<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 22, 1998
REGISTRATION NO. 1-14037
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10/A-1
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
THE NEW DUN & BRADSTREET CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 13-3998945
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
ONE DIAMOND HILL ROAD
MURRAY HILL, NEW JERSEY 07974
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
------------------------
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(908) 665-5000
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
--------------------------------------- ------------------------------
<S> <C>
Common Stock, par value $0.01 per share New York Stock Exchange
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
================================================================================
<PAGE> 2
ITEM 1. BUSINESS.
The information required by this item is contained under the sections "The
New Dun & Bradstreet Corporation Business", "The New Dun & Bradstreet
Corporation (Accounting Successor to D&B) Management's Discussion and Analysis
of Financial Condition and Results of Operations", "Risk Factors -- Risks
Relating to The New Dun & Bradstreet Corporation and R.H. Donnelley Corporation"
and "-- Risks Relating to The New Dun & Bradstreet Corporation", and
"Forward-Looking Statements" of, and in The Dun & Bradstreet Corporation
Financial Statements in, the Information Statement dated May 22, 1998 included
herewith as Exhibit 99.1 (the "Information Statement") and such sections are
incorporated herein by reference.
ITEM 2. FINANCIAL INFORMATION.
The information required by this item is contained under the sections "The
New Dun & Bradstreet Corporation (Accounting Successor to D&B) Selected
Financial Data", "The New Dun & Bradstreet Corporation (Accounting Successor to
D&B) Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Risk Factors -- Risks Relating to The New Dun & Bradstreet
Corporation and R.H. Donnelley Corporation" and "-- Risks Relating to The New
Dun & Bradstreet Corporation", and "Forward-Looking Statements" of the
Information Statement and such sections are incorporated herein by reference.
ITEM 3. PROPERTIES.
The information required by this item is contained under the section "The
New Dun & Bradstreet Corporation Business -- Properties" of the Information
Statement and such section is incorporated herein by reference.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is contained under the section "The
New Dun & Bradstreet Corporation Security Ownership by Certain Beneficial Owners
and Management" of the Information Statement and such section is incorporated
herein by reference.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The information required by this item is contained under the sections "The
New Dun & Bradstreet Corporation Management and Executive Compensation -- The
New Dun & Bradstreet Corporation Board of Directors" and "-- The New Dun &
Bradstreet Corporation Executive Officers" of the Information Statement and such
sections are incorporated herein by reference.
ITEM 6. EXECUTIVE COMPENSATION.
The information required by this item is contained under the section "The
New Dun & Bradstreet Corporation Management and Executive Compensation" of the
Information Statement and such section is incorporated herein by reference.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is contained under the section
"Relationship Between The New Dun & Bradstreet Corporation and R.H. Donnelley
Corporation After the Distribution" of the Information Statement and such
section is incorporated herein by reference.
ITEM 8. LEGAL PROCEEDINGS.
The information required by this item is contained under the sections "The
New Dun & Bradstreet Corporation Business -- Legal Proceedings", "Risk
Factors -- Risks Relating to The New Dun & Bradstreet Corporation" and
"Forward-Looking Statements" of the Information Statement and such sections are
incorporated herein by reference.
2
<PAGE> 3
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The information required by this item is contained under the sections "The
Distribution -- Listing and Trading of New D&B Common Stock and R.H. Donnelley
Common Stock", "Relationship Between The New Dun & Bradstreet Corporation and
R.H. Donnelley Corporation After the Distribution -- Employee Benefits
Agreement", "Dividend Policies", "The New Dun & Bradstreet Corporation
Management and Executive Compensation" and "Description of The New Dun &
Bradstreet Corporation Capital Stock" of the Information Statement and such
sections are incorporated herein by reference.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
On April 14, 1998, as part of its original incorporation, the Registrant
issued 1,000 shares of its common stock, for a total consideration of $10.00, to
The Dun & Bradstreet Corporation, which is and will be the Registrant's sole
stockholder until the Distribution Date as defined and described in the section
"The Distribution" of the Information Statement, and such section is
incorporated herein by reference. Subsequent to the Distribution, The Dun &
Bradstreet Corporation (which will change its name to R.H. Donnelley
Corporation) will hold no capital stock of the Registrant.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The information required by this item is contained under the section
"Description of The New Dun & Bradstreet Corporation Capital Stock" of the
Information Statement and such section is incorporated herein by reference,
except for the information under the caption "The New Dun & Bradstreet
Corporation Rights Plan", which is not incorporated by reference herein as the
preferred share purchase rights and shares of Series A Junior Participating
Preferred Stock of The New Dun & Bradstreet Corporation described under such
caption will be registered separately on a Registration Statement on Form 8-A.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The information required by this item is contained under the section
"Description of The New Dun & Bradstreet Corporation Capital
Stock -- Indemnification and Limitation of Liability for Directors and Officers"
of the Information Statement and such section is incorporated herein by
reference.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is identified in the section "Index
to Financial Statements -- The Dun & Bradstreet Corporation" and is contained in
the section "Financial Statements -- The Dun & Bradstreet Corporation" of the
Information Statement and such sections are incorporated herein by reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL MATTERS.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
The information required by this item is contained in the "Index to
Financial Statements" on page F-1 of the Information Statement and such
information is incorporated herein by reference.
(b) Exhibits
3
<PAGE> 4
The following documents are filed as exhibits hereto:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
3.1 Form of Restated Certificate of Incorporation of The New Dun
& Bradstreet Corporation*
3.2 Form of Amended and Restated By-laws of The New Dun &
Bradstreet Corporation*
4.1 Specimen Common Stock certificate+
10.1 Form of Distribution Agreement between The Dun & Bradstreet
Corporation and The New Dun & Bradstreet Corporation*
10.2 Form of Tax Allocation Agreement between The Dun &
Bradstreet Corporation and The New Dun & Bradstreet
Corporation*
10.3 Form of Employee Benefits Agreement between The Dun &
Bradstreet Corporation and The New Dun & Bradstreet
Corporation*
10.4 Form of Intellectual Property Agreement between The Dun &
Bradstreet Corporation and The New Dun & Bradstreet
Corporation+
10.5 Form of Shared Transaction Services Agreement between The
Dun & Bradstreet Corporation and The New Dun & Bradstreet
Corporation+
10.6 Form of Data Services Agreement between The Dun & Bradstreet
Corporation and The New Dun & Bradstreet Corporation+
10.7 Form of Transition Services Agreement between The Dun &
Bradstreet Corporation and The New Dun & Bradstreet
Corporation+
10.8 Undertaking of The New Dun & Bradstreet Corporation+
21 List of Subsidiaries of The New Dun & Bradstreet
Corporation+
27 Financial Data Schedule of The New Dun & Bradstreet
Corporation+
99.1 Information Statement dated as of May 22, 1998++
99.2 Chairman's Letter to Stockholders of The Dun & Bradstreet
Corporation++
99.3 Form of Rights Agreement between The New Dun & Bradstreet
Corporation and First Chicago Trust Company of New York, as
Rights Agent+
</TABLE>
- ---------------
* Previously filed
+ To be filed by amendment
++ Filed herewith
4
<PAGE> 5
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE NEW DUN & BRADSTREET CORPORATION
By: /s/ NANCY L. HENRY
------------------------------------
Name: Nancy L. Henry
Title: Senior Vice President and
Chief Legal Counsel
Date: May 22, 1998
5
<PAGE> 1
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT ON FORM 10 RELATING TO CERTAIN OF THESE SECURITIES HAS
BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THIS PRELIMINARY
INFORMATION STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES.
EXHIBIT 99.1
SUBJECT TO COMPLETION OR AMENDMENT, DATED MAY 22, 1998
INFORMATION STATEMENT
------------------------
THE NEW DUN & BRADSTREET CORPORATION
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
------------------------
R.H. DONNELLEY CORPORATION
COMMON STOCK
(PAR VALUE $1.00 PER SHARE)
------------------------
This Information Statement is being furnished in connection with the
distribution (the "Distribution") to holders of common stock, par value $1.00
per share (the "D&B Common Stock"), of The Dun & Bradstreet Corporation ("D&B")
of all of the outstanding shares of common stock, par value $0.01 per share (the
"New D&B Common Stock"), of The New Dun & Bradstreet Corporation ("New D&B"). As
of the Distribution Date (as defined below), New D&B will be comprised of
businesses which accounted for approximately 84% of D&B's revenues and 75% of
D&B's operating income in 1997. See "The New Dun & Bradstreet Corporation
Business".
Shares of New D&B Common Stock will be distributed to holders of D&B Common
Stock of record as of the close of business on , 1998 (the
"Record Date"). Each such holder will receive one share of New D&B Common Stock
for every share of D&B Common Stock held on the Record Date. Certificates
representing shares of New D&B Common Stock will be mailed on June 30, 1998 or
as promptly as practicable thereafter. No consideration will be paid by D&B's
stockholders for shares of New D&B Common Stock. Prior to the date hereof, there
has not been any established trading market for the New D&B Common Stock,
although a "when-issued" market is expected to develop prior to the
Distribution. Application will be made for listing the shares of New D&B Common
Stock on the New York Stock Exchange (the "NYSE") under the symbol "DNB". See
"The Distribution -- Listing and Trading of New D&B Common Stock and R.H.
Donnelley Common Stock".
After the Distribution, D&B's only remaining business will be the R.H.
Donnelley Business (as defined below), and, therefore, in connection with the
Distribution, D&B will change its name to R.H. Donnelley Corporation. See "R.H.
Donnelley Business". The symbol under which shares of D&B Common Stock (which
from and after the Distribution will be known as "R.H. Donnelley Common Stock")
will trade on the NYSE will become "RHD". See "The Distribution -- Listing and
Trading of New D&B Common Stock and R.H. Donnelley Common Stock". In connection
with the Distribution, New D&B will change its name to "The Dun & Bradstreet
Corporation".
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY RECIPIENTS OF THE NEW D&B COMMON STOCK AND
CONTINUING HOLDERS OF R.H. DONNELLEY COMMON STOCK.
------------------------
NO STOCKHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR SOUGHT. WE ARE NOT
ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
Stockholders of D&B with inquiries related to the Distribution should
contact First Chicago Trust Company of New York, the Distribution Agent for the
Distribution, at (800) 519-3111 or Investor Relations for D&B at (908) 665-5030.
The date of this Information Statement is , 1998.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION................ 1
INFORMATION STATEMENT SUMMARY............................... 3
FORWARD-LOOKING STATEMENTS.................................. 11
RISK FACTORS................................................ 12
THE DISTRIBUTION............................................ 19
RELATIONSHIP BETWEEN THE NEW DUN & BRADSTREET CORPORATION
AND R.H. DONNELLEY CORPORATION AFTER THE DISTRIBUTION..... 23
DIVIDEND POLICIES........................................... 28
THE NEW DUN & BRADSTREET CORPORATION (ACCOUNTING SUCCESSOR
TO D&B) CAPITALIZATION.................................... 29
THE NEW DUN & BRADSTREET CORPORATION (ACCOUNTING SUCCESSOR
TO D&B) SELECTED FINANCIAL DATA........................... 30
THE NEW DUN & BRADSTREET CORPORATION (ACCOUNTING SUCCESSOR
TO D&B) CONSOLIDATED PRO FORMA CONDENSED FINANCIAL
STATEMENTS................................................ 32
THE NEW DUN & BRADSTREET CORPORATION (ACCOUNTING SUCCESSOR
TO D&B) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 36
THE NEW DUN & BRADSTREET CORPORATION BUSINESS............... 44
THE NEW DUN & BRADSTREET CORPORATION MANAGEMENT AND
EXECUTIVE COMPENSATION.................................... 53
THE NEW DUN & BRADSTREET CORPORATION SECURITY OWNERSHIP BY
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................. 61
DESCRIPTION OF THE NEW DUN & BRADSTREET CORPORATION CAPITAL
STOCK..................................................... 64
R.H. DONNELLEY CAPITALIZATION............................... 71
R.H. DONNELLEY SELECTED FINANCIAL DATA...................... 72
R.H. DONNELLEY PRO FORMA CONDENSED FINANCIAL STATEMENTS..... 74
R.H. DONNELLEY MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 79
R.H. DONNELLEY BUSINESS..................................... 88
R.H. DONNELLEY MANAGEMENT AND EXECUTIVE COMPENSATION........ 98
R.H. DONNELLEY SECURITY OWNERSHIP BY CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..................................... 104
AVAILABLE INFORMATION....................................... 105
REPORTS OF THE NEW DUN & BRADSTREET CORPORATION............. 105
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
<PAGE> 3
QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION
Q1: WHAT IS THE DISTRIBUTION?
A: The Distribution is the method by which The Dun & Bradstreet Corporation
will be separated into two publicly traded companies: (i) The New Dun &
Bradstreet Corporation, which will consist of two leading global
information companies -- Dun & Bradstreet and Moody's Investors Service and
(ii) R.H. Donnelley Corporation, a leading provider of yellow pages and
directory publishing services. Pursuant to the Distribution, D&B will
distribute to its stockholders in a tax-free dividend one share of New D&B
Common Stock for each share of D&B Common Stock held. Immediately after the
Distribution, D&B's stockholders will still own all of D&B's current
businesses, but they will own them through their investments in The New Dun
& Bradstreet Corporation and R.H. Donnelly Corporation.
Q2: WHAT IS THE NEW DUN & BRADSTREET CORPORATION?
A: The New Dun & Bradstreet Corporation is a new company the businesses of
which will include Dun & Bradstreet, a leading provider of
business-to-business credit, marketing and purchasing information and
receivables management services, and Moody's Investors Service, a
preeminent debt-rating company and publisher of financial information for
investors. In connection with the Distribution, The New Dun & Bradstreet
Corporation will change its name to "The Dun & Bradstreet Corporation".
Q3: WHAT IS R.H. DONNELLEY CORPORATION?
A: R.H. Donnelley, currently a subsidiary of D&B, provides sales, marketing
and publishing services for yellow pages and other directory products and
is the largest independent marketer of yellow pages advertising in the
United States. Since after the Distribution D&B's only business will be the
R.H. Donnelley business, in connection with the Distribution, D&B will
change its name to "R.H. Donnelley Corporation".
Q4: WHY IS D&B SEPARATING ITS BUSINESSES?
A: D&B believes that separating its businesses in the Distribution will better
position both New D&B and R.H. Donnelley to achieve their strategic and
financial objectives, benefitting both customers and shareholders of the
companies. D&B believes the separation will enhance management focus on the
businesses, allowing each company to allocate resources and set
compensation policies to meet its own strategic requirements. D&B also
believes the separation will provide New D&B with additional financial
flexibility to pursue growth opportunities and will lead to better investor
understanding of the different businesses.
Q5: HAS D&B DONE THIS BEFORE?
A: D&B successfully effected a spin-off of Cognizant Corporation and ACNielsen
Corporation in November 1996. Since that spin-off, D&B has made significant
progress in pursuing its strategic goals and objectives, and the proposed
spin-off is expected to continue that progress.
Q6: WHY IS THIS TRANSACTION STRUCTURED AS A DISTRIBUTION?
A: The Distribution is the most tax-efficient means of separating D&B's
businesses. D&B has received a ruling from the Internal Revenue Service
that for federal income tax purposes the Distribution of the shares of New
D&B Common Stock to D&B stockholders will be tax-free to D&B and its
stockholders.
Q7: WHAT WILL D&B STOCKHOLDERS RECEIVE IN THE DISTRIBUTION?
A: In the Distribution, D&B stockholders will receive one share of New D&B
Common Stock, and an associated Right under New D&B's stockholder rights
plan, for each share of D&B Common Stock they own. Immediately after the
Distribution, D&B's stockholders will still own their shares of D&B
1
<PAGE> 4
Common Stock and the same stockholders will still own all of D&B's
businesses, but they will own them as two separate investments rather than
as a single investment. After the Distribution, the certificates
representing the "old" D&B Common Stock will represent such stockholders'
interests in the R.H. Donnelley business and the certificates representing
the New D&B Common Stock that stockholders receive in the Distribution will
represent their interest in the New D&B businesses.
Q8: WHAT DOES A D&B STOCKHOLDER NEED TO DO NOW?
A: D&B stockholders do not need to take any action. The approval of the D&B
stockholders is not required to effect the Distribution and D&B is not
seeking a proxy from any stockholders. D&B STOCKHOLDERS SHOULD NOT SEND IN
THEIR D&B SHARE CERTIFICATES. D&B stockholders will automatically receive
their shares of New D&B Common Stock when the Distribution is effected.
Q9: WHERE CAN D&B STOCKHOLDERS GET MORE INFORMATION?
A: D&B stockholders with additional questions related to the Distribution
should contact First Chicago Trust Company of New York, the Distribution
Agent for the Distribution, at Mail Suite 4694, P.O. Box 2536, Jersey City,
NJ 06303-2536, telephone number: (800) 519-3111. Questions may also be
directed to Investor Relations for D&B at One Diamond Hill Road, Murray
Hill, NJ 07974, telephone number: (908) 665-5030.
2
<PAGE> 5
INFORMATION STATEMENT SUMMARY
The following is a summary of certain information contained in this
Information Statement. This summary is included for convenience only and should
not be considered complete. This summary is qualified in its entirety by the
more detailed information and financial statements contained elsewhere in this
Information Statement. In this Information Statement, unless the context
otherwise requires, "D&B" refers to The Dun & Bradstreet Corporation prior to
the Distribution Date, and "R.H. Donnelley" refers to D&B's subsidiary with that
name prior to the Distribution Date and to D&B (which will change its name to
"R.H. Donnelley Corporation") on and after the Distribution Date. In this
Information Statement, unless the context otherwise requires, "New D&B" refers
to The New Dun & Bradstreet Corporation, which is the company whose shares will
be distributed in the Distribution and which will change its name to "The Dun &
Bradstreet Corporation" in connection with the Distribution. Certain capitalized
terms used in this summary are defined elsewhere in this Information Statement.
BUSINESSES OF THE NEW DUN & BRADSTREET CORPORATION AND
R.H. DONNELLEY CORPORATION
The New Dun & Bradstreet
Corporation.............. The New Dun & Bradstreet Corporation is a newly
created Delaware corporation, the businesses of
which will consist of two leading global
information companies -- Dun & Bradstreet, Inc.
("D&B Inc."), the leading provider of commercial
credit, business marketing and purchasing
information and receivables management services;
and Moody's Investors Service, Inc. ("Moody's"), a
leading provider of credit ratings and analysis
covering debt instruments and other obligations
issued in global capital markets and a provider of
business and financial information for investment
research and reference uses (collectively, the "New
D&B Business").
Volney Taylor is currently Chairman and Chief
Executive Officer of D&B and Chairman and Chief
Executive Officer of New D&B. Mr. Taylor will
resign from his positions at D&B effective upon the
Distribution. At the time of the Distribution, the
Board of Directors of New D&B will be composed of
the persons who are serving as directors of D&B
immediately prior to the Distribution Date, and
such persons, other than those named under
"Relationship Between The New Dun & Bradstreet
Corporation and R.H. Donnelley Corporation After
the Distribution -- Overlapping Directors", will
resign as directors of D&B effective upon the
Distribution. See "The New Dun & Bradstreet
Corporation Management and Executive
Compensation -- The New Dun & Bradstreet
Corporation Board of Directors". In addition to Mr.
Taylor, the other executive officers of New D&B at
the time of the Distribution will be the persons
who are serving as executive officers of D&B
immediately prior to the Distribution (other than
Frank R. Noonan, as described below), and such
persons will resign from their positions at D&B
effective upon the Distribution. See "The New Dun &
Bradstreet Corporation Management and Executive
Compensation -- The New Dun & Bradstreet
Corporation Executive Officers".
R.H. Donnelley
Corporation................ As a result of the Distribution, the yellow pages
and other directory sales, marketing and publishing
services business (the "R.H. Donnelley Business")
currently conducted by D&B's subsidiary, R.H.
Donnelley,
3
<PAGE> 6
will remain with D&B. Therefore, in connection with
the Distribution, D&B will change its name to "R.H.
Donnelley Corporation".
Frank R. Noonan is currently Senior Vice President
of D&B and President of R.H. Donnelley and will be
the President and Chief Executive Officer and a
director of R.H. Donnelley after the Distribution.
Immediately after the Distribution, the other
directors of R.H. Donnelley will include certain
persons who are currently directors of D&B and
certain persons who are not currently directors of
D&B. See "Relationship Between The New Dun &
Bradstreet Corporation and R.H. Donnelley
Corporation After the Distribution -- Overlapping
Directors" and "R.H. Donnelley Management and
Executive Compensation -- R.H. Donnelley
Corporation Board of Directors". In addition to Mr.
Noonan, the other executive officers of R.H.
Donnelley Corporation immediately after the
Distribution will be drawn from the current
management of D&B and R.H. Donnelley. See "R.H.
Donnelley Management and Executive
Compensation -- R.H. Donnelley Corporation
Executive Officers".
THE DISTRIBUTION
Form of Transaction; Basis
of Presentation............ The Distribution is the method by which D&B will be
separated into two publicly traded companies, The
New Dun & Bradstreet Corporation and R.H. Donnelley
Corporation. In the Distribution, D&B will
distribute to its stockholders shares of New D&B
Common Stock, which will represent a continuing
interest in D&B's businesses to be conducted by New
D&B. After the Distribution, D&B's only business
will be the R.H. Donnelley Business, and the shares
of D&B Common Stock held by D&B stockholders will
represent a continuing ownership interest only in
that business. In connection with the Distribution,
(i) D&B will change its name to "R.H. Donnelley
Corporation" (and therefore from and after the
Distribution, D&B Common Stock will be "R.H.
Donnelley Common Stock"), and (ii) New D&B will
change its name to "The Dun & Bradstreet
Corporation".
Stockholders should note that notwithstanding the
legal form of the Distribution described above
whereby D&B expects to spin off New D&B, because of
the relative significance of the New D&B Business
to D&B, New D&B will be treated as the "accounting
successor" to D&B for financial reporting purposes.
Therefore, the historical financial information for
New D&B included herein is that of D&B with the
R.H. Donnelley Business treated as a discontinued
operation.
The historical financial information for R.H.
Donnelley has been prepared on a stand-alone basis
as described in Note 1 to R.H. Donnelley
Corporation Financial Statements included elsewhere
in this Information Statement. Such historical
financial information includes allocations of
certain D&B corporate headquarters assets,
liabilities and expenses relating to R.H.
Donnelley.
Shares to be Distributed... The Distribution will be made to holders of record
as of the close of business on the Record Date of
issued and outstanding shares of D&B Common Stock.
Each holder of D&B Common Stock on the Record Date
will receive as a dividend one share of New D&B
Common Stock
4
<PAGE> 7
for every share of D&B Common Stock held. Based on
the shares of D&B Common Stock
outstanding as of , 1998, the
Distribution would consist of shares of
New D&B Common Stock.
The Board of Directors of New D&B expects to adopt
a stockholder rights plan. Certificates evidencing
shares of New D&B Common Stock issued in the
Distribution will therefore represent the same
number of New D&B Rights (as defined below) issued
under the New D&B Rights Plan. See "Description of
The New Dun & Bradstreet Corporation Capital
Stock -- The New Dun & Bradstreet Corporation
Rights Plan". Unless the context otherwise
requires, references herein to the New D&B Common
Stock include the related New D&B Rights.
D&B stockholders will not have to make any payment
or surrender or exchange certificates representing
shares of D&B Common Stock in order to receive
their pro rata share of the Distribution. NO VOTE
OF HOLDERS OF D&B COMMON STOCK IS REQUIRED OR
SOUGHT IN CONNECTION WITH THE DISTRIBUTION.
Record Date................ The Record Date is , 1998. In order to
be entitled to receive shares of New D&B Common
Stock in the Distribution, holders of shares of D&B
Common Stock must be stockholders as of the close
of business on the Record Date.
Distribution Date.......... The "Distribution Date" is presently expected to be
on or about June 30, 1998.
Distribution Agent......... First Chicago Trust Company of New York will be the
Distribution Agent (the "Distribution Agent") for
the Distribution.
Federal Income Tax
Consequences of the
Distribution............. D&B has received a ruling from the Internal Revenue
Service to the effect that the Distribution will be
tax-free for Federal income tax purposes. D&B
stockholders will apportion their tax basis in D&B
Common Stock held immediately before the
Distribution among such D&B Common Stock (which
will represent each such stockholder's interest in
R.H. Donnelley after the Distribution), and New D&B
Common Stock received in the Distribution, based on
the relative fair market values of the D&B Common
Stock and the New D&B Common Stock as of the
Distribution Date. D&B will provide appropriate
information to each holder of record of D&B Common
Stock as of the close of business on the Record
Date concerning the basis allocation. See "The
Distribution -- Federal Income Tax Consequences of
the Distribution".
Stock Exchange Listing and
Trading.................. Prior to the date hereof, there has not been any
established trading market for the New D&B Common
Stock. Application will be made for listing the
shares of New D&B Common Stock on the NYSE under
the symbol "DNB", and trading is expected to
commence on a "when-issued" basis prior to the
Distribution Date. On the first NYSE trading day
following the Distribution Date, "when-issued"
trading (i.e. a trade which is completed only if
the subject security is actually issued) in respect
of the New D&B Common Stock will end and
"regular-way" trading (i.e. normal NYSE trading)
will begin. See "The Distribution --
5
<PAGE> 8
Listing and Trading of New D&B Common Stock and
R.H. Donnelley Common Stock".
R.H. Donnelley Common Stock (i.e. the "old" D&B
Common Stock) will continue to trade on the NYSE,
but the symbol under which it trades will change
from "DNB" to "RHD". However, because of the
significant changes that will take place at D&B as
a result of the Distribution, the trading market
for R.H. Donnelley Common Stock after the
Distribution may be significantly different from
that for D&B Common Stock prior to the
Distribution. See "The Distribution -- Listing and
Trading of New D&B Common Stock and R.H. Donnelley
Common Stock".
Relationship Between The
New Dun & Bradstreet
Corporation and R.H.
Donnelley Corporation
After the Distribution... After the Distribution, neither New D&B nor R.H.
Donnelley will have any ownership interest in the
other and each of New D&B and R.H. Donnelley will
be an independent public company. New D&B and D&B
will enter into certain agreements governing the
relationships between New D&B and R.H. Donnelley
subsequent to the Distribution and providing for
the allocation of tax, employee benefits and
certain other liabilities and obligations arising
from periods prior to the Distribution, including
contingent liabilities relating to certain
litigation. In addition, there will be individuals
on the Boards of Directors of New D&B and R.H.
Donnelley who will also serve on the Board of
Directors of the other company. See "Relationship
Between The New Dun & Bradstreet Corporation and
R.H. Donnelley Corporation After the Distribution".
Certain Indebtedness and
Minority-Interest
Financing................ In connection with the Distribution, R.H. Donnelley
will borrow approximately $350 million under a new
bank credit facility and issue $150 million of
senior subordinated notes, all of which will be
guaranteed by D&B. A portion of the proceeds of
this indebtedness will be used to repay existing
indebtedness of D&B. This $500 million of debt will
be an obligation of R.H. Donnelley after the
Distribution. See "Risk Factors -- Risks Relating
to R.H. Donnelley Corporation -- Substantial
Indebtedness and Negative Shareholders' Equity" and
"-- Restrictions Imposed by the R.H. Donnelley
Credit Facility and the R.H. Donnelley Indenture"
and "The Distribution -- Certain Indebtedness and
Minority-Interest Financing". New D&B will retain
the obligation for approximately $300 million of
existing minority interest financing.
Dividend Policies.......... The payment and level of cash dividends by New D&B
and R.H. Donnelley after the Distribution will be
subject to the discretion of the New D&B Board of
Directors and the R.H. Donnelley Board of
Directors, respectively. It is anticipated that New
D&B will initially pay a quarterly dividend of
$0.185 per share and that R.H. Donnelley will
initially pay a quarterly dividend of $0.035 per
share. However, dividend decisions will be based
on, and affected by, a number of factors, including
the respective operating results and financial
requirements of New D&B and R.H. Donnelley on a
stand-alone basis as well as applicable legal and
contractual restrictions. See "Dividend Policies".
6
<PAGE> 9
Antitakeover Provisions.... The Restated Certificate of Incorporation and
Amended and Restated By-laws of New D&B are
expected to contain provisions that may have the
effect of discouraging an acquisition of control of
New D&B not approved by its Board of Directors.
Such provisions may also have the effect of
discouraging third parties from making proposals
involving an acquisition or change of control of
New D&B, although such proposals, if made, might be
considered desirable by a majority of the
stockholders of New D&B. Such provisions could
further have the effect of making it more difficult
for third parties to cause the replacement of the
Board of Directors of New D&B. These provisions
have been designed to enable New D&B to develop its
businesses and foster its long-term growth without
disruptions caused by the threat of a takeover not
deemed by its Board of Directors to be in the best
interests of New D&B and its stockholders. Certain
provisions of the Distribution Agreement to be
entered into between D&B and New D&B may also have
the effect of discouraging third parties from
making proposals involving an acquisition or change
of control of New D&B. See "Relationship Between
The New Dun & Bradstreet Corporation and R.H.
Donnelley Corporation After the
Distribution -- Distribution Agreement".
New D&B expects to adopt a stockholder rights plan.
The stockholder rights plan is designed to protect
stockholders in the event of an unsolicited offer
and other takeover tactics which, in the opinion of
the New D&B Board of Directors, could impair its
ability to represent stockholder interests. The
provisions of the stockholder rights plan may
render an unsolicited takeover of New D&B more
difficult or less likely to occur or might prevent
such a takeover. See "Description of The New Dun &
Bradstreet Corporation Capital Stock -- The New Dun
& Bradstreet Corporation Rights Plan".
New D&B will be subject to provisions of Delaware
corporate law which may restrict certain business
combination transactions. See "Description of The
New Dun & Bradstreet Corporation Capital
Stock -- Delaware General Corporation Law".
See also "Description of The New Dun & Bradstreet
Corporation Capital Stock -- Provisions of The New
Dun & Bradstreet Corporation Restated Certificate
of Incorporation and Amended and Restated By-laws
Affecting Change in Control".
Risk Factors............... Stockholders should carefully consider the matters
discussed under the section entitled "Risk Factors"
in this Information Statement.
* * *
This Information Statement is being furnished by D&B solely to provide
information to stockholders of D&B who will receive New D&B Common Stock in the
Distribution and who will own R.H. Donnelley Common Stock immediately after the
Distribution. It is not, and is not to be construed as, an inducement or
encouragement to buy or sell any securities of D&B, New D&B or R.H. Donnelley.
The information contained in this Information Statement is believed by D&B and
New D&B to be accurate with respect to D&B, New D&B and R.H. Donnelley as of the
date set forth on the cover. Changes may occur after that date, and none of D&B,
New D&B or R.H. Donnelley will update the information except in the normal
course of their respective public disclosure practices.
7
<PAGE> 10
THE NEW DUN & BRADSTREET CORPORATION
(ACCOUNTING SUCCESSOR TO D&B)
SUMMARY FINANCIAL DATA
The Summary Financial Data of New D&B are derived from the audited and
unaudited interim financial statements of D&B, which reflect the R.H. Donnelley
Business as a discontinued operation. The historical financial statements of D&B
as of December 31, 1996 and 1997 and for each of the years in the three year
period ended December 31, 1997 and as of March 31, 1998 and for the three months
ended March 31, 1997 and 1998 are contained elsewhere in this Information
Statement. The information set forth below should be read in conjunction with,
and is qualified in its entirety by, the information under "The New Dun &
Bradstreet Corporation (Accounting Successor to D&B) Selected Financial Data",
"The New Dun & Bradstreet Corporation (Accounting Successor to D&B) Consolidated
Pro Forma Condensed Financial Statements" and "The New Dun & Bradstreet
Corporation (Accounting Successor to D&B) Management's Discussion and Analysis
of Financial Condition and Results of Operations" and in D&B's Consolidated
Financial Statements and Notes thereto included elsewhere in this Information
Statement.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------- ----------------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1)
------------------------------ ------------ ------------------- ------------
1995 1996 1997 1997 1997 1998 1998
-------- -------- -------- ------------ -------- -------- ------------
(AMOUNTS IN MILLIONS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating Revenues........... $1,734.5 $1,781.7 $1,811.0 $1,811.0 $ 436.4 $ 471.1 $ 471.1
Income (Loss) from Continuing
Operations(2).............. $ 94.9 $ (116.7) $ 219.0 $ 238.4 $ 36.5 $ 51.5 $ 54.9
EARNINGS (LOSS) PER SHARE OF
COMMON STOCK FROM CONTINUING
OPERATIONS:
Basic........................ $ 0.56 $ (0.69) $ 1.28 $ 1.40 $ 0.21 $ 0.30 $ 0.32
Diluted...................... $ 0.55 $ (0.69) $ 1.27 $ 1.38 $ 0.21 $ 0.30 $ 0.32
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING:
Basic........................ 169.5 170.0 170.8 170.8 171.2 171.2 171.2
Diluted...................... 171.6 170.0(4) 172.6 172.6 172.7 174.1 174.1
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------------ -------------------------
HISTORICAL HISTORICAL PRO FORMA(1)
------------------------------ ---------- ------------
1995 1996 1997 1998 1998
-------- -------- -------- ---------- ------------
(AMOUNTS IN MILLIONS) (AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Assets(3)................. $3,628.5 $2,209.0 $2,086.0 $2,087.9 $1,977.0
Shareholders' Equity............ $1,182.5 $ (431.7) $ (490.2) $ (446.2) $ (228.7)
</TABLE>
- ---------------
(1) See "The New Dun & Bradstreet Corporation (Accounting Successor to D&B)
Consolidated Pro Forma Condensed Financial Statements".
(2) 1995 included a fourth-quarter non-recurring pre-tax charge of $188.5
million partially offset by gains of $90.0 million and $28.0 million for the
sale of Interactive Data Corporation and warrants received in connection
with the sale of Donnelley Marketing, respectively. 1996 included one-time
pre-tax charges of $161.2 million for reorganization costs and the loss on
the sale of American Credit Indemnity of $68.2 million.
(3) Includes net assets of discontinued operations of $1,652.2 million, $430.6
million, $296.5 million and $282.5 million, as of December 31, 1995, 1996
and 1997 and March 31, 1998, respectively. 1995 net assets of discontinued
operations include the net assets of Cognizant Corporation and ACNielsen
Corporation of $1,207.3 million.
(4) The exercise of potentially dilutive shares has not been assumed for the
year ended December 31, 1996, since the result is antidilutive.
8
<PAGE> 11
R.H. DONNELLEY
SUMMARY FINANCIAL DATA
The Summary Financial Data of R.H. Donnelley as of December 31, 1996 and
1997, and for each of the years in the three-year period ended December 31,
1997, are derived from the audited financial statements of R.H. Donnelley
included elsewhere in this Information Statement. R.H. Donnelley's audited
financial statements included elsewhere in this Information Statement are
presented as if R.H. Donnelley were a stand-alone entity for all periods
presented. The Summary Financial Data of R.H. Donnelley as of December 31, 1995
and March 31, 1998, and for the three months ended March 31, 1997 and 1998, are
derived from the unaudited financial statements of R.H. Donnelley, and, in the
opinion of management, include all necessary adjustments for a fair presentation
of such data in conformity with generally accepted accounting principles. The
financial data included herein may not necessarily reflect the results of
operations and financial position of R.H. Donnelley in the future or what they
would have been had it been a separate entity. The information set forth below
should be read in conjunction with, and is qualified in its entirety by, the
R.H. Donnelley information under "R.H. Donnelley -- Capitalization", "R.H.
