEBS) which is analogous to
CESR and is instead comprised of European banking regulators, to advise it on
the implementation of the Basel II in Europe. At this time Moodys cannot
predict the long-term impact of Basel II on the manner in which Moodys
conducts its business. However, Moodys does not believe that Basel II will
materially affect Moodys Investors Services financial position or results of
operations.
Finally, Moodys is subject to regulation in certain non-U.S. jurisdictions in
which it operates; some regulatory actions outside the United States are noted
below:
France: as a consequence of the 2003 French Securities Law, Loi de Sécurité
Financiére (the
"
LSF), rating agencies operating in France are subject to a
document retention obligation. Moreover, the newly formed French regulatory
authority, LAutorité des Marchés Financiers (AMF), will be required to
publish an annual report on: the role of rating agencies; their business
ethics, and the transparency of their methods; and, the impact of their
activity on issuers and the financial markets. Moodys has submitted responses
to a series of questions posed by the AMF in accordance with its mandate. The
AMF is expected to release its first report on the rating agency industry in
December 2004.
Italy: in October 2004, the Italian Senate introduced an amendment to an
existing draft legislation the Lettieri Bill which, if approved by the
full Italian Parliament would: (1) require the Consob to recognize and
register rating agencies in the Italian market;
(2) mandate recognized rating agencies to adopt and implement IOSCOs Code of
Conduct; and 3) mandate issuers to attain ratings from recognized rating
agencies. If approved, the bill requires that Consob provide the appropriate
regulatory framework.
Other legislation and regulation relating to credit rating and research
services has been considered from time to time by local, national and
multinational bodies and is likely to be considered in the future. In certain
countries, governments may provide financial or other support to locally-based
rating agencies. In addition, governments may from time to time establish
official rating agencies or credit ratings criteria or procedures for
evaluating local issuers. If enacted, any such legislation and regulation
could significantly change the competitive landscape in which Moodys operates.
In addition, the legal status of rating agencies has been addressed by courts
in various decisions and is likely to be considered and addressed in legal
proceedings from time to time in the future. Management of Moodys cannot
predict whether these or any other proposals will be enacted, the outcome of
any pending or possible future legal proceedings, or the ultimate impact of any
such matters on the competitive position, financial position or results of
operations of Moodys.
35
Forward-Looking Statements
Certain statements contained in this quarterly report on Form 10-Q are
forward-looking statements and are based on future expectations, plans and
prospects for Moodys business and operations that involve a number of risks
and uncertainties. Those statements appear in the sections entitled Outlook
and Contingencies under Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations, commencing at page 20 of this
quarterly report on Form 10-Q and elsewhere in the context of statements
containing the words believe, expect, anticipate, intend, forecast,
project, estimate, should, could, may and other words relating to
Moodys views on future events, trends and contingencies. The forward-looking
statements and other information are made as of the date of this quarterly
report on Form 10-Q, and the Company disclaims any duty to supplement, update
or revise such statements on a going-forward basis, whether as a result of
subsequent developments, changed expectations or otherwise. In connection with
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995, the Company is identifying certain factors that could cause actual
results to differ, perhaps materially, from those indicated by these
forward-looking statements. Those factors include, but are not limited to,
changes in the volume of debt and other securities issued in domestic and/or
global capital markets; changes in interest rates and other volatility in the
financial markets; market perceptions of the utility and integrity of
independent agency ratings; possible loss of market share through competition;
introduction of competing products or technologies by other companies; pricing
pressures from competitors and/or customers; the potential emergence of
government-sponsored credit rating agencies; proposed U.S., foreign, state and
local legislation and regulations, including those relating to Nationally
Recognized Statistical Rating Organizations; possible judicial decisions in
various jurisdictions regarding the status of and potential liabilities of
rating agencies; the possible loss of key employees to investment or commercial
banks or elsewhere and related compensation cost pressures; the outcome of any
review by controlling tax authorities of the Companys global tax planning
initiatives; the outcome of those tax and legal contingencies that relate to
Old D&B, its predecessors and their affiliated companies for which the Company
has assumed portions of the financial responsibility; the outcome of other
legal actions to which the Company, from time to time, may be named as a party;
the ability of the Company to successfully integrate the KMV and MRMS
businesses; a decline in the demand for credit risk management tools by
financial institutions; and other risk factors as discussed in the Companys
annual report on Form 10-K for the year ended December 31, 2003 and in other
filings made by the Company from time to time with the Securities and Exchange
Commission.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There has been no significant change in the Companys exposure to market risk
from December 31, 2003 to September 30, 2004. For a discussion of the Companys
exposure to market risk, refer to Item 7A, Quantitative and Qualitative
Disclosures about Market Risk, contained in the Companys annual report on
Form 10-K for the year ended December 31, 2003.
Item 4. Controls And Procedures
Evaluation of Disclosure Controls and Procedures: The Company carried out an
evaluation, as required by Rule 13a-15(b) under the Securities Exchange Act of
1934, as amended (the Exchange Act), under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Companys disclosure controls and procedures as of
the end of the period covered by this report (the Evaluation Date). Based on
such evaluation, such officers have concluded that, as of the Evaluation Date,
the Companys disclosure controls and procedures are effective in alerting them
on a timely basis to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Companys
periodic filings under the Exchange Act.
In addition, there were no significant changes in the internal control over
financial reporting or in other factors that have materially affected or are
reasonably likely to materially affect these internal controls over financial
reporting during the period covered by this report.
36
Three Months Ended
Nine Months Ended
September 30,
September 30,
2004
2003
2004
2003
$
357.9
$
305.0
$
1,046.7
$
895.9
151.8
135.7
441.2
385.1
8.3
8.1
25.3
23.8
160.1
143.8
466.5
408.9
197.8
161.2
580.2
487.0
(3.5
)
(7.4
)
(14.9
)
(3.6
)
194.3
153.8
565.3
483.4
98.8
68.2
262.8
205.0
$
95.5
$
85.6
$
302.5
$
278.4
$
0.65
$
0.57
$
2.04
$
1.87
$
0.63
$
0.56
$
2.00
$
1.83
147.6
149.4
148.5
148.8
150.7
152.9
151.5
152.0
Table of Contents
September 30, 2004
December 31, 2003
$
451.0
$
269.1
285.5
270.3
53.0
40.5
789.5
579.9
44.2
46.8
59.8
60.2
127.5
126.4
72.4
77.4
40.6
61.6
$
1,134.0
$
952.3
$
236.6
$
228.4
234.0
214.6
470.6
443.0
50.2
41.1
300.3
300.0
165.4
200.3
986.5
984.4
1.7
1.7
121.9
76.4
827.9
558.9
(811.1
)
(677.2
)
7.1
8.1
147.5
(32.1
)
$
1,134.0
$
952.3
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Nine Months Ended September 30,
2004
2003
$
302.5
$
278.4
25.3
23.8
19.1
8.0
36.7
23.2
0.1
0.2
(14.8
)
(29.5
)
(12.0
)
(3.4
)
0.4
(0.7
)
21.6
(0.6
)
5.3
(3.4
)
28.6
23.2
(34.5
)
12.8
378.3
332.0
(14.5
)
(12.7
)
(3.5
)
1.1
(18.0
)
(11.6
)
(107.1
)
76.8
58.3
(221.3
)
(114.5
)
(33.4
)
(20.1
)
(0.9
)
(0.9
)
(178.8
)
(184.3
)
0.4
3.9
181.9
140.0
269.1
39.9
$
451.0
$
179.9
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Three Months Ended
Nine Months Ended
September 30,
September 30,
2004
2003
2004
2003
(in millions, except per share data)
$
95.5
$
85.6
$
302.5
$
278.4
4.0
1.8
11.5
4.9
(7.3
)
(5.0
)
(21.2
)
(15.5
)
$
92.2
$
82.4
$
292.8
$
267.8
$
0.65
$
0.57
$
2.04
$
1.87
$
0.63
$
0.55
$
1.98
$
1.80
$
0.63
$
0.56
$
2.00
$
1.83
$
0.62
$
0.55
$
1.96
$
1.79
Three Months Ended September 30,
Nine Months Ended September 30,
2004
2003
2004
2003
0.46
%
0.41
%
0.46
%
0.41
%
30
%
30
%
30
%
30
%
3.74
%
2.48
%
3.23
%
3.03
%
5 yrs
5 yrs
5 yrs
5 yrs
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Three Months Ended September 30,
Nine Months Ended September 30,
2004
2003
2004
2003
(in millions)
147.6
149.4
148.5
148.8
3.1
3.5
3.0
3.2
150.7
152.9
151.5
152.0
Nine Months Ended
Year Ended
September 30, 2004
December 31, 2003
Moody's
Moody's
Moody's
Moody's
Investors Service
KMV
Consolidated
Investors Service
KMV
Consolidated
$
2.3
$
124.1
$
126.4
$
2.3
$
124.0
$
126.3
1.1
1.1
0.1
0.1
$
3.4
$
124.1
$
127.5
$
2.3
$
124.1
$
126.4
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Years Ending December 31,
(in millions)
$
1.7
6.5
6.2
5.5
4.5
22.4
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allocate potential liabilities that may relate to, arise out of or result from the IRI lawsuit (IRI Liabilities); and
conduct a joint defense of such action.