Donnelley -- Selected Financial Data", "R.H. Donnelley -- Pro Forma Condensed
Financial Statements", "R.H. Donnelley -- Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the R.H. Donnelley
Financial Statements and Notes thereto included elsewhere in this Information
Statement.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, FOR THE THREE MONTHS ENDED MARCH 31,
--------------------------------------------------- ----------------------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1)
------------------------------------ ------------ ------------------------- ------------
1995 1996 1997 1997 1997 1998 1998
---------- ---------- ---------- ------------ ---------- ---------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues(2)........ $ 312,940 $ 270,029 $ 239,865 $ 239,865 $ 20,200 $ 24,344 $ 24,344
Income from
Partnerships and
Related Fees..... $ 137,180 $ 132,945 $ 130,171 $ 130,171 $ 5,442 $ 25,642 $ 25,642
Operating
Income(2)........ $ 182,795 $ 167,442 $ 134,739 $ 134,739 $ (2,290) $ 20,246 $ 20,246
Net Income......... $ 108,397 $ 78,085 $ 84,905 $ 60,643 $ (1,374) $ 12,148 $ 6,083
PRO FORMA EARNINGS
PER SHARE DATA(3):
Basic.............. $ 0.64 $ 0.46 $ 0.50 $ 0.36 $ (0.01) $ 0.07 $ 0.04
Diluted............ $ 0.64 $ 0.46 $ 0.50 $ 0.35 $ (0.01) $ 0.07 $ 0.04
SHARES USED IN
COMPUTING PRO FORMA
EARNINGS PER
SHARE(3):
Basic.............. 169,522 170,017 170,765 170,765 171,189 171,153 171,153
Diluted............ 169,883 170,289 171,065 171,065 171,189(5) 172,396 172,396
OTHER FINANCIAL DATA:
Gross Advertising
Sales(2)(4)...... $1,145,944 $1,115,560 $1,067,242 $1,067,242 $ 68,136 $ 147,226 $ 147,226
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
------------------------------------ -------------------------
HISTORICAL HISTORICAL PRO FORMA(1)
------------------------------------ ---------- ------------
1995 1996 1997 1998 1998
---------- ---------- ---------- ---------- ------------
(AMOUNTS IN THOUSANDS) (AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total Asset(2).................... $ 520,214 $ 502,193 $ 382,286 $ 359,174 $ 369,674
Long Term Debt.................... $ -- $ -- $ -- $ -- $ 500,000
Shareholder's Equity (Deficit).... $ 386,565 $ 379,184 $ 258,675 $ 245,887 $ (243,613)
</TABLE>
9
<PAGE> 12
- ---------------
(1) See "R.H. Donnelley Pro Forma Condensed Financial Statements".
(2) The Summary Financial Data above include amounts related to businesses that
have been sold and will not be included in R.H. Donnelley's results in
future periods. The P-West (as hereinafter defined) business was sold in May
1996 and the P-East (as hereinafter defined) business was sold in December
1997. The above Summary Financial Data contain the following amounts
applicable to those businesses.
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS)
AS OF AND FOR
AS OF AND FOR THE THE
YEAR ENDED DECEMBER 31, THREE MONTHS
-------------------------------- ENDED
1995 1996 1997 MARCH 31, 1997
-------- -------- -------- -----------------
<S> <C> <C> <C> <C>
Revenues........................... $140,104 $ 97,263 $ 77,979 $ 635
Operating Income................... $ 22,250 $ 18,587 $ 10,969 $ (914)
Total Assets....................... $131,751 $ 80,962 $ -- $68,660
Gross Advertising Sales............ $133,389 $ 89,939 $ 73,753 $ 1,513
</TABLE>
(3) The computation of pro forma basic earnings per share for the periods
presented is based upon the historical weighted average number of shares of
D&B Common Stock outstanding, reflecting the one-for-one distribution ratio.
The computation of pro forma diluted earnings per share is calculated by
dividing net income by the sum of D&B's historical weighted average common
shares outstanding and potentially dilutive R.H. Donnelley common shares.
Potentially dilutive common shares are calculated in accordance with the
treasury stock method, which assumes that proceeds from the exercise of all
R.H. Donnelley employees' options are used to repurchase common stock at
market value. The amount of shares remaining after proceeds are exhausted
represent the potentially dilutive effect of the options.
(4) The unaudited gross advertising sales is the billing value of advertisements
sold by R.H. Donnelley and DonTech.
(5) The exercise of potentially dilutive shares has not been assumed for the
three months ended March 31, 1997, since the result is antidilutive.
10
<PAGE> 13
FORWARD-LOOKING STATEMENTS
This Information Statement and other materials filed or to be filed by D&B
and New D&B with the Securities and Exchange Commission (the "SEC"), as well as
information included in oral statements or other written statements made or to
be made by D&B and New D&B, contain statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements appear in a number of places in this document and
include, but are not limited to, all statements relating to plans for future
growth and other business development activities as well as capital
expenditures, financing sources and the effects of regulation and competition,
the terms of the Distribution and all other statements regarding the intent,
plans, belief or expectations of the parties or their directors or officers.
Stockholders are cautioned that such forward-looking statements are not
assurances of future performance or events and involve risks and uncertainties
that could cause actual results and developments to differ materially from those
covered in such forward-looking statements. These risks and uncertainties
include, but are not limited to, the complexity and uncertainty regarding the
development of new high-technology products; loss of market share through
competition; introduction of competing products or technologies by other
companies; pricing pressures from competitors and/or customers; changes in the
business information, risk management and yellow pages industries and markets;
the inability to protect proprietary information and technology or to obtain
necessary licenses on commercially reasonable terms; decreases in the volume of
debt securities issued in global capital markets; the loss of key employees to
investment or commercial banks, or elsewhere; the inability to timely and
cost-effectively resolve any problems associated with the Year 2000 issue;
leverage and debt service (including sensitivity to fluctuations in interest
rates); compliance with covenants in loan agreements; the inability to obtain
future financing on satisfactory terms; and the final allocation of assets and
liabilities in connection with the Distribution. Consequently, all the
forward-looking statements contained in this Information Statement are qualified
by the information contained or incorporated herein, including, but not limited
to, the information contained under this heading and in "Risk Factors", "The
Distribution", "The New Dun & Bradstreet Corporation (Accounting Successor to
D&B) Capitalization", "The New Dun & Bradstreet Corporation (Accounting
Successor to D&B) Management's Discussion and Analysis of Financial Condition
and Results of Operations", "The New Dun & Bradstreet Corporation Business",
"R.H. Donnelley Capitalization", "R.H. Donnelley Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "R.H. Donnelley
Business". Neither D&B nor New D&B has any obligation to publicly release any
revision to any forward-looking statement contained or incorporated herein to
reflect any future events or occurrences.
11
<PAGE> 14
RISK FACTORS
RISKS RELATING TO THE NEW DUN & BRADSTREET CORPORATION
AND R.H. DONNELLEY CORPORATION
Potential Taxation
D&B has received a ruling from the Internal Revenue Service to the effect
that, among other things, the Distribution will qualify as a tax-free spin-off
under Section 355 of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code").
The Internal Revenue Service ruling is based on certain factual
representations made by D&B. If such factual representations were incorrect in a
material respect, such ruling could become invalid. D&B is not aware of any
facts or circumstances which would cause such representations to be incorrect in
a material respect. Each of D&B and New D&B will agree in the Distribution
Agreement to certain restrictions on its future actions to provide further
assurances that Section 355 of the Internal Revenue Code will apply to the
Distribution. See "Relationship Between The New Dun & Bradstreet Corporation and
R.H. Donnelley Corporation After the Distribution".
If the Distribution were not to qualify under Section 355 of the Internal
Revenue Code, then, in general, a corporate tax (which would be very
substantial) would be payable by the consolidated group, of which D&B is the
common parent. In addition, under the consolidated return rules, each member of
the consolidated group would be jointly and severally liable for such tax
liability. If the Distribution occurred and it were not to qualify under Section
355 of the Internal Revenue Code, the resulting tax liability would have a
material adverse effect on the financial position, results of operations and
cash flows of each of New D&B and R.H. Donnelley. D&B estimates that the
aggregate shared tax liability in this regard of New D&B and R.H. Donnelley
would be in the range of approximately $1.5 to $2.0 billion. See "The
Distribution -- Federal Income Tax Consequences of the Distribution".
Moreover, if the Distribution were not to qualify under Section 355 of the
Internal Revenue Code, each D&B stockholder receiving shares of New D&B Common
Stock in the Distribution would be treated as if such stockholder had received a
taxable distribution in an amount equal to the fair market value of the New D&B
Common Stock received. See "The Distribution -- Federal Income Tax Consequences
of the Distribution".
Year 2000
Many existing computer systems and software applications may not properly
record or interpret years after the year 1999. Each of New D&B and R.H.
Donnelley relies on computer hardware, software and related technology, together
with data generated therefrom, in the operation of their respective businesses.
Such technology and data are used in creating and delivering the respective
products and services of New D&B and R.H. Donnelley. There can be no assurance
that New D&B or R.H. Donnelley will be able to timely or cost-effectively
complete Year 2000 remediation programs, that such programs will be successful
or that the failure by either company or by third parties outside of their
control with whom they transact business to adequately address their respective
Year 2000 issues will not have a material adverse effect on New D&B or R.H.
Donnelley. See "The New Dun & Bradstreet Corporation (Accounting Successor to
D&B) Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "R.H. Donnelley Management's Discussion and Analysis of
Financial Condition and Results of Operations".
RISKS RELATING TO THE NEW DUN & BRADSTREET CORPORATION
Absence of Prior Trading Market for the New D&B Common Stock
Prior to the date hereof, there has not been any established trading market
for New D&B Common Stock. Application will be made to list the shares of New D&B
Common Stock on the NYSE under the symbol "DNB", and trading is expected to
commence on a "when-issued" basis (i.e. a trade which is
12
<PAGE> 15
completed only if the subject security is actually issued) prior to the
Distribution. See "The Distribution -- Listing and Trading of New D&B Common
Stock and R.H. Donnelley Common Stock".
Changes in Trading Prices of New D&B Common Stock
There can be no assurance as to the prices at which the New D&B Common
Stock will trade before, on or after the Distribution Date. Until the New D&B
Common Stock is fully distributed and an orderly market develops in the New D&B
Common Stock, the price at which such stock trades may fluctuate significantly
and may be lower or higher than the price that would be expected for a fully
distributed issue. Prices for the New D&B Common Stock will be determined in the
marketplace and may be influenced by many factors, including (i) the depth and
liquidity of the market for New D&B Common Stock, (ii) developments affecting
the businesses of New D&B generally and the impact of those factors referred to
below in particular, (iii) investor perception of New D&B and (iv) general
economic and market conditions.
Risk of Interest Rate and Exchange Rate Fluctuations
New D&B expects to fund its operations primarily through its commercial
paper program and other short-term bank lines of credit. Since New D&B will
operate in more than 38 countries, it will be exposed to market risk from
changes in interest rates and foreign exchange rates which could affect its
results of operations and financial condition. In order to reduce the risk from
fluctuations in interest rate and foreign currencies, New D&B may enter into
interest rate swap agreements and/or forward foreign exchange contracts. These
derivative financial instruments are viewed by New D&B as risk management tools
that are entered into for hedging purposes only; New D&B does not intend to use
derivative financial instruments for trading or speculative purposes. However,
there can be no assurance that New D&B will attempt to or be able to hedge all
of its interest rate and foreign exchange exposure at a satisfactory cost or
that such rate fluctuations will not adversely affect the results of operations
and financial condition of New D&B.
Technological Adaptation and Competition
New D&B will compete in businesses which require sophisticated information
systems, software and other technology. The types of systems which New D&B's
businesses require can be expected to be subject to refinements as such systems
and underlying technologies are upgraded and advanced, and there can be no
guarantee that as various systems and technologies become outdated, New D&B will
be able to replace them, to replace them as quickly as New D&B's competition or
to develop and market new and better products and services in the future on a
cost-effective basis.
Litigation
On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in
the United States District Court for the Southern District of New York, naming
as defendants D&B, A.C. Nielsen Company and IMS International Inc. (the "IRI
Action"). The complaint alleges, among other things, various violations of the
antitrust laws and damages in excess of $350 million, which amount IRI has asked
to be trebled under the antitrust laws. IRI also seeks punitive damages in an
unspecified amount. In connection with such action, D&B, ACNielsen Corporation
("ACNielsen") and Cognizant Corporation ("Cognizant") entered into an Indemnity
and Joint Defense Agreement (the "Indemnity and Joint Defense Agreement")
pursuant to which ACNielsen agreed to be responsible for any potential
liabilities which may ultimately be incurred by D&B or Cognizant as a result of
such action, up to a maximum amount to be determined by an independent
investment bank if and when any such liabilities are incurred. The determination
of such maximum amount will be based on ACNielsen's ability to satisfy such
liabilities and remain financially viable, subject to certain assumptions and
limitations. However, D&B and Cognizant have agreed that to the extent that
ACNielsen is unable to satisfy any such liabilities in full and remain
financially viable, D&B and Cognizant will each be responsible for 50% of the
difference between the amount, if any, which may be payable as a result of such
litigation and the maximum amount which ACNielsen is then able to pay as
determined by such investment bank. Under the terms of the Distribution
Agreement, dated as of October 28, 1996, among D&B, Cognizant and ACNielsen (the
"1996 Distribution Agreement"), as a condition to the Distribution, New D&B is
13
<PAGE> 16
required to undertake to be jointly and severally liable with D&B to Cognizant
and ACNielsen. Pursuant to the Distribution Agreement, New D&B will assume and
indemnify R.H. Donnelley against any payments to be made in respect of the IRI
Action under the Indemnity and Joint Defense Agreement, the 1996 Distribution
Agreement or otherwise, including any ongoing legal fees and expenses related
thereto. Management of New D&B is unable to predict at this time the final
outcome of the IRI Action or whether the resolution of such matter could
materially affect New D&B's results of operations, cash flows or financial
position.
Certain Antitakeover Provisions
The Restated Certificate of Incorporation and Amended and Restated By-laws
of New D&B contain provisions that may have the effect of discouraging an
acquisition of control of New D&B not approved by its Board of Directors. Such
provisions may also have the effect of discouraging third parties from making
proposals involving an acquisition or change of control of New D&B, although
such proposals, if made, might be considered desirable by a majority of the
stockholders of New D&B. Such provisions could further have the effect of making
it more difficult for third parties to cause the replacement of the Board of
Directors of New D&B. These provisions have been designed to enable New D&B to
develop its businesses and foster its long-term growth without disruptions
caused by the threat of a takeover not deemed by its Board of Directors to be in
the best interests of New D&B and its stockholders. Certain provisions of the
Distribution Agreement may also have the effect of discouraging third parties
from making proposals involving an acquisition or change of control of New D&B.
See "Relationship Between The New Dun & Bradstreet Corporation and R.H.
Donnelley Corporation After the Distribution -- Distribution Agreement".
New D&B expects to adopt a stockholder rights plan. This stockholder rights
plan is designed to protect stockholders in the event of an unsolicited offer
and other takeover tactics which, in the opinion of the New D&B Board of
Directors, could impair its ability to represent stockholder interests. The
provisions of this stockholder rights plan may render an unsolicited takeover of
New D&B more difficult or less likely to occur or might prevent such a takeover.
See "Description of The New Dun & Bradstreet Corporation Capital Stock -- The
New Dun & Bradstreet Corporation Rights Plan".
New D&B will be subject to the provisions of Delaware corporate law which
may restrict certain business combination transactions. See "Description of The
New Dun & Bradstreet Corporation Capital Stock -- Delaware General Corporation
Law".
RISKS RELATING TO R.H. DONNELLEY
Dependence on Key Contracts
R.H. Donnelley's business is dependent upon several significant partnership
and agency agreements. These include the DonTech partnership ("DonTech"), a
partnership with Ameritech advertising services, a subsidiary of Ameritech
Corporation ("Ameritech"), and the CenDon partnership ("CenDon"), a partnership
with Centel Directory Company, a subsidiary of Sprint Corporation ("Sprint"), as
well as sales agency agreements with Bell Atlantic Yellow Pages Company, a
subsidiary of Bell Atlantic Corporation ("Bell Atlantic"), and Sprint Publishing
and Advertising, a subsidiary of Sprint. The equity income from the DonTech
partnership and the fees from other arrangements with Ameritech, as well as the
equity income from the CenDon partnership, are included in R.H. Donnelley's
revenues but are included in its operating income. The DonTech partnership and
other arrangements with Ameritech represented approximately 86% of R.H.
Donnelley's operating income in 1997. The CenDon partnership represented
approximately 9% of R.H. Donnelley's operating income in 1997. The Bell Atlantic
sales agency agreement, the CenDon partnership sales agency agreement and the
Sprint sales agency agreement represented approximately 36%, 12% and 5% of R.H.
Donnelley's revenues in 1997, respectively. Such percentages of revenues do not
include revenues of P-East which was sold in December 1997.
Under their existing terms, the DonTech partnership has no expiration date,
and the CenDon partnership and sales agency agreement and the Sprint sales
agency agreement continue through 2004 (subject to, in the case of the Sprint
sales agency agreement, a five year performance review no later than March 2000
and
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agreement on a new price schedule for publishing services by that date) and the
Bell Atlantic sales agency agreement continues through 2005. While these
partnerships and sales agency agreements currently extend for significant
periods, no assurance can be given that R.H. Donnelley will be able to maintain
these agreements and relationships after expiration of the current terms, and a
termination, expiration or modification of these arrangements could have a
material adverse effect on R.H. Donnelley's business, financial condition and
results of operations. In addition, although profits from the DonTech and CenDon
partnerships have historically been distributed to R.H. Donnelley on a monthly
basis, R.H. Donnelley does not control either partnership and its failure to
receive distributions from either for any reason would have a material adverse
effect on R.H. Donnelley's business, financial condition and results of
operations. Certain of these agreements are also subject to termination upon a
change of control (as defined therein) of R.H. Donnelley, including the DonTech
partnership. The Distribution does not constitute a change of control under
these agreements.
From these relationships, R.H. Donnelley maintains significant account
receivable balances with an Ameritech affiliate, a Bell Atlantic affiliate and
the CenDon partnership. The failure of any of these parties to fulfill its
obligations to R.H. Donnelley with respect to these account receivable balances
could have a material adverse effect on R.H. Donnelley's business, operating
results and financial condition.
Outsourcing-Related Risks
Local telephone companies currently conduct their yellow pages advertising
sales and publishing operations either internally, through independent providers
of such services or through some combination of both. R.H. Donnelley provides
yellow pages advertising sales and publishing services to local telephone
companies pursuant to long-standing partnership and other agreements with
Ameritech, Bell Atlantic and Sprint. R.H. Donnelley recently expanded its
relationship with Bell Atlantic to provide, beginning with directories published
in 1999, advertising sales for yellow pages directories in a new market, the
greater Buffalo area, which Bell Atlantic had previously outsourced to another
third-party marketer of yellow pages advertising. Ameritech, Bell Atlantic and
Sprint currently market yellow pages advertising with internal sales forces in
many of their other markets. In addition, each of them, along with other
significant yellow pages publishers, are making investments to acquire
publishing services technology similar to the technology used at R.H.
Donnelley's new Raleigh publishing center. There can be no assurance that
Ameritech, Bell Atlantic, Sprint or any other local telephone company will
decide to outsource yellow pages advertising sales or publishing services in any
of the markets which they currently cover internally or with independent
providers of such services.
R.H. Donnelley's ability to capitalize on any outsourced yellow pages
advertising sales and publishing opportunities from local telephone companies
will depend on a variety of factors, some of which are beyond R.H. Donnelley's
control. These factors include, among others, R.H. Donnelley's ability to:
attract, train, retain and manage qualified personnel for advertising sales or
for its new publishing center in Raleigh, North Carolina and its graphics center
in Dunmore, Pennsylvania (to the extent that the size or scheduling of the
related directories would require R.H. Donnelley to increase its publishing
services capacity); and integrate the information systems, software and other
technology used by R.H. Donnelley's personnel in new markets with R.H.
Donnelley's other information systems, software and technology. There can be no
assurance that R.H. Donnelley will be able to effectively operate and manage any
yellow pages advertising sales and publishing business outsourced to it by local
telephone companies.
Substantial Indebtedness and Negative Shareholders' Equity
In connection with the Distribution, R.H. Donnelley will borrow $350
million under a new $400 million credit facility to be entered into by R.H.
Donnelley prior to the Distribution (the "R.H. Donnelley Credit Facility") and
issue $150 million of senior subordinated notes pursuant to an indenture (the
"R.H. Donnelley Indenture") to be entered into by R.H. Donnelley prior to the
Distribution. The net proceeds of this $500 million of debt will be used (i) to
repay indebtedness of D&B, primarily commercial paper, (ii) pay costs and
expenses related to the Distribution and (iii) repay indebtedness of D&B to
subsidiaries which, following the Distribution, will be subsidiaries of New D&B.
This debt will be an obligation of R.H. Donnelley after the
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Distribution. After the Distribution, R.H. Donnelley will have indebtedness that
is substantial in relation to its stockholders' equity.
As of March 31, 1998, after giving pro forma effect to the indebtedness
described above and the application of the estimated net proceeds therefrom,
R.H. Donnelley will have approximately $500 million of indebtedness and a
shareholder's deficit of approximately $244 million. R.H. Donnelley anticipates
that it will have $50 million of unused capacity available under the R.H.
Donnelley Credit Facility. The ability of R.H. Donnelley to satisfy its debt
obligations will depend on its future operating performance, which will be
affected by prevailing economic conditions and financial, business, competitive
and other factors, many of which are beyond its control.
R.H. Donnelley believes, based on current circumstances, that Donnelley's
cash flow, together with available credit capacity under the R.H. Donnelley
Credit Facility, will be sufficient to permit R.H. Donnelley to meet its
operating expenses and capital expenditures and to service its debt requirements
as they become due for the foreseeable future. R.H. Donnelley may, however, need
to refinance all or a portion of its indebtedness on or prior to maturity, and
there can be no assurance that R.H. Donnelley will generate sufficient cash flow
or that future borrowings will be available under the R.H. Donnelley Credit
Facility in an amount sufficient to enable R.H. Donnelley to service its
indebtedness or to fund its other liquidity needs. If R.H. Donnelley is unable
to service its indebtedness, it will be required to adopt alternative
strategies, which may include actions such as reducing or delaying capital
expenditures, selling assets, restructuring or refinancing its indebtedness or
seeking additional equity capital. There can be no assurance that any of these
strategies could be effected on satisfactory terms.
The degree to which R.H. Donnelley is leveraged could have important
consequences, including (i) R.H. Donnelley's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions
or general corporate purposes may be impaired; (ii) a substantial portion of
R.H. Donnelley's cash flows from operations may be dedicated to the payment of
debt service on its indebtedness, thereby reducing the funds available to R.H.
Donnelley for its operations; (iii) R.H. Donnelley may be more leveraged than
certain of its competitors, which may place R.H. Donnelley at a relative
competitive disadvantage; (iv) R.H. Donnelley's flexibility in planning for, or
reacting to, changes in its business and industry may be limited; and (v) R.H.
Donnelley's level of indebtedness could make it more vulnerable in the event of
a downturn in its business or industry or the economy in general. In addition,
the terms of its indebtedness include financial and other restrictive covenants
that will limit the ability of R.H. Donnelley to, among other things, borrow
additional funds. Failure by R.H. Donnelley to comply with such covenants could
result in an event of default which, if not cured or waived, could have a
material adverse effect on R.H. Donnelley.
Restrictions Imposed by the R.H. Donnelley Credit Facility and the R.H.
Donnelley Indenture
The R.H. Donnelley Credit Facility and the R.H. Donnelley Indenture will
contain a number of significant covenants that, among other things, limit or
restrict the ability of R.H. Donnelley to dispose of assets, incur additional
indebtedness, repay other indebtedness, pay dividends, enter into certain
investments or acquisitions, repurchase or redeem capital stock, engage in
mergers or consolidations, or engage in certain transactions with subsidiaries
and affiliates and otherwise restrict corporate activities. There can be no
assurance that such limitations and restrictions will not adversely affect R.H.
Donnelley's ability to finance its future operations or capital needs or engage
in other business activities that may be in the interest of R.H. Donnelley. In
addition, the R.H. Donnelley Credit Facility will also require R.H. Donnelley to
maintain compliance with certain financial ratios. The ability of R.H. Donnelley
to comply with such ratios may be affected by events beyond R.H. Donnelley's
control. A breach of any of these covenants or the inability of R.H. Donnelley
to comply with the required financial ratios could result in a default under the
R.H. Donnelley Indenture and the R.H. Donnelley Credit Facility, as applicable.
In the event of any such default, (i) the indebtedness under the R.H. Donnelley
Indenture could be accelerated and (ii) the lenders under the R.H. Donnelley
Credit Facility could elect to declare all borrowings outstanding under the R.H.
Donnelley Credit Facility, together with accrued interest and other fees, to be
due and payable, to require R.H. Donnelley to apply all of its available cash to
repay such borrowings or to prevent R.H. Donnelley from
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<PAGE> 19
making debt service payments. If R.H. Donnelley were unable to repay any such
borrowings when due, the lenders could proceed against their collateral, which
consists of substantially all of R.H. Donnelley's assets. If the indebtedness
under the R.H. Donnelley Credit Facility or the R.H. Donnelley Indenture were to
be accelerated, there can be no assurance that the assets of R.H. Donnelley
would be sufficient to repay such indebtedness in full.
Competition
There is competition for yellow pages advertising sales to varying degrees
in R.H. Donnelley's markets from the sales forces of yellow pages publishers
with which R.H. Donnelley is not affiliated. These yellow pages publishers
include local telephone companies with which R.H. Donnelley does not maintain a
contractual relationship, independent publishers (publishers that are not
affiliated with any telephone company), which have slightly increased their
share of the total market for yellow pages advertising sales in the U.S. in
recent years, and national yellow pages sales agents. In the majority of its
markets, R.H. Donnelley benefits from its long-term contractual relationships
with the largest potential competitor in a directory market, the incumbent local
telephone company. While R.H. Donnelley's operating results to date have not
been adversely impacted, the Telecommunications Act of 1996 effectively opened
local telephone markets to increased competition, and there can be no assurance
that these incumbent local telephone companies will remain the dominant
telephone service providers in the R.H. Donnelley's markets. There is also
competition for advertising sales from other media, including newspapers,
magazines, radio, direct mail, on-line information services, television and
cable television, and advances in technology have brought to the industry new
participants, new products and new channels. There can be no assurance that R.H.
Donnelley will be able to successfully compete in responding to any such
developments.
Effect of Distribution on Trading Market of R.H. Donnelley Common Stock
R.H. Donnelley Common Stock (i.e. the "old" D&B Common Stock) will continue
to trade on the NYSE after the Distribution, but the symbol under which it
trades will change from "DNB" to "RHD". However, because of the significant
changes that will take place as a result of the Distribution, the trading market
for R.H. Donnelley Common Stock after the Distribution may be significantly
different from that for D&B Common Stock prior to the Distribution. After the
Distribution, D&B's only remaining business will be the R.H. Donnelley Business
and the shares of R.H. Donnelley Common Stock held by D&B stockholders will
represent their continuing interest in that business. The market may view R.H.
Donnelley as a "new" company after the Distribution, and due to its smaller
size, it may not be the subject of significant research analyst coverage. There
can be no assurance as to the prices at which the R.H. Donnelley Common Stock
will trade before, on or after the Distribution Date, and until an orderly
market develops in the R.H. Donnelley Common Stock, the price at which it trades
may fluctuate significantly. Prices for R.H. Donnelley Common Stock will be
determined in the marketplace and may be influenced by many factors, including
(i) the depth and liquidity of the market for R.H. Donnelley Common Stock, (ii)
developments affecting the businesses of R.H. Donnelley including the impact of
the factors referred to in this section, (iii) investor perception of R.H.
Donnelley and (iv) general economic and market conditions.
Transition to an Independent Public Company
R.H. Donnelley does not have an operating history as an independent
company. Accordingly, the financial statements included herein may not
necessarily reflect the results of operations, financial condition and cash
flows that would have been achieved had R.H. Donnelley been operated
independently during the periods presented. Historically, D&B has provided
substantially all of R.H. Donnelley's corporate services and employee benefits.
While R.H. Donnelley's management believes the costs of these services and
benefits charged to R.H. Donnelley have been reasonably equivalent to terms
which could have been obtained through arm's-length negotiations with D&B, these
costs may not be indicative of the costs that would have been incurred if R.H.
Donnelley had performed or provided these services as an independent company. In
addition, following the Distribution, R.H. Donnelley will also be responsible
for the additional costs associated with
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being an independent public company, including costs associated with corporate
governance, listed and registered securities and investor relations.
Sensitivity of Financial Results to Economic Conditions
R.H. Donnelley derives its sales commissions and partnership income and
related fees from the sale of advertising in yellow pages directories.
Advertising sales by R.H. Donnelley, as well as those of yellow pages publishers
in general, generally do not fluctuate widely with economic cycles. However, a
prolonged national or regional economic recession could have a material adverse
effect on R.H. Donnelley's business, operating results and financial condition.
Technological Adaptation and Competition
R.H. Donnelley competes in a business which requires sophisticated
information systems, software and other technology, as well as for its systems
to be able to interface with those of the local telephone companies with which
it has contractual relationships. R.H. Donnelley's technology and databases at
its publishing center in Raleigh, North Carolina also must interface with the
systems of yellow pages publishers for which it provides publishing services and
the systems of printers to which it delivers electronic output. The yellow pages
directory advertising market is subject to changes arising from developments in
technology (including methods used to distribute yellow pages-style information)
and yellow pages users' technological preferences. As a result of these factors,
R.H. Donnelley's growth and future financial performance may depend upon its
ability to develop and market new products and services and to create new
distribution channels, while enhancing existing products, services and
distribution channels, in order to accommodate the latest technological advances
and user preferences, including use of the Internet. A failure by R.H. Donnelley
to anticipate or respond adequately to changes in technology and user
preferences, or an inability to finance any related capital expenditures
(including, if necessary, adaptation or replacement of its information systems,
software, databases or other technology), could have a material adverse effect
on R.H. Donnelley's business, operating results and financial condition.
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THE DISTRIBUTION
INTRODUCTION
On December 17, 1997, the Board of Directors of D&B announced a plan to
distribute the New D&B Common Stock to all holders of outstanding D&B Common
Stock. On , 1998, the D&B Board of Directors formally approved the
Distribution and declared a dividend payable to each holder of record at the
close of business on the Record Date of one share of New D&B Common Stock for
each share of D&B Common Stock held by such holder at the close of business on
the Record Date.
D&B has received a tax ruling from the Internal Revenue Service that the
receipt by D&B stockholders of the New D&B Common Stock in the Distribution will
be tax-free to such stockholders and D&B for Federal income tax purposes. On or
before the Distribution Date, D&B will deliver all of the outstanding shares of
New D&B Common Stock to the Distribution Agent for transfer and distribution to
the holders of record of D&B Common Stock at the close of business on the Record
Date. The Distribution will be made on or about , 1998.
Questions relating to the Distribution prior to the Distribution Date or
relating to transfers of New D&B Common Stock after the Distribution Date should
be directed to: First Chicago Trust Company of New York, Mail Suite 4694, P.O.
Box 2536, Jersey City, NJ 06303-2536, telephone number: (800) 519-3111.
REASONS FOR THE DISTRIBUTION
The Board of Directors of D&B believes that the Distribution is in the best
interests of D&B and D&B's stockholders and that the separation of New D&B will
provide each of New D&B and R.H. Donnelley with greater managerial and
operational flexibility to respond to changing market conditions in their
different business environments as well as provide New D&B with additional
financial flexibility to pursue growth opportunities. The discussion of the
reasons for the Distribution set forth herein includes forward-looking
statements that are based upon numerous assumptions with respect to the trading
characteristics of the New D&B Common Stock, the ability of New D&B management
to successfully take advantage of growth opportunities and the ability of R.H.
Donnelley to successfully operate as a stand-alone company. Many of such factors
are discussed above under the captions "Forward-Looking Statements" and "Risk
Factors".
Management Considerations. At present, the R.H. Donnelley Business and the
New D&B Business are conducted as separate operating groups under the direction
of D&B. The Distribution should be beneficial to each of D&B's operating groups,
allowing the management of each group to design and implement corporate policies
and strategies that are based primarily on the business characteristics of the
group and to concentrate its financial resources wholly on its own operations.
The Distribution will also permit each of New D&B and R.H. Donnelley to
design incentive compensation programs that relate more directly to its own
business characteristics and performance and will provide each company with a
"pure play" publicly traded equity for use in its compensation programs.
Provide Independent Access to Capital Markets; Facilitate Growth of The New
Dun & Bradstreet Corporation. New D&B intends to pursue growth opportunities in
its business areas and the separation of the businesses is expected to provide
New D&B with additional financial flexibility to do so. After the Distribution,
New D&B will have a capital structure that is expected to facilitate the
acquisitions, joint ventures, partnerships and internal expansion that are
important to remaining competitive in the information services business.
Management of D&B believes that the Distribution will facilitate New D&B's
growth in part because it believes that the New D&B Common Stock will generally
trade at higher price-earnings multiples than those at which D&B Common Stock
has recently traded. Such higher multiples would make such stock a more
attractive acquisition currency for New D&B to deliver, and to the extent such
stock is perceived to be a higher-growth stock, a generally more attractive
investment opportunity for the typical seller of a business to New D&B. In
addition, New D&B would be able to finance additional growth opportunities
through the sale of capital stock with a higher price-earnings multiple.
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Investor Understanding; Public Relations. Investors should be able to
evaluate better the financial performance of each of New D&B and R.H. Donnelley
and their respective strategies, thereby enhancing the likelihood that each will
achieve appropriate market valuation. In addition, each of the businesses will
be able to focus its public relations efforts on cultivating its own separate
identity.
FORM OF TRANSACTION; BASIS OF PRESENTATION
The Distribution is the method by which D&B will be separated into two
publicly traded companies, New D&B and R.H. Donnelley. In the Distribution, D&B
will distribute to its stockholders shares of New D&B Common Stock, which will
represent a continuing interest in D&B's businesses to be conducted by New D&B.
After the Distribution, D&B's only business will be the R.H. Donnelley Business,
and the shares of D&B Common Stock held by D&B stockholders will represent a
continuing ownership interest only in that business. In connection with the
Distribution, (i) D&B will change its name to "R.H. Donnelley Corporation" (and
therefore from and after the Distribution, D&B Common Stock will be "R.H.
Donnelley Common Stock") and (ii) New D&B will change its name to "The Dun &
Bradstreet Corporation".
Stockholders should note that notwithstanding the legal form of the
Distribution described above whereby D&B expects to spin off New D&B, because of
the relative significance of the New D&B Business to D&B, New D&B will be
treated as the "accounting successor" to D&B for financial reporting purposes.
Therefore, the historical financial information for New D&B included herein is
that of D&B with the R.H. Donnelley Business treated as a discontinued
operation.
The historical financial information for R.H. Donnelley has been prepared
on a stand-alone basis as described in Note 1 to R.H. Donnelley Financial
Statements included elsewhere in this Information Statement. Such historical
financial information includes allocations of certain D&B corporate headquarters
assets, liabilities and expenses relating to R.H. Donnelley.
MANNER OF EFFECTING THE DISTRIBUTION
The Distribution will be made on the Distribution Date to stockholders of
record of D&B at the close of business on the Record Date. Based on the
shares of D&B Common Stock outstanding as of , 1998, the
Distribution would consist of shares of New D&B Common Stock. Prior to
the Distribution Date, D&B will deliver all outstanding shares of New D&B Common
Stock to the Distribution Agent for distribution. The Distribution Agent will
mail, on or about the Distribution Date, certificates representing the shares of
New D&B Common Stock to D&B stockholders of record at the close of business on
the Record Date. D&B stockholders will not be required to pay for shares of New
D&B Common Stock received in the Distribution, or to surrender or exchange
certificates representing shares of D&B Common Stock in order to receive shares
of New D&B Common Stock. No vote of D&B stockholders is required or sought in
connection with the Distribution.
IN ORDER TO BE ENTITLED TO RECEIVE SHARES OF NEW D&B COMMON STOCK IN THE
DISTRIBUTION, D&B STOCKHOLDERS MUST BE STOCKHOLDERS AT THE CLOSE OF BUSINESS ON
THE RECORD DATE, , 1998.
The Board of Directors of New D&B expects to adopt a stockholder rights
plan. Certificates evidencing shares of New D&B Common Stock issued in the
Distribution will therefore represent the same number of New D&B Rights issued
under the New D&B Rights Plan. See "Description of The New Dun & Bradstreet
Corporation Capital Stock -- The New Dun & Bradstreet Corporation Rights Plan".
Unless the context otherwise requires, references herein to the New D&B Common
Stock include the related New D&B Rights.
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FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
D&B has received a ruling letter from the Internal Revenue Service to the
effect that, among other things, the Distribution will qualify as a tax-free
spin-off under Section 355 of the Internal Revenue Code. Under Section 355 of
the Internal Revenue Code, in general:
1. Holders of D&B Common Stock will not recognize any income, gain or
loss as a result of the Distribution.