ACNielsen would assume exclusive liability for IRI Liabilities up to
a maximum amount to be calculated at such time as such liabilities
became payable as a result of a final non-appealable judgment or any
settlement permitted under the Original Indemnity and Joint Defense
Agreement (the ACN Maximum Amount); and
Donnelley and NMR would share liability equally for any amounts in
excess of the ACN Maximum Amount.
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Three Months Ended
Nine Months Ended
September 30,
September 30,
2004
2003
2004
2003
(in millions)
$
95.5
$
85.6
$
302.5
$
278.4
0.2
1.8
(0.6
)
3.5
(0.1
)
(0.4
)
$
95.6
$
87.4
$
301.5
$
281.9
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Three Months Ended September 30, 2004
Three Months Ended September 30, 2003
Moody's
Moody's
Investors
Moody's
Investors
Moody's
Service
KMV
Consolidated
Service
KMV
Consolidated
$
328.1
$
29.8
$
357.9
$
277.3
$
27.7
$
305.0
126.8
25.0
151.8
113.7
22.0
135.7
4.0
4.3
8.3
3.9
4.2
8.1
197.3
0.5
197.8
159.7
1.5
161.2
(3.5
)
(7.4
)
194.3
153.8
98.8
68.2
$
95.5
$
85.6
Three Months Ended
Nine Months Ended
September 30,
September 30,
2004
2003
2004
2003
$
142.6
$
110.1
$
387.4
$
324.8
72.2
69.4
226.9
202.4
50.1
44.8
154.4
134.6
20.2
21.4
62.2
65.0
285.1
245.7
830.9
726.8
43.0
31.6
124.9
90.4
$
328.1
$
277.3
$
955.8
$
817.2
Three Months Ended
Nine Months Ended
September 30,
September 30,
2004
2003
2004
2003
$
228.0
$
192.4
$
670.9
$
578.6
129.9
112.6
375.8
317.3
$
357.9
$
305.0
$
1,046.7
$
895.9
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September 30, 2004
December 31, 2003
Moody's
Moody's
Investors
Moody's
Investors
Moody's
Service
KMV
Consolidated
Service
KMV
Consolidated
$
883.5
$
250.5
$
1,134.0
$
673.0
$
268.4
$
941.4
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allocate potential liabilities that may relate to, arise out of or result from the IRI lawsuit (IRI Liabilities); and
conduct a joint defense of such action.
ACNielsen would assume exclusive liability for IRI Liabilities up to
a maximum amount to be calculated at such time as such liabilities
became payable as a result of a final non-appealable judgment or any
settlement permitted under the Original Indemnity and Joint Defense
Agreement (the ACN Maximum Amount); and
Donnelley and NMR would share liability equally for any amounts in
excess of the ACN Maximum Amount.
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Should credit rating agencies continue to be used for regulatory purposes under the federal securities laws?
If ratings continue to be used in federal securities laws, what should be the process for approving rating agencies?
If ratings continue to be used in federal securities laws, what should be the nature and extent of oversight?
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, Moodys is involved in legal and tax proceedings, claims and
litigation that are incidental to the Companys business including claims based
on ratings assigned by Moodys. Management periodically assesses the Companys
liabilities and contingencies in connection with these matters, based upon the
latest information available. For those matters where the probable amount of
loss can be reasonably estimated, the Company believes it has recorded
appropriate reserves in the consolidated financial statements and periodically
adjusts these reserves as appropriate. In other instances, because of the
uncertainties related to both the probable outcome and amount or range of loss,
management is unable to make a reasonable estimate of a liability, if any. As
additional information becomes available, the Company adjusts its assessments
and estimates of such liabilities accordingly.
The discussion of the litigation under Part I, Item 2. Managements Discussion
and Analysis of Financial Condition and Results of Operations Contingencies,
commencing at page 28 of this report on Form 10-Q, is incorporated into this
Item 1 by reference.
Based on its review of the latest information available, in the opinion of
management, the ultimate liability of the Company in connection with pending
legal and tax proceedings, claims and litigation will not have a material
adverse effect on Moodys financial position, results of operations or cash
flows, subject to the contingencies described in Part I, Item 2, Managements
Discussion and Analysis of Financial Condition and Results of
Operations Contingencies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
MOODYS PURCHASES OF EQUITY SECURITIES
Moodys repurchased 0.5 million shares during the third quarter of 2004 at a
total cost of $35 million, which partially offset shares issued under employee
stock plans. Since becoming a public company in September 2000 and through the
third quarter of 2004, Moodys has repurchased 26.4 million shares at a total
cost of $1.1 billion, including 12.0 million shares to offset issuances under
employee stock plans.
37
Item 6. Exhibits
Exhibits
EXHIBIT NO. DESCRIPTION
* Filed herewith.
38
Total Number of Shares
Approximate Dollar Value of
Purchased as Part of
Shares that May Yet Be
Total Number of
Average Price
Publicly Announced
Purchased Under the
Period
Shares Purchased
Paid per Share
Program
Program (1)
540,900
$
64.89
540,900
$547.7 million
$547.7 million
$547.7 million
540,900
540,900
(1)
As of the last day of each of the months. On May 24, 2004, the Company
announced that its Board of Directors had authorized an additional $600
million share repurchase program, which includes both special share
repurchases and systematic share repurchases to offset shares issued under
Moodys stock-based compensation plans. There is no established expiration
date of this authorization. During June 2004, the Company completed its
previous $450 million program, which had been authorized by its Board of
Directors in October 2002.
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3.
ARTICLES OF INCORPORATION AND BY-LAWS
1
Restated Certificate of Incorporation of the Registrant dated
June 15, 1998, as amended effective June 30, 1998, and as further
amended effective October 1, 2000 (incorporated by reference to
Exhibit 3.1 to the Report on Form 8-K of the Registrant, file number
1-14037, filed October 4, 2000).
2
Amended and Restated By-laws of the Registrant (incorporated by
reference to Exhibit 3.2 of the Registrants Registration Statement on
Form 10, file number 1-14037, filed June 18, 1998).
10.
MATERIAL CONTRACTS
1*
Amended and Restated 2001 Moodys Corporation Key Employees
Stock Incentive Plan.
2*
Form of Employee Non-Qualified Stock Option and Restricted
Stock Grant Agreement for the Amended and Restated 2001 Moodys
Corporation Key Employees Stock Incentive Plan.
3*
Form of Non-Employee Director Restricted Stock Grant Agreement
for the 1998 Moodys Corporation Non-Employee Directors Stock
Incentive Plan (as amended on April 23, 2001).
4*
2004 Moodys Corporation Covered Employee Cash Incentive Plan.
5*
Description of Bonus Terms under the 2004 Moodys Corporation Covered Employee Cash Incentive Plan.
31.
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
1*
Chief Executive Officer Certification Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
2*
Chief Financial Officer Certification Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.
CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
1*
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (The
Company has furnished this certification and does not intend for it to
be considered filed under the Securities Exchange Act of 1934 or
incorporated by reference into future filings under the Securities Act
of 1933 or the Securities Exchange Act of 1934.)
2*
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (The
Company has furnished this certification and does not intend for it to
be considered filed under the Securities Exchange Act of 1934 or
incorporated by reference into future filings under the Securities Act
of 1933 or the Securities Exchange Act of 1934.)
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MOODYS CORPORATION
|
||||
Date: November 3, 2004 | By: | /s/ JEANNE M. DERING | ||
Jeanne M. Dering | ||||
Senior Vice President and Chief Financial Officer
(principal financial officer) |
||||
Date: November 3, 2004 | By: | /s/ JOSEPH MCCABE | ||
Joseph McCabe | ||||
Vice President and Corporate Controller
(principal accounting officer) |
||||
39
AMENDED AND RESTATED 2001 MOODYS CORPORATION
1. | Purpose of the Plan |
The purpose of the Plan is to aid the Company and its Affiliates in securing and retaining key employees of outstanding ability and to motivate such employees to exert their best efforts on behalf of the Company and its Affiliates by providing incentives through the granting of Awards. The Company expects that it will benefit from the added interest which such key employees will have in the welfare of the Company as a result of their proprietary interest in the Companys success.