2. Holders of D&B Common Stock will apportion the tax basis of their
D&B Common Stock between such D&B Common Stock and New D&B Common Stock
received by such holder in the Distribution in proportion to the relative
fair market values of such stock on the Distribution Date. D&B will provide
appropriate information to each holder of record of D&B Common Stock as of
the close of business on the Record Date concerning the basis allocation.
3. The holding period for the New D&B Common Stock received in the
Distribution by holders of D&B Common Stock will include the period during
which such holder held the D&B Common Stock with respect to which the
Distribution was made, provided that such D&B Common Stock is held as a
capital asset by such holder on the Distribution Date.
4. The Distribution will not be treated as a taxable disposition of
New D&B by D&B.
Current Treasury regulations require each holder of D&B Common Stock who
receives New D&B Common Stock pursuant to the Distribution to attach to his or
her Federal income tax return for the year in which the Distribution occurs a
detailed statement setting forth such data as may be appropriate in order to
show the applicability of Section 355 of the Internal Revenue Code to the
Distribution. D&B will convey the appropriate information to each holder of
record of D&B Common Stock as of the close of business on the Record Date.
The Internal Revenue Service ruling is based on certain factual
representations made by D&B. If such factual representations were incorrect in a
material respect, such ruling could become invalid. D&B is not aware of any
facts or circumstances which would cause such representations to be incorrect in
a material respect. Each of D&B and New D&B has agreed to certain restrictions
on its future actions to provide further assurances that Section 355 of the
Internal Revenue Code will apply to the Distribution. See "Relationship Between
The New Dun & Bradstreet Corporation and R.H. Donnelley Corporation After the
Distribution". If the Distribution were not to qualify under Section 355 of the
Internal Revenue Code, then in general, a corporate tax (which, as noted below,
would be very substantial) would be payable by the consolidated group, of which
D&B is the common parent, based upon the difference between (x) the fair market
value of the New D&B Common Stock and (y) the adjusted basis of such New D&B
Common Stock. In addition, under the consolidated return rules, each member of
the consolidated group would be jointly and severally liable for such tax
liability. If the Distribution occurred and it were not to qualify under Section
355 of the Internal Revenue Code, the resulting tax liability would have a
material adverse effect on the financial position, results of operations and
cash flows of each of New D&B and R.H. Donnelley. D&B estimates that the
aggregate shared tax liability in this regard of New D&B and R.H. Donnelley
would be in the range of approximately $1.5 to $2.0 billion.
Furthermore, if the Distribution were not to qualify as a tax-free
spin-off, each D&B stockholder receiving shares of New D&B Common Stock in the
Distribution would be treated as if such stockholder had received a taxable
distribution in an amount equal to the fair market value of New D&B Common Stock
received, which would result in (i) a dividend to the extent of such
stockholder's pro rata share of D&B's current and accumulated earnings and
profits, (ii) a reduction in such stockholder's basis in D&B Common Stock to the
extent the amount received exceeds such stockholder's share of earnings and
profits and (iii) a capital gain to the extent the amount received exceeds the
sum of the amount treated as a dividend and the stockholder's basis.
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D&B STOCKHOLDERS SHOULD CONSULT THEIR OWN ADVISERS AS TO THE SPECIFIC TAX
CONSEQUENCE OF THE DISTRIBUTION, INCLUDING THE APPLICATION AND EFFECT OF
FOREIGN, STATE AND LOCAL TAX LAWS.
LISTING AND TRADING OF NEW D&B COMMON STOCK AND R.H. DONNELLEY COMMON STOCK
Prior to the date hereof, there has not been any established trading market
for New D&B Common Stock. Application will be made to list the shares of New D&B
Common Stock on the NYSE under the symbol "DNB", and trading is expected to
commence on a "when-issued" basis at least two days prior to the Record Date. On
the first NYSE trading day following the Distribution Date, "when-issued"
trading (i.e. a trade which is completed only if the subject security is
actually issued) in respect of the New D&B Common Stock will end and
"regular-way" trading (i.e. normal NYSE trading) will begin.
There can be no assurance as to the prices at which the New D&B Common
Stock will trade before, on or after the Distribution Date. Until the New D&B
Common Stock is fully distributed and an orderly market develops in the New D&B
Common Stock, the price at which it trades may fluctuate significantly and may
be lower or higher than the price that would be expected for a fully distributed
issue. Prices for the New D&B Common Stock will be determined in the marketplace
and may be influenced by many factors, including (i) the depth and liquidity of
the market for New D&B Common Stock, (ii) developments affecting the businesses
of New D&B generally and the impact of the factors referred to in "Risk Factors"
above, (iii) investor perception of New D&B and (iv) general economic and market
conditions.
Shares of New D&B Common Stock distributed to D&B stockholders will be
freely transferable, except for shares of New D&B Common Stock received by
persons who may be deemed to be "affiliates" of New D&B under the Securities Act
of 1933, as amended (the "Securities Act"). Persons who may be deemed to be
affiliates of New D&B after the Distribution generally include individuals or
entities that control, are controlled by, or are under common control with, New
D&B, and may include certain officers and directors of New D&B, as well as
principal stockholders of New D&B. Persons who are affiliates of New D&B will be
permitted to sell their shares of New D&B Common Stock only pursuant to an
effective registration statement under the Securities Act or an exemption for
the registration requirements of the Securities Act, such as the exemption
afforded by Section 4(1) of the Securities Act or Rule 144 thereunder.
R.H. Donnelley Common Stock (i.e. the "old" D&B Common Stock) will continue
to trade on the NYSE after the Distribution, but the symbol under which it
trades will change from "DNB" to "RHD". However, because of the significant
changes that will take place as a result of the Distribution, the trading market
for R.H. Donnelley Common Stock after the Distribution may be significantly
different from that for D&B Common Stock prior to the Distribution. The market
may view R.H. Donnelley as a "new" company after the Distribution, and due to
its smaller size it may not be the subject of significant research analyst
coverage. There can be no assurance as to the prices at which R.H. Donnelley
Common Stock will trade before, on or after the Distribution Date and until an
orderly market develops in the R.H. Donnelley Common Stock, the price at which
it trades may fluctuate significantly. Prices for R.H. Donnelley Common Stock
will be determined in the marketplace and may be influenced by many factors,
including (i) the depth and liquidity of the market for R.H. Donnelley Common
Stock, (ii) developments affecting the businesses of R.H. Donnelley, including
the impact of the factors referred to in "Risk Factors" above, (iii) investor
perception of R.H. Donnelley and (iv) general economic and market conditions.
CERTAIN INDEBTEDNESS AND MINORITY INTEREST FINANCING
In connection with the Distribution, D&B will borrow approximately $500
million. A portion of the proceeds of this borrowing will be used to repay
existing indebtedness of D&B. This approximately $500 million of debt will be an
obligation of R.H. Donnelley after the Distribution. While the final form of
such financing has not yet been determined, it is expected that approximately
$350 million will come from a senior secured credit facility and the remainder
will come from the issuance of senior subordinated notes. New D&B will retain
the obligation for approximately $300 million of existing minority interest
financing.
22
<PAGE> 25
RELATIONSHIP BETWEEN THE NEW DUN & BRADSTREET CORPORATION
AND R.H. DONNELLEY CORPORATION AFTER THE DISTRIBUTION
New D&B is presently wholly owned by D&B, and the results of operations of
entities that are or will be its subsidiaries have been included in D&B's
consolidated financial results. After the Distribution, D&B (which will change
its name to "R.H. Donnelley Corporation") will not have any ownership interest
in New D&B, and New D&B will be an independent public company. In addition,
after the Distribution, New D&B will not have any ownership interest in R.H.
Donnelley, and R.H. Donnelley will be an independent public company.
Furthermore, except as described below, all contractual relationships existing
prior to the Distribution between D&B and New D&B will be terminated except for
contracts specifically set forth in a schedule to the Distribution Agreement.
Prior to the Distribution, D&B and New D&B will enter into certain
agreements, described below, governing the relationship between R.H. Donnelley
and New D&B subsequent to the Distribution and providing for the allocation of
tax, employee benefits and certain other liabilities and obligations arising
from periods prior to the Distribution. Copies of the forms of such agreements
have been filed as exhibits to the Registration Statement of New D&B in respect
of the registration of the New D&B Common Stock under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). In addition, D&B will file a
Current Report on Form 8-K in connection with the Distribution, and the
agreements will be filed as exhibits to such Report. Such agreements may be
amended by D&B prior to the Distribution Date. In addition, there will be
individuals on the Boards of Directors of New D&B and R.H. Donnelley who will
also serve on the Board of Directors of the other company. See "The New Dun &
Bradstreet Corporation Management and Executive Compensation -- Board of
Directors" and "R.H. Donnelley Management and Executive Compensation -- Board of
Directors".
The following description summarizes certain terms of such agreements, but
is qualified by reference to the text of such agreements, which are incorporated
herein by reference.
DISTRIBUTION AGREEMENT
D&B and New D&B will enter into the Distribution Agreement providing for,
among other things, certain corporate transactions required to effect the
Distribution and other arrangements between R.H. Donnelley and New D&B
subsequent to the Distribution.
In particular, the Distribution Agreement defines the assets and
liabilities which are being allocated to and assumed by New D&B and those which
will remain with R.H. Donnelley. The Distribution Agreement also defines what
constitutes the "New D&B Business" and what constitutes the "R.H. Donnelley
Business".
Pursuant to the Distribution Agreement, D&B is obligated to transfer or
cause to be transferred all its right, title and interest in the assets
comprising the New D&B Business and other assets not specifically included in
the R.H. Donnelley Business to New D&B and New D&B is obligated to transfer or
cause to be transferred all its right, title and interest in the assets
comprising the R.H. Donnelley Business to D&B. All assets are being transferred
without any representation or warranty, "as is-where is", and the relevant
transferee bears the risk that any necessary consent to transfer is not
obtained. Each party also agrees to exercise its respective commercially
reasonable efforts promptly to obtain any necessary consents and approvals and
to take such actions as may be reasonably necessary or desirable to carry out
the purposes of the Distribution Agreement and the other agreements summarized
below.
In general, pursuant to the terms of the Distribution Agreement, all assets
of D&B prior to the Distribution Date, other than those relating to the R.H.
Donnelley Business, will become assets of New D&B. The Distribution Agreement
also provides for assumptions of liabilities and cross indemnities designed to
allocate generally, effective as of the Distribution Date, financial
responsibility for all liabilities of D&B, other than those specified to be
transferred to R.H. Donnelley on or prior to the Distribution Date or to remain
with R.H. Donnelley subsequent to the Distribution Date (which liabilities
primarily relate to the R.H. Donnelley Business or the indebtedness to be
incurred in connection with the Distribution), to New D&B. For a discussion of
the respective businesses of New D&B and R.H. Donnelley, see "The New Dun &
Bradstreet
23
<PAGE> 26
Corporation Business" and "R.H. Donnelley Business". The Distribution Agreement
provides for the allocation generally of the financial responsibility for the
liabilities arising out of or in connection with former businesses, other than
those formerly conducted by R.H. Donnelley prior to the Distribution, to New
D&B.
Pursuant to the terms of the 1996 Distribution Agreement, as a condition to
the Distribution, New D&B is required to undertake to be jointly and severally
liable with D&B to Cognizant and ACNielsen for any liabilities arising
thereunder. Pursuant to the Distribution Agreement, all liabilities of D&B under
the 1996 Distribution Agreement and related agreements will be liabilities of
New D&B, and New D&B will indemnify R.H. Donnelley against such liabilities. In
addition, any rights of D&B arising under the 1996 Distribution Agreement and
related agreements will be rights of New D&B.
The Distribution Agreement provides that immediately prior to the
Distribution, D&B will transfer cash to New D&B (or its affiliates) in an amount
such that, immediately following the Distribution, R.H. Donnelley's net debt
will be approximately $500 million.
The Distribution Agreement includes provisions governing the administration
of certain insurance programs and the procedures for making claims. The
Distribution Agreement also allocates the right to proceeds and the obligation
to incur deductibles under certain insurance policies.
In the event that any transfers contemplated by the Distribution Agreement
are not effected on or prior to the Distribution Date, the parties will be
required to cooperate to effect such transfers as promptly as practicable
following the Distribution Date, and pending any such transfers, to hold any
asset not so transferred in trust for the use and benefit of the party entitled
thereto (at the expense of the party entitled thereto), and to retain any
liability not so transferred for the account of the party by whom such liability
is to be assumed.
The Distribution Agreement provides that D&B (which will become R.H.
Donnelley) and New D&B will comply with and otherwise not take action
inconsistent with each representation and statement made to the Internal Revenue
Service in connection with D&B's request for a ruling letter as to certain tax
aspects of the Distribution. Each of D&B and New D&B agrees to maintain its
status as a company engaged in the active conduct of a trade or business, as
defined in Section 355(b) of the Internal Revenue Code, to continue to own stock
of certain operating subsidiaries constituting control (within the meaning of
Section 368(c) of the Internal Revenue Code) of such operating subsidiaries and
to maintain at least 90% of the fair market value of its assets in the form of
stock and securities of certain operating subsidiaries, in each case until the
second anniversary of the Distribution Date. Neither D&B nor New D&B expects
this limitation to inhibit its financing or other activities or its ability to
respond to unanticipated developments. Under the Distribution Agreement, D&B
agrees that until two years after the Distribution Date it will not (i) merge or
consolidate with another corporation, (ii) liquidate or partially liquidate,
(iii) sell or transfer all or substantially all of its assets, (iv) redeem or
repurchase its stock (except in certain limited circumstances), or (v) take any
other action which would result in one or more persons acquiring a 50 percent or
greater interest in D&B, unless, prior to taking such action, it obtains a
written opinion of a law firm reasonably acceptable to New D&B or a supplemental
ruling from the Internal Revenue Service that such action will not affect the
tax-free treatment of the Distribution. As a result of the representations in
the request for a ruling letter and the covenants in the Distribution Agreement,
the acquisition of control of each of R.H. Donnelley and New D&B prior to the
second anniversary may be more difficult or less likely to occur because of the
potential substantial liabilities associated with a breach of such
representations or covenants. The Distribution Agreement requires a party that
takes or fails to take any action which contributes to a determination that the
Distribution is not tax-free to D&B, New D&B or their stockholders to indemnify
the other party and its stockholders from any taxes arising therefrom.
Under the Distribution Agreement, each of D&B and New D&B agrees to provide
to the other party, subject to certain conditions, access to certain corporate
records and information and to provide certain services on such terms as are set
forth in a Data Services Agreement, a Shared Transaction Services Agreement and
a Transition Services Agreement between such parties.
24
<PAGE> 27
The Distribution Agreement also provides that, except as otherwise set
forth therein or in any other agreement, all costs or expenses in connection
with the Distribution will be borne by New D&B. New D&B will agree to be liable
for any claims arising from or based upon "controlling person" liability
relating to the Registration Statement on Form 10 filed with the SEC by New D&B.
Except as set forth in the Distribution Agreement or any related agreement, each
party shall bear its own costs and expenses incurred after the Distribution
Date.
TAX ALLOCATION AGREEMENT
D&B and New D&B will enter into a Tax Allocation Agreement to the effect
that New D&B will generally be liable for all income taxes of D&B and its
subsidiaries attributable to periods prior to the Distribution, provided that in
the case of any separate company state or local income taxes, R.H. Donnelley and
its subsidiaries and New D&B and its subsidiaries will be liable for their own
liabilities arising from any audit adjustment. For income taxes attributable to
periods beginning after the Distribution, New D&B will be liable for taxes
relating to New D&B and its subsidiaries and R.H. Donnelley will be liable for
taxes relating to R.H. Donnelley and its subsidiaries. For all other taxes, New
D&B and its subsidiaries and R.H. Donnelley and its subsidiaries will be
responsible for their own liabilities for all periods.
EMPLOYEE BENEFITS AGREEMENT
D&B and New D&B will enter into an Employee Benefits Agreement (the
"Employee Benefits Agreement"), which allocates responsibility for certain
employee benefits matters on and after the Distribution Date.
The Employee Benefits Agreement provides that R.H. Donnelley will adopt a
new defined benefit pension plan for its employees and that New D&B will assume
and become the sponsor of the current D&B plan for the benefit of its employees
and in general former employees who terminated employment on or prior to the
Distribution Date. Assets and liabilities of the current D&B pension plan that
are attributable to R.H. Donnelley employees will be transferred to the new R.H.
Donnelley plan.
In addition, R.H. Donnelley will adopt a new savings plan for its
employees, and New D&B will assume and become the sponsor of the D&B savings
plan for the benefit of its employees and former employees who terminated
employment on or prior to the Distribution Date. The account balances of R.H.
Donnelley employees will be transferred to the new R.H. Donnelley plan.
New D&B will assume and become the sponsor of D&B's nonqualified
supplemental pension plans for the benefit of persons who, prior to the
Distribution Date were participants thereunder; provided, however, that with
respect to R.H. Donnelley employees, New D&B generally will retain only those
liabilities that were vested prior to the Distribution Date. R.H. Donnelley will
guarantee payment of the benefits under these plans to its employees in the
event that New D&B is unable to satisfy its obligations.
The Employee Benefits Agreement also provides that R.H. Donnelley will
continue to sponsor its welfare plans for its employees. As of the Distribution
Date, New D&B will adopt welfare plans for the benefit of its employees and
former employees who terminated employment on or prior to the Distribution Date.
R.H. Donnelley will be responsible for providing retiree welfare benefits, where
applicable, to its employees and New D&B will be responsible for providing
retiree welfare benefits, where applicable, to its employees and former
employees who terminated employment on or prior to the Distribution Date.
New D&B and R.H. Donnelley will generally retain the severance liabilities
of their respective employees who terminated employment prior to the
Distribution Date.
With respect to equity-based plans, the Employee Benefits Agreement
provides that unexercised D&B stock options held by R.H. Donnelley employees as
of the Distribution Date will be adjusted to reflect the Distribution. The
number of shares of R.H. Donnelley Common Stock covered by the adjusted stock
options will be determined by (i) multiplying the number of shares of D&B Common
Stock covered by the unexercised D&B stock option by a fraction, the numerator
of which is the average of the Daily Average Trading Prices per share of D&B
Common Stock for the five consecutive trading days immediately preceding
25
<PAGE> 28
the first date on which D&B Common Stock is traded ex-dividend, and the
denominator of which is the average of the Daily Average Trading Prices per
share of R.H. Donnelley Common Stock for the five consecutive trading days
starting on the first date on which R.H. Donnelley Common Stock is traded ex-
dividend (the "R.H. Donnelley Ratio"), and (ii) rounding down the result to a
whole number of shares. The Daily Average Trading Price of a given stock on a
given day means the average of the high and low trading prices for such stock on
such date. The exercise price per share of an adjusted R.H. Donnelley stock
option will be determined by multiplying the exercise price per share of an
unexercised D&B stock option by the reciprocal of the R.H. Donnelley Ratio.
Unexercised D&B stock options held by New D&B employees as of the
Distribution Date will be converted into options that are exercisable into
shares of New D&B Common Stock. Specifically, each unexercised D&B stock option
held by a New D&B employee will be cancelled, and such individual will receive a
replacement stock option exercisable into shares of New D&B Common Stock. The
number of shares of New D&B Common Stock covered by the replacement stock option
will be determined by (i) multiplying the number of shares of D&B Common Stock
covered by the cancelled D&B stock option by a fraction, the numerator of which
is the average of the Daily Average Trading Prices per share of D&B Common Stock
for the five consecutive trading days immediately preceding the first date on
which D&B Common Stock is traded ex-dividend, and the denominator of which is
the average of the Daily Average Trading Prices per share of New D&B Common
Stock for the five consecutive trading days starting on the first date on which
New D&B Common Stock is traded regular way (the "New D&B Ratio"), and (ii)
rounding down the result to a whole number of shares. The exercise price per
share of a replacement stock option will be determined by multiplying the
exercise price per share of the cancelled D&B stock option by the reciprocal of
the New D&B Ratio. Except as otherwise provided in the applicable plans, all
other terms of the replacement stock options will remain substantially identical
to the terms of the cancelled D&B stock options. The issuance of the replacement
stock options will not result in a compensation charge to New D&B.
Unexercised D&B stock options held by former employees who terminated
employment on or prior to the Distribution Date will be adjusted in
substantially the same manner as options held by R.H. Donnelley employees, and
New D&B will offer such former employees alternative adjustments or
substitutions, provided such former employees agree to surrender their adjusted
stock options.
All limited stock appreciation rights will be adjusted or converted in
substantially the same manner as the unexercised D&B stock options. See "R.H.
Donnelley Management and Executive Compensation -- Option Grants on D&B Common
Stock to R.H. Donnelley Corporation Executives in Last Fiscal Year" and "The New
Dun & Bradstreet Corporation Management and Executive Compensation -- Option
Grants on D&B Common Stock to The New Dun & Bradstreet Corporation Executives in
Last Fiscal Year".
D&B restricted stock held by New D&B employees and New D&B restricted stock
credited to New D&B employees as a dividend shall be forfeited and such
individuals shall receive replacement New D&B restricted stock equal to (i) the
number of shares of forfeited New D&B restricted stock plus (ii) the number of
shares of forfeited D&B restricted stock multiplied by the New D&B Ratio and the
reciprocal of the R.H. Donnelley Ratio, such replacement New D&B restricted
stock to have the same terms as the D&B restricted stock from which they arose.
If performance targets are met pursuant to the D&B Performance Unit Plan,
R.H. Donnelley employees shall receive promptly after the Distribution Date a
number of shares of R.H. Donnelley Common Stock equal to (i) the pro rated
target number of performance shares plus (ii) the target number of performance
shares multiplied by the R.H. Donnelley Ratio and the reciprocal of the New D&B
Ratio. Outstanding opportunities for New D&B employees to earn performance
shares under the D&B Performance Unit Plan shall be cancelled and each
individual shall receive a replacement opportunity to earn a number of New D&B
performance shares equal to (i) the target number of D&B performance shares plus
(ii) the target number of D&B performance shares multiplied by the New D&B Ratio
and the reciprocal of the R.H. Donnelley Ratio.
The Employee Benefits Agreement also provides that New D&B will generally
retain all employee benefit litigation liabilities that are asserted prior to
the Distribution Date (but not such liabilities that relate to the
26
<PAGE> 29
transferred retirement and savings plan assets of R.H. Donnelley employees).
Except as otherwise provided in the Employee Benefits Agreement, as of the
Distribution Date, R.H. Donnelley employees will generally cease participation
in D&B employee benefit plans, and R.H. Donnelley will generally recognize,
among other things, their respective employees' past service with D&B under
their respective employee benefit plans. Except as specifically provided
therein, nothing in the Employee Benefits Agreement restricts R.H. Donnelley's
or New D&B's ability to amend or terminate any of their respective employee
benefit plans after the Distribution Date.
INTELLECTUAL PROPERTY AGREEMENT
D&B and New D&B will enter into an Intellectual Property Agreement (the "IP
Agreement") which provides for the allocation and recognition by and between
these companies of rights under patents, copyrights, software, technology, trade
secrets and certain other intellectual property owned by New D&B and R.H.
Donnelley and their respective subsidiaries as of the Distribution Date. See
"The New Dun & Bradstreet Corporation Business -- Intellectual Property" and
"R.H. Donnelley Business -- Intellectual Property".
SHARED TRANSACTION SERVICES AGREEMENT
D&B and New D&B will enter into a Shared Transaction Services Agreement
providing for the orderly continuation, for a transitional period after the
Distribution Date, of certain of the shared transaction and other services (such
as payroll, accounts payable, general accounting and computer processing and
support) currently being provided.
DATA SERVICES AGREEMENT
D&B and New D&B will enter into a Data Services Agreement providing for the
orderly continuation, for a transitional period after the Distribution Date, of
certain specified computer processing and related services to be provided by one
party to the other.
TRANSITION SERVICES AGREEMENT
D&B and New D&B will enter into a Transition Services Agreement pursuant to
which the respective parties have agreed to certain basic terms governing the
provision by one party to the other of specified pension investment management
services, insurance services or other support services for a transitional period
after the Distribution Date.
OVERLAPPING DIRECTORS
After the Distribution Date, there will be individuals on the Boards of
Directors of New D&B and R.H. Donnelley who will also serve on the Board of
Directors of the other company. will serve on the Boards of Directors
of both companies. See "The New Dun & Bradstreet Corporation Management and
Executive Compensation -- Board of Directors" and "R.H. Donnelley Management and
Executive Compensation -- Board of Directors".
27
<PAGE> 30
DIVIDEND POLICIES
The payment and level of cash dividends by New D&B and R.H. Donnelley after
the Distribution will be subject to the discretion of the New D&B Board of
Directors and the R.H. Donnelley Board of Directors, respectively. It is
anticipated that New D&B will initially pay a quarterly dividend of $0.185 per
share and that R.H. Donnelley will initially pay a quarterly dividend of $0.035
per share. However, the payment and level of cash dividends by New D&B and R.H.
Donnelley will be based on, and affected by, a number of factors, including the
respective operating results and financial requirements of New D&B and R.H.
Donnelley on a stand-alone basis as well as applicable legal and contractual
restrictions. There can be no assurance that any dividends will be declared or
paid after the Distribution.
28
<PAGE> 31
THE NEW DUN & BRADSTREET CORPORATION
(ACCOUNTING SUCCESSOR TO D&B)
CAPITALIZATION
The following table sets forth the capitalization of D&B as of March 31,
1998, and as adjusted to give effect to the Distribution and the transactions
contemplated thereby. The following data is qualified in its entirety by the
Consolidated Financial Statements of D&B and other information contained
elsewhere in this Information Statement. See "Forward-Looking Statements".
<TABLE>
<CAPTION>
HISTORICAL
MARCH 31, AS ADJUSTED FOR
1998 THE DISTRIBUTION
---------- ---------------------
(DOLLAR AMOUNTS IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Cash and Cash Equivalents................................... $ 116.6 $ 288.2(1)
------- -------
Notes Payable............................................... $ 364.8 $ 36.4(1)
------- -------
Minority Interest........................................... $ 301.9 $ 301.9
------- -------
Preferred Stock, authorized -- 10,000,000 shares
$1.00 par value per share -- historical
$0.01 par value per share -- adjusted..................... (2)
Series Common Stock, authorized -- 10,000,000 shares
$0.01 par value per share -- adjusted..................... (2)
Common Stock, authorized -- 400,000,000 shares
$1.00 par value per share, 188,420,996 shares
issued -- historical
$0.01 par value per share, 171,570,140 shares
issued -- adjusted..................................... 188.4 1.7(2)
Capital Surplus............................................. 80.2 250.0(2)
Retained Earnings........................................... 396.2 (275.9)(1)(2)(3)
Treasury Stock, at cost, 16,850,856 shares -- historical.... (906.5) --(2)
Cumulative Translation Adjustment........................... (167.1) (167.1)
Minimum Pension Liability................................... (37.4) (37.4)
------- -------
Total Equity........................................... $(446.2) $(228.7)
------- -------
Total Capitalization.............................. $ 337.1 $ 397.8
======= =======
</TABLE>
- ---------------
(1) In connection with the Distribution, R.H. Donnelley will borrow
approximately $350 million under the R.H. Donnelley Credit Facility and
issue $150 million of senior subordinated notes under the R.H. Donnelley
Indenture all of which will be guaranteed by D&B. A portion of the proceeds
of this indebtedness will be used to repay existing indebtedness of D&B.
This $500 million of debt will be an obligation of R.H. Donnelley after the
Distribution. The adjustment represents a reduction in commercial paper
outstanding as of March 31, 1998 of $328.4 million with the remaining
proceeds of $171.6 million reflected as an increase to cash and cash
equivalents.
(2) To reflect the recapitalization of New D&B in connection with the
Distribution, including the elimination of treasury stock which shares will
be treasury shares of R.H. Donnelley, the adjustment of the par value of the
Preferred and Common Stock to $0.01 per share and the authorization of
Series Common Stock.
(3) To reflect the dividend (for accounting purposes only) of the net assets of
the R.H. Donnelley Business in connection with the Distribution.
29
<PAGE> 32
THE NEW DUN & BRADSTREET CORPORATION
(ACCOUNTING SUCCESSOR TO D&B)
SELECTED FINANCIAL DATA
The following data is qualified in its entirety by the Consolidated
Financial Statements of D&B and other information contained elsewhere in this
Information Statement. The financial data as of and for each of the years in the
five year period ended December 31, 1997 have been derived from the audited
financial statements of D&B, which financial statements as of December 31, 1996
and 1997 and for each of the years in the three year period ended December 31,
1997 are contained elsewhere in this Information Statement. The financial data
as of March 31, 1998 and for the three months ended March 31, 1997 and 1998 have
been derived from the unaudited interim financial statements of D&B contained
elsewhere in this Information Statement. Due to the relative significance of the
New D&B Business to D&B, the transaction will be accounted for as a reverse
spin-off, and as such, the New D&B Business has been classified as a continuing
operation and the R.H. Donnelley Business has been classified as a discontinued
operation. See "The Distribution -- Form of Transaction; Basis of Presentation".
The following financial data should also be read in conjunction with the
information set forth under "The New Dun & Bradstreet Corporation (Accounting
Successor to D&B) Consolidated Pro Forma Condensed Financial Statements" and
"The New Dun & Bradstreet Corporation (Accounting Successor to D&B) Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
D&B's Consolidated Financial Statements and Notes thereto appearing elsewhere in
this Information Statement.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
HISTORICAL PRO FORMA(1)
----------------------------------------------------- ------------
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- ------------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Operating Revenues.......... $1,676.3 $1,684.8 $1,734.5 $1,781.7 $1,811.0 $1,811.0
Costs and Expenses(2)....... 1,513.7 1,337.9 1,522.2 1,725.1 1,407.3 1,407.3
-------- -------- -------- -------- -------- --------
Operating Income............ 162.6 346.9 212.3 56.6 403.7 403.7
Non-Operating (Expense)
Income -- Net............. 1.6 (35.1) (68.0) (71.2) (71.3) (38.4)
-------- -------- -------- -------- -------- --------
Income from Continuing
Operations before
Provision for Income
Taxes..................... 164.2 311.8 144.3 (14.6) 332.4 365.3
Provision for Income
Taxes..................... 50.4 110.3 49.4 102.1 113.4 126.9
-------- -------- -------- -------- -------- --------
Income (Loss) from:
Continuing Operations..... 113.8 201.5 94.9 (116.7) 219.0 $ 238.4
========
Discontinued Operations,
Net of Income
Taxes(3)................ 166.4 428.0 225.9 72.3 92.0
-------- -------- -------- -------- --------
Income (Loss) before
Cumulative Effect of
Accounting Changes........ 280.2 629.5 320.8 (44.4) 311.0
Cumulative Effect of
Accounting Changes, Net of
Income Tax Benefit(4)..... (242.1) -- -- -- (150.6)
-------- -------- -------- -------- --------
Net Income (Loss)........... $ 38.1 $ 629.5 $ 320.8 $ (44.4) $ 160.4
======== ======== ======== ======== ========
BASIC EARNINGS (LOSS) PER
SHARE OF COMMON STOCK:
Continuing Operations....... $ 0.65 $ 1.18 $ 0.56 $ (0.69) $ 1.28 $ 1.40
========
Discontinued Operations..... 0.94 2.52 1.33 0.43 0.54
-------- -------- -------- -------- --------
Before Cumulative Effect of
Accounting Changes........ 1.59 3.70 1.89 (0.26) 1.82
Cumulative Effect of
Accounting Changes, Net of
Income Tax Benefit(4)..... (1.36) -- -- -- (0.88)
-------- -------- -------- -------- --------
Basic Earnings (Loss) Per
Share of Common Stock....... $ 0.23 $ 3.70 $ 1.89 $ (0.26) $ 0.94
======== ======== ======== ======== ========
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------------------
HISTORICAL PRO FORMA(1)
------------------- ------------
1997 1998 1998
-------- -------- ------------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
RESULTS OF OPERATIONS:
Operating Revenues.......... $ 436.4 $ 471.1 $ 471.1
Costs and Expenses(2)....... 358.5 378.3 378.3
-------- -------- --------
Operating Income............ 77.9 92.8 92.8
Non-Operating (Expense)
Income -- Net............. (22.5) (12.9) (7.1)
-------- -------- --------
Income from Continuing
Operations before
Provision for Income
Taxes..................... 55.4 79.9 85.7
Provision for Income
Taxes..................... 18.9 28.4 30.8
-------- -------- --------
Income (Loss) from:
Continuing Operations..... 36.5 51.5 $ 54.9
========
Discontinued Operations,
Net of Income
Taxes(3)................ (1.6) 12.0
-------- --------
Income (Loss) before
Cumulative Effect of
Accounting Changes........ 34.9 63.5
Cumulative Effect of
Accounting Changes, Net of
Income Tax Benefit(4)..... (150.6) --
-------- --------
Net Income (Loss)........... $ (115.7) $ 63.5
======== ========
BASIC EARNINGS (LOSS) PER
SHARE OF COMMON STOCK:
Continuing Operations....... $ 0.21 $ 0.30 $ 0.32
========
Discontinued Operations..... (0.01) 0.07
-------- --------
Before Cumulative Effect of
Accounting Changes........ 0.20 0.37
Cumulative Effect of
Accounting Changes, Net of
Income Tax Benefit(4)..... (0.88) --
-------- --------
Basic Earnings (Loss) Per
Share of Common Stock....... $ (0.68) $ 0.37
======== ========
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
HISTORICAL PRO FORMA(1)
----------------------------------------------------- ------------
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- -------- ------------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
DILUTED EARNINGS (LOSS) PER
SHARE OF COMMON STOCK:
Continuing Operations....... $ 0.64 $ 1.17 $ 0.55 $ (0.69) $ 1.27 $ 1.38
========
Discontinued Operations..... 0.93 2.50 1.32 0.43 0.53
-------- -------- -------- -------- --------
Before Cumulative Effect of
Accounting Changes........ 1.57 3.67 1.87 (0.26) 1.80
Cumulative Effect of
Accounting Changes, Net of
Income Tax Benefit(4)..... (1.35) -- -- -- (0.87)
-------- -------- -------- -------- --------
Diluted Earnings (Loss) Per
Share of Common Stock....... $ 0.22 $ 3.67 $ 1.87 $ (0.26) $ 0.93
======== ======== ======== ======== ========
OTHER DATA:
Dividends Per Share........... $ 2.40 $ 2.56 $ 2.63 $ 1.82 $ 0.88
Dividends Paid................ $ 423.0 $ 435.2 $ 446.1 $ 310.8 $ 150.6
Weighted Average Number of
Shares Outstanding --
Basic....................... 177.2 169.9 169.5 170.0 170.8 170.8
Diluted..................... 179.1 171.7 171.6 170.0(6) 172.6 172.6
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------------------
HISTORICAL PRO FORMA(1)
------------------- ------------
1997 1998 1998
-------- -------- ------------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
DILUTED EARNINGS (LOSS) PER
SHARE OF COMMON STOCK:
Continuing Operations....... $ 0.21 $ 0.30 $ 0.32
========
Discontinued Operations..... (0.01) 0.07
-------- --------
Before Cumulative Effect of
Accounting Changes........ 0.20 0.37
Cumulative Effect of
Accounting Changes, Net of
Income Tax Benefit(4)..... (0.87) --
-------- --------
Diluted Earnings (Loss) Per
Share of Common Stock....... $ (0.67) $ 0.37
======== ========
OTHER DATA:
Dividends Per Share........... $ 0.22 $ 0.22
Dividends Paid................ $ 37.7 $ 37.7
Weighted Average Number of
Shares Outstanding --
Basic....................... 171.2 171.2 171.2
Diluted..................... 172.7 174.1 174.1
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
HISTORICAL
-----------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET:
Total Assets(5)............. $3,558.7 $3,743.2 $3,628.5 $2,209.0 $2,086.0
Shareholders' Equity........ $1,111.3 $1,318.6 $1,182.5 $ (431.7) $ (490.2)
<CAPTION>
AS OF MARCH 31,
-------------------------
HISTORICAL PRO FORMA(1)
---------- ------------
1998 1998
---------- ------------
(AMOUNTS IN MILLIONS)
<S> <C> <C>
BALANCE SHEET:
Total Assets(5)............. $2,087.9 $1,977.0
Shareholders' Equity........ $ (446.2) $ (228.7)
</TABLE>
- ---------------
(1) See "The New Dun & Bradstreet Corporation (Accounting Successor to D&B)
Consolidated Pro Forma Condensed Financial Statements".
(2) 1993 included restructuring expense of $158.8 million partially offset by
gains of $13.6 million for the redemption of preferred shares received from
the 1991 sale of Donnelley Marketing, $9.5 million on the sale of Donnelley
Marketing and $8.9 million for the redemption of notes related to the 1992
sale of Datastream International. 1994 included restructuring expense and a
non-recurring charge of $66.7 million partially offset by a gain on the sale
of DunsNet of $36.0 million. 1995 included a fourth-quarter non-recurring
charge of $188.5 million partially offset by gains of $90.0 million and
$28.0 million for the sale of Interactive Data Corporation and warrants
received in connection with the sale of Donnelley Marketing, respectively.
1996 included one-time charges of $161.2 million for reorganization costs
and the loss on the sale of American Credit Indemnity of $68.2 million.
(3) Income taxes on discontinued operations were $109.0 million, $139.4 million,
$73.4 million, $145.1 million and $52.2 million in 1993, 1994, 1995, 1996
and 1997, respectively, and $8.1 million for the three months ended March
31, 1998. An income tax benefit on discontinued operations was $0.7 million
for the three months ended March 31, 1997.
(4) 1993 included the impact of $127.1 million or $.72 per share basic and $.71
per share diluted for the adoption of SFAS No. 112 and $115.0 million or
$.64 per share (basic and diluted) for the adoption of SFAS No. 106. 1997
included the impact of a change in revenue recognition policies (see Note 1
to the D&B Consolidated Financial Statements).
(5) Includes net assets of discontinued operations of $1,626.0 million, $1,809.3
million, $1,652.2 million, $430.6 million and $296.5 million as of December
31, 1993, 1994, 1995, 1996 and 1997, respectively, and $282.5 as of March
31, 1998. 1993, 1994 and 1995 net assets of discontinued operations included
the net assets of Cognizant Corporation and ACNielsen Corporation of
$1,186.4 million, $1,342.3 million and $1,207.3 million, respectively.
(6) The exercise of potentially dilutive shares has not been assumed for the
year ended December 31, 1996, since the result is antidilutive.
31
<PAGE> 34
THE NEW DUN & BRADSTREET CORPORATION
(ACCOUNTING SUCCESSOR TO D&B)
CONSOLIDATED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited consolidated pro forma condensed financial
statements have been prepared giving effect to the Distribution as if it
occurred on March 31, 1998 for the pro forma condensed balance sheet and January
1, 1997 for the pro forma condensed statements of operations. The pro forma
condensed balance sheet and statements of operations set forth below do not
purport to represent what New D&B's financial position actually would have been
had the Distribution occurred on the date indicated or to project New D&B's
operating results for any future period. The pro forma adjustments are based
upon available information and certain assumptions that D&B management believes
are reasonable. The consolidated pro forma condensed financial statements set
forth below should be read in conjunction with, and are qualified in their
entirety by, the information under "The New Dun & Bradstreet Corporation
(Accounting Successor to D&B) Selected Financial Data" and "The New Dun &
Bradstreet Corporation (Accounting Successor to D&B) Management's Discussion and
Analysis of Financial Condition and Results of Operations" and in the D&B
Consolidated Financial Statements and Notes thereto included elsewhere in this
Information Statement.
32
<PAGE> 35
THE NEW DUN & BRADSTREET CORPORATION
(ACCOUNTING SUCCESSOR TO D&B)
CONSOLIDATED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- -----------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
OPERATING REVENUES......................................... $1,811.0 $1,811.0
-------- --------
Operating Costs............................................ 487.0 487.0
Selling and Administrative Expenses........................ 788.4 788.4
Depreciation and Amortization.............................. 131.9 131.9
-------- --------
OPERATING INCOME........................................... 403.7 403.7
-------- --------
Interest Income............................................ 1.8 1.8
Interest Expense........................................... (53.4) $32.9(A) (20.5)
Other Expense -- Net....................................... (19.7) (19.7)
-------- ----- --------
Non-Operating Expense -- Net............................... (71.3) 32.9 (38.4)
-------- ----- --------
Income from Continuing Operations before Provision for
Income Taxes............................................. 332.4 32.9 365.3
Provision for Income Taxes................................. 113.4 13.5(B) 126.9
-------- ----- --------
INCOME FROM CONTINUING OPERATIONS.......................... $ 219.0 $19.4 $ 238.4
======== ===== ========
EARNINGS PER SHARE OF COMMON STOCK FROM CONTINUING
OPERATIONS:
Basic.................................................... $ 1.28 $ 1.40
Diluted.................................................. $ 1.27 $ 1.38
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic.................................................... 170.8 170.8
Diluted.................................................. 172.6 172.6
</TABLE>
- ---------------
(A) In connection with the Distribution, R.H. Donnelley will borrow
approximately $350 million under the R.H. Donnelley Credit Facility and
issue $150 million of senior subordinated notes under the R.H. Donnelley
Indenture, all of which will be guaranteed by D&B. A portion of the proceeds
of this indebtedness will be used to repay existing indebtedness of D&B.
This $500 million of debt will be the obligation of R.H. Donnelley after the
Distribution. The adjustment represents the reduction in actual interest
expense on debt outstanding during the year, up to a maximum of $500
million, assuming the debt was repaid as of January 1, 1997.
(B) To reflect the tax effect of the pro forma adjustment at the statutory tax
rate.
(C) Management estimates that one-time pre-tax expenditures of approximately $25
million to $30 million ($20 million to $25 million after-tax), including the
costs to terminate outstanding interest rate swaps, will be required to
complete the Distribution. These costs will be recorded as incurred and have
not been considered in the consolidated pro forma condensed statement of
operations.
33
<PAGE> 36
THE NEW DUN & BRADSTREET CORPORATION
(ACCOUNTING SUCCESSOR TO D&B)
CONSOLIDATED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1998
----------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- -----------
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
OPERATING REVENUES....................................... $471.1 $471.1
Operating Costs.......................................... 145.3 145.3
Selling and Administrative Expenses...................... 197.6 197.6
Depreciation and Amortization............................ 35.4 35.4
------ ------
OPERATING INCOME......................................... 92.8 92.8
------ ------
Interest Income.......................................... 0.9 0.9
Interest Expense......................................... (7.3) $5.8(A) (1.5)
Other Expense -- Net..................................... (6.5) (6.5)
------ ---- ------
Non-Operating Expense -- Net............................. (12.9) 5.8 (7.1)
------ ---- ------
Income from Continuing Operations before Provision for
Income Taxes........................................... 79.9 5.8 85.7
Provision for Income Taxes............................... 28.4 2.4(B) 30.8
------ ---- ------
INCOME FROM CONTINUING OPERATIONS........................ $ 51.5 $3.4 $ 54.9
====== ==== ======
EARNINGS PER SHARE OF COMMON STOCK FROM CONTINUING
OPERATIONS:
Basic.................................................. $ 0.30 $ 0.32
Diluted................................................ $ 0.30 $ 0.32
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic.................................................. 171.2 171.2
Diluted................................................ 174.1 174.1
</TABLE>
- ---------------
(A) In connection with the Distribution, R.H. Donnelley will borrow
approximately $350 million under the R.H. Donnelley Credit Facility and
issue $150 million of senior subordinated notes under the R.H. Donnelley
Indenture, all of which will be guaranteed by D&B. A portion of the proceeds
of this indebtedness will be used to repay existing indebtedness of D&B.
This $500 million of debt will be the obligation of R.H. Donnelley after the
Distribution. The adjustment represents the reduction in actual interest
expense on debt outstanding during the period, assuming the debt was repaid
as of January 1, 1997.
(B) To reflect the tax effect of the pro forma adjustment at the statutory tax
rate.
(C) Management estimates that one-time pre-tax expenditures of approximately $25
million to $30 million ($20 million to $25 million after-tax), including the
costs to terminate outstanding interest rate swaps, will be required to
complete the Distribution. These costs will be recorded as incurred and have
not been considered in the consolidated pro forma condensed statement of
operations.
34
<PAGE> 37
THE NEW DUN & BRADSTREET CORPORATION
(ACCOUNTING SUCCESSOR TO D&B)
CONSOLIDATED PRO FORMA CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
---------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
ASSETS
Cash and Cash Equivalents................................. $ 116.6 $ 171.6(A) $ 288.2
Other Current Assets...................................... 719.3 719.3
-------- ------- --------
Total Current Assets............................ 835.9 171.6 1,007.5
Non-Current Assets........................................ 969.5 969.5
Net Assets of Discontinued Operations..................... 282.5 (282.5)(B) --
-------- ------- --------
Total Assets.............................................. $2,087.9 $(110.9) $1,977.0
======== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes Payable............................................. $ 364.8 $(328.4)(A) $ 36.4
Accrued and Other Current Liabilities..................... 1,089.6 1,089.6
-------- ------- --------
Total Current Liabilities....................... 1,454.4 (328.4) 1,126.0
Long-term Liabilities..................................... 777.8 777.8
Minority Interest......................................... 301.9 301.9
Shareholders' Equity
Preferred Stock -- authorized -- 10,000,000 shares;
$1.00 par value per share -- historical.................
$0.01 par value per share -- pro forma..................
Series Common Stock -- authorized -- 10,000,000 shares
$0.01 par value per share -- pro forma..................
Common Stock authorized -- 400,000,000 shares
$1.00 par value per share, 188,420,996 shares
issued -- historical.................................
$0.01 par value per share, 171,570,140 shares
issued -- pro forma.................................. 188.4 (16.9)(C) 1.7
(169.8)(D)
Capital Surplus........................................... 80.2 169.8(D) 250.0
Retained Earnings (Deficit)............................... 396.2 500.0(A) (275.9)
(282.5)(B)
(889.6)(C)
Treasury Stock, at cost, 16,850,856
shares -- historical.................................... (906.5) 906.5(C) --
Cumulative Translation Adjustment......................... (167.1) (167.1)
Minimum Pension Liability Adjustment...................... (37.4) (37.4)
-------- ------- --------
Total Shareholders' Equity...................... (446.2) 217.5 (228.7)
-------- ------- --------
Total Liabilities and Shareholders' Equity...... $2,087.9 $(110.9) $1,977.0
======== ======= ========
</TABLE>
- ---------------
(A) In connection with the Distribution, R.H. Donnelley will borrow
approximately $350 million under the R.H. Donnelley Credit Facility and
issue $150 million of senior subordinated notes under the R.H. Donnelley
Indenture, all of which will be guaranteed by D&B. A portion of this
indebtedness will be used to repay existing indebtedness. This $500 million
of debt will be an obligation of R.H. Donnelley after the Distribution. The
adjustment represents the reduction in commercial paper outstanding as of
March 31, 1998 of $328.4 million with the remaining proceeds of $171.6
million reflected as an increase to cash and cash equivalents.
(B) To reflect the dividend of net assets of R.H. Donnelley (for accounting
purposes only).
(C) To reflect the elimination of treasury stock which shares will be treasury
shares of R.H. Donnelley.
(D) To reflect the adjustment of the par value of the Common Stock to $0.01.
35
<PAGE> 38
THE NEW DUN & BRADSTREET CORPORATION
(ACCOUNTING SUCCESSOR TO D&B)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As described under "The Distribution -- Form of Transaction; Basis of
Presentation", for financial reporting purposes, New D&B will be treated as the
"accounting successor" to D&B. Therefore, the historical financial information
for New D&B included herein and management's discussion and analysis thereof set
forth below are those of D&B, with the R.H. Donnelley Business treated as a
discontinued operation.
OVERVIEW
On December 17, 1997, the Board of Directors of D&B announced a plan to
separate into two publicly traded companies -- New D&B and R.H. Donnelley. The
separation of the two companies will be accomplished through a tax-free dividend
to D&B's stockholders of New D&B Common Stock, which will represent a continuing
interest in businesses to be conducted by New D&B. After the Distribution, D&B's
only business will be the R.H. Donnelley Business, and the shares of D&B Common
Stock held by D&B stockholders will represent a continuing ownership interest
only in that business. In connection with the Distribution, D&B will change its
name to "R.H. Donnelley Corporation" (and therefore from and after the
Distribution, D&B Common Stock will be "R.H. Donnelley Common Stock"), and New
D&B will change its name to "The Dun & Bradstreet Corporation". D&B has received
a ruling from the Internal Revenue Service to the effect that the Distribution
will be tax-free for Federal income tax purposes. New D&B will consist of D&B
Inc. and Moody's.
On November 1, 1996, D&B reorganized into three publicly traded independent
companies by spinning off through a tax-free distribution (the "1996
Distribution") two new companies, (1) Cognizant and (2) ACNielsen, to
shareholders. In conjunction with the 1996 Distribution, D&B also disposed of
Dun & Bradstreet Software ("DBS") and NCH Promotional Services ("NCH"). After
the transaction was completed, D&B's continuing operations consisted of D&B
Inc., Moody's and the R.H. Donnelley Business. For purposes of effecting the
1996 Distribution and governing certain of the ongoing relationships among D&B,
Cognizant and ACNielsen after the 1996 Distribution and to provide for an
orderly transition, D&B, Cognizant and ACNielsen entered into various
agreements, as described in Note 2 to D&B's consolidated financial statements.
Pursuant to Accounting Principles Board Opinion ("APB") No. 30, "Reporting
the Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of D&B have been
reclassified to reflect both the Distribution and the 1996 Distribution.
Accordingly, revenues, costs and expenses and cash flows of R.H. Donnelley,
Cognizant, ACNielsen, DBS and NCH have been excluded from the respective
captions in the Consolidated Statements of Operations and Consolidated
Statements of Cash Flows. The net operating results of these entities have been
reported, net of applicable income taxes, as "Income (Loss) from Discontinued
Operations," and the net cash flows of these entities have been reported as "Net
Cash (Used In) Provided by Discontinued Operations". The assets and liabilities
of the R.H. Donnelley Business have been excluded from the respective captions
in the Consolidated Balance Sheets and have been reported as "Net Assets of
Discontinued Operations".
RESULTS OF OPERATIONS
Three months ended March 31, 1998 Compared with Three months ended March 31,
1997
D&B's first quarter 1998 income from continuing operations of $51.5 million
was up $15.0 million or 41% from the prior year's first quarter results from
continuing operations. Earnings per share from continuing operations (basic and
diluted) of $.30 was up 43% from the prior year's earnings per share from
continuing operations of $.21. D&B's first quarter net income was $63.5 million
or $.37 per share, both basic and diluted. This compares with a first quarter
1997 net loss of $115.7 million, or a $.68 per share loss basic, $.67 per share
loss diluted. The 1997 results include a one-time, non-cash charge for the
cumulative effect of accounting changes of $150.6 million after-tax ($.88 per
share basic, $.87 per share diluted), with respect to certain of
36
<PAGE> 39
D&B's revenue recognition methods. Effective January 1, 1997, D&B changed its
revenue recognition method for its Credit Information Services business and
changed certain of its revenue recognition methods in the Marketing Information
Services, Receivables Management Services and Moody's businesses. In accordance
with APB No. 20, "Accounting Changes," the cumulative effect of these accounting
changes resulted in a pre-tax non-cash charge of $254.7 million ($150.6 million
after-tax).
Operating revenues for the first quarter were up 8% to $471.1 million in
1998 from $436.4 million in 1997. Revenues for D&B of $338.6 million were up 2%
from the prior year. Excluding the impact of foreign currency fluctuations,
revenue growth for D&B was 6%. D&B U.S. posted an 8% increase in first quarter
revenue, driven by solid growth in traditional credit products, as well as
strong performance in sales of Value Added Products and Database Marketing. D&B
Europe's revenues decreased 8%, driven by unfavorable foreign exchange
fluctuations. Excluding foreign exchange, Europe's results improved modestly, up
1% over the prior year. Growth in the UK, Eastern Europe, Italy, Holland and
Portugal were offset by declines in Switzerland, Norway and Germany. Revenues
from D&B's other regions were up 3%, driven by a 13% improvement in Receivable
Management Services and growth in Latin America, partially offset by declines in
Canada and Asia Pacific resulting from unfavorable foreign exchange. Moody's
posted revenue growth of 25% to $132.5 million over the prior year reflecting
the continuing favorable interest rate environment, the continuing trend toward
the globalization of capital markets and Moody's success in product innovation.
Operating income for the first quarter of 1998 of $92.8 million was 19%
higher than 1997 first quarter operating income of $77.9 million. This growth
reflects the strong revenue results noted above and continued efforts to control
costs.
Non-operating expense-net was $12.9 million for the first quarter of 1998
compared with non-operating expense-net of $22.5 million for the first quarter
of 1997. This significant decrease was a result of sharply lower interest
expense, driven by lower debt and strong cash flow versus prior year.
The effective tax rate was 35.5% for the first quarter of 1998 compared to
34.1% in 1997.
Income from discontinued operations, net of income taxes, was $12.0 million
for the first quarter of 1998 compared to a loss of $1.6 million for the same
period in 1997. Revenue for the R.H. Donnelley Business totaled $41.5 million,
an increase of $22.5 million from $19.0 million reported in the first quarter of
1997 (which included $.8 million of revenues of the East Coast proprietary
operations of the R.H. Donnelley Business ("P-East") which was sold in the
fourth quarter of 1997). This strong increase is the result of a one-time shift
of approximately $19 million in revenues from the DonTech partnership as well as
growth in sales of advertising for both DonTech's Illinois directories and for
Sprint's Las Vegas directory. Certain revenue that in previous years was
reported in later quarters of the year is being reported in the first quarter
this year, a result of the August 1997 restructuring of the DonTech partnership
agreement with Ameritech advertising services. Operating income for the R.H.
Donnelley Business for the first quarter of 1998 was $20.1 million, up $22.4
million from 1997 (which included the $.9 million operating loss of P-East), due
mainly to the DonTech revenue shift.
Year ended December 31, 1997 Compared with Year ended December 31 1996
D&B's basic earnings per share from continuing operations were $1.28 in
1997, up $1.97 from a loss of $.69 per share reported in 1996. On a diluted
basis, D&B reported earnings per share from continuing operations of $1.27 per
share compared with a loss of $.69 per share reported in 1996. The 1996 loss
included all corporate overhead expenses associated with D&B prior to the 1996
Distribution and certain transaction-related expenses. D&B's basic earnings per
share in 1997 were $.94, up $1.20 from a loss of $.26 per share reported in
1996. On a diluted basis, D&B reported earnings per share of $.93 compared with
a loss of $.26 in 1996. The 1997 results include a one-time, non-cash charge for
the cumulative effect of accounting changes ($.88 per share basic, $.87 per
share diluted), with respect to certain of D&B's revenue recognition methods.
Effective January 1, 1997, D&B changed its revenue recognition method for its
Credit Information Services business and changed certain of its revenue
recognition methods in the Marketing Information Services, Receivables
Management Services and Moody's businesses. In accordance with APB No. 20,
"Accounting Changes," the cumulative effect of these accounting changes resulted
in a pre-tax non-cash charge of $254.7 million ($150.6 million after-tax).
37
<PAGE> 40
Operating revenues grew 1.6% to $1,811.0 million from $1,781.7 million in
1996. Excluding the results of American Credit Indemnity ("ACI"), which was
divested in 1996, revenue growth would have increased 5.4% from 1996. Moody's
reported revenues of $457.4 million in 1997, up 18.7% from 1996, driven by gains
in corporate bonds, increased coverage in the mortgage-backed market and
continued expansion outside the U.S. Corporate bonds displayed strong volume
growth, especially in the high-yield market, where volumes were 30% above the
prior year. D&B Inc.'s 1997 revenues were up 1.7% to $1,353.6 million. D&B U.S.
revenues were up 6.4%, including increases in Marketing Information Services of
14.3% and Receivables Management Services of 9.9%. D&B Europe's 1997 revenues of
$426.1 million were 4.3% lower than 1996, resulting from the increased strength
of the U.S. dollar. Excluding the impact of foreign exchange, D&B Europe would
have reported a 4.0% increase in revenues. Other D&B regions reported an 8.8%
decrease in operating revenues to $93.8 million from $102.8 million, primarily
as a result of phasing out certain unprofitable operations in Latin America.
Operating income in 1997 of $403.7 million increased $347.1 million from
$56.6 million in 1996. 1996 operating income included $161.2 million in
transaction costs incurred in conjunction with D&B's 1996 Distribution and a
$68.2 million loss attributable to the sale of ACI. Excluding these
non-recurring items, 1997 operating income would have been up 41.2% from $286.0
million in 1996. Operating income growth reflected strong growth at Moody's and
growth in D&B U.S., partially offset by declines in the international operations
of D&B Inc.
1997 operating costs and selling and administrative expenses increased by
3.7% to $1,226.6 million, excluding corporate expenses in each year, since 1996
included costs associated with the corporate structure prior to the 1996
Distribution.
Non-operating expense-net of $71.3 million in 1997, which primarily
included interest expense on notes payable, and minority interest costs
(included in other expense-net), was essentially unchanged compared with 1996.
Interest expense in 1997 included a $3.2 million charge to mark-to-market
certain interest rate swaps and a $2.9 million charge as a result of interest
rate swap cancellations. These charges were offset by lower financing costs in
1997.
In 1997, D&B's effective tax rate from continuing operations was 34.1%. Due
to tax implications of the 1996 Distribution, discussed below, the 1996
effective tax rate was 698.4%. The underlying effective tax rate, excluding
these one-time items for 1996, was approximately 34%.
Income from discontinued operations, net of income taxes, was $92.0 million
in 1997 and $230.5 million in 1996. Operating results of the R.H. Donnelley
Business comprised the income from discontinued operations in 1997, while 1996
includes operating results of the R.H. Donnelley Business and NCH for the full
year and Cognizant, ACNielsen and DBS for the ten months ended October 31, 1996.
The R.H. Donnelley Business operating income included a gain on the sale of the
East Coast proprietary operations of the R.H. Donnelley Business ("P-East") of
$9.4 million in 1997 and a loss on the sale of the West Coast proprietary
operations of the R.H. Donnelley Business ("P-West") of $28.5 million in 1996.
Also recorded in 1996 was a loss on the disposition of DBS of $220.6 million
($158.2 million after-tax). Additionally, D&B sold NCH in the fourth quarter of
1996. No gain or loss resulted from the sale.
Year ended December 31, 1996 Compared with Year ended December 1995
D&B incurred a loss from continuing operations in 1996 of $116.7 million,
or $.69 basic earnings per share ($.69 diluted earnings per share) compared with
earnings of $94.9 million, or $.56 basic earnings per share ($.55 diluted
earnings per share) in 1995. 1996 results included all corporate overhead
expenses associated with D&B prior to the 1996 Distribution and certain
transaction-related expenses. 1995 results included certain non-recurring
charges and gains.
Operating revenues from continuing operations for the year ended December
31, 1996 grew 2.7% to $1,781.7 million from $1,734.5 million in 1995. Excluding
the results of divested businesses, revenue growth would have increased 6.6%
from 1995. Moody's reported revenues of $385.3 million in 1996, up 16.9% from
1995, driven by strong corporate and municipal bond market volumes during the
year. D&B Inc.'s 1996 revenues were up 4.0% to $1,331.5 million. D&B U.S.
revenues were up 4.0%, including increases in
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Marketing Information Services of 9.7% and Receivables Management Services of
12.2%. D&B Europe and other D&B regions were up 3.1% and 7.8%, respectively.
Operating income in 1996 of $56.6 million decreased from $212.3 million in
the prior year. Included in operating income in 1996 was $161.2 million in
transaction costs incurred in connection with D&B's 1996 Distribution. These
costs included $75.0 million for professional and consulting fees and $86.2
million primarily for settlement of executive compensation plans and retention
bonuses. Also included in 1996 operating income was the $68.2 million loss
incurred as a result of the sale of ACI in October of 1996. 1995 operating costs
included gains on both the sales of Interactive Data Corporation ("IDC") of
$90.0 million and warrants received in connection with the previous divestiture
of Donnelley Marketing of $28.0 million, offset by a non-recurring charge of
$188.5 million recorded in the fourth quarter of 1995. This charge primarily
reflected an impairment loss in connection with the adoption of the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
($93.7 million), a provision for postemployment benefits ($56.3 million) under
D&B's severance plan, an accrual for contractual obligations that have no future
economic benefits and for penalties to cancel certain contracts ($19.8 million)
and other asset revaluations ($18.7 million).
Operating costs and selling and administrative expenses, excluding the
effects of divestitures, transaction costs associated with the 1996 Distribution
and the fourth-quarter non-recurring charge, increased 8.6% in 1996 compared
with 1995. The increase reflects D&B's investments in new products and services.
D&B reported 1996 non-operating expense-net of $71.2 million compared with
non-operating expense-net of $68.0 million in 1995. The increase was
attributable, in part, to lower interest income earned due to the high cash
requirements of the 1996 Distribution and the sale of ACI, which held $111.5
million of marketable securities at the date of the sale.
Despite a loss from continuing operations, the provision for income taxes
was $102.1 million in 1996. D&B's effective tax rate was 698.4% in 1996 and
34.2% in 1995. In 1996, the higher effective tax rate primarily reflected the
non-deductibility of certain transaction costs, lower tax benefits on losses
from divested businesses and certain foreign taxes incurred in connection with
the 1996 Distribution. The underlying effective tax rate, excluding these
one-time items for 1996, was approximately 34%.
Income from discontinued operations, net of income taxes, was $230.5
million in 1996 compared with $225.9 million in the prior year. 1996 includes
the operating results of the R.H. Donnelley Business and NCH for the full year
and Cognizant, ACNielsen and DBS for the ten months ended October 31, 1996,
while 1995 includes the operating results of all of those entities for the full
year. The R.H. Donnelley Business' 1996 results include a loss on the
disposition of P-West of $28.5 million. D&B also reported a loss on the
disposition of DBS, which was completed in the fourth quarter of 1996, of $220.6
million ($158.2 million after tax). Additionally, D&B sold NCH in the fourth
quarter of 1996, with no resulting gain or loss recorded on the disposition. The
1995 results were affected by the fourth-quarter non-recurring charge of $206.3
million after tax.
ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132
revises employers' disclosures about pension and other postretirement benefit
plans. SFAS No. 132 is effective for fiscal years beginning after December 15,
1997. Restatement of disclosures for earlier periods provided for comparative
purposes are required unless the information is not readily available. D&B is in
the process of evaluating the disclosure requirements. The adoption of SFAS No.
132 will have no impact on D&B's results of operations, financial position or
cash flows.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share" ("SFAS No. 128"), which simplifies existing
computational guidelines, revises disclosure requirements and increases the
comparability of earnings per share data on an international basis. D&B adopted
the statement in 1997, which required restatement of all prior-period per share
data presented.
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In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"), which establishes standards for reporting and
displaying comprehensive income and its components in a full set of
general-purpose financial statements. D&B adopted the statement in 1998.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), which
revises disclosure requirements about operating segments and establishes
standards for related disclosures about products and services, geographic areas
and major customers. SFAS No. 131 requires that public business enterprises
report financial and descriptive information about their reportable operating
segments. The statement will be adopted by D&B effective year end December 31,
1998 and will require restatement of prior years. SFAS No. 131 is expected to
affect D&B's segment disclosures, but will not affect D&B's results of
operations, financial position or cash flows. D&B is in the process of
evaluating the disclosure requirements.
NON-U.S. OPERATING AND MONETARY ASSETS
D&B has operations in 38 countries. D&B's non-U.S. operations generated
approximately 32% of total revenues, including approximately 26% from European
operations. Thirty-eight percent of D&B's assets are located outside the U.S.,
and no one country had a significant concentration of cash.
At December 31, 1997, D&B had approximately $117 million in forward foreign
exchange contracts outstanding, with various expiration dates through March 1998
(see Note 5 to D&B's consolidated financial statements).
MARKET RISK SENSITIVE INSTRUMENTS
D&B funds its operations primarily through its commercial paper program and
other short-term bank lines of credit. As D&B operates in 38 countries, D&B is
exposed to market risk from changes in interest rates and foreign exchange rates
which could affect its results of operations and financial condition. In order
to reduce the risk from fluctuations in interest rates and foreign currencies,
D&B uses interest rate swap agreements and forward foreign exchange contracts.
These derivative financial instruments are viewed by D&B as risk management
tools that are entered into for hedging purposes only. D&B does not use
derivative financial instruments for trading or speculative purposes.
D&B also has investments in fixed income marketable securities.
Consequently, D&B is exposed to fluctuations in rates on these marketable
securities. Market risk associated with investments in marketable securities is
immaterial and has been excluded from the sensitivity discussions.
A discussion of D&B's accounting policies for derivative financial
instruments is included in the Summary of Significant Accounting Policies in
Note 1 to D&B's consolidated financial statements, and further disclosure
relating to financial instruments is included in Note 5 -- Financial Instruments
with Off-Balance Sheet Risks.
The following analysis presents the sensitivity of the fair value of D&B's
market risk sensitive instruments to changes in market rates and prices.
Interest Rate Risk
D&B is exposed to market risk through its commercial paper program, where
it borrows at prevailing short-term commercial paper rates, and through its
variable-rate short-term bank borrowings.
D&B enters into interest rate swap agreements to manage exposure to changes
in interest rates. Specifically, D&B is exposed to fluctuations in both
short-term commercial paper and short-term bank rates. Interest rate swaps allow
D&B to raise funds at floating rates and effectively swap them into fixed rates
that are lower than those available to it if fixed-rate borrowings were made
directly. At December 31, 1997, D&B had $300.0 million of these interest rate
swaps.
The fair value for interest rate risk is calculated by D&B utilizing
estimates of the termination value of D&B's interest rate swaps, commercial
paper borrowings and short-term bank borrowings based upon a 10% increase, or
decrease in interest rates from their December 31, 1997 levels. Fair values are
the present value of projected future cash flows based on the market rates and
prices chosen. At December 31, 1997 the unrealized
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fair value of the interest rate swaps was a loss of $11.1 million. Assuming an
instantaneous parallel upward shift in the yield curve of 10% from December 31,
1997 levels, the unrealized fair value of D&B's interest rate swaps, commercial
paper borrowings and short-term bank borrowings would result in a loss of $2.5
million. Assuming an instantaneous parallel downward shift in the yield curve of
10% from December 31, 1997 levels, the unrealized fair value of D&B's interest
rate swaps, commercial paper borrowings and short-term bank borrowings would
result in a loss of $20.5 million.
Foreign Exchange Risk
D&B follows a policy of hedging substantially all cross-border intercompany
transactions denominated in a currency other than the functional currency
applicable to each of its various subsidiaries. D&B only uses forward foreign
exchange contracts to implement its hedging strategy. Typically, these contracts
have maturities of 12 months or less. These forward contracts are executed with
creditworthy institutions and are denominated primarily in British Pound, German
Mark, Swedish Krona and Japanese Yen.
The fair value of foreign currency risk is calculated by using estimates of
the cost of closing out all outstanding forward foreign exchange contracts given
a 10% increase or decrease in forward rates from December 31, 1997 levels. At
December 31, 1997, net unrealized gains related to D&B's forward contracts were
$1.1 million. If forward rates increased by 10% from December 31, 1997 levels,
the unrealized loss on these contracts would be $4.7 million. If forward rates
decreased by 10% from December 31, 1997 levels, the unrealized gain on these
contracts would be $6.9 million. However, the estimated potential gain or loss
on forward contracts is expected to be offset by changes in the underlying
transactions. Therefore, the impact of a 10% movement in foreign exchange rates
will be immaterial.
LIQUIDITY AND FINANCIAL POSITION
D&B generates significant, predictable cash flows from its business
operations. Management believes that these cash flows are sufficient to fund its
operating needs, service debt and pay dividends and will continue to be so
subsequent to the Distribution. At March 31, 1998, cash and cash equivalents
totaled $116.6 million, an increase of $34.8 million from $81.8 million held at
December 31, 1997.
Operating activities of continuing operations generated net cash of $143.1
million during the first quarter of 1998 compared to $122.9 million in 1997.
This increase is consistent with the improvement in the income from continuing
operations. Discontinued operations generated $28.4 million in the first quarter
of 1998 compared to $59.9 million in 1997. All interest expense, taxes and
corporate overhead costs have been borne by the continuing operations of D&B.
Additionally, costs incurred to complete the Distribution are the responsibility
of D&B.
Net cash used in investing activities was $36.6 million for the first
quarter of 1998 compared to $34.6 million in 1997 including net cash used in
investing activities of discontinued operations of $2.5 million in the first
quarter of 1998 and $8.7 million in 1997. In the first quarter of 1998 D&B
invested $26.1 million for capital expenditures and additions to computer
software and other intangibles compared to $17.1 million in the comparable
period in 1997.
Net cash used in financing activities was $101.2 million during the first
quarter of 1998 compared to $125.8 million in the first quarter of 1997.
Payments of dividends accounted for $37.7 million in both 1998 and 1997. During
the first quarter of 1998, D&B reduced short-term borrowings by $85.9 million
compared to $99.2 million in the first quarter of 1997. Proceeds from the
exercise of stock options were $22.6 million for the first quarter of 1998
compared to $13.1 million in 1997.
At December 31, 1997, cash and cash equivalents totaled $81.8 million, a
decrease from $127.8 million in 1996. Net cash provided by operating activities
of the continuing operations increased by $200.1 million to $380.0 million in
1997. This increase is primarily due to the absence of transaction and
divestiture-related costs as a result of the 1996 Distribution. Net cash
provided by operating activities of discontinued operations decreased by $31.7
million to $120.4 million in 1997. The absence of this source of cash after the
Distribution will not have a material impact on D&B's liquidity or financial
position.
Net cash used in investing activities totaled $15.9 million in 1997
compared with $210.1 million in 1996. Net cash provided by investing activities
of discontinued operations was $105.7 million in 1997 resulting from
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the proceeds from the sale of P-East of $122.0 million offset by spending for
capital expenditures. This compared to net cash used by investing activities of
discontinued operations in 1996 of $180.5 million. In 1997 spending for capital
expenditures, computer software and other intangibles of the continuing
operations totaled $129.1 million. Spending for capital expenditures, computer
software and other intangibles totaled $152.0 million in 1996, which was offset
by proceeds received from the sale of ACI of $93.9 million.
D&B utilizes the commercial paper market as its primary source of
financing. D&B has two committed bank facilities that support the commercial
paper borrowings. One facility permits borrowings of up to $750 million and
matures in August 2001; the other permits borrowings of up to $150 million and
matures in August 1998. D&B has the ability to borrow under these facilities at
prevailing short-term interest rates. D&B also has available non-committed lines
of credit of $82.9 million. As of December 31, 1997, $29.9 million was borrowed
against these facilities. As of March 31, 1998, $36.4 million was borrowed
against these facilities.
D&B is in the process of arranging $600 million of committed revolving
credit facilities with a group of banks, which are expected to replace D&B's
existing $900 million facilities. D&B expects these facilities to be in place
prior to the Distribution. D&B also expects to replace its existing commercial
paper program with a new program subsequent to the Distribution. While it is
expected that the new revolving credit facilities will be used to support any
commercial paper borrowings, D&B may also borrow under these facilities at
prevailing short-term interest rates.
On April 1, 1997, D&B completed a $300.0 million minority interest
financing. Funds raised by this financing were used to repay a portion of the
outstanding short-term debt in April 1997. Also during the second quarter of
1997, D&B reentered the commercial paper market and used the proceeds to repay
the additional amounts outstanding on the short-term debt facility. D&B had
$328.4 million and $421.6 million in commercial paper outstanding at March 31,
1998 and December 31, 1997, respectively. In connection with the Distribution,
R.H. Donnelley will borrow approximately $350 million under the R.H. Donnelley
Credit Facility and issue $150 million of senior subordinated notes under the
R.H. Donnelley Indenture, all of which will be guaranteed by D&B. A portion of
the proceeds of this indebtedness will be used to repay existing indebtedness of
D&B. This $500 million of debt will be an obligation of R.H. Donnelley after the
Distribution.
D&B has interest rate swap agreements, which effectively fix interest rates
on $300.0 million of variable-rate debt through January 2005, at a weighted
average fixed rate of 6.84% (see Note 5 to D&B's consolidated financial
statements). Currently, a portion of the swaps is marked-to-market through
earnings. In connection with the repayment of the outstanding notes payable at
the time of the Distribution, D&B will cancel its outstanding interest rate swap
agreements and recognize into income any previously unrecognized loss. At March
31, 1998, the unrealized fair value of these agreements was a loss of $11.7
million, of which $3.8 million had been recorded as interest expense in 1998 and
1997 ($.6 million in 1998 and $3.2 million in 1997).
Management estimates that one-time cash outlays of approximately $25
million to $30 million, including the costs to terminate the swaps, will be
required to complete the Distribution. These costs will be recorded as incurred.