2. | Definitions |
The following capitalized terms used in the Plan have the respective meanings set forth in this Section:
(a) Act: The Securities Exchange Act of 1934, as amended, or any successor thereto. | |
(b) Affiliate: Any entity (i) 20% or more of the voting equity of which is owned or controlled directly or indirectly by the Company, or (ii) that had been a business, division or subsidiary of the Company, the equity of which has been distributed to the Companys shareholders, even if the Company thereafter owns less than 20% of the voting equity. | |
(c) Award: An Option, Stock Appreciation Right or Other Stock-Based Award granted pursuant to the Plan. | |
(d) Beneficial Owner: As such term is defined in Rule 13d-3 under the Act (or any successor rule thereto). | |
(e) Board: The Board of Directors of the Company. | |
(f) Change in Control: The occurrence of any of the following events: |
(i) any Person as such term is used in Section 13(d) and 14(d) of the Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Companys then outstanding securities; | |
(ii) during any period of twenty-four months (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board, and any new director (other than (A) a director nominated by a Person who has entered into an agreement with the Company to effect a transaction described in Sections 2(e)(i), (iii) or (iv) of the Plan, (B) a director nominated by any Person (including the Company) who publicly announces an intention to take or to consider taking actions (including, but not limited to, an actual or threatened proxy contest) which if consummated would constitute a Change in Control or (C) a director designated by any Person who is the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Companys securities) whose election by the Board or nomination for election by the Companys stockholders was approved in advance by a vote of at least two-thirds ( 2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; | |
(iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation (A) which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by |
remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation and (B) after which no Person would hold 20% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity; or | |
(iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Companys assets. |
(g) Code: The Internal Revenue Code of 1986, as amended, or any successor thereto. | |
(h) Committee: The Governance and Compensation Committee of the Board, or any successor thereto or other committee designated by the Board to assume the obligations of the Committee hereunder. | |
(i) Company: Moodys Corporation, a Delaware corporation. | |
(j) Disability: Inability to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which constitutes a permanent and total disability, as defined in Section 22(e)(3) of the Code (or any successor section thereto). The determination whether a Participant has suffered a Disability shall be made by the Committee based upon such evidence as it deems necessary and appropriate. A Participant shall not be considered disabled unless he or she furnishes such medical or other evidence of the existence of the Disability as the Committee, in its sole discretion, may require. | |
(k) Effective Date: The date on which the Plan takes effect, as defined pursuant to Section 17 of the Plan. | |
(l) Fair Market Value: On a given date, the arithmetic mean of the high and low prices of the Shares as reported on such date on the Composite Tape of the principal national securities exchange on which such Shares are listed or admitted to trading, or, if no Composite Tape exists for such national securities exchange on such date, then on the principal national securities exchange on which such Shares are listed or admitted to trading, or, if the Shares are not listed or admitted on a national securities exchange, the arithmetic mean of the per Share closing bid price and per Share closing asked price on such date as quoted on the National Association of Securities Dealers Automated Quotation System (or such market in which such prices are regularly quoted), or, if there is no market on which the Shares are regularly quoted, the Fair Market Value shall be the value established by the Committee in good faith. If no sale of Shares shall have been reported on such Composite Tape or such national securities exchange on such date or quoted on the National Association of Securities Dealers Automated Quotation System on such date, then the immediately preceding date on which sales of the Shares have been so reported or quoted shall be used. | |
(m) ISO: An Option that is also an incentive stock option granted pursuant to Section 7(d) of the Plan. | |
(n) LSAR: A limited stock appreciation right granted pursuant to Section 8(d) of the Plan. | |
(o) Other Stock-Based Awards: Awards granted pursuant to Section 9 of the Plan. | |
(p) Option: A stock option granted pursuant to Section 7 of the Plan. | |
(q) Option Price: The purchase price per Share of an Option, as determined pursuant to Section 7(a) of the Plan. | |
(r) Participant: An individual who is selected by the Committee to participate in the Plan pursuant to Section 5 of the Plan. | |
(s) Performance-Based Awards: Other Stock-Based Awards granted pursuant to Section 9(b) of the Plan. |
(t) Person: As such term is used for purposes of Section 13(d) or 14(d) of the Act (or any successor section thereto). | |
(u) Plan: The Amended and Restated 2001 Moodys Corporation Key Employees Stock Incentive Plan. | |
(v) Post-Retirement Exercise Period: As such term is defined in Section 7(f) of the Plan. | |
(w) Restricted Stock: Restricted stock granted pursuant to Section 9 of the Plan. | |
(x) Restricted Stock Unit: A restricted stock unit representing a right to acquire a fixed number of Shares at a future date, granted pursuant to Section 9 of the Plan. | |
(y) Retirement: Termination of employment with the Company or an Affiliate after such Participant has attained age 55 and five years of service with the Company; or, with the prior written consent of the Committee that such termination be treated as a Retirement hereunder, termination of employment under other circumstances. | |
(z) Shares: Shares of common stock, par value $0.01 per Share, of the Company. | |
(aa) Special Exercise Period: As such term is defined in Section 7(f) of the Plan. | |
(bb) Stock Appreciation Right: A stock appreciation right granted pursuant to Section 8 of the Plan. | |
(cc) Subsidiary: A subsidiary corporation, as defined in Section 424(f) of the Code (or any successor section thereto). | |
(dd) Termination of Employment: A Participants termination of employment with the Company or an Affiliate, as the case may be. |
3. | Shares Subject to the Plan |
The maximum number of Shares with respect to which Awards may be granted under the Plan shall be 12,800,000 (subject to adjustment in accordance with the provisions of Section 10 hereof), whether pursuant to ISOs or otherwise. Of that number, not more than 2,500,000 Shares (subject to adjustment in accordance with the provisions of Section 10 hereof) will be available for grants under the Plan of unrestricted Shares, Restricted Stock, Restricted Stock Units or any Other Stock-Based Awards pursuant to Section 9 hereof. The maximum number of Shares with respect to which Awards of any and all types may be granted during a calendar year to any Participant shall be limited, in the aggregate, to 400,000. The Shares may consist, in whole or in part, of authorized and unissued Shares or treasury Shares. Shares which are subject to Awards which terminate, expire, are forfeited or lapse may be utilized again with respect to Awards granted under the Plan.
4. | Administration |
The Plan shall be administered by the Committee, which may delegate its duties and powers in whole or in part to any subcommittee thereof consisting solely of at least two individuals who are each non-employee directors within the meaning of Rule 16b-3 under the Act (or any successor rule thereto) and outside directors within the meaning of Section 162(m) of the Code (or any successor section thereto); provided, however , that any action permitted to be taken by the Committee may be taken by the Board, in its discretion. The Committee is authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make any other determinations that it deems necessary or desirable for the administration of the Plan. The Committee may correct any defect or omission or reconcile any inconsistency in the Plan in the manner and to the extent the Committee deems necessary or desirable. Any decision of the Committee in the interpretation and administration of the Plan, as described herein, shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned (including, but not limited to, Participants and their beneficiaries or successors). Determinations made by the Committee under the Plan need not be uniform and may be made selectively among Participants, whether or not such
5. | Eligibility |
Key employees (but not members of the Committee or any person who serves only as a director) of the Company and its Affiliates, who are from time to time responsible for the management, growth and protection of the business of the Company and its Affiliates, and consultants to the Company and its Affiliates, are eligible to be granted Awards under the Plan. Participants shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine, in its sole discretion, the number of Shares to be covered by the Awards granted to each Participant.
6. | Limitations |
No Award may be granted under the Plan after the tenth anniversary of the Effective Date, but Awards theretofore granted may extend beyond that date.
7. | Terms and Conditions of Options |
Options granted under the Plan shall be, as determined by the Committee, non-qualified, incentive or other stock options for federal income tax purposes, as evidenced by the related Award agreements, and shall be subject to the foregoing and the following terms and conditions and to such other terms and conditions, not inconsistent therewith, as the Committee shall determine:
(a) Option Price. The Option Price per Share shall be determined by the Committee, but shall not be less than 100% of the Fair Market Value of the Shares on the date an Option is granted. | |
(b) Exercisability. Options granted under the Plan shall be exercisable at such time and upon such terms and conditions as may be determined by the Committee, but in no event shall an Option be exercisable more than ten years after the date it is granted. | |
(c) Exercise of Options. Except as otherwise provided in the Plan or in an Award agreement, an Option may be exercised for all, or from time to time any part, of the Shares for which it is then exercisable. For purposes of Section 7 of the Plan, the exercise date of an Option shall be the later of the date a notice of exercise is received by the Company and, if applicable, the date payment is received by the Company pursuant to clauses (i), (ii) or (iii) in the following sentence. The purchase price for the Shares as to which an Option is exercised shall be paid to the Company in full at the time of exercise at the election of the Participant (i) in cash, (ii) in Shares having a Fair Market Value equal to the aggregate Option Price for the Shares being purchased and satisfying such other requirements as may be imposed by the Committee; provided, that such shares of Common Stock have been held by the Participant for no less than six months, (iii) partly in cash and partly in such Shares, (iv) through the delivery of irrevocable instructions to a broker to deliver promptly to the Company an amount equal to |
the aggregate Option Price for the Shares being purchased, or (v) through such other means as shall be prescribed in the Award agreement. No Participant shall have any rights to dividends or other rights of a stockholder with respect to Shares subject to an Option until the occurrence of the exercise date (determined as set forth above) and, if applicable, the satisfaction of any other conditions imposed by the Committee pursuant to the Plan. | |
(d) ISOs. The Committee may grant Options under the Plan that are intended to be ISOs. Such ISOs shall comply with the requirements of Section 422 of the Code (or any successor section thereto). Unless otherwise permitted under Section 422 of the Code (or any successor section thereto), no ISO may be granted to any Participant who at the time of such grant, owns more than 10% of the total combined voting power of all classes of stock of the Company or of any Subsidiary, unless (i) the Option Price for such ISO is at least 110% of the Fair Market Value of a Share on the date the ISO is granted and (ii) the date on which such ISO terminates is a date not later than the day preceding the fifth anniversary of the date on which the ISO is granted. Any Participant who disposes of Shares acquired upon the exercise of an ISO either (i) within two years after the date of grant of such ISO or (ii) within one year after the transfer of such Shares to the Participant, shall notify the Company of such disposition and of the amount realized upon such disposition. Notwithstanding Section 5 hereof, ISOs may be granted solely to employees of the Company and its Subsidiaries. | |
(e) Exercisability Upon Termination of Employment by Death or Disability. Upon a Termination of Employment by reason of death or Disability after the first anniversary of the date of grant of an Option, (i) the unexercised portion of such Option shall immediately vest in full and (ii) such portion may thereafter be exercised during the shorter of (A) the remaining stated term of the Option or (B) five years after the date of death or Disability. | |
(f) Exercisability Upon Termination of Employment by Retirement. Upon a Termination of Employment by reason of Retirement after the first anniversary of the date of grant of an Option, an unexercised Option may thereafter be exercised during the shorter of (i) the remaining stated term of the Option or (ii) five years after the date of such Termination of Employment (the Post-Retirement Exercise Period), but only to the extent to which such Option was exercisable at the time of such Termination of Employment or becomes exercisable during the Post-Retirement Exercise Period as if such Participant were still employed by the Company or an Affiliate; provided, however , that if a Participant dies within a period of five years after such Termination of Employment, an unexercised Option may thereafter be exercised, during the shorter of (i) the remaining stated term of the Option or (ii) the period that is the longer of (A) five years after the date of such Termination of Employment or (B) one year after the date of death (the Special Exercise Period), but only to the extent to which such Option was exercisable at the time of such Termination of Employment or becomes exercisable during the Special Exercise Period. | |
(g) Effect of Other Termination of Employment. Upon a Termination of Employment for any reason (other than death, Disability or Retirement after the first anniversary of the date of grant of an Option as described above), an unexercised Option may thereafter be exercised during the period ending 30 days after the date of such Termination of Employment, but only to the extent to which such Option was exercisable at the time of such Termination of Employment. Notwithstanding the foregoing, the Committee may, in its sole discretion, either by prior written agreement with the Participant or upon the occurrence of a Termination of Employment, accelerate the vesting of unvested Options held by a Participant if such Participants Termination of Employment is without cause (as such term is defined by the Committee in its sole discretion) by the Company. | |
(h) Nontransferability of Stock Options. Except as otherwise provided in this Section 7(h), a stock option shall not be transferable by the Participant otherwise than by will or by the laws of descent and distribution, and during the lifetime of a Participant an option shall be exercisable only by the Participant. An option exercisable after the death of a Participant or a transferee pursuant to the following sentence may be exercised by the legatees, personal representatives or distributees of the Participant or such transferee. The Committee may, in its discretion, authorize all or a portion of the |
options previously granted or to be granted to a Participant, other than ISOs, to be on terms which permit irrevocable transfer for no consideration by such Participant to any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, including adoptive relationships, of the Participant, any trust in which these persons have more than 50% of the beneficial interest, any foundation in which these persons (or the Participant) control the management of assets, and any other entity in which these persons (or the Participant) own more than 50% of the voting interests (Eligible Transferees), provided that (i) the stock option agreement pursuant to which such options are granted must be approved by the Committee, and must expressly provide for transferability in a manner consistent with this Section and (ii) subsequent transfers of transferred options shall be prohibited except those in accordance with the first sentence of this Section 7(h). The Committee may, in its discretion, amend the definition of Eligible Transferees to conform to the coverage rules of Form S-8 under the Securities Act of 1933 or any comparable Form from time to time in effect. Following transfer, any such options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer. The events of Termination of Employment of Sections 7(e), 7(f) and 7(g) hereof shall continue to be applied with respect to the original Participant, following which the options shall be exercisable by the transferee only to the extent, and for the periods specified, in Sections 7(e), 7(f) and 7(g). The Committee may delegate to a committee consisting of employees of the Company the authority to authorize transfers, establish terms and conditions upon which transfers may be made and establish classes of options eligible to transfer options, as well as to make other determinations with respect to option transfers. | |
(i) Elective Deferral. |
(i) Notwithstanding anything herein to the contrary, the Committee, in its sole discretion, may provide that a Participant may elect to defer delivery of the proceeds of exercise of an unexercised Option, provided that such election is in accordance with rules which may be established by the Committee, is irrevocable and is made (A) at least two years (or such shorter period as may be determined by the Committee) prior to the date that such Option otherwise would expire and (B) at least one year (or such shorter period as may be determined by the Committee) prior to the date such Option is exercised. Upon such exercise, the amount deferred shall be credited, at the date of exercise, to a deferred compensation account pursuant to a deferred compensation agreement between the Participant and the Company, and shall be payable at such time or times and in such manner as shall be provided in such agreement, provided that the date as of which payment shall be made or payments shall commence shall be not less than two years (or such shorter period as may be determined by the Committee) subsequent to the date of exercise, but not later than the first day of the third month following the Participants Termination of Employment. | |
(ii) Each Participant shall have the status of a general unsecured creditor of the Company with respect to his or her deferred compensation account, and such account constitutes a mere promise by the Company to make payments with respect thereto. | |
(iii) A Participants right to benefit payments under the Plan with respect to his or her deferred compensation account may not be anticipated, alienated, sold, transferred, assigned, pledged, encumbered, attached or garnished by creditors of the Participant or the Participants beneficiary and any attempt to do so shall be void. |
8. | Terms and Conditions of Stock Appreciation Rights |
(a) Grants. The Committee also may grant (i) a Stock Appreciation Right independent of an Option or (ii) a Stock Appreciation Right in connection with an Option, or a portion thereof. A Stock Appreciation Right granted pursuant to clause (ii) of the preceding sentence (A) may be granted at the time the related Option is granted or at any time prior to the exercise or cancellation of the related Option, (B) shall cover the same Shares covered by an Option (or such lesser number of Shares as the Committee may determine) and (C) shall be subject to the same terms and conditions as such Option except for such additional limitations as
(b) Terms. The exercise price per Share of a Stock Appreciation Right shall be an amount determined by the Committee but in no event shall such amount be less than the greater of (i) the Fair Market Value of a Share on the date the Stock Appreciation Right is granted or, in the case of a Stock Appreciation Right granted in conjunction with an Option, or a portion thereof, the Option Price of the related Option and (ii) an amount permitted by applicable laws, rules, by-laws or policies of regulatory authorities or stock exchanges. Each Stock Appreciation Right granted independent of an Option shall entitle a Participant to exercise the Stock Appreciation Right in whole or in part and, upon such exercise, to receive from the Company an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one Share over (B) the exercise price per Share, times (ii) the number of Shares covered by the portion of the Stock Appreciation Right so exercised. Each Stock Appreciation Right granted in conjunction with an Option, or a portion thereof, shall entitle a Participant to surrender to the Company the unexercised Option, or any portion thereof, and to receive from the Company in exchange therefor an amount equal to (i) the excess of (A) the Fair Market Value on the exercise date of one Share over (B) the Option Price per Share, times (ii) the number of Shares covered by the Option, or portion thereof, which is surrendered. The date a notice of exercise is received by the Company shall be the exercise date. Payment shall be made in Shares or in cash, or partly in Shares and partly in cash, valued at such Fair Market Value, all as shall be determined by the Committee. Stock Appreciation Rights may be exercised from time to time upon actual receipt by the Company of written notice of exercise stating the number of Shares with respect to which the Stock Appreciation Right is being exercised. No fractional Shares will be issued in payment for Stock Appreciation Rights, but instead cash will be paid for a fraction or, if the Committee should so determine, the number of Shares will be rounded downward to the next whole Share.
(c) Limitations. The Committee may impose, in its discretion, such conditions upon the exercisability or transferability of Stock Appreciation Rights as it may deem fit.
(d) Limited Stock Appreciation Rights. The Committee may grant LSARs that are exercisable upon the occurrence of specified contingent events. Such LSARs may provide for a different method of determining appreciation, may specify that payment will be made only in cash and may provide that any related Awards are not exercisable while such LSARs are exercisable. Unless the context otherwise requires, whenever the term Stock Appreciation Right is used in the Plan, such term shall include LSARs.
9. | Other Stock-Based Awards |
(a) Generally. The Committee, in its sole discretion, may grant Awards of unrestricted Shares, Restricted Stock, Restricted Stock Units and other Awards that are valued in whole or in part by reference to, or are otherwise based on the Fair Market Value of, Shares (collectively, Other Stock-Based Awards). Such Other Stock-Based Awards shall be in such form, and dependent on such conditions, as the Committee shall determine, including, without limitation, the right to receive one or more Shares (or the equivalent cash value of such Shares) upon the completion of a specified period of service, the occurrence of an event and/or the attainment of performance objectives. Other Stock-Based Awards may be granted alone or in addition to any other Awards granted under the Plan. Subject to the provisions of the Plan, the Committee shall determine to whom and when Other Stock-Based Awards will be made; the number of Shares to be awarded under (or otherwise related to) such Other Stock-Based Awards; whether such Other Stock-Based Awards shall be settled in cash, Shares or a combination of cash and Shares; and all other terms and conditions of such Awards (including, without limitation, the vesting provisions thereof).
(b) Performance-Based Awards. Notwithstanding anything to the contrary herein, certain Other Stock-Based Awards granted under this Section 9 may be granted in a manner that will enable the Company to deduct any amount paid by the Company under Section 162(m) of the Code (or any successor section thereto) (Performance-Based Awards). A Participants Performance-Based Award shall be determined based on the attainment of one or more pre-established, objective performance goals established in writing by the Committee, for a performance period established by the Committee, (i) at a time when the outcome for
(c) Terms and Conditions of Restricted Stock and Restricted Stock Units.