Subsequent to the Distribution, D&B will report a deficit in both retained
earnings and shareholders' equity. The changes in these balance sheet accounts
in connection with the Distribution are primarily the result of recording the
dividend of the net assets of the R.H. Donnelley business (for accounting
purposes only) and the elimination of treasury stock, which shares will be
treasury shares of R.H. Donnelley after the Distribution. The resultant decrease
in retained earnings and increase in shareholders' equity will not require the
use of cash and are not expected to have any impact on D&B's liquidity.
Additionally, since November 1996 D&B has reported a deficit in shareholders'
equity without adverse effect on its liquidity.
In January 1997, D&B announced a continuation of its systematic stock
repurchase plan, authorizing the purchase of up to 9.8 million shares of D&B
Common Stock. The stock was held in treasury and issued upon exercise of
employee stock options and for compensation plans. Under this plan, D&B
repurchased 2,271,851 shares of its D&B Common Stock for $60.1 million in 1997.
In connection with the Distribution, these shares will be treasury shares of
R.H. Donnelley. New D&B intends to start a new systematic stock repurchase plan
in 1998. D&B also paid dividends of $150.6 million during 1997.
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YEAR 2000
D&B relies on computer hardware, software and related technology, together
with data, in the operation of its businesses. Such technology and data are used
in creating and delivering D&B's products and services, as well as in D&B's
internal operations, such as billing and accounting. D&B has initiated an
enterprise-wide program to prepare for the year 2000. D&B has created a Year
2000 program office, reporting to the Chief Executive Officer and to the Chief
Information Officer, to coordinate and oversee D&B's Year 2000 program. In
addition, responsible Year 2000 executives have been appointed, and Year 2000
teams have been established at each of D&B's operating units. D&B has evaluated
the technology and data used in the creation and delivery of its products and
services and in its internal operations, has identified Year 2000 issues related
thereto and developed and has begun to implement a plan to remediate such Year
2000 issues. The plan includes remediating D&B's Year 2000 issues that are
related to its customers, suppliers and distributors, but there can be no
assurances that such third parties will successfully remediate their own Year
2000 issues over which D&B has no control. D&B believes that it will
substantially complete the implementation of its Year 2000 plan prior to the
commencement of the year 2000, and that upon substantial completion of such
implementation, and assuming that D&B's customers, suppliers and distributors
successfully remediate their own Year 2000 issues over which D&B has no control,
D&B will have no material business risk from such Year 2000 issues. The total
cost of D&B's Year 2000 program is estimated to be $70 to $75 million. Of this
amount, approximately $11 million was incurred in 1997. It is estimated that
approximately $40 million, $15 million to $20 million and $4 million will be
incurred in 1998, 1999 and 2000, respectively. Maintenance and modification
costs are expensed as incurred, while the costs of new hardware and software
purchased by D&B are capitalized.
DIVIDENDS
D&B paid a quarterly dividend of $.22 per share in 1997, resulting in a
full-year dividend per share of $.88, a decline of 51.6% from the 1996 dividend
of $1.82 per share. In 1996, D&B reorganized into three publicly traded
independent companies: D&B, Cognizant and ACNielsen. Consequently, D&B paid
quarterly dividends of $.66 per share for the first half of 1996, and in the
second half of 1996, D&B paid quarterly dividends of $.25 per share, reflecting
the revised dividend policies of each of the three companies. Of the $.25 per
share dividend declared for the third and fourth quarters of 1996, $.22 was
attributable to D&B and $.03 was attributable to Cognizant.
On April 15, 1998, the Board of Directors of D&B approved a second quarter
1998 dividend of $.22 per share, payable June 10, 1998 to shareholders of record
at the close of business May 20, 1998. On December 17, 1997, the Board of
Directors approved a first-quarter 1998 dividend of $.22 per share, payable
March 10, 1998, to shareholders of record at the close of business on February
20, 1998. Subject to the approval of its Board of Directors, it is anticipated
that New D&B will initially pay a quarterly dividend of $0.185 per share.
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THE NEW DUN & BRADSTREET CORPORATION
BUSINESS
As described under "The Distribution -- Form of Transaction; Basis of
Presentation", for financial reporting purposes, New D&B will be treated as the
"accounting successor" to D&B. Therefore, the historical financial information
included herein with respect to New D&B is that of D&B with R.H. Donnelley
treated as a discontinued operation. The following description of the New D&B
Business is derived from the D&B Form 10-K for the year ended December 31, 1997,
but it does not include a description of the R.H. Donnelley Business from which
the New D&B Business is being separated in the Distribution. For a description
of the R.H. Donnelley Business, see "R.H. Donnelley Business" included elsewhere
in this Information Statement.
DUN & BRADSTREET, INC.
General
D&B Inc. is the world's largest provider of business-to-business credit,
marketing and purchasing information and receivables management services. D&B
Inc. operates offices in 36 countries, conducts operations in two other
countries through minority interests in joint venture companies, and operates
through independent correspondents in over 150 additional countries. D&B Inc.
gathers data through telephone and personal interviews with business managers
and through third party sources. At the core of D&B Inc.'s products and services
are its worldwide database containing information on more than 48 million
businesses, the D-U-N-S Numbering System (a numerical identification system used
to identify corporate affiliations), and its ability to integrate business
information from multiple sources and create decision support tools. Companies
throughout the world use D&B Inc.'s products and services to evaluate and make
decisions about their working relationships with customers and suppliers; to
improve efficiency and productivity; to identify growth opportunities and market
their products more successfully; and to take actions that increase revenue,
cash flow and profits. D&B Inc. conducts business in three general regions:
United States; Europe, Africa and Middle East; and Asia-Pacific, Canada and
Latin America.
DUN & BRADSTREET, U.S.
In the United States, D&B Inc. provides Value-Added Products, Credit
Information Services, Marketing Information Services and Receivable Management
Services, as described below.
Value-Added Products
Value-Added Products, which include Database Marketing Services, Predictive
Scoring Services, Decision Support Services, Supplier Evaluation and Management
Services, Software Partner Marketing and Internet Access, provide easy, open
access to D&B Inc.'s databases and allow D&B Inc. to embed its information in
its customers' business processes and technology. These products and services
are scalable for use on individual desktops, in networks and on computer hosts,
and are designed to improve customers' decision making, speed-of-action and
productivity and to help customers realize the full value of their information
and technology investments.
The D-U-N-S Numbering System is a critical component in D&B Inc.'s
Valued-Added Products. As a unique, universal identifier of more than 48 million
businesses around the world, the D-U-N-S Number can help customers tap revenue
and customer service opportunities by uncovering prospects and linking related
customer accounts, identifying cross-selling opportunities within the same
corporate family, eliminating duplicate file entries in customer and supplier
databases, reducing operating costs and increasing purchasing power by linking
interrelated suppliers.
Database Marketing Services help give D&B Inc.'s customers a better
understanding of the profitability and performance of their customers by
enhancing internal customer data with external information and analysis that can
help target the most profitable customers and prospects, analyze market
penetration, territory alignment and market segmentation and perform demand
estimation. Predictive Scoring Services, such as the
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Commercial Credit Score, Industry-specific Credit Scores and OneScore, use
statistical models to help D&B Inc.'s customers predict the likelihood of
delinquent payment or failure to pay within terms, while the Financial Stress
Score is a statistical model that helps D&B Inc.'s customers predict the
likelihood that a customer or prospect will discontinue operations or file for
bankruptcy. Decision Support Services include desktop decision support systems
such as Risk Assessment Manager and Supplier Assessment Manager. These systems
use the customers' rules to automate credit and purchasing decisions,
respectively, using internal and external information, including D&B Inc.'s
predictive scores. Supplier Evaluation and Management Services provide
information and analyses that help customers identify suppliers and assess the
risk of doing business with them. Through alliances being developed with major
business application software providers, Software Partner Marketing can cleanse,
consolidate and migrate legacy customer and vendor data to a business' new
enterprise application system, as well as provide real-time, online access to
D&B Inc. information. Internet access allows customers to access D&B information
directly from D&B Inc.'s web site using secure transaction services and from the
web sites of certain third parties. D&B Inc. is also developing custom access to
its databases through customers' intranets.
Value-Added Products, while a market leader in its industry, faces
competition from various information services and software providers.
Credit Information Services
D&B Inc. provides business credit information on more than 11 million U.S.
businesses. Its core credit information is available through a variety of
company-specific reports, including the Business Information Report, Payment
Analysis Report, Alert Services and business reference directories. Customers
can access this information through D&B Inc.'s web site, personal computer,
mail, telephone, fax and customized connections between D&B Inc. and a
customer's computer systems. Credit Information Services also distributes its
products via a number of other firms, including leading vendors of online
information services and the web sites of certain third parties.
The Business Information Report contains commercial credit information that
may include the D&B Inc. Rating, PAYDEX Score, financials, summary information,
public record data and payment history. The Payment Analysis Report provides
information on a company's payment record and includes the PAYDEX Score,
historical trends and industry comparisons. Alert Services provide businesses
with the ability to monitor accounts or their portfolio for significant changes
that could impact a customer, supplier or partner. The Dun & Bradstreet
Reference Book of American Business contains approximately 3.4 million business
listings in the U.S. and Puerto Rico.
Customers use D&B Inc.'s Credit Information Services to extend commercial
credit, approve loans and leases, underwrite insurance, evaluate vendors, and
make other financial and risk assessment decisions. D&B Inc.'s largest customers
for this information are major manufacturers and wholesalers, insurance
companies, banks, and other credit and financial institutions.
Traditionally, Credit Information Services were offered pursuant to an
annual contract requiring a minimum volume commitment. In January 1998, D&B Inc.
began to offer customers a choice of how to pay for these services. Customers
can now continue to commit to a standard, annual discounted contract or opt for
a flexible, monthly, pay-as-you-go discount plan, with no minimum usage
requirement. It is anticipated that these changes will, in the future, along
with changes in sales force compensation and service practices, generate
increased revenue growth rates. This will be accomplished by attracting and
retaining customers and providing a strong incentive for D&B's sales force to
familiarize customers with the full line of D&B solutions.
Credit Information Services is the leading commercial credit-reporting
agency in the U.S. However, it faces competition from in-house operations of the
businesses it seeks as customers and from other general and specialized credit
reporting agencies and other information services providers. It believes the
principal attributes in judging the competition are information quality,
availability, service and price.
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Marketing Information Services
Marketing Information Services provides business-to-business marketing
information and analysis. This information is derived from D&B Inc.'s database
of information on more than 48 million businesses in 200 countries. The
information is delivered in print, on diskette, magnetic tape and CD-ROM,
through online information services and other third parties, and via D&B Inc.'s
web site and the web sites of certain third parties. These products and services
help businesses conduct market segmentation, customer profiling, prospect
selection and marketing list development.
Market Data Retrieval ("MDR") offers marketing information that helps
businesses sell to the education market. MDR's database includes information on
course offerings, facilities and more than 4 million educators in 250,000
pre-school, elementary, secondary and higher educational institutions and
libraries in the United States and Canada.
Marketing Information Services, while a market leader in its industry,
faces competition from data providers who have competitive distribution
channels, delivery formats and data quality.
Receivable Management Services
Receivable Management Services ("RMS") provides its customers with a full
range of accounts receivable management services, including third-party
collection of accounts, letter demand services and receivables management
outsourcing programs. These services substitute and/or enhance its customers'
own internal management of accounts receivable.
RMS services and collects delinquent receivables on behalf of 30,000
customers primarily in the business-to-business market. Principal markets
include insurance, telecommunications, and transportation services. Customers
select the applicable RMS service that best meets their receivable portfolio
needs.
RMS uses the Dun & Bradstreet name to communicate with debtors about
delinquent accounts for collection services. Revenues are generally earned on a
contingent fee basis. Receivables outsourcing programs are selected when
customers seek to outsource their accounts receivable function to a third party
vendor. Services include debt verification and collection, customer service
functions and analytical reporting.
RMS has sold franchises to third parties, which are given permission to
sell debt collection services under the RMS name. These franchises cover
portions of 27 states. RMS uses franchises to complement its field sales and
telesales forces. These franchises are located in less concentrated markets
where local presence is preferred. RMS continues to be responsible for all
product fulfillment. Customer ownership remains with RMS with franchisees
retaining exclusive access in their markets.
Certain states require licensing for consumer and commercial debt
collection. RMS, and in some instances the individual collectors, must be
licensed in order to conduct business in these states. The laws under which such
licenses are granted generally require annual license renewal and provide for
denial, suspension or revocation for improper actions or other reasons.
Internationally, RMS provides cross-border receivable services in which the
RMS worldwide offices service cross-border claims for one another. This service
has grown significantly, but comprises only 2 percent of RMS' total revenue.
RMS is considered to be a leader in the commercial receivables management
industry in the U.S. There are several consumer collection agencies that have
larger receivables portfolios, particularly health care and credit card
collection providers. The third-party commercial collection market is highly
fragmented with over 5,000 collection agencies. The outsourcing market has
significantly fewer competitors due to the need for larger scale operations by
the receivables providers. Both markets are very price competitive with status
and statistical reporting and speed of service as key qualitative attributes.
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<PAGE> 49
DUN & BRADSTREET EUROPE/AFRICA/MIDDLE EAST AND
DUN & BRADSTREET ASIA-PACIFIC, CANADA, LATIN AMERICA
Outside the U.S., D&B Inc. operates through Dun & Bradstreet
Europe/Africa/Middle East and Dun & Bradstreet Asia-Pacific, Canada, Latin
America ("D&B Europe" and "D&B Asia-Pacific, Canada, Latin America",
respectively), which opened their first overseas office in 1857 and today
conduct operations in offices and branches located throughout Europe, Latin
America, Africa, the Middle East, Asia, Japan, the Pacific Rim and Canada.
D&B Europe and D&B Asia-Pacific, Canada, Latin America provide
substantially the same business-to-business credit, marketing and purchasing
information and receivable management services outside the U.S. as those
provided domestically by D&B Inc., D&B Europe and D&B Asia-Pacific, Canada,
Latin America's major products and services include company-specific reports,
analytical tools to help the customer make better business decisions, local and
international credit-reference publications, marketing publications, marketing
information systems, consumer-credit information, as well as receivables
management services. Customers can access information through D&B's web site and
the web sites of certain third parties, personal computer, mail, fax, CD-ROM,
online information services and other third parties.
In 1996, D&B Asia-Pacific, Canada, Latin America reorganized its operations
in Brazil, Mexico, Chile and Venezuela. It continues to provide cross-border
services originating in Latin America through local affiliates, small local
operations centers and an operations center in Florida, and in the Asia-Pacific
region, it is exploring possible joint venture and distribution arrangements to
leverage its staff and data sourcing and distribution capabilities.
D&B Europe continues to invest in data systems and is continuing its
rollout to the European market of a range of new cross-border products. D&B
Europe has also continued investing heavily in a new technology platform, which
is expected to result in enhanced product/service flexibility as well as
opportunities to streamline operations.
D&B Europe and D&B Asia-Pacific, Canada, Latin America's operations are
subject to the usual risks inherent in carrying on business in certain countries
outside of the U.S., including currency fluctuations and possible
nationalization, expropriation, price controls, changes in the availability of
data from public sector sources, limits on providing information across borders
or other restrictive governmental actions. Management believes that the risks of
nationalization or expropriation are reduced because its basic service is the
delivery of information, rather than the production of products that require
manufacturing facilities or the use of natural resources.
D&B Europe and D&B Asia-Pacific, Canada, Latin America face competition
from banks, consumer information companies, application software developers,
online content providers and in-house operations of businesses as well as direct
competition from businesses providing similar services. D&B Europe is believed
to be the largest single supplier of credit information services in Europe. The
competition is primarily local and there are no competitors offering a
comparable range of global services or capabilities. See Note 15 to the D&B
Consolidated Financial Statements.
D&B INC.'S STRATEGY
D&B Inc. intends to focus its business strategy on supplying business
information. Customers realize that their internal information can be made more
powerful by coupling it with external information. In this way, D&B Inc.'s
products and services become embedded in the customer's processes. This strategy
will focus on the following opportunities:
Expand the Use of Traditional Products. Traditional products,
principally the Business Information Report, will continue to be
distributed as in the past. Additional distribution of these products will
occur through new customer sales efforts and through expanded use of the
Internet. Because many of these products are used in conjunction with or
are accessed through Value-Added Products, opportunity exists to leverage
the sale of traditional products globally through sales of Value-Added
Products.
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<PAGE> 50
Focus Resources on the Development and Deployment of Value-Added
Products. Value-Added Products include a range of new products and
services in the credit, business marketing, purchasing and receivable
management service areas. These products represented 21% of D&B Inc.'s U.S.
revenue in 1997. Revenue from Value-Added Products grew 26% in 1997. D&B
Inc. intends to accelerate deployment of these products through global
distribution and alliances being developed with business partners.
Improve the Profitability of International Operations. The roll-out
of Value-Added Products, which have previously only been available in the
U.S., to markets outside of the U.S. will be a key driver for improving
international profitability. D&B Inc. has established Global Marketing,
Technology and Sales groups to help focus the deployment of these products
internationally, focus efforts with global customers, and centralize
related technology development to eliminate duplicate development efforts.
In addition, cost structures will be reviewed with the intent of
implementing further efficiencies.
MOODY'S INVESTORS SERVICE, INC.
Moody's is a leading global credit rating agency, Moody's publishes credit
opinions, research, and ratings on fixed-income securities, issuers of
securities and other credit obligations. It also provides a broad range of
business and financial information. Credit ratings help investors analyze the
credit risks associated with fixed-income securities. Ratings also create
efficiencies in fixed income markets by providing reliable, credible, and
independent assessments of credit risk. For issuers, Moody's services increase
market liquidity and may reduce transaction costs.
Moody's employs approximately 600 analysts and has a total of more than
1,500 associates located around the world. Moody's maintains offices in 12
countries. Moody's provides ratings and information on governmental and
commercial entities in over 95 countries. Moody's customers include investors;
depositors, creditors, investment banks, commercial banks and other financial
intermediaries; and a wide range of corporate and governmental issuers of
securities.
Moody's publishes rating opinions on a broad range of credit obligations.
These include various United States corporate and governmental obligations,
international cross-border notes and bonds, domestic obligations in foreign
local markets, structured finance securities and commercial paper issues. In
recent years, Moody's has moved beyond its traditional bond ratings activity,
assigning ratings to insurance companies' obligations, bank loans, derivative
product companies, bank deposits and other bank debt, managed funds, and
derivatives. At the end of 1997, Moody's had outstanding ratings on
approximately 85,000 corporate and 62,000 public finance obligations. Ratings
are disseminated to the public through a variety of print and electronic media
including real-time systems, widely used by securities traders and investors.
In addition to its rating activities, Moody's publishes investor-oriented
credit research services to over 30,000 subscribers globally. Moody's publishes
more than 100 research products, including in-depth research on major issuers,
industry studies, special comments, and summary credit opinion handbooks.
Detailed descriptions of both the rated issue and issuer, along with a summary
of the rationale for the assignment of the specific rating, also appear in
various Moody's credit research products. Product selection includes insurance,
utilities, speculative grade instruments, bank and global credit research.
Moody's also offers current and historical business and financial
information for investment research and reference uses. Such information is
published in more than 30 different products and services, in various media,
including manuals, handbooks and guides, as well as on CD-ROM and other
electronic formats. These products and services cover over 20,000 major U.S. and
non-U.S. companies and more than 22,000 municipalities and governmental entities
and their securities. Moody's is presently exploring a disposition of the
business described in this paragraph but there can be no assurance that such a
transaction will be consummated.
PROSPECTS FOR GROWTH
In the last seven years the global public fixed-income markets have
expanded from $13 trillion to $26 trillion in outstanding principal amount.
Moody's believes that the size of the global credit markets will
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<PAGE> 51
continue to increase. In addition, the securities being issued in the global
fixed-income markets are becoming more complex. Moody's expects that these
trends will increase the demand for high quality, independent credit opinions
from Moody's.
The size of the world capital markets is increasing because, in general,
the global political and economic climate has promoted economic growth and
productive capital investment. Moody's believes that the outlook is generally
favorable for the continued growth of the world capital markets.
Lower cost information technology makes information about investment
alternatives available throughout the world. Investors are able to obtain
information about securities issued outside their national markets. Investors
are also able to obtain information about new financing techniques and new types
of securities that they may wish to purchase or sell. This availability of
information promotes globalization and integration of financial markets. A
number of new "emerging" capital markets have been created. There is investor
and intermediary interest in domestic currency debt obligations from such
markets that are now being sold cross-border in unprecedented volumes.
Another trend that is increasing the size of the world capital markets is
the ongoing disintermediation of the world's financial system. Issuers are
increasingly financing on the global public capital markets, rather than through
financial intermediaries. In addition, financial intermediaries are selling
assets in the global public capital markets, in addition to or instead of
retaining those assets. Structured finance securities markets for many types of
assets have developed in many countries and are contributing to those trends.
The complexity of capital market instruments is also growing. Consequently
assessing the credit risk of such instruments is a challenge for financial
intermediaries and asset managers. In the credit markets, third party ratings
represent an increasingly viable alternative to traditional in-house research as
the geographic scope and complexity of market instruments grow.
Rating fees paid by issuers account for a majority of Moody's revenues.
Therefore, a substantial portion of Moody's revenues is dependent upon the
volume of debt securities issued in the global capital markets. Accordingly,
Moody's is dependent on the macro-economic prospects of the major world
economies and the fiscal and monetary policies pursued by their governments.
Moody's non-U.S. operations are subject to the usual risks inherent in carrying
on business in certain countries outside the United States including currency
fluctuations and possible nationalization, expropriation, price controls, or
other restrictive governmental actions. Management believes that the risks of
nationalization or expropriation are negligible.
COMPETITION
Moody's competes with other credit rating agencies and with credit opinions
offered by investment banks and brokerage firms. Institutional investors also
have in-house credit research capabilities. Credit rating agencies compete, in
addition, with other methods of addressing credit risk, such as credit insurance
and credit derivatives. Moody's most direct competitor in the global credit
rating business is Standard and Poor's Corporation (S&P), a division of
McGraw-Hill, Inc. There are some rating markets, based on industry, geography
and/or instrument type, in which S&P has made investments and obtained market
positions superior to Moody's. In other markets the reverse is true. Moody's
believes that its rating revenues and operating income for 1997 are
approximately similar to S&P's.
Other smaller rating agency competitors of Moody's are Duff & Phelps and
Fitch IBCA. Fitch IBCA is a recent combination of the U.S. rating agency, Fitch,
and the British-French rating agency, IBCA. Moody's and S&P are significantly
larger than Duff & Phelps and Fitch IBCA, but increased competition from those
two rating agencies can be expected.
Over the last decade, additional rating agencies have been established,
primarily in emerging markets, and primarily as a result of local capital market
regulation. Regulators worldwide have recognized that credible, independent
credit ratings can further regulatory objectives for the development of public
fixed-income securities markets. The result of such regulatory activity has been
the creation of many primarily national ratings agencies worldwide. Regulation
stimulates the production of less credible ratings and makes all rating systems
appear undifferentiated -- to the detriment of Moody's high quality rating
opinions.
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<PAGE> 52
Regulators of financial institutions are attempting to improve their
approach to supervision. They are shifting away from rule-based systems that
address only specific risk components and institution-specific
protections -- toward more sophisticated, prudential supervision. The
regulators, evolving approach includes their making qualitative judgments about
the sophistication of each financial institution's risk management processes and
systems, in terms of both market and credit risk. While such regulatory trends
present additional opportunities for the use of Moody's ratings, they may also
result in additional competition for Moody's.
REGULATION
Moody's is registered as an investment advisor under the Investment
Advisers Act of 1940. Moody's has been designated as a Nationally Recognized
Statistical Rating Organization (NRSRO) by the United States Securities and
Exchange Commission (SEC). The SEC is currently engaged in a rule-making process
to establish the criteria for designation as an NRSRO; such criteria may impose
operating requirements upon Moody's. Moody's is also subject to regulation in
certain countries outside the United States.
BUSINESS STRATEGY
Moody's intends to focus its business strategy on the following
opportunities:
Continue International Expansion. Moody's has established offices in the
major global financial centers. Moody's expects that these centers will continue
to offer the greatest potential for its revenue growth. It anticipates that
these centers will capture much of the expansion in global capital markets, both
from normal growth in volume and from growth as new instruments (e.g.,
speculative grade bonds, and Euro-medium term notes) are introduced.
Focus On Natural Adjacencies. Moody's is pursuing initiatives that expand
credit ratings from securities markets to other credit risk exposures. Moody's
has a committed effort to extend its opinion franchise to the global bank
counterparty universe through emerging market ratings, including bank financial
strength ratings. Insurance financial strength ratings in the property and
casualty, reinsurance, and life insurance markets represent additional growth
opportunities. Moody's is investigating numerous non-traditional opportunities
to extend its opinion franchise.
Pursue Opportunities In New Sectors. The enhancement of risk management
processes will hasten the convergence of the loan and capital markets as
intermediaries and investors seek additional opportunities for the development
of financial markets and a consistent standard of relative risk comparison.
Moody's has a program in place to expand coverage for ratings of bank loans.
The repackaging of financial assets has had a profound effect on the U.S.
fixed-income market. New patterns of securitization will emerge in the next
decade. The bulk of assets securitized in the past five years are consumer
assets owned by banks. Now, commercial assets, principally commercial mortgages,
term receivables, and corporate loans, are increasingly being securitized.
Securitization concepts are rapidly being exported to Europe and Asia. In
addition, securitization is evolving into a strategic corporate finance tool.
Opportunities in these areas will be pursued.
FPI
Financial Proforma, Inc. (FPI), a wholly-owned subsidiary of Moody's,
develops and distributes credit education materials, seminars and computer-based
lending simulations, which it complements with financial and risk assessment
software for the commercial lending community.
INTELLECTUAL PROPERTY
New D&B owns and controls a number of trade secrets, confidential
information, trademarks, trade names, copyrights, patents and other intellectual
property rights which, in the aggregate, are of material importance to New D&B's
business. Management of New D&B believes that each of the "Dun & Bradstreet" and
"Moody's" names and related names, marks and logos are of material importance to
New D&B. New D&B is licensed to use certain technology and other intellectual
property rights owned and controlled by
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<PAGE> 53
others, and, similarly, other companies are licensed to use certain technology
and other intellectual property rights owned and controlled by New D&B. New D&B
considers its trademarks, service marks, databases, software and other
intellectual property to be proprietary and New D&B relies on a combination of
copyright, trademark, trade secret, patent, non-disclosure and contract
safeguards for protection.
The names of New D&B's products and services referred to herein are
trademarks, service marks or registered trademarks or service marks owned by or
licensed to New D&B or one or more of its subsidiaries.
YEAR 2000
New D&B will rely on computer hardware, software and related technology,
together with data, in the operation of its businesses. Such technology and data
are used in creating and delivering New D&B's products and services, as well as
in New D&B's internal operations, such as billing and accounting. New D&B
initiated an enterprise-wide program to prepare for the year 2000. New D&B has
created a Year 2000 program office, reporting to the Chief Executive Officer and
to the Chief Information Officer, to coordinate and oversee New D&B's Year 2000
program. In addition, responsible Year 2000 executives have been appointed, and
Year 2000 teams have been established at each of New D&B's operating units. New
D&B has evaluated the technology and data used in the creation and delivery of
its products and services and in its internal operations, has identified Year
2000 issues related thereto and developed and has begun to implement a plan to
remediate such Year 2000 issues. The plan includes remediating New D&B's Year
2000 issues that are related to its customers, suppliers and distributors, but
there can be no assurances that such third parties will successfully remediate
their own Year 2000 issues over which New D&B has no control. New D&B believes
that it will substantially complete the implementation of its Year 2000 plan
prior to the commencement of the year 2000, and that upon substantial completion
of such implementation, and assuming that New D&B's customers, suppliers and
distributors successfully remediate their own Year 2000 issues over which New
D&B has no control, New D&B will have no material business risk from such Year
2000 issues. The total cost of the New D&B's Year 2000 program is estimated to
be approximately $70 to $75 million.
EMPLOYEES
As of December 31, 1997, the number of full time equivalent employees of
New D&B was approximately 13,400.
PROPERTIES
The executive offices of New D&B are located at One Diamond Hill Road,
Murray Hill, New Jersey in a property owned by New D&B. New D&B's other
properties are geographically distributed to meet sales and operating
requirements worldwide. These properties are generally considered to be both
suitable and adequate to meet current operating requirements and virtually all
space is being utilized.
New D&B owns five properties located within the U.S., consisting of two
buildings in Berkeley Heights, New Jersey, one each in Murray Hill and
Parsippany, New Jersey, and one in New York, New York. New D&B also owns
properties located outside the U.S. in Melbourne, Australia; Curitiba, Brazil;
Santiago, Chile; Mexico City, Mexico; Caracas, Venezuela; High Wycombe, England;
Lyon, France; Marseille, France and Milan, Italy. Its operations are also
conducted from 84 leased offices located throughout the U.S. and 93 leased
non-U.S. office locations.
LEGAL PROCEEDINGS
New D&B and its subsidiaries are involved in legal proceedings, claims and
litigation arising in the ordinary course of business. In the opinion of
management of New D&B, the outcome of such current legal proceedings, claims and
litigation could have a material effect on quarterly or annual operating results
or cash flows when resolved in a future period. However, in the opinion of
management of New D&B, these matters will not materially affect New D&B's
consolidated financial position.
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In addition, on July 29, 1996, IRI filed a complaint in the United States
District Court for the Southern District of New York, naming as defendants D&B,
A.C. Nielsen Company (a subsidiary of ACNielsen) and IMS International, Inc. (a
subsidiary of Cognizant). The complaint alleges various violations of United
States antitrust laws, including alleged violations of Section 1 and 2 of the
Sherman Act. The 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 SRG. IRI
alleges SRG violated an alleged agreement with IRI when it agreed to be acquired
by the defendants and that the defendants induced SRG to breach that agreement.
IRI's complaint alleges damages in excess of $350 million, which amount IRI has
asked to be trebled under antitrust laws. IRI also seeks punitive damages in an
unspecified amount.
In connection with the IRI action, D&B, Cognizant and ACNielsen entered
into the Indemnity and Joint Defense Agreement pursuant to which ACNielsen will
assume exclusive liability for IRI Liabilities up to the ACN Maximum Amount to
be calculated at such time such liabilities, if any, become payable and that D&B
and Cognizant will share liability equally for any amounts in excess of the ACN
Maximum Amount.
Under the terms of the 1996 Distribution Agreement, as a condition to the
Distribution, New D&B is required to undertake to be jointly and severally
liable with D&B to Cognizant and ACNielsen. Pursuant to the Distribution
Agreement, New D&B will assume and indemnify R.H. Donnelley against any payments
to be made in respect of the IRI Action under the Indemnity and Joint Defense
Agreement, the 1996 Distribution Agreement or otherwise, including any ongoing
legal fees and expenses related thereto. Management is unable to predict at this
time the final outcome of the IRI Action or whether the resolution of such
matter could materially affect New D&B's results of operations, cash flows or
financial position. See "Risk Factors -- Risks Relating to The New Dun &
Bradstreet Corporation -- Litigation".
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THE NEW DUN & BRADSTREET CORPORATION
MANAGEMENT AND EXECUTIVE COMPENSATION
Volney Taylor is currently Chairman and Chief Executive Officer of D&B and
Chairman and Chief Executive Officer of New D&B. Mr. Taylor will resign from his
positions at D&B effective upon the Distribution. At the time of the
Distribution, the Board of Directors of New D&B will be composed of the persons
who are serving as directors of D&B immediately prior to the Distribution, and
such persons, other than those named under "Relationship Between The New Dun &
Bradstreet Corporation and The R.H. Donnelley Corporation After the
Distribution--Overlapping Directors", will resign as directors of D&B effective
upon the Distribution. See "--The New Dun & Bradstreet Corporation Board of
Directors". In addition to Mr. Taylor, the other executive officers of New D&B
at the time of the Distribution (other than Frank R. Noonan) will be the persons
who are serving as executive officers of D&B immediately prior to the
Distribution, and such persons will resign from their positions at D&B effective
upon the Distribution. See "--The New Dun & Bradstreet Corporation Executive
Officers".
THE NEW DUN & BRADSTREET CORPORATION BOARD OF DIRECTORS
Immediately after the Distribution, New D&B expects to have a Board of
Directors composed of nine directors.
The following table sets forth the names, in alphabetical order, and
information as to the persons who are expected to serve as directors of New D&B
following the Distribution, including information as to service with D&B, if
applicable.
<TABLE>
<CAPTION>
DIRECTOR
POSITIONS WITH OF D&B PRINCIPAL OCCUPATION OTHER
NAME D&B SINCE DURING LAST FIVE YEARS AGE* DIRECTORSHIPS
---- -------------- -------- ---------------------- ---- -------------------
<S> <C> <C> <C> <C> <C>
Hall Adams, Jr.............. Director 1992 Former Chairman of the 64 McDonald's
Board, Chief Executive Corporation; Sears,
Officer, Leo Burnett Roebuck and Co.
Company, Inc.,
Chicago, IL
(advertising agency)
1/1/87 to 12/31/91.
Clifford L. Alexander,
Jr........................ Director 1993 President, Alexander & 64 American Home
Associates, Inc., Products
Washington, DC Corporation;
(consulting firm Cognizant
specializing in Corporation;
workforce Dreyfus General
inclusiveness), 1/1/81 Family of Funds;
to present. Dreyfus Premier
Family of Funds;
Dreyfus Third
Century Fund; MCI
Communications
Corporation; Mutual
of America Life
Insurance Company;
TLC Beatrice
International
Holdings, Inc.
Mary Johnston Evans......... Director 1990 Former Vice Chairman 68 Baxter
of the Board, Amtrak, International Inc.;
Washington, D.C. Delta Air Lines,
(National Railroad Inc.; Household
Passenger Corporation) International,
1975 to 1979. Inc.; Scudder New
Europe Fund; Sun
Company, Inc.
</TABLE>
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<PAGE> 56
<TABLE>
<CAPTION>
DIRECTOR
POSITIONS WITH OF D&B PRINCIPAL OCCUPATION OTHER
NAME D&B SINCE DURING LAST FIVE YEARS AGE* DIRECTORSHIPS
---- -------------- -------- ---------------------- ---- -------------------
<S> <C> <C> <C> <C> <C>
Ronald L. Kuehn, Jr......... Director 1996 Chairman, President 62 Sonat Inc.; AmSouth
and Chief Executive Bancorporation;
Officer, Sonat Inc., Praxair, Inc.;
Birmingham, AL Protective Life
(natural gas Corporation;
transmission and Transocean Offshore
marketing services, Inc.; Union Carbide
oil and gas Corporation.
exploration and
production activities)
1986 to present.
Robert J. Lanigan........... Director 1978 Chairman Emeritus, 69 Owens-Illinois,
Owens-Illinois, Inc., Inc.; Chrysler
Toledo, OH (glass, Corporation;
paper, plastics and Cognizant
other packaging Corporation; The
products) 1/24/92 to Coleman Company,
present; Chairman of Inc.; Sonat Inc.;
the board 4/18/84 to Transocean Offshore
10/15/91; Chief Inc.
Executive Officer
1/1/84 to 9/30/90.
Vernon R. Loucks Jr......... Director 1978 Chairman of the Board, 63 Baxter
Chief Executive International Inc.;
Officer, Baxter Affymetrix Inc.;
International Inc., Anheuser-Busch
Deerfield, IL (medical Companies, Inc.;
care products and Coastcast
services) 9/16/87 to Corporation;
present; Chairman, Emerson Electric
President, Chief Co.; The Quaker
Executive Officer Oats Company.
7/20/87 to 9/15/87;
President, Chief
Executive Officer
5/3/80 to 7/19/87.
Henry A. McKinnell.......... Director 1997 Executive Vice 55 Pfizer, Inc.;
President, Pfizer, Aviall, Inc.; John
Inc., New York, NY Wiley & Sons.
(diversified research-
based health care
company) 3/1/92 to
present; President,
Pfizer Pharmaceuticals
Group 1/1/97 to
present; President,
Medical Technology
Group 1/1/92 to
12/31/96; Chief
Financial Officer and
Vice President,
Finance 8/1/90 to
1/1/92
</TABLE>
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<PAGE> 57
<TABLE>
<CAPTION>
DIRECTOR
POSITIONS WITH OF D&B PRINCIPAL OCCUPATION OTHER
NAME D&B SINCE DURING LAST FIVE YEARS AGE* DIRECTORSHIPS
---- -------------- -------- ---------------------- ---- -------------------
<S> <C> <C> <C> <C> <C>
Michael R. Quinlan.......... Director 1989 Chairman, Chief 53 McDonald's
Executive Officer, Corporation; The
McDonald's May Department
Corporation, Oak Stores Company.