(i) Grant. Each grant of Restricted Stock and Restricted Stock Units shall be evidenced by an agreement in form approved by the Committee. The vesting of a Restricted Stock Award or Restricted Stock Unit granted under the Plan may be conditioned upon the completion of a specified period of employment with the Company or an Affiliate, upon attainment of specified performance goals, and/or upon such other criteria as the Committee may determine in its sole discretion. | |
(ii) Receipt of Restricted Stock. As soon as practicable after an Award of Restricted Stock has been made to a Participant, there shall be registered in the name of such Participant or of a nominee the number of Shares of Restricted Stock so awarded. Except as provided in the applicable agreement, no Shares of Restricted Stock may be assigned, transferred or otherwise encumbered or disposed of by the Participant until such Shares have vested in accordance with the terms of such agreement. If and to the extent that the applicable agreement so provides, a Participant shall have the right to vote and receive dividends on the Shares of Restricted Stock granted to him or her under the Plan. Unless otherwise provided in the applicable agreement, any Shares received as a dividend on such Restricted Stock or in connection with a stock split of the Shares of Restricted Stock shall be subject to the same restrictions as the Restricted Stock. | |
(iii) Payments Pursuant to Restricted Stock Units. Restricted Stock Units may not be assigned, transferred or otherwise encumbered or disposed of by the Participant until such Restricted Stock Units have vested in accordance with the terms of the applicable agreement. Upon the vesting of the Restricted Stock Unit (unless a Deferral Election has been made), certificates for Shares shall be delivered to the Participant or his legal representative on the last business day of the calendar quarter in which such vesting event occurs or as soon thereafter as practicable, in a number equal to the Shares covered by the Restricted Stock Unit. A Participant may elect to defer receipt of his certificates (a Deferral Election) |
beyond the vesting date for a specified period or until a specified event, subject to the Committees approval and to such terms as are determined by the Committee in its discretion, provided that any such Deferral Election is made at least one year (or such shorter period as may be determined by the Committee) prior to the date on which the Restricted Stock Unit would vest. | |
(iv) Effect of Termination of Employment or Death. Upon a Termination of Employment by reason of death, Disability or Retirement after the first anniversary of the date of the Award of Restricted Stock or Restricted Stock Units, the Restricted Stock or Restricted Stock Units shall immediately vest in full and all restrictions on such Awards shall terminate. Upon a Termination of Employment for any reason other than death, Disability or Retirement, a Participants unvested Restricted Stock and Restricted Stock Units shall be forfeited. Notwithstanding the foregoing, the Committee may, in its sole discretion, either by prior written agreement with the Participant or upon the occurrence of a Termination of Employment, accelerate the vesting of unvested Restricted Stock or Restricted Stock Units held by the Participant if such Participants Termination of Employment is without cause (as such term is defined by the Committee in its sole discretion) by the Company. |
10. | Adjustments Upon Certain Events |
Notwithstanding any other provisions in the Plan to the contrary, the following provisions shall apply to all Awards granted under the Plan:
(a) Generally. In the event of any change in the outstanding Shares after the Effective Date by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, split-up, spin-off, combination or exchange of Shares or other corporate exchange, or any distribution to stockholders of Shares other than regular cash dividends, the Committee shall make such substitution or adjustment, if any, as it, in its sole discretion and without liability to any person, deems to be equitable to prevent substantial dilution or enlargement of the rights granted to Participants, as to (i) the number or kind of Shares or other securities issued or reserved for issuance pursuant to the Plan or pursuant to outstanding Awards, (ii) the Option Price and/or (iii) any other affected terms of such Awards. | |
(b) Change in Control. In the event of a Change in Control, Awards granted under the Plan shall accelerate as follows: (i) each Option and Stock Appreciation Right shall become immediately vested and exercisable; provided, however , that if such Awards are not exercised prior to the date of the consummation of the Change in Control, the Committee, in its sole discretion and without liability to any person, may provide for (A) the payment of a cash amount in exchange for the cancellation of such Award and/or (B) the issuance of substitute Awards that will substantially preserve the value, rights and benefits of any affected Awards (previously granted hereunder) as of the date of the consummation of the Change in Control; (ii) restrictions on Awards of restricted shares shall lapse; and (iii) Other Stock-Based Awards shall become payable as if targets for the current period were satisfied at 100%. |
11. | No Right to Employment |
The granting of an Award under the Plan shall impose no obligation on the Company or any Affiliate to continue the employment of a Participant and shall not lessen or affect the Companys or Affiliates right to terminate the employment of such Participant.
12. | Successors and Assigns |
The Plan shall be binding on all successors and assigns of the Company and a Participant, including, without limitation, the estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participants creditors.
13. | Nontransferability of Awards |
Except as provided in Section 7(h) of the Plan, an Award shall not be transferable or assignable by the Participant otherwise than by will or by the laws of descent and distribution. During the lifetime of a
14. | Amendments or Termination |
The Board or the Committee may amend, alter or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which, (a) without the approval of the stockholders of the Company, would (except as is provided in Section 10 of the Plan), increase the total number of Shares reserved for the purposes of the Plan or change the maximum number of Shares for which Awards may be granted to any Participant or (b) without the consent of a Participant, would impair any of the rights or obligations under any Award theretofore granted to such Participant under the Plan; provided, however , that the Board or the Committee may amend the Plan in such manner as it deems necessary to permit the granting of Awards meeting the requirements of the Code or other applicable laws. Notwithstanding anything to the contrary herein, neither the Committee nor the Board may amend, alter or discontinue the provisions relating to Section 10(b) of the Plan after the occurrence of a Change in Control.
15. | International Participants |
With respect to Participants who reside or work outside the United States of America and who are not (and who are not expected to be) covered employees within the meaning of Section 162(m) of the Code (or any successor section thereto), the Committee may, in its sole discretion, amend the terms of the Plan or Awards with respect to such Participants in order to conform such terms with the requirements of local law.
16. | Choice of Law |
The Plan shall be governed by and construed in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in the State of Delaware.
17. | Effectiveness of the Plan |
The Plan, as amended and restated, shall be effective as of April 27, 2004, upon its approval by the stockholders at the 2004 Annual Meeting.
Form of Employee Non-Qualified Stock Option and Restricted Stock Grant Agreement for the Amended and Restated 2001 Moodys Corporation Key Employees Stock Incentive Plan
Exhibit 10.2
[Moodys Corporation Letterhead]
__________, 2004
Dear [Name]:
Congratulations! I am pleased to inform you that the Board of Directors of Moodys Corporation (Moodys) awarded you stock options with an exercise price of US$ and restricted shares on [date]. This letter outlines the key terms and conditions of your equity award. After reading this letter, please sign a copy and return it to in Human Resources.
Your equity award is subject to the terms and conditions of the 2001 Moodys Corporation Key Employees Stock Incentive Plan (the Plan). A copy of the Plan, as well as the original prospectus relating to the offering of shares of Moodys stock pursuant to the Plan, are enclosed with this letter.
Moodys has engaged Charles Schwab & Company as the Plan administrator. Each Moodys associate who received an equity award will be provided with a Charles Schwab on-line brokerage account, at no cost to the associate, through which Moodys stock options may be exercised and in which shares will be delivered when restrictions on your restricted shares lapse. You are strongly encouraged to promptly complete the enclosed application form from Charles Schwab Employee Stock Plan Services in order to open the account. A copy of that information may be obtained on MoodysNet under the headings Human Resources Equity Awards. Once you exercise your options and purchase shares, or the restrictions on your restricted shares lapse, you may transfer your shares to another brokerage account or leave them in your Schwab account.
Your Equity Award
Your equity award provides you with an equity stake in Moodys through a combination of stock options and restricted shares and an opportunity for long-term capital appreciation. It provides a direct link between an associates benefits and increases in stockholder value.
Details of Your Stock Option Grant
Your options give you the right to buy Moodys stock at a fixed price in the future. This is called the exercise price. The value of your options is tied directly to the stock market price of Moodys stock during the life span of the options. The higher the stock price rises in the future, the more valuable your options become.
Your stock option grant is a grant of non-qualified stock options, which expires 10 years after the date of grant (date), or upon your termination of employment, if earlier.
The terms of the Plan notwithstanding, for purposes of this equity award, Termination of Employment will occur on the date when you are no longer actively employed by the Company or an Affiliate and will not be extended by any notice period mandated under local law.
Subject to your continued employment, your options will vest and become
exercisable with respect to 25% of the shares on each of the first, second,
third and fourth anniversaries of the date of grant, so that your options will
be 100% vested and exercisable after the fourth anniversary of the date of
grant, as set forth in the following schedule:
Timeframe from Date of Grant
(Vesting Date)
Vesting
Cumulative Vesting
25
%
25
%
25
%
50
%
25
%
75
%
25
%
100
%
You may exercise all or a portion of your options to purchase shares, to the extent vested, at the fixed exercise price at any time after vesting commences and on or before the expiration date (date). Further information on how to exercise your options and pay the exercise price is set forth in the enclosed informational brochure.
Details of Your Restricted Stock Grant
Your restricted shares provide you with all the rights of a shareholder from the date of grant, including the right to receive any dividends and to vote your restricted shares. However, until such time as your restricted stock vests, the shares may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by you otherwise than by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance will be void and unenforceable against Moodys. Note that dividends will be subject to the same restrictions as the shares to which they relate and will be accumulated and paid, without interest, when the underlying shares vest. In the event of a stock split, a stock dividend or similar change in Moodys stock, your restricted shares will be adjusted as determined by the Committee under the Plan.