Brook, IL (global food
service retailer)
3/31/90 to present;
President, Chief
Executive Officer
3/1/87 to 3/30/90;
President, Chief
Operating Officer
6/15/82 to 2/28/87
Volney Taylor............... Chairman, 1984 Chairman, Chief 58
Chief Executive Officer, The
Executive Dun & Bradstreet
Officer, Corporation, Murray
Director Hill, NJ 11/1/96 to
present; Executive
Vice President, 2/1/82
to 10/31/96.
</TABLE>
- ---------------
* As of March 6, 1998
DIRECTOR'S COMPENSATION
It is anticipated that the Board of Directors of New D&B will adopt and
implement a director compensation program as described below prior to, on or
shortly after, the Distribution Date.
If such program is adopted and implemented, each non-employee director will
receive a 1998 retainer of $12,500; thereafter, the retainer will be paid at an
annual rate of $25,000 in quarterly installments. Each non-employee director who
is the Chairman of a Committee of the Board of Directors will be paid an
additional retainer of $2,000 for 1998 and $4,000 annually thereafter in
quarterly installments. A fee of $1,000 will be paid to each non-employee
director for every Board or Committee meeting attended. Directors who are
employed by New D&B shall receive no retainers or meeting fees.
Each director not employed by New D&B may elect on or before December 31 of
any year to have all or a specified part of the retainer and fees during the
subsequent calendar year or years deferred until such director ceases to be a
director. New directors may similarly so elect at the beginning of their terms.
Such deferred amounts are held for the account of directors and receive the rate
earned by one or more investment options in the New D&B Profit Participation
Plan to be sponsored by New D&B as selected by the director. Deferred amounts
and earnings thereon are paid in accordance with a director's election in a lump
sum or five or ten annual installments commencing on the tenth day of the
calendar year following the year in which such person ceases to be a director of
New D&B, except that the balance of a director's account is paid in a lump sum
on the tenth day of the calendar year following the director's death to the
director's estate or to such beneficiary as was previously designated by the
director. A director may change or terminate an election to defer retainers and
fees, effective as of the end of the calendar year in which notice of such
change or termination is given to New D&B.
COMMITTEES OF THE NEW DUN & BRADSTREET CORPORATION BOARD OF DIRECTORS
Prior to the Distribution, it is anticipated that the New D&B Board of
Directors will establish Audit, Compensation and Benefits, Corporate Governance
and Executive Committees and designate specific
55
<PAGE> 58
functions and areas of oversight as to such committees. No final determination
has yet been made as to the memberships of such standing committees.
THE NEW DUN & BRADSTREET CORPORATION EXECUTIVE OFFICERS
Listed below is certain information as to the executive officers who have
been selected to serve after the Distribution.
<TABLE>
<CAPTION>
NAME, POSITION WITH NEW D&B AND AGE BIOGRAPHICAL DATA
----------------------------------- -----------------
<S> <C>
Volney Taylor, 58............................ See information under "The New Dun &
Chairman and Chief Executive Officer Bradstreet Corporation Board of Directors".
William F. Doescher, 60...................... Senior Vice President and Chief
Senior Vice President and Chief Communications Officer of D&B, 11/96 to
Communications Officer present; Senior Vice President -- Global
Communications, D&B, 4/92 to present; Vice
President -- Public Relations and
Advertising, D&B, 4/83 to 10/96.
Nancy L. Henry, 53........................... Senior Vice President and Chief Legal
Senior Vice President and Chief Legal Counsel, D&B, 3/97 to present; Special
Counsel Counsel, Skadden, Arps, Slate, Meagher & Flom
LLP, 4/85 to 3/97.
Elahe Hessamfar, 44.......................... Senior Vice President and Chief Information
Senior Vice President and Chief Information Officer, D&B, 8/97 to present; Chief
Officer Information Officer, Turner Broadcasting
System, 7/93 to 7/97; Vice President
Information Systems, PAC Bell Directories,
5/87 to 6/93.
Peter J. Ross, 52............................ Senior Vice President and Chief Human
Senior Vice President and Chief Human Resources Officer, D&B, 11/96 to present;
Resources Officer Senior Vice President -- Human Resources,
D&B, 6/88 to present.
Frank S. Sowinski, 42........................ Senior Vice President and Chief Financial
Senior Vice President and Chief Financial Officer, D&B, 11/96 to present; Executive
Officer Vice President -- Applications, Mass
Marketing & Alliances, Dun & Bradstreet,
U.S., 10/93 to 10/96; Senior Vice
President-Finance & Planning, Dun &
Bradstreet, U.S., 8/89 to 9/93.
Chester J. Geveda, 51........................ Vice President and Controller, D&B, 11/96 to
Vice President and Controller present; Senior Vice President -- Finance,
D&B, 11/96 to present; Senior Vice
President -- Finance and Planning, Dun &
Bradstreet, U.S., 4/93 to 10/96; Senior Vice
President -- Finance and Administration, Dun
& Bradstreet Europe/Africa/Middle East, 9/90
to 3/93.
</TABLE>
COMPENSATION OF THE NEW DUN & BRADSTREET CORPORATION EXECUTIVE OFFICERS
The following table discloses the compensation paid by D&B for services
rendered to D&B in 1997 by New D&B's Chief Executive Officer and by each of the
persons who are anticipated to be one of the four other most highly compensated
executive officers of New D&B following the Distribution. During the period
presented, the individuals were compensated in accordance with D&B's plans and
policies. In that connection, stock-based compensation described in the
following tables is expressed in shares of D&B Common Stock, which will be
converted into an adjusted number of shares of New D&B Common Stock following
the Distribution. See also "Relationship Between The New Dun & Bradstreet
Corporation and R.H. Donnelley Corporation After the Distribution -- Employee
Benefits Agreement".
56
<PAGE> 59
SUMMARY COMPENSATION TABLE
FOR SERVICES WITH D&B
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------- ------------------------ ----------
(a) (b) (c) (d) (e) (g) (i)
(f) SECURITIES (h)
RESTRICTED UNDERLYING LONG-TERM
OTHER ANNUAL STOCK OPTIONS/ INCENTIVE ALL OTHER
NAME AND PRINCIPAL SALARY BONUS(1) COMPENSATION AWARD(S)(3) SARS(4) PAYOUTS(5) COMPENSATION
POSITION WITH NEW D&B YEAR ($) ($) (2)($) ($) (#) ($) (6)($)
--------------------- ---- ------- --------- ------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Volney Taylor................. 1997 630,000 1,517,449 231 0 120,540 0 20,449
Chairman and Chief Executive
Officer
Frank S. Sowinski............. 1997 320,000 381,746 36 0 30,130 0 10,177
Senior Vice President and
Chief Financial Officer
Elahe Hessamfar(7)............ 1997 168,750 375,064 20,731 280,625 57,941 0 4,516
Senior Vice President and
Chief Information Officer
Nancy L. Henry(8)............. 1997 219,318 279,549 0 0 35,930 0 3,072
Senior Vice President and
Chief Legal Counsel
Chester J. Geveda, Jr. ....... 1997 257,500 246,711 35 0 16,070 0 8,059
Vice President and
Controller
</TABLE>
- ---------------
(1) The 1997 bonus amounts shown were earned with respect to that year and paid
in 1998. Included in the 1997 amounts is one-half of the 1997 performance
share grant made under the Key Employees Performance Unit Plan for D&B and
subsidiaries (the "PUP") and earned with respect to 1997. The remaining
one-half of the 1997 performance share grant is payable after two years
based on cumulative 1997 -- 1998 performance goals and will be reflected as
long-term incentive payouts in the Summary Compensation Table to appear in
New D&B's 1999 Proxy Statement. The performance shares are paid in
unrestricted shares of D&B Common Stock.
(2) Amounts shown represent reimbursement for taxes paid by the named executive
officers with respect to D&B-directed spousal travel and personal use of
automobiles and/or reimbursement for certain other expenses.
(3) Amounts shown represent the dollar value of restricted stock on the date of
grant. The number and value of the aggregate restricted stock holdings of
the named executive officers at December 31, 1997 were: Messrs. Taylor,
Sowinski and Geveda and Ms. Henry -- none; Ms. Hessamfar -- 10,000 shares
($309,375). Ms. Hessamfar's 10,000 shares of restricted stock are scheduled
to vest in full in September 2000. Dividends are paid at the rate
established from time to time for D&B Common Stock.
(4) Amounts shown represent the number of non-qualified stock options granted in
1997.
(5) No payments were made to any of the named executive officers in 1997.
(6) Amounts shown represent aggregate annual D&B contributions for the account
of each named executive officer under the Dun & Bradstreet Profit
Participation Plan (the "PPP") and the Profit Participation Benefit
Equalization Plan (the "PPBEP"), which plans are open to employees of D&B
and certain subsidiaries. The PPP is a tax-qualified defined contribution
plan and the PPBEP is a non-qualified plan that provides benefits to
participants in the PPP equal to the amount of D&B contributions that would
have been made to the participant's PPP account but for certain Federal tax
laws.
(7) Hired effective August 18, 1997. Salary shown represents actual amount paid
for the portion of the year employed. In accordance with her employment
offer, Ms. Hessamfar was guaranteed a full-year bonus for 1997.
(8) Hired effective April 8, 1997. Salary shown represents actual amount paid
for the portion of the year employed. In accordance with her employment
offer, Ms. Henry was also awarded a cash sign-on bonus and was guaranteed a
full-year bonus for 1997.
57
<PAGE> 60
OPTION GRANTS ON D&B COMMON STOCK TO THE NEW DUN & BRADSTREET CORPORATION
EXECUTIVES IN LAST FISCAL YEAR
The following table provides information on fiscal year 1997 grants of
options to the named New D&B executives to purchase shares of D&B Common Stock.
Options to acquire D&B Common Stock will be replaced by options to acquire New
D&B Common Stock. See "Relationship Between The New Dun & Bradstreet Corporation
and R.H. Donnelley Corporation After the Distribution--Employee Benefits
Agreement".
OPTION GRANTS/SAR GRANTS IN LAST FISCAL YEAR TO PURCHASE D&B COMMON STOCK
<TABLE>
<CAPTION>
(a) (b) (e) (f)
NUMBER OF (c) (d)
SECURITIES % OF TOTAL EXERCISE
UNDERLYING OPTIONS/SARS OR
OPTIONS/SARS GRANTED TO BASE GRANT DATE
GRANTED(1) EMPLOYEES IN PRICE EXPIRATION PRESENT VALUE(2)
NAME (#) FISCAL YEAR ($/SHARE) DATE ($)
---- ------------ ------------ --------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Volney Taylor...................... 120,540 3.82% 30.2188 12/22/07 672,613
Frank S. Sowinski.................. 30,130 0.96% 30.2188 12/22/07 168,125
Elahe Hessamfar.................... 27,700 0.88% 30.2188 12/22/07 154,566
30,241 0.96% 27.5938 08/18/07 158,463
Nancy L. Henry..................... 17,300 0.55% 30.2188 12/22/07 96,534
18,630 0.59% 25.6250 04/16/07 96,876
Chester J. Geveda, Jr.............. 16,070 0.51% 30.2188 12/22/07 89,671
</TABLE>
- ---------------
(1) Amounts shown represent the number of non-qualified stock options, without
tandem stock appreciation rights ("SARs"), granted in 1997. Options may not
be exercised for at least one year after grant and may then be exercised in
installments of 25% of the grant amount each year until they are 100%
vested. Payment for all options must be made in full upon exercise in cash
or D&B Common Stock. The option holder may elect to have shares of D&B
Common Stock issuable upon exercise withheld by D&B to pay withholding taxes
due. The options shown include Limited SARs in tandem with the options.
Limited SARs are exercisable only if and to the extent that the related
option is exercisable and are exercisable only during the 30-day period
following the acquisition of at least 20% of the outstanding D&B Common
Stock pursuant to a tender or exchange offer not made by D&B. Each Limited
SAR permits the holder to receive cash equal to the excess over the related
option exercise price of the highest price paid pursuant to a tender or
exchange offer for D&B Common Stock which is in effect at any time during
the 60 days preceding the date upon which the Limited SAR is exercised.
Limited SARs can be exercised regardless of whether D&B supports or opposes
the offer.
(2) Grant date present value is based on the Black-Scholes option valuation
model applied to D&B prior to the Distribution, which makes the following
material assumptions for the April 16, 1997 grant, the August 18, 1997 grant
and the December 22, 1997 grant: an expected stock-price volatility factor
of 20.0%, a risk-free rate of return of 6.76%, 6.02% and 5.71% respectively,
a dividend yield of 3.3% and a weighted average exercise date of 4.5 years
from date of grant. These assumptions may or may not be fulfilled. The
amounts shown cannot be considered predictions of future value. In addition,
the options will gain value only to the extent the stock price exceeds the
option exercise price during the life of the option.
AGGREGATE D&B OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR END D&B
OPTION VALUES
The following table provides information on option exercises in 1997 by the
named executives of New D&B and the value of each such executive's unexercised
options to acquire D&B Common Stock at December 31, 1997. See also,
"Relationship Between The New Dun & Bradstreet Corporation and R.H. Donnelley
Corporation After the Distribution -- Employee Benefits Agreement".
58
<PAGE> 61
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
NUMBER OF SECURITIES VALUE OF UNEXERCISED,
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES D&B OPTIONS/SARS AT D&B OPTIONS/SARS AT
ACQUIRED VALUE FISCAL YEAR-END(#) FISCAL YEAR-END(2)($)
ON EXERCISE REALIZED(1) --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Volney Taylor............... 22,817 170,799 403,104 316,836 4,302,261 1,649,054
Frank S. Sowinski........... 3,662 20,388 69,023 69,025 722,342 333,499
Elahe Hessamfar............. 0 0 0 57,941 0 121,025
Nancy L. Henry.............. 0 0 0 35,930 0 111,405
Chester J. Geveda, Jr. ..... 4,266 36,333 57,434 68,310 622,792 404,484
</TABLE>
- ---------------
(1) Amounts shown represent the value realized upon the exercise of stock
options during 1997, which equals the difference between the exercise price
of the options and the average of the high and low market price of the
underlying D&B Common Stock on the exercise date.
(2) The values shown equal the difference between the exercise price of
unexercised in-the-money options and the closing market price of the
underlying D&B Common Stock at December 31, 1997. Options are in-the-money
if the fair market value of the D&B Common Stock exceeds the exercise price
of the option. The options shown include Limited SARs having the terms
described for D&B Limited SARs in Footnote 1 under the caption "-- Option
Grants on D&B Common Stock to The New Dun & Bradstreet Corporation
Executives in Last Fiscal Year" above. Such D&B Limited SARs will be
converted into Limited SARs of New D&B in connection with the Distribution.
See "Relationship Between The New Dun & Bradstreet Corporation and R.H.
Donnelley Corporation After the Distribution -- Employee Benefits
Agreement".
LONG-TERM D&B INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
(a) (f)
(d) (e)
(b) (c) ESTIMATED FUTURE PAYOUTS
NO. OF PERFORMANCE UNDER NON-STOCK PRICE-BASED PLANS(2)
SHARES, OR OTHER -------------------------------------
UNITS OR PERIOD UNTIL THRESHOLD TARGET MAXIMUM
OTHER MATURATION (#) (#) (#)
NAME RIGHTS(1)(#) OR PAYOUT (0%) (100%) (200%)
---- ------------ ------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Volney Taylor....................... 40,310 Two Years 0 40,310 80,620
Frank S. Sowinski................... 10,080 Two Years 0 10,080 20,160
Elahe Hessamfar..................... 9,260 Two Years 0 9,260 18,520
Nancy L. Henry...................... 5,780 Two Years 0 5,780 11,560
Chester J. Geveda, Jr............... 5,370 Two Years 0 5,370 10,740
</TABLE>
- ---------------
(1) Amounts shown represent the performance shares granted under the Dun &
Bradstreet Performance Unit Plan. The performance shares are payable in
February 2000 based on cumulative 1998 -- 1999 performance goals. Earned
awards are paid in unrestricted shares of D&B Common Stock.
(2) Awards may range from 0 to 200% of the targeted number of performance shares
based on achievements within a range of performance goals.
RETIREMENT BENEFITS
The following table sets forth the estimated aggregate annual benefits
payable under Dun & Bradstreet's Retirement Account Plan, Pension Benefit
Equalization Plan ("PBEP") and Supplemental Executive Benefit Plan ("SEBP") as
in effect during 1997 to persons in specified average final compensation and
credited service classifications upon retirement at age 65. Amounts shown in the
table include U.S. Social Security
59
<PAGE> 62
benefits which would be deducted in calculating benefits payable under these
plans. These aggregate annual retirement benefits do not increase as a result of
additional credited service after 20 years.
<TABLE>
<CAPTION>
ESTIMATED AGGREGATE ANNUAL RETIREMENT BENEFIT
AVERAGE ASSUMING CREDITED SERVICE OF:
FINAL -------------------------------------------------
COMPENSATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
- ------------ -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$550,000 275,000 330,000 330,000 330,000 330,000
700,000 350,000 420,000 420,000 420,000 420,000
850,000 425,000 510,000 510,000 510,000 510,000
1,000,000 500,000 600,000 600,000 600,000 600,000
1,300,000 650,000 780,000 780,000 780,000 780,000
1,600,000 800,000 960,000 960,000 960,000 960,000
1,900,000 950,000 1,140,000 1,140,000 1,140,000 1,140,000
</TABLE>
The number of years of credited service under the plans as of December 31,
1997 of Messrs. Taylor, Sowinski and Geveda and Mmes. Hessamfar and Henry are
26, 13, 21, 0 and 0, respectively.
Compensation, for the purpose of determining retirement benefits, consists
of salary, wages, regular cash bonuses, commissions and overtime pay. Severance
pay, contingent payments and other forms of special remuneration are excluded.
Bonuses included in the Summary Compensation Table are normally not paid until
the year following the year in which they are accrued and expensed; therefore,
compensation for purposes of determining retirement benefits varies from the
Summary Compensation Table amounts in that bonuses expensed in the previous
year, but paid in the current year, are part of retirement compensation in the
current year, and current year's bonuses accrued and included in the Summary
Compensation Table are not. For 1997, compensation for purposes of determining
retirement benefits also varies from the Summary Compensation Table in that the
amounts shown in the "Bonus" column include performance share payouts under the
PUP, which are not creditable compensation under the retirement plans.
For the reasons discussed above, compensation for determining retirement
benefits for the named executive officers differed by more than 10% from the
amounts shown in the Summary Compensation Table. 1997 compensation for purposes
of determining retirement benefits for Messrs. Taylor, Sowinski and Geveda and
Mmes. Hessamfar and Henry was $651,875, $329,000, $264,011, $168,750 and
$219,318, respectively.
Average final compensation is defined as the highest average annual
compensation during five consecutive twelve-month periods in the last ten
consecutive twelve-month periods of the member's credited service. Members vest
in their accrued retirement benefit upon completion of five years of service.
The benefits shown in the table above are calculated on a straight-life annuity
basis.
The Retirement Account Plan, together with the PBEP, provides retirement
income based on a percentage of annual compensation. The percentage of
compensation allocated annually ranges from 3% to 12.5%, based on age and
credited service. Amounts allocated also receive interest credits based on
30-year Treasuries with a minimum interest credit rate of 3%. Executives close
to or eligible to retire as of January 1, 1997 will receive the higher of
benefits provided by the final pay formula in effect prior to 1997 or the
Retirement Account formula.
The SEBP provides retirement benefits in addition to the benefits provided
under the Retirement Account Plan and the PBEP. The SEBP has the effect of
increasing the retirement benefits under the Retirement Account Plan and the
PBEP to the amounts depicted in the preceding table. The SEBP provides maximum
benefits after 20 years. Executives close to or eligible for retirement, as
approved by the Chairman and Chief Executive Officer, will receive maximum
benefits after 15 years.
60
<PAGE> 63
THE NEW DUN & BRADSTREET CORPORATION
SECURITY OWNERSHIP BY
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All the outstanding shares of New D&B Common Stock are currently held by
D&B. The following table sets forth the number of shares of New D&B Common Stock
that are expected to be beneficially owned after the Distribution by each of the
New D&B directors, by each of the executive officers named in The New Dun &
Bradstreet Corporation Summary Compensation Table above, by all New D&B
directors and executive officers as a group and by each person known by New D&B
to beneficially own more than 5% of the outstanding shares of D&B Common Stock
as of December 31, 1997 ("5% Owners"). Stock ownership information is based on
(i) the number of shares of D&B Common Stock held by directors and executive
officers as of December 31, 1997, (ii) the number of shares held by 5% Owners,
based upon a Schedule 13G filed with the SEC by such 5% Owners and (iii) one
share of New D&B Common Stock being distributed for every share of D&B Common
Stock. See "The Distribution" and "The New Dun & Bradstreet Corporation
Management and Executive Compensation -- Compensation of The New Dun &
Bradstreet Corporation Executive Officers". Information regarding shares subject
to options reflects shares of D&B Common Stock subject to options as of December
31, 1997 and exercisable within 60 days thereafter, all of which will be
converted into options that are exercisable into shares of New D&B Common Stock.
See "Relationship Between The New Dun & Bradstreet Corporation and R.H.
Donnelley Corporation After the Distribution -- Employee Benefits Agreement".
Unless otherwise stated, the indicated persons have sole voting and investment
power over the shares listed. Percentages are based upon the number of shares of
D&B Common Stock outstanding on December 31, 1997, plus, where applicable, the
number of shares that the indicated person or group had a right to acquire
within 60 days of such date. The mailing address for each of the New D&B
directors and executive officers listed below is One Diamond Hill Road, Murray
Hill, New Jersey 07974.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENT
OF BENEFICIAL OWNER AND NATURE OF OWNERSHIP OF CLASS(1)
------------------- ----------------------- -----------
<S> <C> <C> <C>
Hall Adams, Jr. ................ 1,400 Owned(2)
3,000 Rights to Acquire Within 60 Days(3)
----------
4,400 --
Clifford L. Alexander, Jr. ..... 1,300 Owned(2)(4)
4,203 Rights to Acquire Within 60 Days(3)
----------
5,503 --
Mary Johnston Evans............. 46,670 Owned(2)(5)
3,000 Rights to Acquire Within 60 Days(3)
----------
49,670 --
Chester J. Geveda, Jr. ......... 16,241 Owned(4)
60,210 Rights to Acquire Within 60 Days(3)
----------
76,451 --
Nancy L. Henry.................. 0 Owned
2,983 Rights to Acquire Within 60 Days(3)
----------
2,983 --
Elahe Hessamfar................. 10,000 Owned(6)
4,841 Rights to Acquire Within 60 Days(3)
----------
14,841 --
Ronald L. Kuehn, Jr. ........... 1,318 Owned(7)
3,000 Rights to Acquire Within 60 Days(3)
----------
4,318 --
Robert J. Lanigan............... 7,100 Owned(2)(8)
4,203 Rights to Acquire Within 60 Days(3)
----------
11,303 --
</TABLE>
61
<PAGE> 64
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENT
OF BENEFICIAL OWNER AND NATURE OF OWNERSHIP OF CLASS(1)
------------------- ----------------------- -----------
<S> <C> <C> <C>
Vernon R. Loucks Jr. ........... 1,600 Owned(2)(9)
4,203 Rights to Acquire Within 60 Days(3)
----------
5,803 --
Henry A. McKinnell.............. 884 Owned(7)
257 Rights to Acquire Within 60 Days(3)
----------
1,141 --
Michael R. Quinlan.............. 1,400 Owned(2)
3,000 Rights to Acquire Within 60 Days(3)
----------
4,400 --
Frank S. Sowinski............... 2,920 Owned
74,210 Rights to Acquire Within 60 Days(3)
----------
77,130 --
Volney Taylor................... 104,845 Owned
428,557 Rights to Acquire Within 60 Days(3)
----------
533,402 --
All Directors and Executive
Officers as a Group........... 229,226 Owned(5)
703,598 Rights to Acquire Within 60 Days(10)
----------
932,824 --
Harris Associates L.P. and its
general partner, Harris
Associates, Inc. ............. 14,903,640 (11) 8.72 %
Two North La Salle Street,
Ste. 500
Chicago, Illinois 60602-3790
AMVESCAP PLC and certain of its
subsidiaries.................. 12,048,320 (12) 7.05 %
11 Devonshire Square
London EC2M 4YR
England
</TABLE>
- ---------------
(1) Represents ownership of less than 1% of the outstanding New D&B Common
Stock unless otherwise indicated.
(2) Includes 900 shares of restricted stock granted under The Dun & Bradstreet
Corporation Restricted Stock Plan for Non-Employee Directors, which shares
are scheduled to vest in the years 1999, 2000 and 2001.
(3) Includes the following number of performance shares delivered under the
1996 The Dun & Bradstreet Corporation Non-Employee Directors' Stock
Incentive Plan (the "1996 Directors' Plan") (in the case of directors) and
the Key Employees Performance Unit Plan for D&B and its subsidiaries (the
"PUP") (in the case of the executive officers) in February 1998 based upon
performance goals for the 1997 fiscal year: 1,203 shares for Messrs.
Alexander, Lanigan and Loucks; 257 shares for Dr. McKinnell; 2,776 shares
for Mr. Geveda; 2,983 shares for Ms. Henry; 4,841 shares for Ms. Hessamfar;
5,187 shares for Mr. Sowinski; and 25,452 shares for Mr. Taylor. Messrs.
Adams, Kuehn and Quinlan and Mrs. Evans have elected to defer receipt of
their 1,203 performance shares until after retirement. The balance of the
indicated shares represents stock options granted under a D&B plan.
(4) Includes the following number of shares as to which the indicated person
has shared voting and shared investment power: 400 shares for Mr. Alexander
and 9,075 shares for Mr. Geveda.
(5) Includes 44,770 shares owned by Mrs. Evans' spouse, as to which Mrs. Evans
disclaims beneficial ownership.
(6) Represents shares of restricted stock granted under the 1989 Key Employees
Restricted Stock Plan, which shares are scheduled to vest in the year 2000.
62
<PAGE> 65
(7) Represents shares of restricted stock granted to Mr. Kuehn and Dr.
McKinnell under the 1996 Directors' Plan, which shares are scheduled to
vest in the years 2001 and 2002, respectively.
(8) Includes shares held in two revocable trusts (one trust holding 5,000
shares and the other 1,200 shares) for the benefit of Mr. Lanigan in which
he is the settlor and sole beneficial owner and over which he has sole
investment control.
(9) Includes 300 shares held in a Keogh Plan for the benefit of Mr. Loucks.
(10) Includes 50,996 performance shares delivered under the 1996 Directors' Plan
(in the case of directors) and the PUP (in the case of executive officers)
in February 1998 based upon performance goals for the 1997 fiscal year. The
balance of the indicated shares represents stock options granted under a
D&B plan.
(11) Harris Associates L.P. ("Harris") and its sole general partner, Harris
Associates, Inc., ("Harris Inc.") jointly filed a Schedule 13G with the SEC
on February 11, 1998. This Schedule 13G shows that Harris, a registered
investment adviser, had as of December 31, 1997, shared voting power over
14,903,640 shares of D&B Common Stock. Of such shares, Harris had sole
dispositive power over 5,171,140 shares and shared dispositive power over
9,732,500 shares. In addition, Harris and Harris Inc. jointly filed an
amendment to their Schedule 13G with the SEC on April 4, 1998. This amended
Schedule 13G shows that Harris had as of March 31, 1998 shared voting power
over 17,374,440 shares of D&B Common Stock. Of such shares, Harris had sole
dispositive power over 5,435,440 shares and shared dispositive power over
11,939,000 shares.
(12) AMVESCAP PLC and its subsidiaries, AVZ, Inc. (a holding company), AIM
Management Group Inc. (a holding company), INVESCO, Inc. (a holding
company), INVESCO North American Holdings, Inc. (a holding company),
INVESCO Capital Management, Inc. (a registered investment adviser), INVESCO
Funds Group, Inc. (a registered investment adviser), and INVESCO Realty
Advisers, Inc. (a registered investment adviser), jointly filed a Schedule
13G with the SEC on February 11, 1998. This Schedule 13G shows that these
companies had, as of December 31, 1997, shared voting power and shared
dispositive power over 12,048,320 shares.
63
<PAGE> 66
DESCRIPTION OF THE NEW DUN & BRADSTREET CORPORATION CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The total number of shares of all classes of stock that New D&B has
authority to issue under its Restated Certificate of Incorporation is
420,000,000 shares of which 400,000,000 shares represent shares of New D&B
Common Stock, 10,000,000 shares represent shares of Preferred Stock (the "New
D&B Preferred Stock") and 10,000,000 shares represent shares of Series Common
Stock (the "New D&B Series Common Stock"). Based on shares of D&B
Common Stock outstanding as of , 1998, and a distribution ratio of
one share of New D&B Common Stock for every one share of D&B Common Stock,
shares of New D&B Common Stock would be distributed to holders of D&B
Common Stock on the Distribution Date.
NEW D&B COMMON STOCK
Subject to any preferential rights of any New D&B Preferred Stock or New
D&B Series Common Stock created by the Board of Directors of New D&B, each
outstanding share of New D&B Common Stock will be entitled to such dividends, if
any, as may be declared from time to time by the Board of Directors of New D&B.
See "Dividend Policies". Each outstanding share is entitled to one vote on all
matters submitted to a vote of stockholders. In the event of liquidation,
dissolution or winding up of New D&B, holders of New D&B Common Stock are
entitled to receive on a pro rata basis any assets remaining after provision for
payment of creditors and after payment of any liquidation preferences to holders
of New D&B Preferred Stock and New D&B Series Common Stock.
NEW D&B PREFERRED STOCK AND NEW D&B SERIES COMMON STOCK
Each of the authorized Preferred Stock and the authorized Series Common
Stock of New D&B is available for issuance from time to time in one or more
series at the discretion of the New D&B Board of Directors without stockholder
approval. The New D&B Board of Directors has the authority to prescribe for each
series of New D&B Preferred Stock or New D&B Series Common Stock it establishes
the number of shares in that series, the voting rights (if any) to which such
shares in that series are entitled, the consideration for such shares in that
series and the designation, powers, preference and relative, participating,
optional or other special rights and such qualifications, limitations or
restrictions of the shares in that series. Depending upon the rights of such
Preferred Stock or Series Common Stock, as applicable, the issuance of New D&B
Preferred Stock or New D&B Series Common Stock, as applicable, could have an
adverse effect on holders of New D&B Common Stock by delaying or preventing a
change in control of New D&B, making removal of the present management of New
D&B more difficult or resulting in restrictions upon the payment of dividends
and other distributions to the holders of New D&B Common Stock.
AUTHORIZED BUT UNISSUED CAPITAL STOCK
Delaware law does not require stockholder approval for any issuance of
authorized shares. However, the listing requirements of the NYSE, which would
apply so long as the New D&B Common Stock remained listed on the NYSE, require
stockholder approval of certain issuances equal to or exceeding 20% of the then
outstanding voting power or then outstanding number of shares of New D&B Common
Stock. These additional shares may be used for a variety of corporate purposes,
including future public offerings to raise additional capital or to facilitate
corporate acquisitions. New D&B currently does not have any plans to issue
additional shares of New D&B Common Stock, New D&B Preferred Stock or New D&B
Series Common Stock other than in connection with employee compensation plans.
One of the effects of the existence of unissued and unreserved New D&B
Common Stock, New D&B Preferred Stock and New D&B Series Common Stock may be to
enable the Board of Directors of New D&B to issue shares to persons friendly to
current management, which issuance could render more difficult or discourage an
attempt to obtain control of New D&B by means of a merger, tender offer, proxy
contest or otherwise, and thereby protect the continuity of New D&B's management
and possibly deprive the stockholders of opportunities to sell their shares of
New D&B Common Stock at prices higher than prevailing
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market prices. Such additional shares also could be used to dilute the stock
ownership of persons seeking to obtain control of New D&B pursuant to the
operation of the New D&B Rights Plan, which is discussed below.
THE NEW DUN & BRADSTREET CORPORATION RIGHTS PLAN
On , 1998 the Board of Directors of New D&B declared a dividend
of one preferred share purchase right (a "New D&B Right") for each outstanding
share of New D&B Common Stock. The dividend will be payable on ,
1998 (the "New D&B Record Date") to D&B, which will be the sole stockholder of
record on the New D&B Record Date. Each New D&B Right entitles the registered
holder to purchase from New D&B one one-thousandth of a share of Series A Junior
Participating New D&B Preferred Stock, par value $0.01 per share (the "New D&B
Participating Preferred Stock"), of New D&B at a price of $ per one
one-thousandth of a share of New D&B Participating Preferred Stock (as the same
may be adjusted, hereinafter referred to as the "New D&B Participating Preferred
Stock Purchase Price"), subject to adjustment. The description and terms of the
New D&B Rights are set forth in the New D&B Rights Agreement dated as of
, 1998, as the same may be amended from time to time (the "New D&B
Rights Agreement"), between New D&B and First Chicago Trust Company of New York,
as the New D&B Rights Agent (the "New D&B Rights Agent").
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (with certain
exceptions, hereinafter referred to in this description of New D&B Rights, an
"Acquiring Person") have acquired beneficial ownership of 15% or more of the
outstanding shares of New D&B Common Stock or (ii) 10 business days (or such
later date as may be determined by action of the Board of Directors prior to
such time as any person or group of affiliated persons becomes an Acquiring
Person) following the commencement of, or announcement of an intention to make,
a tender offer or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 15% or more of the outstanding
shares of New D&B Common Stock (the earlier of such dates hereinafter referred
to in this description of New D&B Rights as the "Rights Distribution Date"), the
New D&B Rights will be evidenced by the certificates representing New D&B Common
Stock.
The New D&B Rights Agreement provides that, until the Rights Distribution
Date (or earlier redemption or expiration of the New D&B Rights), the New D&B
Rights will be transferred with and only with the New D&B Common Stock. Until
the Rights Distribution Date (or earlier redemption or expiration of the New D&B
Rights), New D&B Common Stock certificates will contain a notation incorporating
the New D&B Rights Agreement by reference. Until the Rights Distribution Date
(or earlier redemption or expiration of the New D&B Rights), the surrender for
transfer of any certificates for shares of New D&B Common Stock will also
constitute the transfer of the New D&B Rights associated with the shares of New
D&B Common Stock represented by such certificate. As soon as practicable
following the Rights Distribution Date, separate certificates evidencing the New
D&B Rights ("New D&B Rights Certificates") will be mailed to holders of record
of the New D&B Common Stock as of the close of business on the Rights
Distribution Date and such separate New D&B Rights Certificates alone will
evidence the New D&B Rights.
The New D&B Rights are not exercisable until the Rights Distribution Date.
The New D&B Rights will expire on , 2008 (hereinafter referred to in
this description of New D&B Rights as the "Final Expiration Date"), unless the
Final Expiration Date is advanced or extended or unless the New D&B Rights are
earlier redeemed or exchanged by New D&B, in each case as described below.
The New D&B Participating Preferred Stock Purchase Price payable, and the
number of shares of New D&B Participating Preferred Stock or other securities or
property issuable, upon exercise of the New D&B Rights are subject to adjustment
from time to time to prevent dilution (i) in the event of a stock dividend on,
or a subdivision, combination or reclassification of, the New D&B Participating
Preferred Stock, (ii) upon the grant to holders of the New D&B Participating
Preferred Stock of certain rights or warrants to subscribe for or purchase New
D&B Participating Preferred Stock at a price, or securities convertible into New
D&B Participating Preferred Stock with a conversion price, less than the
then-current market price of the New D&B Participating Preferred Stock or (iii)
upon the distribution to holders of the New D&B Participating Preferred Stock of
evidences of indebtedness or assets (excluding regular periodic cash dividends
or dividends
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payable in New D&B Participating Preferred Stock) or of subscription rights or
warrants (other than those referred to above).
The New D&B Rights are also subject to adjustment in the event of a stock
dividend on the New D&B Common Stock payable in shares of New D&B Common Stock
or subdivisions, consolidations or combinations of the New D&B Common Stock
occurring, in any such case, prior to the Rights Distribution Date.