If you are an employee who, as of the date of grant, does not participate in the Companys Executive Performance Incentive Compensation (EPIC) bonus plan and who is not a Moodys KMV Managing Director, subject to your continued employment, your restricted stock will vest with respect to 25% of the shares on each of the first, second, third and fourth anniversaries of the date of grant, so that your restricted grant
will be 100% vested after the fourth anniversary of the date of grant, as
set forth in the following schedule:
Timeframe from Date of Grant
(Vesting Date)
Vesting
Cumulative Vesting
25
%
25
%
25
%
50
%
25
%
75
%
25
%
100
%
If you are an employee who, as of the date of grant, does participate in
the Companys EPIC bonus plan (including covered employees as defined in
Section 162(m) of the U.S. Internal Revenue Code, as amended) or you are a
Moodys KMV Managing Director, subject to your continued employment, your
restricted stock will vest to the extent that the Company has achieved certain
performance goals. The vesting of shares in any one year will be expressed as a
percentage of the Target Shares (equal to 25% of the number of restricted
shares granted to you), on the applicable vesting date as set forth in the
following schedule:
Annual Operating Income Growth
% of Target Shares Vesting
50
%
100
%
150
%
In addition, if your restricted stock is not fully vested on the fifth anniversary of the date of grant, such restricted stock will vest in full on the fifth anniversary of the date of grant regardless of whether the performance goals described above have been achieved. In any event, no more than 100% of the restricted shares granted to you shall vest regardless of whether the performance goals have been achieved.
Transferability of Options and Restricted Shares
Neither your options nor restricted shares may be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by you otherwise than by will or by the laws of descent and distribution, and any such purported assignment, alienation, pledge, attachment, sale, transfer or encumbrance will be void and unenforceable against Moodys. During your lifetime, your options are exercisable only by you.
Nature of the Grant
In accepting the grant, you acknowledge that:
(1) the Plan is established voluntarily by Moodys, it is discretionary in nature and it may be modified, suspended or terminated by Moodys at any time, as provided in the Plan and this letter;
(2) the equity award is voluntary and occasional and does not create any contractual or other right to receive future equity award grants, or benefits in lieu of equity awards, even if equity awards have been granted repeatedly in the past;
(3) all decisions with respect to future equity awards, if any, will be at the sole discretion of Moodys;
(4) your participation in the Plan shall not create a right to further employment with your employer and shall not interfere with the ability of your employer to terminate your employment relationship at any time with or without cause;
(5) you are voluntarily participating in the Plan;
(6) the equity award is an extraordinary item that does not constitute compensation of any kind for services of any kind rendered to Moodys or to your employer, and which is outside the scope of your employment contract, if any;
(7) the equity award is not part of normal or expected compensation or salary for any purpose, including, but not limited to, calculating any severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments;
(8) in the event that you are not an employee of Moodys Corporation, the equity award will not be interpreted to form an employment contract or relationship with Moodys Corporation; and furthermore, the equity award will not be interpreted to form an employment contract with any subsidiary or affiliate of Moodys Corporation;
(9) the future value of the underlying shares is unknown and cannot be predicted with certainty;
(10) if the underlying shares do not increase in value, the options will have no value;
(11) if you exercise your options and obtain shares, the value of those shares acquired upon exercise may increase or decrease in value, even below the fixed exercise price;
(12) no claim or entitlement to compensation or damages arises from termination of the equity award, or diminution in value of the equity award or the shares
acquired through the equity award, and you irrevocably release Moodys and your employer from any such claim that may arise; and
(13) notwithstanding any terms or conditions of the Plan to the contrary, in the event of involuntary termination of your employment, your right to receive equity awards and vest in such awards under the Plan, if any, will terminate effective as of the date that you are no longer actively employed and will not be extended by any notice period mandated under local law (e.g., active employment would not include a period of garden leave or similar period pursuant to local law); furthermore, in the event of involuntary termination of employment, your right to exercise the options or take delivery of your restricted shares after termination of employment, if any, will be measured by the date of termination of your active employment and will not be extended by any notice period mandated under local law.
Responsibility for Taxes
Regardless of any action Moodys or your employer takes with respect to any or all income tax, social insurance, payroll tax or other tax-related withholding (Tax-Related Items), you acknowledge that the ultimate liability for all Tax-Related Items legally due by you is, and remains, your responsibility and that Moodys and/or your employer (1) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the equity award, including the grant of the equity award, the vesting of the equity award, the exercise of the options, the subsequent sale of shares acquired pursuant to the equity award and the receipt of any dividends; and (2) do not commit to structure the terms of the equity award or any aspect of the equity award to reduce or eliminate your liability for Tax-Related Items.
Prior to exercise of the options or the vesting of restricted shares, you agree to pay or make adequate arrangements satisfactory to Moodys and/or your employer to satisfy all withholding obligations of Moodys and/or your employer. In this regard, you authorize Moodys and/or your employer to withhold all applicable Tax-Related Items legally payable by you from your wages or other cash compensation paid to you by Moodys and/or your employer or from proceeds of the sale of the shares. Alternatively, or in addition, if permissible under local law, Moodys may (1) sell or arrange for the sale of shares that you acquire to meet the withholding obligation for Tax-Related Items, and/or (2) withhold in shares, provided that Moodys only withholds the amount of shares necessary to satisfy the minimum withholding amount. Finally, you shall pay to Moodys or your employer any amount of Tax-Related Items that Moodys or your employer may be required to withhold as a result of your participation in the Plan that cannot be satisfied by the means previously described. Moodys may refuse to deliver the shares if you fail to comply with your obligations in connection with the Tax-Related Items as described in this section.
Income Tax Consequences
You should consult your own tax advisor concerning the tax implications of the Plan and your equity award.
Data Privacy
You hereby explicitly and unambiguously consent to the collection, use and transfer, in electronic or other form, of your personal data as described in this document by and among, as applicable, your employer and Moodys and its subsidiaries and affiliates for the exclusive purpose of implementing, administering and managing your participation in the Plan.
You understand that Moodys and your employer hold certain personal information about you, including, but not limited to, your name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in Moodys, details of all options or any other entitlement to shares of stock awarded, canceled, exercised, vested, unvested or outstanding in your favor, for the purpose of implementing, administering and managing the Plan (Data). You understand that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan (such as Charles Schwab), that these recipients may be located in your country or elsewhere, and that the recipients country may have different data privacy laws and protections than your country. You understand that you may request a list with the names and addresses of any potential recipients of the Data by contacting your local human resources representative. You authorize the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing your participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom you may elect to deposit any shares of stock acquired through your equity award. You understand that Data will be held only as long as is necessary to implement, administer and manage your participation in the Plan. You understand that you may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, without cost to you, by contacting in writing your local human resources representative. You understand, however, that refusing or withdrawing your consent may affect your ability to participate in the Plan. For more information on the consequences of your refusal to consent or withdrawal of consent, you understand that you may contact your local human resources representative.
Governing Law, Documents and Severability
This equity award is made in the state of Delaware and is governed by, and subject to, the laws of the state of Delaware applicable to contracts made and to be
performed in the state of Delaware, as provided in the Plan, and the requirements of the New York Stock Exchange as well as the terms and conditions set forth herein.
If you have received this letter or any other document related to the Plan translated into a language other than English, and if the translated version is different than the English version, the English version will control.
The terms and conditions provided herein are severable and if any one or more provisions are determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.
Exercise and Share Issuance Restrictions
Moodys has the right to restrict or otherwise delay the issuance of stock in connection with your equity award until the requirements of any applicable laws or regulations and any stock exchange requirements have, in Moodys judgment, been satisfied in full. Moodys also has the right to refuse to issue or transfer any stock under the Plan if, in Moodys judgment, such issuance or transfer might violate any applicable law or regulation.
* * *
If you have any questions regarding this one-time grant, please contact your Human Resources representative.
Sincerely,
Moodys Corporation
I hereby accept and agree to the foregoing terms of this equity award.
____________________________
Signature
____________________________
Name
____________________________
Date
Form of Non-Employee Director Restricted Stock Grant Agreement for the 1998 Moodys Corporation Non-Employee Directors Stock Incentive Plan
Exhibit 10.3
[Date]
[Director Name]
[Director Address]
Re: Restricted Stock Award
Dear [Name]:
This letter agreement (the Agreement) contains the terms and conditions under which the Committee has granted to you (the Director), as of [date] and pursuant to the 1998 Moodys Corporation Non-Employee Directors Stock Incentive Plan (as Amended and Restated as of April 23, 2001) (the Plan), shares of Common Stock (the Shares) of Moodys Corporation (the Company) in order to encourage you to continue in the service of the Company as a non-employee director.
1. Definitions. When used herein, the following terms shall have the following meanings:
(a) Restrictions means those restrictions on the Shares as set forth in Section 3(c).
(b) Any terms not defined in this Agreement shall have the meaning provided in the Plan.
2. The Shares.
The Shares consist of shares of the Common Stock of the Company which the Company has issued to the Director as of the date hereof in consideration for Directors services as a non-employee member of the Board of Directors of the Company, and shall also include any new, additional or different securities the Director may become entitled to receive with respect to such Shares by virtue of a stock dividend or split, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of shares or other corporate exchange, or similar change affecting the Common Stock pursuant to Section 9(a) of the Plan.
3. Registration of Shares; Restrictions. Subject to the provisions of Section 5,
(a) The Shares shall be registered in the name of the Director as soon as practicable after the date hereof.
(b) The Shares registered in the name of the Director shall be maintained in a book entry position account at the Companys transfer agent, The Bank of New York, and the Director shall thereupon be a stockholder and have all the rights of a stockholder with respect to such Shares except as otherwise provided in paragraph (c) of this Section 3 and in Section 5, including full voting rights and the right to receive all dividends or other distributions made or paid with respect to such Shares; provided, however, that such Shares, and any new, additional or different securities the Director may become entitled to receive with respect to such Shares by virtue of stock dividend, recapitalization, reorganization or similar change affecting the Common Stock pursuant to Section 9(a) of the Plan, shall be subject to the Restrictions described or referred to in this Section 3.
(c) Prior to their release from the Restrictions as provided in Section 4, all Shares held for or in respect of the Director may not be sold, transferred, pledged, assigned, or otherwise encumbered or disposed of by the Director.
4. Release of Shares from Restrictions.
(a) Subject to the provisions of paragraph (b) of this Section 4, the
Restrictions shall cease to apply to the Shares awarded to the Director
according to the following schedule or, if earlier, upon the first anniversary
of the Directors Retirement, death or Disability; provided, however, that
release from the Restrictions of any or all Shares may be accelerated at the
direction and in the sole discretion of the Committee.
Vesting Schedule
Release Date
Percent of Shares Released
33 1/3
%
33 1/3
%
33 1/3
%
(b) Upon the termination of the Directors service as a non-employee director of the Company for any reason other than the Directors death or Disability, any Shares which remain subject to the Restrictions at such time shall be forfeited by the Director to the Company, and the Director shall promptly return such Shares to the Company, unless the Committee shall otherwise determine.
5. Election to Defer Receipt of Restricted Stock. The Director may elect to defer the receipt of some or all of the Shares by filing a written, irrevocable, election to that effect with the Company not less than one year prior to the date on which the restrictions lapse pursuant to Section 4 above, identifying the portion of the Shares the receipt of which he elects to defer, and specifying the period of deferral and the time at which or event upon which the deferred portion of the Shares shall be distributed to the Director. Any Shares with respect to which such a deferral election is made shall be contributed to a grantor rabbi trust established by the Company prior to the date on which the restrictions lapse. Paragraphs (a) and (b) of Section 3, above, shall not apply to any of the Shares to which such deferral election relates. However, the vesting schedule and forfeiture provisions of Section 4 shall continue to apply to any such Shares.
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6. Designation of Beneficiaries. Director may file with the Company a written designation of a beneficiary or beneficiaries under this Agreement and may from time to time revoke or change any such designation of beneficiary. Any designation of beneficiary under this Agreement shall be controlling over any other disposition, testamentary or otherwise; provided, however, that if the Committee shall be in doubt as to the entitlement of any such beneficiary to any dividends or other rights under this Agreement, the Committee may determine to recognize only the legal representative of the Director, in which case the Company, the Committee and the members thereof shall not be under any further liability to anyone.
7. Governing Law. The interpretation, performance and enforcement of this Agreement and any disputes or controversies arising with respect to the transactions contemplated herein, shall be governed by the laws of the State of New York, irrespective of New Yorks choice-of-law principles that would apply the law of any other jurisdiction.
8. Taxes. The Company may, in its discretion, make such provisions and take such steps as it may deem necessary or appropriate for the withholding of all federal, state, local and other taxes required by law to be withheld with respect to issuance or vesting of any Shares including, but not limited to, deducting the amount of any such withholding taxes from any other amount then or thereafter payable to the Director, or requiring the Director or the beneficiary or legal representative of the Director, to pay to the Company the amount required to be withheld or to execute such documents as the Company deems necessary or desirable to enable it to satisfy its withholding obligations.
9. Election under Section 83(b).
If the Director makes the election permitted under Section 83(b) of the Internal Revenue Code of 1986, as amended, he shall notify the Company of such election within 10 days of filing the notice of election with the Internal Revenue Service.
10. Governance by Compensation and Benefits Committee.
The Committees decisions as to the meanings of terms used in this Agreement and as to whether the events or conditions described in this Agreement have been satisfied shall be final and binding upon the Director and the Directors successors and representatives. Without limiting the generality of the foregoing, the Committee shall have the power to determine, for purposes of this Agreement, when a termination of service as a non-employee director shall have occurred, and the Committees decision shall be final and binding upon the Director and the Directors successors and representatives.
11. Period of Service.
Director will, except in the event of his or her earlier death or Disability, serve the Company as a member of its Board for such term as he or she has been, and may hereafter be, elected, provided that although Director may agree to stand for reelection to the Board after the date hereof, he or she is under no obligation to do so and the Company is under no obligation to submit his or her name for reelection by the stockholders.
Please acknowledge your agreement to the foregoing in the space provided below.
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Very truly yours,
ACCEPTED AND AGREED:
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Exhibit 10.4
2004 MOODYS CORPORATION
1. | Purpose of the Plan |
The purpose of the Plan is to advance the interests of the Company and its stockholders by providing incentives in the form of periodic cash bonus awards to certain management employees of the Company and its Subsidiaries, thereby motivating such employees to attain performance goals established pursuant to the Plan.
2. | Definitions |
The following capitalized terms used in the Plan have the respective meanings set forth in this Section:
(a) Act: The Securities Exchange Act of 1934, as amended, or any successor thereto. | |
(b) Award: A periodic cash bonus award granted pursuant to the Plan. | |
(c) Beneficial Owner: As such term is defined in Rule 13d-3 under the Act (or any successor rule thereto). | |
(d) Board: The Board of Directors of the Company. | |
(e) Change in Control: The occurrence of any of the following events: |
(i) any Person as such term is used in Section 13(d) and 14(d) of the Act (other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Companys then outstanding securities; | |
(ii) during any period of twenty-four months (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board, and any new director (other than (A) a director nominated by a Person who has entered into an agreement with the Company to effect a transaction described in Sections 2(e)(i), (iii) or (iv) of the Plan, (B) a director nominated by any Person (including the Company) who publicly announces an intention to take or to consider taking actions (including, but not limited to, an actual or threatened proxy contest) which if consummated would constitute a Change in Control or (C) a director designated by any Person who is the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Companys securities) whose election by the Board or nomination for election by the Companys stockholders was approved in advance by a vote of at least two-thirds ( 2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof; | |
(iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation (A) which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation and (B) after which no Person would hold 20% or more of the combined voting power of the then outstanding securities of the Company or such surviving entity; or |
(iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Companys assets. |
(f) Code: The Internal Revenue Code of 1986, as amended, or any successor thereto. | |
(g) Committee: The Governance and Compensation Committee of the Board, or any successor thereto or any other committee designated by the Board to assume the obligations of the Committee hereunder. | |
(h) Company: Moodys Corporation, a Delaware corporation. | |
(i) Covered Employee: An employee who is, or who is anticipated to become, a covered employee, as such term is defined in Section 162(m) of the Code (or any successor section thereto) and the Treasury Regulations promulgated thereunder. | |
(j) Effective Date: The date on which the Plan takes effect, as defined pursuant to Section 13 of the Plan. | |
(k) Participant: A Covered Employee of the Company or any of its Subsidiaries who is selected by the Committee to participate in the Plan pursuant to Section 4 of the Plan. | |
(l) Performance Period: The calendar year or any other period that the Committee, in its sole discretion, may determine. | |
(m) Person: As such term is used for purposes of Section 13(d) or 14(d) of the Act or any successor sections thereto. | |
(n) Plan: The 2004 Moodys Corporation Covered Employee Cash Incentive Plan. | |
(o) Shares: Shares of common stock, par value $0.01 per Share, of the Company. | |
(p) Subsidiary: A subsidiary corporation, as defined in Section 424(f) of the Code (or any successor section thereto). |
3. | Administration |
The Plan shall be administered by the Committee or such other persons designated by the Board. The Committee may delegate its duties and powers in whole or in part to any subcommittee thereof consisting solely of at least two individuals who are each non-employee directors within the meaning of Rule 16b-3 of the Act (or any successor rule thereto) and outside directors within the meaning of Section 162(m) of the Code (or any successor section thereto) and the Treasury Regulations promulgated thereunder. The Committee shall have the authority to select the Covered Employees to be granted Awards under the Plan, to determine the size and terms of an Award (subject to the limitations imposed on Awards in Section 5 below), to modify the terms of any Award that has been granted (except for any modification that would increase the amount of the Award), to determine the time when Awards will be made and the Performance Period to which they relate, to establish performance objectives in respect of such Performance Periods and to certify that such performance objectives were attained; provided, however , that any such action shall be consistent with the applicable provisions of Section 162(m) of the Code. The Committee is authorized to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, and to make any other determinations that it deems necessary or desirable for the administration of the Plan; provided, however , that any action permitted to be taken by the Committee may be taken by the Board, in its discretion, to the extent that any such action taken by the Board is consistent with the applicable provisions of Section 162(m) of the Code. The Committee may correct any defect or omission or reconcile any inconsistency in the Plan in the manner and to the extent the Committee deems necessary or desirable. Any decision of the Committee in the interpretation and administration of the Plan, as described herein, shall lie within its sole and absolute discretion and shall be final, conclusive and binding on all parties concerned. Determinations made by the Committee under the Plan need not be uniform and may be made selectively among Participants, whether or not such Participants are similarly situated. The Committee shall have the right to deduct from any payment
4. | Eligibility and Participation |
The Committee shall designate those persons who shall be Participants for each Performance Period. Participants shall be selected from among the Covered Employees of the Company and any of its Subsidiaries who are in a position to have a material impact on the results of the operations of the Company or of one or more of its Subsidiaries.