Shares of New D&B Participating Preferred Stock purchasable upon exercise
of the New D&B Rights will not be redeemable. Each share of New D&B
Participating Preferred Stock will be entitled, when, as and if declared, to a
minimum preferential quarterly dividend payment of $10 per share but will be
entitled to an aggregate dividend of 1,000 times the dividend declared per share
of New D&B Common Stock. In the event of liquidation, dissolution or winding up
of New D&B, the holders of the New D&B Participating Preferred Stock will be
entitled to a minimum preferential liquidation payment of $100 per share (plus
any accrued but unpaid dividends) but will be entitled to an aggregate payment
of 1,000 times the payment made per share of New D&B Common Stock. Each share of
New D&B Participating Preferred Stock will have 1,000 votes, voting together
with the New D&B Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of New D&B Common Stock are
converted or exchanged, each share of New D&B Participating Preferred Stock will
be entitled to receive 1,000 times the amount received per share of New D&B
Common Stock. These rights are protected by customary antidilution provisions.
Because of the nature of the New D&B Participating Preferred Stock's
dividend, liquidation and voting rights, the value of the one one-thousandth
interest in a share of New D&B Participating Preferred Stock purchasable upon
exercise of each New D&B Right should approximate the value of one share of New
D&B Common Stock.
In the event that any person or group of affiliated or associated persons
becomes an Acquiring Person, each holder of a New D&B Right, other than New D&B
Rights beneficially owned by the Acquiring Person (which will thereupon become
void), will thereafter have the right to receive upon exercise of a New D&B
Right and payment of the New D&B Participating Preferred Stock Purchase Price,
that number of shares of New D&B Common Stock having a market value of two times
the New D&B Participating Preferred Stock Purchase Price.
In the event that, after a person or group has become an Acquiring Person,
New D&B is acquired in a merger or other business combination transaction or 50%
or more of its consolidated assets or earning power are sold, proper provision
will be made so that each holder of a New D&B Right (other than New D&B Rights
beneficially owned by an Acquiring Person which will have become void) will
thereafter have the right to receive, upon the exercise thereof, that number of
shares of common stock of the person with whom New D&B has engaged in the
foregoing transaction (or its parent), which number of shares at the time of
such transaction will have a market value of two times the New D&B Participating
Preferred Stock Purchase Price.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of 50% or more of the outstanding
shares of New D&B Common Stock or the occurrence of an event described in the
prior paragraph, the Board of Directors of New D&B may exchange the New D&B
Rights (other than New D&B Rights owned by such person or group which will have
become void), in whole or in part, at an exchange ratio of one share of New D&B
Common Stock, or a fractional share of New D&B Participating Preferred Stock of
equivalent value (or of a share of a class or series of New D&B's Preferred
Stock having similar rights, preferences and privileges), per New D&B Right
(subject to adjustment).
With certain exceptions, no adjustment in the New D&B Participating
Preferred Stock Purchase Price will be required until cumulative adjustments
require an adjustment of at least 1% in such New D&B Participating Preferred
Stock Purchase Price. No fractional shares of New D&B Participating Preferred
Stock will be issued (other than fractions which are integral multiples of one
one-thousandth of a share of New D&B Participating Preferred Stock, which may,
at the election of New D&B, be evidenced by depositary receipts) and in lieu
thereof, an adjustment in cash will be made based on the market price of the New
D&B Participating Preferred Stock on the last trading period to the date of
exercise.
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<PAGE> 69
At any time prior to the time an Acquiring Person becomes such, the Board
of Directors of New D&B may redeem the New D&B Rights in whole, but not in part,
at a price of $0.01 per New D&B Right (hereinafter referred to in this
description of New D&B Rights as the "Redemption Price"). The redemption of the
New D&B Rights may be made effective at such time, on such basis and with such
conditions as the Board of Directors in its sole discretion may establish.
Immediately upon any redemption of the New D&B Rights, the right to exercise the
New D&B Rights will terminate and the only right of the holders of New D&B
Rights will be to receive the Redemption Price.
For so long as the New D&B Rights are then redeemable, New D&B may, except
with respect to the Redemption Price, amend the New D&B Rights in any manner.
After the New D&B Rights are no longer redeemable, New D&B may, except with
respect to the Redemption Price, amend the New D&B Rights in any manner that
does not adversely affect the interests of holders of the New D&B Rights.
Until a New D&B Right is exercised, the holder thereof, as such, will have
no rights as a stockholder of New D&B, including, without limitation, the right
to vote or to receive dividends.
A copy of the New D&B Rights Agreement will be filed as an exhibit to the
Registration Statement on Form 10 of New D&B in respect of the registration of
the New D&B Common Stock under the Exchange Act. A copy of the New D&B Rights
Agreement is available free of charge from New D&B. The summary description of
the New D&B Rights set forth above does not purport to be complete and is
qualified in its entirety by reference to the New D&B Rights Agreement, as the
same may be amended from time to time, which is hereby incorporated herein by
reference.
CERTAIN EFFECTS OF THE NEW DUN & BRADSTREET CORPORATION RIGHTS AGREEMENT
The New D&B Rights Agreement is designed to protect stockholders of New D&B
in the event of unsolicited offers to acquire New D&B and other coercive
takeover tactics which, in the opinion of the Board of Directors of New D&B,
could impair its ability to represent stockholder interests. The provisions of
the New D&B Rights Agreement may render an unsolicited takeover of New D&B more
difficult or less likely to occur or might prevent such a takeover, even though
such takeover may offer New D&B's stockholders the opportunity to sell their
stock at a price above the prevailing market rate and may be favored by a
majority of the stockholders of New D&B.
NO PREEMPTIVE RIGHTS
No holder of any class of stock of New D&B authorized at the time of the
Distribution will have any preemptive right to subscribe to any securities of
New D&B of any kind or class.
DELAWARE GENERAL CORPORATION LAW
The terms of Section 203 of the General Corporation Law of the State of
Delaware (the "DGCL") apply to New D&B since it is a Delaware corporation.
Pursuant to Section 203, with certain exceptions, a Delaware corporation may not
engage in any of a broad range of business combinations, such as mergers,
consolidations and sales of assets, with an "interested stockholder" for a
period of three years from the time that such person became an interested
stockholder unless (a) the transaction that results in the person's becoming an
interested stockholder or the business combination is approved by the board of
directors of the corporation before the person becomes an interested
stockholder, (b) upon consummation of the transaction which results in the
stockholder becoming an interested stockholder, the interested stockholder owns
85% or more of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding shares owned by persons who are directors and
also officers and shares owned by certain employee stock plans or (c) on or
after the time the person becomes an interested stockholder, the business
combination is approved by the corporation's board of directors and by holders
of at least two-thirds of the corporation's outstanding voting stock, excluding
shares owned by the interested stockholder, at a meeting of stockholders. Under
Section 203, an "interested stockholder" is defined as any person, other than
the corporation and any direct or indirect majority-owned subsidiary, that is
(a) the owner of 15% or more of the outstanding voting stock of the corporation
or (b) an affiliate or associate of the corporation and was the owner of 15% or
more of the
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outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder. Section 203 does not apply to
a corporation that so provides in an amendment to its certificate of
incorporation or by-laws passed by a majority of its outstanding shares, but
such stockholder action does not become effective for 12 months following its
adoption and would not apply to persons who were already interested stockholders
at the time of the amendment. New D&B's Restated Certificate of Incorporation
does not exclude New D&B from the restrictions imposed under Section 203.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period. The provisions of
Section 203 may encourage companies interested in acquiring New D&B to negotiate
in advance with New D&B's Board of Directors, because the stockholder approval
requirement would be avoided if the Board of Directors approves either the
business combination or the transaction which results in the stockholder
becoming an interested stockholder. Such provisions also may have the effect of
preventing changes in the Board of Directors of New D&B. It is further possible
that such provisions could make it more difficult to accomplish transactions
which stockholders may otherwise deem to be in their best interests.
PROVISIONS OF THE NEW DUN & BRADSTREET CORPORATION RESTATED CERTIFICATE OF
INCORPORATION AND AMENDED AND RESTATED BY-LAWS AFFECTING CHANGE IN CONTROL
Certain provisions of the New D&B Restated Certificate of Incorporation and
Amended and Restated By-laws may delay or make more difficult unsolicited
acquisitions or changes of control of New D&B. It is believed that such
provisions will enable New D&B to develop its business in a manner that will
foster its long-term growth without disruption caused by the threat of a
takeover not deemed by its Board of Directors to be in the best interests of New
D&B and its stockholders. Such provisions could have the effect of discouraging
third parties from making proposals involving an unsolicited acquisition or
change of control of New D&B, although such proposals, if made, might be
considered desirable by a majority of New D&B's stockholders. Such provisions
may also have the effect of making it more difficult for third parties to cause
the replacement of the current Board of Directors of New D&B. These provisions
include (i) the availability of capital stock for issuance from time to time at
the discretion of the Board of Directors (see "-- Authorized But Unissued
Capital Stock"), (ii) prohibitions against stockholders calling a special
meeting of stockholders or acting by written consent in lieu of a meeting, (iii)
requirements for advance notice for raising business or making nominations at
stockholders' meetings, (iv) the ability of the Board of Directors to increase
the size of the board and to appoint directors to newly created directorships,
(v) a classified Board of Directors and (vi) higher than majority requirements
to make certain amendments to the By-laws and Certificate of Incorporation.
No Stockholder Action by Written Consent; Special Meetings
The New D&B Restated Certificate of Incorporation and Amended and Restated
By-laws provide that stockholder action can be taken only at an annual or
special meeting and cannot be taken by written consent in lieu of a meeting. The
New D&B Restated Certificate of Incorporation and Amended and Restated By-laws
also provide that special meetings of the stockholders can be called only by the
Chief Executive Officer of New D&B or by a vote of the majority of the Board of
Directors. Furthermore, the By-laws of New D&B provide that only such business
as is specified in the notice of any such special meeting of stockholders may
come before such meeting.
Advance Notice for Raising Business or Making Nominations at Meetings
The By-laws of New D&B establish an advance notice procedure for
stockholder proposals to be brought before an annual meeting of stockholders and
for nominations by stockholders of candidates for election as directors at an
annual or special meeting at which directors are to be elected. Only such
business may be conducted at an annual meeting of stockholders as has been
brought before the meeting by, or at the direction of, the Chairman of the Board
of Directors, or by a stockholder of New D&B who is entitled to vote at the
meeting who has given to the Secretary of New D&B timely written notice, in
proper form, of the
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stockholder's intention to bring that business before the meeting. The chairman
of such meeting has the authority to make such determinations. Only persons who
are nominated by, or at the direction of, the Chairman of the Board of
Directors, or who are nominated by a stockholder who has given timely written
notice, in proper form, to the Secretary prior to a meeting at which directors
are to be elected will be eligible for election as directors of New D&B.
To be timely, a stockholder's notice of business to be brought before an
annual meeting and nominations of candidates for election as directors at any
annual meeting shall be delivered to the Secretary of New D&B at the principal
executive offices of New D&B not less than 70 days nor more than 90 days prior
to the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is advanced by
more than 20 days, or delayed by more than 70 days, from such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier than the
ninetieth day prior to such annual meeting and not later than the close of
business on the later of the seventieth day prior to such annual meeting or the
tenth day following the day on which public announcement of the date of such
meeting is first made.
To be timely, a stockholder's notice of nominations of persons for election
to the Board of Directors may be made at such a special meeting of stockholders
if the stockholder's notice shall be delivered to the Secretary of New D&B at
the principal executive offices of New D&B not earlier than the ninetieth day
prior to such special meeting and not later than the close of business on the
later of the seventieth day prior to such special meeting or the tenth day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the Board of Directors to be
elected at such meeting.
The notice of any nomination for election as a director must set forth the
name and address of, and the class and number of shares of New D&B held by, the
stockholder who intends to make the nomination and the beneficial owner, if any,
on whose behalf the nomination is being made; the name and address of the person
or persons to be nominated; a representation that the stockholder is a holder of
record of stock of New D&B entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; a description of all arrangements or understandings
between the stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the stockholder; such other information regarding each nominee
proposed by such stockholder as would have been required to be included in a
proxy statement filed pursuant to the proxy rules of the SEC had each nominee
been nominated, or intended to be nominated, by the Board of Directors; and the
consent of each nominee to serve as a director if so elected.
Number of Directors; Filling of Vacancies; Removal
The New D&B Restated Certificate of Incorporation and Amended and Restated
By-laws provide that newly created directorships resulting from an increase in
the authorized number of directors (or any vacancy) may only be filled by a vote
of a majority of directors then in office. Accordingly, the Board of Directors
of New D&B may be able to prevent any stockholder from obtaining majority
representation on the Board of Directors by increasing the size of the board and
filling the newly created directorships with its own nominees. If any applicable
provision of the DGCL expressly confers power on stockholders to fill such a
directorship at a special meeting of stockholders, such a directorship may be
filled at such meeting only by the affirmative vote of at least 80% in voting
power of all shares of New D&B entitled to vote generally in the election of
directors, voting as a single class. Directors may be removed only for cause,
and only by the affirmative vote of at least 80% in voting power of all shares
of New D&B entitled to vote generally in the election of directors, voting as a
single class.
Classified Board of Directors
The New D&B Restated Certificate of Incorporation provides for New D&B's
Board of Directors to be divided into three classes of directors serving
staggered three-year terms. As a result, approximately one third of New D&B's
Board of Directors will be elected each year. See "The New Dun & Bradstreet
Corporation Management and Executive Compensation -- The New Dun & Bradstreet
Corporation Board of Directors".
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New D&B believes that a classified board will help to assure the continuity
and stability of its Board of Directors, and its business strategies and
policies as determined by its Board, because a majority of the directors at any
given time will have prior experiences as directors of New D&B. This provision
should also help to ensure that New D&B's Board of Directors, if confronted with
an unsolicited proposal from a third party that has acquired a block of New
D&B's voting stock, will have sufficient time to review the proposal and
appropriate alternatives and to seek the best available result for all
stockholders.
This provision could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of New D&B's Board of
Directors until the second annual stockholders meeting following the date the
acquiror obtains the controlling stock interest, could have the effect of
discouraging a potential acquiror from making a tender offer or otherwise
attempting to obtain control of New D&B and could thus increase the likelihood
that incumbent directors will retain their positions.
Amendments to the Amended and Restated By-laws
The New D&B Restated Certificate of Incorporation provides that the
affirmative vote of the holders of at least 80% in voting power of all the
shares of New D&B entitled to vote generally in the election of directors,
voting together as a single class, shall be required in order for the
stockholders to alter, amend or repeal any provision of the Amended and Restated
By-laws which is to the same effect as provisions contained in the Restated
Certificate of Incorporation relating to (i) the amendment of the Amended and
Restated By-laws, (ii) the classified Board of Directors and the filling of
director vacancies and (iii) calling and taking actions at meetings of
stockholders and prohibiting stockholders from taking action by written consent.
Amendments to the Restated Certificate of Incorporation
The New D&B Restated Certificate of Incorporation requires the affirmative
vote of the holders of at least 80% in voting power of all the shares of New D&B
entitled to vote generally in the election of directors, voting together as a
single class, to alter, amend or repeal provisions of the Restated Certificate
of Incorporation relating to (i) the amendment of the Restated Certificate of
Incorporation and/or the Amended and Restated By-laws, (ii) the classified Board
of Directors and the filling of director vacancies and (iii) calling and taking
actions at meetings of stockholders and prohibiting stockholders from taking
action by written consent.
INDEMNIFICATION AND LIMITATION OF LIABILITY FOR DIRECTORS AND OFFICERS
The New D&B Restated Certificate of Incorporation provides that New D&B
shall indemnify directors and officers to the fullest extent permitted by the
laws of the State of Delaware. The New D&B Restated Certificate of Incorporation
also provides that a director of New D&B shall not be liable to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the DGCL as the same exists or may hereafter be
amended.
The indemnification rights conferred by the Restated Certificate of
Incorporation of New D&B are not exclusive of any other right to which a person
seeking indemnification may otherwise be entitled. New D&B will also provide
liability insurance for the directors and officers for certain losses arising
from claims or charges made against them, while acting in their capacities as
directors or officers.
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R.H. DONNELLEY
CAPITALIZATION
The following table sets forth the pro forma historical capitalization of
R.H. Donnelley as of March 31, 1998 and as adjusted to give effect to the
Distribution and the transactions contemplated thereby. The following data is
qualified in its entirety by the financial statements of R.H. Donnelley
presented on a stand-alone basis and the other information contained elsewhere
in this Information Statement. See "Forward-Looking Statements".
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL
AS OF PRO FORMA
MARCH 31, AS ADJUSTED FOR
1998(1) THE DISTRIBUTION(2)
---------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
<S> <C> <C>
Cash and Cash Equivalents................................... $ 17 $ 17
======== =========
Long Term Debt.............................................. -- 500,000
-------- ---------
Preferred Stock, par value $1.00 per share,
authorized -- 10,000,000 shares........................... -- --
-------- ---------
Common Stock, par value $1.00 per share,
authorized -- 400,000,000 shares, issued and
outstanding -- 188,420,996 shares, less treasury shares of
16,850,856................................................ 171,570 171,570
Retained Earnings (Deficit)................................. 74,317 (415,183)
Total Equity (Deficit)................................. 245,887 (243,613)
-------- ---------
Total Capitalization.............................. $245,887 $ 256,387
======== =========
</TABLE>
- ---------------
(1) The Pro Forma Historical column reflects the recapitalization of R.H.
Donnelley at the date of the Distribution. See "R.H. Donnelley Pro Forma
Condensed Financial Statements".
(2) In connection with the Distribution, R.H. Donnelley will borrow $350 million
under the R.H. Donnelley Credit Facility and will issue $150 million of
senior subordinated notes under the R.H. Donnelley Indenture. The net
proceeds of the offering of the notes, along with R.H. Donnelley's
anticipated borrowings under the R.H. Donnelley Credit Facility will be used
(i) to repay indebtedness of D&B, primarily commercial paper, (ii) to pay
costs and expenses related to the Distribution and (iii) to repay
indebtedness of D&B to subsidiaries which, following the Distribution, will
be subsidiaries of New D&B. This $500 million of debt will be an obligation
of R.H. Donnelley after the Distribution.
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R.H. DONNELLEY
SELECTED FINANCIAL DATA
The Selected Financial Data of R.H. Donnelley as of December 31, 1996 and
1997, and for each of the years in the three year period ended December 31,
1997, are derived from the audited financial statements of R.H. Donnelley
included elsewhere in this Information Statement. R.H. Donnelley's audited
financial statements are presented as if R.H. Donnelley were a stand-alone
entity for all periods presented. The Selected Financial Data of R.H. Donnelley
as of December 31, 1993, 1994 and 1995, and for the years ended December 31,
1993 and 1994, are derived from the unaudited financial statements of R.H.
Donnelley, and, in the opinion of management, include all necessary adjustments
for a fair presentation of such data in conformity with generally accepted
accounting principles. The Selected Financial Data as of March 31, 1998 and for
the three months ended March 31, 1997 and 1998 have been derived from the
unaudited interim financial statements of R.H. Donnelley included elsewhere in
this Information Statement, and, in the opinion of management, include all
necessary adjustments for a fair presentation of such data in conformity with
generally accepted accounting principles. The financial data included herein may
not necessarily reflect the results of operations and financial position of R.H.
Donnelley in the future or what they would have been had it been a separate
entity. The information set forth below should be read in conjunction with the
R.H. Donnelley information under "R.H. Donnelley -- Capitalization", "R.H.
Donnelley -- Pro Forma Condensed Financial Statements", "R.H.
Donnelley -- Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the R.H. Donnelley Financial Statements and Notes
thereto included elsewhere in this Information Statement.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
HISTORICAL PRO FORMA(1)
-------------------------------------------------------------- ------------
1993 1994 1995 1996 1997 1997
---------- ---------- ---------- ---------- ---------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(2):
Revenues........................... $ 333,047 $ 310,313 $ 312,940 $ 270,029 $ 239,865 $ 239,865
Expenses:
Operating Expenses(3)............ 157,546 139,022 157,559 135,500 132,278 132,278
General and Administrative(3).... 124,992 91,368 75,754 83,803 81,089 81,089
Depreciation and Amortization.... 15,694 15,444 16,322 16,229 21,930 21,930
Restructuring Charges............ -- -- 17,690 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total Expenses............. 298,232 245,834 267,325 235,532 235,297 235,297
Income from Partnerships and
Related Fees..................... 129,873 148,770 137,180 132,945 130,171 130,171
---------- ---------- ---------- ---------- ---------- ----------
Operating Income........... 164,688 213,249 182,795 167,442 134,739 134,739
Gain(Loss) on Dispositions......... -- -- -- (28,500) 9,412 9,412
Interest Expense................... -- -- -- -- -- 40,436
---------- ---------- ---------- ---------- ---------- ----------
Income Before Provision for
Income Taxes............. 164,688 213,249 182,795 138,942 144,151 103,715
Provision for Income Taxes......... 65,875 85,300 74,398 60,857 59,246 43,072
---------- ---------- ---------- ---------- ---------- ----------
Net Income................. $ 98,813 $ 127,949 $ 108,397 $ 78,085 $ 84,905 $ 60,643
========== ========== ========== ========== ========== ==========
PRO FORMA EARNINGS PER SHARE(4):
Basic.......................... $ 0.56 $ 0.75 $ 0.64 $ 0.46 $ 0.50 $ 0.36
Diluted........................ $ 0.56 $ 0.75 $ 0.64 $ 0.46 $ 0.50 $ 0.35
SHARES USED IN COMPUTING PRO FORMA
EARNINGS PER SHARE(4):
Basic.......................... 177,200 169,946 169,522 170,017 170,765 170,765
Diluted........................ 177,200 169,946 169,883 170,289 171,065 171,065
OTHER FINANCIAL DATA:
Gross Advertising Sales(5)..... $1,151,700 $1,108,705 $1,145,944 $1,115,560 $1,067,242 $1,067,242
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
------------------------------------
HISTORICAL PRO FORMA(1)
--------------------- ------------
1997 1998 1998
-------- -------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(2):
Revenues........................... $ 20,200 $ 24,344 $ 24,344
Expenses:
Operating Expenses(3)............ 5,553 7,093 7,093
General and Administrative(3).... 16,963 17,695 17,695
Depreciation and Amortization.... 5,416 4,952 4,952
Restructuring Charges............ -- -- --
-------- -------- ----------
Total Expenses............. 27,932 29,740 29,740
Income from Partnerships and
Related Fees..................... 5,442 25,642 25,642
-------- -------- ----------
Operating Income........... (2,290) 20,246 20,246
Gain(Loss) on Dispositions......... -- -- --
Interest Expense................... -- -- 10,109
-------- -------- ----------
Income Before Provision for
Income Taxes............. (2,290) 20,246 10,137
Provision for Income Taxes......... (916) 8,098 4,054
-------- -------- ----------
Net Income................. $ (1,374) $ 12,148 $ 6,083
======== ======== ==========
PRO FORMA EARNINGS PER SHARE(4):
Basic.......................... $ (0.01) $ 0.07 $ 0.04
Diluted........................ $ (0.01) $ 0.07 $ 0.04
SHARES USED IN COMPUTING PRO FORMA
EARNINGS PER SHARE(4):
Basic.......................... 171,189 171,153 171,153
Diluted........................ 171,189(6) 172,396 172,396
OTHER FINANCIAL DATA:
Gross Advertising Sales(5)..... $ 68,136 $147,226 $ 147,226
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------
HISTORICAL
--------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(2):
Total Assets...................... $ 512,165 $ 526,168 $ 520,214 $ 502,193 $ 382,286
Long Term Debt....................
Shareholder's Equity (Deficit).... $ 350,942 $ 370,314 $ 386,565 $ 379,184 $ 258,675
<CAPTION>
AS OF MARCH 31,
-------------------------
HISTORICAL PRO FORMA(1)
---------- ------------
1998 1998
---------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA(2):
Total Assets...................... $359,174 $ 369,674
Long Term Debt.................... $ -- $ 500,000
Shareholder's Equity (Deficit).... $245,887 $(243,613)
</TABLE>
72
<PAGE> 75
- ---------------
(1) See "R.H. Donnelley Pro Forma Condensed Financial Statements".
(2) The Selected Financial Data above include amounts related to businesses that
have been sold and will not be included in R.H. Donnelley's results in
future periods. The P-West business was sold in May 1996 and the P-East
business was sold in December 1997. The above Selected Financial Data
contain the following amounts applicable to those businesses.
<TABLE>
<CAPTION>
AS OF AND
FOR THE
AS OF AND FOR THE YEAR ENDED DECEMBER 31, YEAR ENDED
(AMOUNTS IN THOUSANDS) MARCH 31,
--------------------------------------------------- ---------------
1993 1994 1995 1996 1997 1997
-------- -------- -------- -------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................. $166,176 $148,785 $140,104 $ 97,263 $77,979 $ 635
Operating Income.......... $ 13,199 $ 27,926 $ 22,250 $ 18,587 $10,969 $ (914)
Total Assets.............. $163,440 $138,345 $131,751 $ 80,962 $ -- $68,660
Gross Advertising Sales... $156,631 $139,060 $133,389 $ 89,939 $73,753 $ 1,513
</TABLE>
(3) Allocations of historical corporate expense of D&B are included in operating
expenses and general and administrative expenses. R.H. Donnelley's
management believes these allocations are reasonable. However, the costs of
these services and benefits allocated to R.H. Donnelley are not necessarily
indicative of the costs that would have been incurred if R.H. Donnelley had
performed or provided these services as a separate entity. These allocations
were $24.1 million, $18.6 million and $21.5 million in 1995, 1996 and 1997,
respectively, and were $5.9 million and $5.3 million for the three months
ended March 31, 1997 and the three months ended March 31, 1998,
respectively. No data is available prior to the year ended December 31,
1995.
(4) The computation of pro forma basic earnings per share for the periods
presented is based upon the historical weighted average number of shares of
D&B Common Stock outstanding, reflecting the one-for-one distribution. The
computation of pro forma diluted earnings per share is calculated by
dividing net income by the sum of D&B's historical weighted average common
shares outstanding and potentially dilutive R.H. Donnelley common shares.
Potentially dilutive common shares are calculated in accordance with the
treasury stock method, which assumes that proceeds from the exercise of all
R.H. Donnelley employees' options are used to repurchase common stock at
market value. The amount of shares remaining after the proceeds are
exhausted represent the potentially dilutive effect of the options.
(5) Unaudited gross advertising sales is the billing value of advertisements
sold by R.H. Donnelley and DonTech.
(6) The exercise of potentially dilutive shares has not been assumed for the
three months ended March 31, 1997, since the result is antidilutive.
73
<PAGE> 76
R.H. DONNELLEY
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial statements have been
prepared giving effect to the Distribution as if it occurred on March 31, 1998
for the pro forma condensed balance sheet and January 1, 1997 for the pro forma
condensed statements of operations. The pro forma condensed balance sheet and
statements of operations set forth below do not purport to represent what R.H.
Donnelley's financial position and results of operations actually would have
been had the Distribution occurred on the date indicated or to project R.H.
Donnelley's operating results for any future period. The pro forma adjustments
are based upon available information and certain assumptions that R.H.
Donnelley's management believes are reasonable. The pro forma condensed
financial statements set forth below should be read in conjunction with, and are
qualified in their entirety by, the R.H. Donnelley information under "R.H.
Donnelley Selected Financial Data" and "R.H. Donnelley Management's Discussion
and Analysis of Financial Condition and Results of Operations" and in the R.H.
Donnelley Financial Statements and Notes thereto included elsewhere in this
Information Statement.
74
<PAGE> 77
R.H. DONNELLEY
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues...................................... $ 239,865 $ 239,865(A)
Expenses:
Operating Expenses.......................... 132,278 132,278
General and Administrative.................. 81,089 81,089(B)
Depreciation and Amortization............... 21,930 21,930
----------- -----------
Total Expenses...................... 235,297 235,297
Income from Partnerships and Other Related
Fees........................................ 130,171 130,171
----------- -----------
Operating Income.............................. 134,739 134,739(A)
Gain on Disposition........................... 9,412 9,412
Interest Expense.............................. -- $(39,132)(C)(D) (40,436)
(1,299)(E)
----------- -------- -----------
Income before Provision for Income
Taxes............................. 144,151 (40,436) 103,715
Provision for Income Taxes.................... 59,246 (16,174)(F) 43,072
----------- -------- -----------
Net Income.................................... $ 84,905 $(24,262) $ 60,643
=========== ======== ===========
Pro Forma Earnings Per Share:
Basic....................................... $ 0.50 $ 0.36
=========== ===========
Diluted..................................... $ 0.50 $ 0.35
=========== ===========
Shares Used in Computing Pro Forma Earnings
Per Share:
Basic....................................... 170,765 170,765
=========== ===========
Diluted..................................... 171,065 171,065
=========== ===========
</TABLE>
See notes to pro forma condensed financial statements
75
<PAGE> 78
R.H. DONNELLEY
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues...................................... $ 24,344 $ 24,344
Expenses:
Operating Expenses.......................... 7,093 7,093
General and Administrative.................. 17,695 17,695(B)
Depreciation and Amortization............... 4,952 4,952
-------- --------
Total Expenses...................... 29,740 29,740
Income from Partnerships and Other Related
Fees........................................ 25,642 25,642
-------- --------
Operating Income.............................. 20,246 20,246
Interest Expense.............................. -- $ (9,784)(C)(D) (10,109)
(325)(E)
-------- -------- --------
Income before Provision for Income
Taxes............................. 20,246 (10,109) 10,137
Provision for Income Taxes.................... 8,098 (4,044)(F) 4,054
-------- -------- --------
Net Income.................................... $ 12,148 $ (6,065) $ 6,083
======== ======== ========
Pro Forma Earnings Per Share:
Basic....................................... $ 0.07 $ 0.04
======== ========
Diluted..................................... $ 0.07 $ 0.04
======== ========
Shares Used in Computing Pro Forma Earnings
Per Share:
Basic....................................... 171,153 171,153
======== ========
Diluted..................................... 172,396 172,396
======== ========
</TABLE>
See notes to pro forma condensed financial statements
76
<PAGE> 79
R.H. DONNELLEY
PRO FORMA CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
---------------------------------------------------------
PRO FORMA
HISTORICAL HISTORICAL(H) ADJUSTMENTS PRO FORMA
---------- ------------- ----------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS:
Cash and Cash Equivalents................ $ 17 $ 17 $ 17
Other Current Assets..................... 136,703 136,703 136,703
-------- -------- ---------
Total Current Assets........... 136,720 136,720 136,720
Non-Current Assets....................... 222,454 222,454 $ 10,500(G) 232,954
-------- -------- --------- ---------
Total Assets................... $359,174 359,174 $ 10,500 $ 369,674
======== ======== ========= =========
LIABILITIES AND SHAREHOLDER'S EQUITY:
Current Liabilities...................... $ 50,527 $ 50,527 $ 50,527
Long Term Debt........................... -- -- $ 500,000(C) 500,000
Other Liabilities........................ 62,760 62,760 62,760
-------- -------- --------- ---------
Total Liabilities.............. 113,287 113,287 500,000 613,287
Shareholder's Equity:
Preferred Stock, par value $1.00 per
share, Authorized -- 10,000,000 shares
Common Stock, par value $1.00 per share,
Authorized -- 400,000,000 shares;
Issued -- 188,420,996 shares, less
treasury shares of 16,850,856.......... -- 171,570 -- 171,570
Common Stock, no par value Authorized --
100 shares; Issued and
Outstanding -- 100 shares.............. 12,002 -- -- --
Capital Surplus.......................... 101,032 -- -- --
Retained Earnings (Deficit).............. 132,853 74,317 (489,500) (415,183)
-------- -------- --------- ---------
Total Shareholder's Equity..... 245,887 245,887 (489,500) (243,613)
-------- -------- --------- ---------
Total Liabilities and
Shareholder's Equity......... $359,174 $359,174 $ 10,500 $ 369,674
======== ======== ========= =========
</TABLE>
See notes to pro forma condensed financial statements
77
<PAGE> 80
R.H. DONNELLEY
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
A. The pro forma condensed statement of operations for the year ended December
31, 1997 includes amounts related to the P-East business that was sold in
December 1997 and will not be included in the results going forward. The
following amounts were related to this business.
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Revenues.................................................... $77,979
Operating Income............................................ 10,969
</TABLE>
B. R.H. Donnelley estimates a net increase in operating expense of as much as
approximately $8.6 million annually associated with operating as a publicly
owned company which is not reflected in the pro forma condensed financial
statements.
C. In connection with the Distribution, R.H. Donnelley will borrow $350 million
under the R.H. Donnelley Credit Facility and will issue $150 million of
senior subordinated notes. The net proceeds of the offering of the notes,
along with R.H. Donnelley's anticipated borrowings under the R.H. Donnelley
Credit Facility will be used (i) to repay indebtedness of D&B, primarily
commercial paper, (ii) to pay costs and expenses related to the Distribution
and (iii) to repay indebtedness of D&B to subsidiaries which, following the
Distribution, will be subsidiaries of New D&B. This $500 million of debt
will be an obligation of R.H. Donnelley after the Distribution. The debt is
currently estimated to be comprised of:
<TABLE>
<CAPTION>
BANK FINANCING SENIOR
------------------------------------------------------------------ SUBORDINATED
REVOLVER A LOAN B LOAN C LOAN TOTAL NOTES
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Amount............... $50 million $75 million $125 million $100 million $350 million $150 million
Estimated Interest... 7.20% 7.20% 7.45% 7.70% 8.75%
Estimated Financing
Costs.............. $5.8 million $4.7 million
Estimated Financing
Term............... 6 years 6 years 7.5 years 8.5 years 6-8.5 years 10 years
</TABLE>
D. Gives effect to the interest expense on $500 million of debt based on a
weighted average interest rate of 7.83% per annum.
E. Gives effect to the amortization of $10.5 million of estimated deferred
financing costs related to the $500 million of debt. The deferred financing
costs will be amortized over the life of the debt.
F. To reflect the tax effect of the pro forma adjustments at the statutory tax
rate.
G. To reflect the $10.5 million of deferred financing costs related to the $500
million of debt.
H. The Pro Forma Historical column reflects the recapitalization of R.H.
Donnelley at the date of the Distribution.
78
<PAGE> 81
R.H. DONNELLEY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of financial condition and results of
operations is prepared as if R.H. Donnelley was a stand-alone entity for all
periods discussed. This discussion should be read in conjunction with the R.H.
Donnelley Financial Statements and Notes thereto included elsewhere in this
Information Statement.
OVERVIEW
R.H. Donnelley is currently a direct wholly owned subsidiary of D&B.
Currently, it is anticipated that on June , 1998, the Board of Directors of
D&B will declare the Distribution and announce that the Distribution will be
effected on June 30, 1998. Following the Distribution, D&B's only remaining
subsidiary will be R.H. Donnelley, and each of D&B and New D&B will be
independent, publicly-traded companies. In connection with the Distribution, D&B
will be renamed R.H. Donnelley Corporation and New D&B will be renamed The Dun &
Bradstreet Corporation. R.H. Donnelley provides sales, marketing and publishing
services for yellow pages directories and is the largest independent marketer of
yellow pages advertising in the United States. R.H. Donnelley is also a leading
provider of pre-press publishing services for yellow pages directories
(including a majority of the directories for which it sells advertising). R.H.
Donnelley will retain all the assets and liabilities related to yellow pages
sales, marketing and publishing services after the Distribution.
The financial statements generally reflect the financial position, results
of operations and cash flows of R.H. Donnelley as if it were a stand-alone
entity for all periods presented. The financial statements include allocations
of certain D&B corporate headquarters assets (including prepaid pension assets)
and liabilities (including postretirement benefits) and expenses (including cash
management, legal, accounting, tax, employee benefits, insurance services, data
services and other D&B corporate overhead) relating to R.H. Donnelley's business
which R.H. Donnelley's management believes to be reasonable. However, the costs
of these services and benefits charged to R.H. Donnelley are not necessarily
indicative of the costs that would have been incurred if R.H. Donnelley had
performed or provided these functions as a separate entity. R.H. Donnelley
estimates a net increase in general and administrative expenses associated with
operating as an independent, publicly-traded company, which may be as much as
approximately $8.6 million annually above the amount which was allocated in 1997
from D&B.