5. | Awards |
(a) Performance Goals. A Participants Award shall be determined based on the attainment of one or more pre-established, objective performance goals established in writing by the Committee, for a Performance Period established by the Committee, (i) at a time when the outcome for the Performance Period is substantially uncertain and (ii) not later than 90 days after the commencement of the Performance Period to which the performance goal relates, but in no event after 25 percent of the relevant Performance Period has elapsed. The performance goals shall be based upon one or more or the following criteria: (i) earnings before or after taxes (including earnings before interest, taxes, depreciation and amortization); (ii) net income; (iii) operating income; (iv) earnings per Share; (v) book value per Share; (vi) return on stockholders equity; (vii) expense management; (viii) return on investment before or after the cost of capital; (iv) improvements in capital structure; (x) profitability of an identifiable business unit or product; (xi) maintenance or improvement of profit margins; (xii) stock price; (xiii) market share; (xiv) revenues or sales; (xv) costs; (xvi) cash flow; (xvii) working capital; (xviii) changes in net assets (whether or not multiplied by a constant percentage intended to represent the cost of capital); and (xix) return on assets. The foregoing criteria may relate to the Company, one or more of its Subsidiaries or one or more of its divisions, units, partnerships, joint ventures or minority investments, product lines or products or any combination of the foregoing, and may be applied on an absolute basis and/or be relative to one or more peer group companies or indices, or any combination thereof, all as the Committee shall determine. In addition, to the degree consistent with Section 162(m) of the Code (or any successor section thereto), the performance goals may be calculated without regard to extraordinary items. The maximum amount of an Award to any Participant with respect to a fiscal year of the Company shall be $5,000,000.
(b) Payment. The Committee shall determine whether, with respect to a Performance Period, the applicable performance goals have been met with respect to a given Participant and, if they have, to so certify in writing and ascertain the amount of the applicable Award. No Awards will be paid for such Performance Period until such certification is made by the Committee. The amount of the Award actually paid to a given Participant may be less than the amount determined by the applicable performance goal formula (including zero), at the discretion of the Committee. The amount of the Award determined by the Committee for a Performance Period shall be paid to the Participant at such time as determined by the Committee in its sole discretion after the end of such Performance Period.
(c) Compliance with Section 162(m) of the Code. The provisions of this Section 5 shall be administered and interpreted in accordance with Section 162(m) of the Code and the Treasury Regulations promulgated thereunder to ensure the deductibility by the Company or its Subsidiaries of the payment of Awards; provided, however, that the Committee may, in its sole discretion, administer the Plan in violation of Section 162(m) of the Code.
(d) Termination of Employment. If a Participant dies, retires, is assigned to a different position, is granted a leave of absence, or if the Participants employment is otherwise terminated (except with cause by the Company, as determined by the Committee in its sole discretion) during a Performance Period (other than a Performance Period in which a Change in Control occurs), a pro-rata share of the Participants award based on the period of actual participation shall be paid to the Participant after the end of the Performance
6. | Amendments or Termination |
The Board or the Committee may amend, alter or discontinue the Plan, but no amendment, alteration or discontinuation shall be made which would impair any of the rights or obligations under any Award theretofore granted to a Participant under the Plan without such Participants consent; provided, however , that the Board or the Committee may amend the Plan in such manner as it deems necessary to permit the granting of Awards meeting the requirements of Section 162(m) of the Code or other applicable laws. Notwithstanding anything to the contrary herein, the Board may not amend, alter or discontinue the provisions relating to Section 10(b) of the Plan after the occurrence of a Change in Control.
7. | No Right to Employment |
Neither the Plan nor any action taken hereunder shall be construed as giving any Participant or other person any right to continue to be employed by or perform services for the Company or any Subsidiary, and the right to terminate the employment of or performance of services by any Participant at any time and for any reason is specifically reserved to the Company and its Subsidiaries.
8. | Nontransferability of Awards |
An award shall not be transferable or assignable by the Participant otherwise than by will or by the laws of descent and distribution.
9. | Reduction of Awards |
Notwithstanding anything to the contrary herein, the Committee, in its sole discretion (but subject to applicable law), may reduce any amounts payable to any Participant hereunder in order to satisfy any liabilities owed to the Company or any of its Subsidiaries by the Participant.
10. | Adjustments Upon Certain Events |
(a) Generally. In the event of any change in the outstanding Shares by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of Shares or other corporate exchange, or any distribution to stockholders of Shares other than regular cash dividends, the Committee in its sole discretion and without liability to any person may make such substitution or adjustment, if any, as it deems to be equitable, as to any affected terms of outstanding Awards.
(b) Change in Control. In the event that (i) a Participants employment is actually or constructively terminated during a given Performance Period (the Affected Performance Period) and (ii) a Change in Control shall have occurred within the 365 days immediately preceding the date of such termination, then such Participant shall receive, promptly after the date of such termination, payment pursuant to his or her Award for the Affected Performance Period as if the performance goals for such Performance Period had been achieved at 100%.
11. | Miscellaneous Provisions |
The Company is the sponsor and legal obligor under the Plan and shall make all payments hereunder, other than any payments to be made by any of the Subsidiaries (in which case payment shall be made by such Subsidiary, as appropriate).
The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to ensure the payment of any amounts under the Plan, and the Participants rights to the
12. | Governing Law |
The interpretation, performance and enforcement of this Plan and any disputes or controversies arising with respect to the transactions contemplated herein, shall be governed by the laws of the State of Delaware, irrespective of Delawares choice of law principles that would apply the law of any other jurisdiction.
13. | Effective Date |
The Plan shall be effective as of April 27, 2004.
Exhibit 10.5
Description of Bonus Terms under the Covered Employee Cash Incentive Plan
The 2004 Moodys Corporation Covered Employee Cash Incentive Plan (the Plan) provides for annual performance-based bonuses to the Chief Executive Officer and each of the other named executive officers.
In the first quarter of each year, the Governance and Compensation Committee (the Committee) establishes specific quantitative performance measures for a target level of performance, and assigns different percentage weights to each such performance measure. The Committee also approves a target bonus amount for each executive. Actual performance under the Plan is measured against the target performance level in order to determine the actual payment.
The Committee typically has measured an executives performance based upon the Companys earnings per share and operating income. However, a percentage of the bonus awards of certain executives also may be tied to the financial performance of the Companys subsidiaries or business units.
Under the Plan, award payments are adjusted linearly based on actual performance (determined on weighted average results of the performance measures) relative to the target level of performance. Accordingly, payment of 100% of an executives target bonus is awarded upon attainment of the target level of performance, with a percentage increase or decrease in that target bonus consistent with the percentage increase or decrease relative to the target level of performance.
In determining actual payments under the Plan, the Committee may reduce, but not increase, an executives bonus award based on such objective or subjective criteria as it determines appropriate, notwithstanding that executives attainment of the pre-established, objective performance goals.
The Plan was approved by the Companys stockholders on April 27, 2004, and amounts payable thereunder are intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code.
EXHIBIT 31.1
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, John Rutherfurd, Jr., Chief Executive Officer of Moodys Corporation,
certify that:
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
1.
I have reviewed this quarterly report on Form 10-Q of Moodys
Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4.
The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b)
Evaluated the effectiveness of the registrants disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c)
Disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants
most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over
financial reporting; and
5.
The registrants other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrants auditors and the audit committee of registrants board
of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to record,
process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
control over financial reporting.
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EXHIBIT 31.2
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Jeanne M. Dering, Senior Vice President and Chief Financial Officer of
Moodys Corporation, certify that:
PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
1.
I have reviewed this quarterly report on Form 10-Q of Moodys
Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3.
Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4.
The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant
and have:
a)
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b)
Evaluated the effectiveness of the registrants disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
c)
Disclosed in this report any change in the registrants internal
control over financial reporting that occurred during the registrants
most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over
financial reporting; and
5.
The registrants other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrants auditors and the audit committee of registrants board
of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrants ability to record,
process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
control over financial reporting.
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EXHIBIT 32.1
CERTIFICATION PURSUANT TO
In connection with the Quarterly Report of Moodys Corporation (the Company)
on Form 10-Q for the period ended September 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the Report), I, John
Rutherfurd, Jr., Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that to the best of my knowledge:
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(1)
the Report fully complies with the requirements of section 13(a) of the
Securities Exchange Act of 1934; and
(2)
the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
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EXHIBIT 32.2
CERTIFICATION PURSUANT TO
In connection with the Quarterly Report of Moodys Corporation (the Company)
on Form 10-Q for the period ended September 30, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the Report), I, Jeanne
M. Dering, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge:
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(1)
the Report fully complies with the requirements of section 13(a) of the
Securities Exchange Act of 1934; and
(2)
the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
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