The financial information included herein may not necessarily reflect the
results of operations, financial position, changes in shareholder's equity and
cash flows of R.H. Donnelley in the future or what they would have been had it
been a separate entity during the periods presented. The financial statements
reflect effective tax rates of R.H. Donnelley on a separate company basis. These
rates do not reflect the historical benefit of D&B's global tax planning actions
which have resulted in lower consolidated tax rates. Historically, D&B used a
centralized cash management system to finance R.H. Donnelley's operations. Cash
deposits from R.H. Donnelley's business were transferred to D&B on a daily basis
and D&B funded R.H. Donnelley's disbursement bank accounts as required. No
interest was charged on these transactions with D&B. R.H. Donnelley will not
continue to participate in D&B's cash management system after the Distribution.
R.H. Donnelley will have its own bank accounts and control the use of its cash.
For purposes of governing certain of the ongoing relationships between New
D&B and R.H. Donnelley after the Distribution and to provide for an orderly
transition, D&B and New D&B will enter into various agreements including a
Distribution Agreement, Tax Allocation Agreement, Employee Benefits Agreement,
Intellectual Property Agreement, Shared Transaction Services Agreement, Data
Services Agreement and Transition Services Agreements. For descriptions of these
agreements see "Relationship Between The New Dun & Bradstreet Corporation and
R.H. Donnelley Corporation After The Distribution".
R.H. Donnelley earns income from three primary sources: sales commission
revenues, publishing services revenues and partnership income and related fees.
Sales commission revenues from R.H. Donnelley's Bell Atlantic operations and its
Sprint sales agency operations are recognized by R.H. Donnelley when an
79
<PAGE> 82
advertising contract is signed with a customer. Sales commission revenues for
advertising sales for the CenDon partnership are recognized by R.H. Donnelley
when a directory is published. Publishing services revenues are recognized by
R.H. Donnelley on a straight-line basis as services are provided to a customer.
R.H. Donnelley does not recognize the revenues of the DonTech or CenDon
partnerships.
R.H. Donnelley recognizes income from the DonTech partnership when an
advertising contract is signed with a customer. R.H. Donnelley also receives
direct fees ("Revenue Participation") from an affiliate of Ameritech, which are
tied to advertising sales generated by the DonTech partnership. R.H. Donnelley
recognizes income from the CenDon partnership when a directory is published.
These items are included in income from partnerships and related fees.
RESULTS OF OPERATIONS
Three Months ended March 31, 1998 Compared with Three Months ended March 31,
1997
Gross advertising sales is the billing value of advertisements sold by R.H.
Donnelley and DonTech. Gross advertising sales in the first quarter of 1998
increased by 116.2% over the corresponding period in the prior year, from $68.1
million in the first quarter of 1997 to $147.2 million in the first quarter of
1998. This increase is primarily due to a restructuring of the DonTech
partnership and a corresponding change in the timing of the DonTech
partnership's recognition of gross advertising sales. In the first quarter of
1997, DonTech recognized gross advertising sales when the related directories
were published. As restructured, in the first quarter of 1998 and thereafter,
DonTech recognizes gross advertising sales when a customer signs an advertising
contract. Also, in December 1997, R.H. Donnelley sold its East Coast proprietary
yellow pages business ("P-East"). Excluding DonTech's gross advertising sales of
$10.0 million in the first quarter of 1997 and $75.6 million in the first
quarter of 1998 and P-East's gross advertising sales of $1.5 million in the
first quarter of 1997, gross advertising sales increased 26.3%, from $56.6
million in 1997 to $71.6 million in 1998. The increase is primarily due to a
shift in advertising sales in R.H. Donnelley's Bell Atlantic markets from 1997
to 1998 due to the rescheduling of certain directories in these markets; gross
advertising sales in these markets increased by $15.1 million in the first
quarter of 1998 compared to the first quarter of 1997, from $53.4 million in
1997 to $68.5 million in 1998.
Revenues are derived from commissions related to advertising sales and do
not include revenues generated by sales of advertising by the DonTech
partnership. Revenues increased from $20.2 million in the first quarter of 1997
to $24.3 million in the first quarter of 1998. Excluding P-East revenues of $0.6
million in the first quarter of 1997, revenues increased by 24.4%, from $19.6
million in the first quarter of 1997 to $24.3 million in the first quarter of
1998. This increase was primarily due to the timing shift in R.H. Donnelley's
Bell Atlantic markets discussed above, which resulted in a $3.1 million increase
in revenues in those markets, from $12.9 million in the first quarter of 1997 to
$16.0 million in the first quarter of 1998. In 1997, scheduling shifts for
certain directories in the Bell Atlantic region affected the timing of R.H.
Donnelley servicing those directories' customers and recording revenues, which
resulted in a shift of revenue into the first quarter of 1998. Publishing
revenues increased by $1.8 million, from $5.8 million in the first quarter of
1997 to $7.6 million in the first quarter of 1998 due to revenues for publishing
services which R.H. Donnelley began providing to Yellow Book USA, L.P. in 1998.
Partnership income and related fees increased by $20.2 million in the first
quarter of 1998, from $5.4 million in the first quarter of 1997 to $25.6 million
in the first quarter of 1998. R.H. Donnelley receives partnership income and
related fees primarily from two sources, the CenDon partnership and the DonTech
partnership. R.H. Donnelley receives 50% of the profits generated by the CenDon
partnership. R.H. Donnelley receives a percentage share of the profits generated
by the DonTech partnership (which percentage share is 50% under the restructured
DonTech partnership arrangement) and, beginning in the third quarter of 1997,
also receives direct fees (Revenue Participation) from an affiliate of Ameritech
which are tied to advertising sales generated by the DonTech partnership. These
items are included in income from partnerships and related fees. Due to the
DonTech restructuring discussed above, R.H. Donnelley recorded $20.0 million of
partnership income and related fees from DonTech's operations in the first
quarter of 1998, compared to $1.0 million in the first quarter of 1997, an
increase of $19.0 million. R.H. Donnelley's partnership income from
80
<PAGE> 83
CenDon increased 27.3% in the first quarter of 1998, from $4.4 million in the
first quarter of 1997 to $5.6 million in the first quarter of 1998 due to sales
performance in R.H. Donnelley's markets that was well above industry averages.
R.H. Donnelley's operating and general and administrative expenses
increased from $22.5 million in the first quarter of 1997 to $24.8 million in
the first quarter of 1998. Excluding P-East operating expenses of $1.4 million
in the first quarter of 1997, these costs increased by $3.7 million, from $21.1
million in the first quarter of 1997 to $24.8 million in the first quarter of
1998. For interim reporting purposes, R.H. Donnelley recognizes certain expenses
on a percentage-of-advertising-sales basis. Consequently, since gross
advertising sales in R.H. Donnelley's Bell Atlantic markets increased in the
first quarter of 1998 as compared to the first quarter of 1997 as discussed
above, operating and general and administrative expenses in these markets
increased from $6.5 million in the first quarter of 1997 to $10.5 million in the
first quarter of 1998.
R.H. Donnelley's net income before taxes in the first quarter of 1998 was
$20.2 million compared to a loss of $2.3 million in the first quarter of 1997.
Excluding P-East operating results in the first quarter of 1997, net income
before taxes was a loss of $1.4 million. Prior to the DonTech restructuring
discussed above, R.H. Donnelley's operating results in the first quarter were
significantly below its operating results in other quarters due to the
relatively few directories that were published in the first quarter as compared
to other quarters. The net income increase in the first quarter of 1998 is
primarily due to the DonTech restructuring, which resulted in the significant
increase in partnership income and related fees, also discussed above. In
addition, R.H. Donnelley recorded equity earnings from the CenDon partnership of
$5.6 million in the first quarter of 1998 as compared to $4.4 million in the
first quarter of 1997.
Year ended December 31, 1997 Compared with Year ended December 31, 1996
Gross advertising sales is the billing value of advertisements sold by R.H.
Donnelley and DonTech. Gross advertising sales in 1997 decreased 4.3%, from
$1,115.6 million in 1996 to $1,067.2 million in 1997. In December 1997, R.H.
Donnelley sold its East Coast proprietary yellow pages business (P-East) and in
May 1996, R.H. Donnelley sold its West Coast proprietary yellow pages business
("P-West"). The decline in gross advertising sales in 1997 was primarily due to
the sale of P-East, which accounted for gross advertising sales of $87.8 million
in 1996 and $73.8 million in 1997, and the expiration of R.H. Donnelley's
contract with Cincinnati Bell during August 1997, which led to a reduction in
the related gross advertising sales from that contract from $65.0 million in
1996 to $50.1 million in 1997. Gross advertising sales in R.H. Donnelley's other
markets, after adjusting for P-West's gross advertising sales of $2.1 million in
1996, decreased by 1.8%, from $960.6 million in 1996 to $943.4 million in 1997
due to lower sales for Bell Atlantic directories because of the rescheduling of
certain directories in those markets, which created a shift in sales from 1997
to 1998. This decline was partially offset by gross advertising sales growth in
R.H. Donnelley's Sprint markets (primarily Las Vegas), which was well above
industry average levels. DonTech's gross advertising sales also increased by
1.3%, from $403.5 million in 1996 to $408.6 million in 1997.
Revenues are derived from commissions related to advertising sales and do
not include revenues generated by sales of advertising by the DonTech
partnership. Revenues decreased from $270.0 million in 1996 to $239.9 million in
1997, primarily reflecting the sale of P-East and the expiration of R.H.
Donnelley's contract with Cincinnati Bell. Adjusted for P-East revenues of $95.1
million in 1996 and $78.0 million in 1997, P-West revenues of $2.2 million in
1996 and Cincinnati Bell revenues of $17.1 million in 1996 and $13.1 million in
1997, R.H. Donnelley's revenues declined 4.4% from $155.6 million in 1996 to
$148.8 million in 1997. Revenues were adversely affected by scheduling shifts in
the publication schedules for certain Bell Atlantic directories, which resulted
in a 9.9% decrease in revenues for R.H. Donnelley in its Bell Atlantic markets,
from $95.9 million in 1996 to $86.4 million in 1997. This decrease was partially
offset by a 7.7% increase in revenues in R.H. Donnelley's Sprint markets, from
$37.0 million in 1996 to $39.9 million in 1997; revenue growth was especially
strong in Las Vegas, where directories are published semi-annually due to the
strong economic growth in the Las Vegas market and resulting above-average
growth in yellow pages advertising.
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Partnership income and related fees decreased in 1997 by 2.1%, from $132.9
million in 1996 to $130.2 million in 1997. R.H. Donnelley receives partnership
income primarily from two sources, the CenDon partnership and the DonTech
partnership. R.H. Donnelley receives 50% of the profits generated by the CenDon
partnership. R.H. Donnelley receives a percentage share of the profits generated
by the DonTech partnership (which percentage share is 50% under the restructured
DonTech partnership arrangement) and, beginning in the third quarter of 1997,
also receives direct fees (Revenue Participation) from an affiliate of Ameritech
which are tied to advertising sales generated by the DonTech partnership. These
items are included in income from partnerships and related fees. R.H.
Donnelley's income related to DonTech declined 4.3% in 1997, from $121.4 million
in 1996 to $116.2 million in 1997, primarily due to a contractual reduction in
R.H. Donnelley's share of DonTech's profits. In 1990, R.H. Donnelley accepted
such contractual reductions in its share of DonTech's profits in return for
amending the DonTech partnership agreement so that it would have no termination
date, and these contractual reductions ended in 1997. A portion of the decline
was also due to sales and production inefficiencies that arose from an
unbalanced production schedule in which the majority of the directories with
which DonTech is affiliated were published in the fourth quarter; R.H. Donnelley
and DonTech instituted a two-year program in 1997 that is intended to correct
the imbalance and increase the effectiveness of DonTech's sales force and
support operations. R.H. Donnelley's partnership income from CenDon increased
25.8% in 1997 from $9.7 million in 1996 to $12.2 million in 1997 due to sales
growth in CenDon's Las Vegas markets that was well above industry averages.
R.H. Donnelley's 1997 operating and general and administrative expenses
decreased by 2.7%, from $219.3 million in 1996 to $213.4 million in 1997.
Excluding operating and general and administrative expenses related to P-East
($75.1 million in 1996 and $66.2 million in 1997) and P-West ($1.9 million in
1996), these costs increased by 3.4%, from $142.3 million in 1996 to $147.2
million in 1997. The increase is primarily due to $4 million in start-up costs
that were expensed in 1997 for R.H. Donnelley's new proprietary Cincinnati
directories, which are scheduled to be published in the third quarter of 1998.
Depreciation and amortization increased from $16.2 million in 1996 to $21.9
million in 1997, principally due to the first full year of depreciation and
amortization costs related to the $40 million investment made in 1995 and 1996
for the software, equipment and start-up costs of R.H. Donnelley's new
publishing center in Raleigh, North Carolina. The depreciation and amortization
costs on this investment were approximately $4 million in 1996 and approximately
$9 million in 1997.
R.H. Donnelley's net income before taxes for 1997 was $144.2 million
compared to $138.9 million for 1996. Excluding the gain on the sale of P-East of
$9.4 million and the operating results of P-East of $11.0 million in 1997, net
income before taxes was $123.8 million in 1997. Excluding the loss on the sale
of P-West of $28.5 million and the operating results of P-East ($19.2 million)
and P-West ($0.6 million loss) in 1996, net income before taxes was $148.8
million in 1996. The net income decline was primarily due to several factors
discussed above, including (i) the rescheduling of certain directories in R.H.
Donnelley's Bell Atlantic markets, (ii) a decrease in R.H. Donnelley's share of
partnership income from DonTech, (iii) the first full year of amortization costs
related to R.H. Donnelley's new publishing facility and (iv) expensed start-up
costs for the new proprietary Cincinnati directories.
Year ended December 31, 1996 Compared with Year ended December 31, 1995
Gross advertising sales in 1996 decreased 2.7% compared to the prior year,
from $1,145.9 million in 1995 to $1,115.6 million in 1996. Excluding gross
advertising sales from P-East and P-West, which declined from $133.4 million in
1995 to $89.9 million in 1996 due to the mid-year sale of P-West in 1996 and the
resulting recognition of less than a full year of advertising sales from P-West,
gross advertising sales increased 1.3% from $1,012.6 million in 1995 to $1,025.6
million in 1996. This increase was primarily due to a 9.2% increase in gross
advertising sales in Sprint markets, which was primarily driven by the high
level of economic growth in the Las Vegas market. DonTech's gross advertising
sales decreased by 1.9%, from $411.3 million in 1995 to $403.5 million in 1996,
primarily because DonTech's gross advertising sales in 1995 were benefitted by
extensions in the publishing cycles for certain of its directories.
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Revenues decreased from $312.9 million in 1995 to $270.0 million in 1996,
primarily due to the sale of R.H. Donnelley's P-West operations in May 1996;
P-West accounted for revenues of $45.0 million in 1995 and $2.2 million in 1996.
Excluding the revenues of P-West and P-East (which was sold in December 1997),
which were $140.1 million in 1995 and $97.3 million in 1996, R.H. Donnelley's
revenues were essentially flat with $172.8 million of revenues in 1995 and
$172.7 million in 1996. Revenue growth in R.H. Donnelley's Sprint markets was
7.2%, from $34.5 million in 1995 to $37.0 million in 1996. This growth was
partially offset by a revenue decline of 4.2% in R.H. Donnelley's Bell Atlantic
markets from $100.1 million in 1995 to $95.9 million in 1996, which was due to
the scheduling shift, discussed above, in the publication dates of certain Bell
Atlantic directories, and a one-time contractual decrease in R.H. Donnelley's
sales commission.
Partnership income decreased in 1996 by 3.1%, from $137.2 million in 1995
to $132.9 million in 1996. R.H. Donnelley's partnership income from DonTech
declined 3.3% in 1996, from $125.6 million in 1995 to $121.4 million in 1996,
primarily due to the contractual decrease, discussed above, in R.H. Donnelley's
share of DonTech's profits and the benefit in 1995 from extending the publishing
cycles for certain directories. R.H. Donnelley's partnership income from CenDon
was essentially flat in 1996 compared to 1995 with $9.5 million in 1995 and $9.7
million in 1996. R.H. Donnelley's 1995 partnership income from CenDon included a
reversal of prior year excess provision accruals of $1.5 million.
R.H. Donnelley's 1996 operating costs and general and administrative
expenses decreased by 6.0%, from $233.3 million in 1995 to $219.3 million in
1996. Excluding operating and general and administrative expenses related to
P-East ($73.1 million in 1995 and $75.1 million in 1996) and P-West ($43.2
million in 1995 and $1.9 million in 1996), and a one-time reversal of prior year
excess provision accruals of $19.9 million in 1995, these expenses increased
from $136.9 million in 1995 to $142.3 million in 1996 primarily due to costs
associated with shifting operations to the new Raleigh publishing center and
legal fees incurred in litigation (which has since been concluded) involving its
Illinois markets.
Depreciation and amortization was essentially flat in 1996 compared to 1995
with $16.3 million in 1995 and $16.2 million in 1996.
R.H. Donnelley's net income before taxes for 1996 was $138.9 million
compared to $182.8 million for 1995. Excluding the loss on the sale of P-West of
$28.5 million in 1996 and the operating results of both P-East ($21.3 million in
1995 and $19.2 million in 1996) and P-West ($1.0 million in 1995 and a $0.6
million loss in 1996), net income before taxes was $148.8 million in 1996
compared to $160.5 million in 1995. A non-recurring charge of $17.7 million was
also recorded in 1995 related to the closing of the Terre Haute publishing
facility. After adjusting for this non-recurring charge and the $19.9 million
reversal of bad debt reserves in 1995 discussed above, net income before taxes
for 1996 compared to 1995 was $148.8 million and $158.3 million, respectively.
This variance was primarily caused by R.H. Donnelley's lower sales commission
rate, discussed above, on Bell Atlantic sales in 1996, costs associated with
shifting operations to the new Raleigh publishing center and legal fees, and the
benefit to 1995 results from extending the publishing cycles for certain DonTech
directories.
Restructuring Charge
In 1995, R.H. Donnelley recorded a restructuring charge of $17.7 million
for the closing of the Terre Haute publishing facility. The charge included
fixed asset write-offs, as well as severance (cash outlays were made primarily
in 1996 and 1997), legal costs (cash outlays were made in 1996) and a reserve
for additional advertising claims expected to result from the conversion to the
Raleigh publishing center. R.H. Donnelley moved its publishing operations from
Terre Haute, Indiana to Raleigh, North Carolina to enhance its integrated,
cost-effective advertising sales and publishing services. It is expected that
this investment will result in improved productivity, quality and cycle times.
To date, R.H. Donnelley has been able to reduce publishing costs by
approximately 30% and publishing cycle times by approximately 50%.
Income Taxes
The financial statements reflect effective tax rates of R.H. Donnelley on a
separate company basis. R.H. Donnelley's effective tax rates were 40.7%, 43.8%,
and 41.1% in 1995, 1996, and 1997, respectively. The
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increase in the rate in 1996 is related to non-deductible capital losses related
to the sale of P-West which increased the rate 2.8%.
Changes in Financial Position at March 31, 1998 Compared with December 31, 1997
R.H. Donnelley's accounts receivable, net, decreased by $12.3 million in
the first quarter of 1998, primarily due to the collection of Bell Atlantic and
CenDon year-end receivables, which was partially offset by an increase in
receivables related to the DonTech partnership. This decrease is consistent with
prior years.
R.H. Donnelley's total liabilities decreased by $10.3 million in the first
quarter of 1998, primarily due to the payment of year-end accrued liabilities
such as bonuses. This decrease is consistent with prior years.
Changes in Financial Position at December 31, 1997 Compared with December 31,
1996
R.H. Donnelley's accounts receivable, net, decreased $22.3 million in 1997
primarily due to the sale of P-East assets, including receivables of $61.9
million at December 31, 1996. This was off-set by the recording of a receivable
for the Revenue Participation portion of the DonTech agreement ($51.6 million),
which arose due to the DonTech restructuring discussed above. In addition,
receivables also decreased due to delays in publication of certain directories
in the markets served by Bell Atlantic, which created lower revenues and lower
year-end receivables in 1997.
R.H. Donnelley's total liabilities remained essentially flat at $123.6
million in 1997 as compared to $123.0 million in 1996. A decrease of $19.5
million in the deferred income tax liability and a decrease in liabilities as a
result of the sale of P-East were offset by a related increase in reserves in
connection with the sale.
Liquidity And Capital Resources
Three Months ended March 31, 1998 Compared with Three Months ended March 31,
1997
Cash and cash equivalents for the quarters ending March 31, 1998 and March
31, 1997 were $17,000 and $64,000, respectively. These balances reflect D&B's
centralized cash management system, where historically cash deposits were
transferred to D&B on a daily basis and D&B funded R.H. Donnelley's disbursement
bank accounts as required.
Net cash provided by operations was $27.4 million in the first quarter of
1998 and $57.7 million in the first quarter of 1997, a decrease of $30.3
million. Excluding cash provided by P-East in the first quarter of 1997 of $7.4
million, cash provided by operations in the first quarter of 1998 decreased by
$22.9 million. The decrease in 1998 is primarily due to a change in the timing
of cash receipts from DonTech related to the DonTech restructuring discussed
above.
Net cash used in investing activities was $2.5 million in the first quarter
of 1998, compared to $8.7 million in the first quarter of 1997. This decrease is
a result of an increased amount of capital spending, primarily on computer
equipment and furniture and fixtures, in 1997 in connection with office moves
made in late 1996.
Net cash used in financing activities represents cash transferred to D&B
throughout the quarter. As stated above, historically all cash deposits have
been transferred to D&B on a daily basis and D&B has funded R.H. Donnelley's
disbursement bank accounts as required. The net amounts transferred to D&B were
$24.9 million in the first quarter of 1998 and $49.0 million in the first
quarter of 1997. The increased transfer in 1997 is primarily due to higher
amounts of cash received from the DonTech and CenDon partnerships and from
P-East receivables.
Years Ended December 31, 1997, 1996 and 1995
Cash and cash equivalents for the years ended 1995, 1996 and 1997 were $1.4
million, $60,000 and $32,000, respectively. These balances reflect D&B's
centralized cash management system, where historically cash deposits were
transferred to D&B on a daily basis and D&B funded R.H. Donnelley's disbursement
bank accounts as required. The 1995 balance reflects certain marketable
securities held by R.H. Donnelley.
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Net cash provided by operations was $136.6 million, $100.5 million and
$99.7 million in 1995, 1996 and 1997, respectively. In 1997, R.H. Donnelley
received cash from its partnerships in excess of the related income that was
recorded; consequently, investments in partnerships decreased in 1997.
Investments in partnerships also declined in 1997 due to the DonTech
restructuring discussed above, as the Revenue Participation portion of
DonTech-related income is recorded in accounts receivable, as compared to 1996
and 1995 when all DonTech-related income was recorded as a component of
investments in partnerships. The investment in partnerships account will
increase or decrease in the future depending on the operating results of DonTech
and CenDon and the related amounts of cash disbursements that R.H. Donnelley
receives. After the Distribution, R.H. Donnelley anticipates that it will have
approximately $50 million of unused capacity available under the Revolving
Facility, which will be used as necessary to offset any fluctuations in
liquidity caused by the timing of cash receipts from DonTech and CenDon. The
decrease from 1995 to 1996 was due to an increase of accounts payable in 1995.
Net cash provided from investing activities in 1997 was $105.7 million,
which was primarily derived from the sale of the P-East business for $122.0
million in cash. Net cash used in investing activities in 1995 and 1996 was
$43.0 million and $16.5 million, respectively. In both years there was an
increased amount of capital spending on property and equipment and computer
software.
The majority of capital spending for R.H. Donnelley is computer hardware,
software and upgrades for its production and operating systems. Capital spending
excluding computer software in 1995, 1996 and 1997 was $19.3 million, $16.0
million and $9.1 million, respectively. Computer software spending for those
years was $23.7 million, $21.9 million and $7.2 million, respectively. The
increased spending in 1995 and 1996 is due to the investment R.H. Donnelley has
made in its new publishing facility in Raleigh, North Carolina, which totaled
approximately $23 million in 1995 and approximately $18 million in 1996. Net of
the Raleigh investment, capital and computer software spending in 1995, 1996 and
1997 was $20.0 million, $19.9 million and $16.3 million, respectively.
Net cash used in financing activities represents cash transferred to D&B
throughout the year. As stated above, all cash deposits were transferred to D&B
on a daily basis and D&B funded R.H. Donnelley's disbursement bank accounts as
required. The net amounts transferred to D&B were $92.1 million, $85.4 million
and $205.4 million in 1995, 1996 and 1997, respectively. The 1997 transfer
includes the proceeds received from the sale of P-East.
In connection with the Distribution, R.H. Donnelley will issue $150 million
of senior subordinated notes and anticipates borrowing approximately $350
million under the R.H. Donnelley Credit Facility. The net proceeds of the note
issuance and the anticipated borrowing will be dividended to D&B to be used (i)
to repay indebtedness of D&B, primarily commercial paper, (ii) to pay costs and
expenses related to the Distribution and (iii) to repay indebtedness of D&B to
subsidiaries which, following the Distribution, will be subsidiaries of New D&B.
This approximately $500 million of debt will be an obligation of R.H. Donnelley
after the Distribution. As of March 31, 1998, after giving pro forma effect to
the indebtedness described above and the application of the estimated net
proceeds therefrom, R.H. Donnelley will have approximately $500 million of
indebtedness and a shareholder's deficit of approximately $244 million. The
projected future interest expense, after tax, on the $500 million of debt will
result initially in a reduction to net income of approximately $24 million per
year. Following the Distribution, R.H. Donnelley anticipates that it will have
$50 million of unused capacity available under the revolving facility portion of
the R.H. Donnelley Credit Facility. Loans obtained under the R.H. Donnelley
Credit Facility mature in the amounts of $2.25 million, $6.0 million, $13.5
million, $17.25 million, $21.0 million, $28.5 million, $38.5 million, $81.0
million and $92.0 million in the first through ninth years, respectively, of the
R.H. Donnelley Credit Facility. R.H. Donnelley believes, based on current
circumstances, that R.H. Donnelley's cash flow, together with available credit
capacity under the R.H. Donnelley Credit Facility, will be sufficient to permit
R.H. Donnelley to meet its operating expenses and capital expenditures and to
service its debt requirements as they become due for the foreseeable future.
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ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"), which establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general-purpose financial statements. R.H. Donnelley adopted the statement in
1998.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131"), which
revises disclosure requirements about operating segments and establishes
standards for related disclosures about products and services, geographic areas
and major customers. SFAS No. 131 requires that public business enterprises
report financial and descriptive information about their reportable operating
segments. The statement will be adopted by R.H. Donnelley effective year end
December 31, 1998, and will require restatement of prior years. R.H. Donnelley
is in the process of evaluating the disclosure requirements. The adoption of
SFAS No. 131 will have no impact on R.H. Donnelley's results of operations,
financial position or cash flows.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132
revises employers' disclosures about pension and other postretirement benefit
plans. SFAS No. 132 is effective for fiscal years beginning after December 15,
1997. Restatement of disclosures for earlier periods provided for comparative
purposes is required unless the information is not readily available, in which
case the notes to the financial statements should include all available
information and a description of the information not available. R.H. Donnelley
is in the process of evaluating the disclosure requirements. The adoption of
SFAS No. 132 will have no impact on R.H. Donnelley's results of operations,
financial position or cash flows.
YEAR 2000
The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions.
As part of its Year 2000 compliance program, many of R.H. Donnelley's
currently installed computer systems and software products have been tested for
Year 2000 problems and R.H. Donnelley anticipates that these computer systems
and software products will be fully Year 2000 compliant. Also, R.H. Donnelley is
requesting assurances from all software vendors from which it has purchased or
licensed or from which it may purchase or license software that such software
will correctly process all date information at all times. Through continued
modifications to existing software and conversions to new software, R.H.
Donnelley believes that it will be able to mitigate its exposure to the Year
2000 problem before 2000. However, if continued modifications and conversions
are not made, or are not timely completed, the Year 2000 problem could have a
material adverse effect on R.H. Donnelley's operating results and financial
condition.
R.H. Donnelley plans to have its Year 2000 compliance program substantially
completed by the end of 1998. In 1997, R.H. Donnelley spent approximately $0.5
million addressing the Year 2000 problem and has budgeted expenditures of
approximately $4.4 million for 1998 and approximately $0.3 million for 1999.
These costs will be funded through cash flows from operations.
In addition, it is possible that certain computer systems or software
products with which R.H. Donnelley's computer systems, software, databases or
other technology interface or are integrated of those or third parties with
which R.H. Donnelley maintains business relationships may not accept input of,
store, manipulate and output dates in the year 2000 or thereafter without error
or interruption. R.H. Donnelley has conducted a review of its computer systems
to attempt to identify ways in which its systems could be affected by interface-
or integration-related or third-party problems in correctly processing date
information. R.H. Donnelley is also querying applicable third parties with which
it maintains business relationships as to their progress in identifying and
addressing their Year 2000 problems. However, there can be no assurance that
R.H. Donnelley will identify all interface- or integration-related or
third-party date-handling problems in advance of their
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occurrence, or that R.H. Donnelley will be able to successfully remedy problems
that are discovered. The expenses of R.H. Donnelley's efforts to identify and
address such problems, or the expenses or liabilities to which R.H. Donnelley
may become subject as a result of such problems, could have a material adverse
effect on its operating results and financial condition.
DIVIDENDS
R.H. Donnelley as a subsidiary of D&B did not pay dividends directly to D&B
shareholders. The net proceeds of R.H. Donnelley's anticipated borrowings under
the senior subordinated notes and the credit facility discussed above will be
dividended to D&B. R.H. Donnelley will also dividend substantially all of its
cash to D&B immediately prior to the Distribution for transfer to New D&B in
connection with the Distribution. Subject to the approval of R.H. Donnelley's
Board of Directors, following the Distribution, it is anticipated that R.H.
Donnelley will initially pay a quarterly dividend of $0.035 per share.
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R.H. DONNELLEY
BUSINESS
GENERAL
R.H. Donnelley is the largest independent marketer of yellow pages
advertising in the United States. R.H. Donnelley sold over $1 billion of
advertising in 1997 and is the leader in all of its major markets. R.H.
Donnelley is also a leading provider of pre-press publishing services for yellow
pages directories (including a majority of the directories for which it sells
advertising). In operation since 1886, R.H. Donnelley provides services to over
300 directories, including providing advertising sales for over 270 directories
in 13 states which collectively had a total circulation of approximately 30
million in 1997. R.H. Donnelley has a diversified customer base of approximately
500,000 businesses, many of which rely on yellow pages directories as their
principal or sole form of advertising. Over the past three years, R.H. Donnelley
achieved average advertising sales renewal rates ranging from 100% to 90% in its
major markets.
R.H. Donnelley is strategically aligned on a long-term basis with the
established, leading telephone service provider (the incumbent telephone
company) in each of its major markets, which include Illinois (including
Chicago), New York State (including New York City), Nevada (primarily Las Vegas)
and Florida (including Tallahassee and Orlando). R.H. Donnelley provides yellow
pages advertising marketing and sales in these markets through long-term
contractual agreements with these incumbent telephone companies, which are
Ameritech, Bell Atlantic and Sprint. R.H. Donnelley has the DonTech partnership
with no expiration date with a subsidiary of Ameritech and long-term contracts
with subsidiaries of Sprint and Bell Atlantic which extend through 2004 and
2005, respectively. These relationships allow the incumbent telephone companies
to gain the benefits of R.H. Donnelley's long-term presence in its markets,
yellow pages marketing and publishing expertise, established infrastructure and
performance-focused, non-union sales force. R.H. Donnelley benefits from its
relationship with the incumbent telephone company's yellow pages directories,
which are the leading directories in terms of numbers of advertisers,
utilization and distribution in the majority of R.H. Donnelley's markets.
Management believes that R.H. Donnelley's competitive strengths and
business strategy position it to take advantage of significant business
opportunities and anticipated industry trends, including (i) opportunities for
yellow pages advertising sales growth within R.H. Donnelley's existing markets,
(ii) the potential outsourcing of yellow pages operations by local telephone
companies (including those companies with which R.H. Donnelley is currently
affiliated) in new markets and (iii) the increasing use of the yellow pages
sales channel across other advertising media (such as yellow pages advertising
on cable television and the Internet).
Management has completed several actions that it believes will position
R.H. Donnelley for these future growth opportunities and improve earnings
stability, including the completion of R.H. Donnelley's new publishing center in
Raleigh, North Carolina and the restructuring of the DonTech relationship with
Ameritech and the rescheduling of related directories. In addition, R.H.
Donnelley sold the majority of its proprietary yellow pages operations as part
of its primary objective of focusing on long-term alliances with major telephone
service providers. In December 1997, R.H. Donnelley sold for $122 million its
East Coast proprietary yellow pages operations, which included 34 directories in
certain mid-Atlantic states. In May 1996, R.H. Donnelley sold for $22 million
its West Coast proprietary yellow pages operations, which included 18
directories in southern California.
R.H. Donnelley's principal executive offices are located at One
Manhattanville Road, Purchase, NY 10577 and its telephone number is (914)
933-6400.
COMPETITIVE STRENGTHS
R.H. Donnelley believes that it has been able to maintain long-term
telephone company relationships through the quality of its sales force and
marketing techniques and its advanced technology and product innovation. Based
on these attributes and its extensive yellow pages expertise, R.H. Donnelley has
been able to successfully manage significant strategic relationships with
incumbent telephone companies and complex
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systems integration issues inherent in its business. R.H. Donnelley believes
that it has a strong competitive advantage in each of its markets primarily due
to the following:
LARGEST INDEPENDENT MARKETER OF YELLOW PAGES ADVERTISING. In 1997, R.H.
Donnelley sold over $1 billion of yellow pages advertising, accounting for
approximately 9% of the $11.4 billion of yellow pages advertising sold in the
U.S. All other independent marketers of yellow pages advertising combined
accounted for only 7% of total U.S. yellow pages advertising sales. R.H.
Donnelley's market leadership position, scale of operations and long-standing
relationships with incumbent telephone companies uniquely position it to
capitalize on future growth opportunities by expanding its current relationships
into new markets, developing new relationships and capturing potential yellow
pages outsourcing opportunities.
HIGH RATES OF ADVERTISING SALES RENEWAL. R.H. Donnelley has achieved high
and stable advertising sales renewal rates, with three-year averages of
approximately 91% overall, including 92% in Chicago, 90% in New York City, 100%
in Las Vegas and 90% in Orlando. For many businesses, yellow pages directory
advertising is their principal or sole form of advertising due to its relatively
low cost, widespread distribution, lasting presence and high consumer usage.
These positive features are especially present in an incumbent telephone
company's directories, which are frequently a company's first choice for
advertising. R.H. Donnelley is affiliated with the incumbent local telephone
company in each of its major markets.
LEADING DIRECTORY MARKET SHARES. In each of R.H. Donnelley's major
markets, the directory with which R.H. Donnelley is affiliated has a commanding
market share, based on directory usage. These markets include Chicago (with a
98% market share in 1996, the latest date for which data is available), New York
City (97% in 1997) and Las Vegas (95%), as well as R.H. Donnelley's markets in
New York State (90%) and other regions. Management believes that these
directories will continue to enjoy a leading market share because of their
affiliation with incumbent telephone companies and high-quality, and R.H.
Donnelley's established relationships with advertisers and economies of scale.
Management also believes that these directories are utilized more than any other
directories by both residential and business consumers in its major markets.
STABLE UNDERLYING BUSINESS FUNDAMENTALS. R.H. Donnelley's advertising
sales and profitability are derived primarily from yellow pages advertising
sales pursuant to long-term contractual relationships with several of the
country's largest local telephone service providers. Its relationships with
Ameritech, Bell Atlantic and Sprint began in 1908, 1909 and 1980, respectively.
Furthermore, R.H. Donnelley's business is characterized by a high level of
recurring advertising sales, leading market share positions and the geographic
and industry diversification of its over 500,000 advertisers. Management
believes that these underlying business fundamentals, in combination with R.H.
Donnelley's predictable cost structure and capital expenditure requirements,
provide R.H. Donnelley with a solid base from which to grow.
EXPERIENCED MANAGEMENT TEAM. R.H. Donnelley has assembled a strong and
experienced management team at both the corporate and operating levels. R.H.
Donnelley's management is responsible for R.H. Donnelley's long-term
relationships with incumbent telephone companies and its market leadership
position. In addition, R.H. Donnelley's account managers average over 12 years
of experience in the yellow pages industry.
BUSINESS STRATEGY
R.H. Donnelley has identified its major sources of potential growth and has
developed a business strategy to capitalize on these opportunities. Principal
elements of R.H. Donnelley's business strategy include:
GROW THE CORE BUSINESS IN EXISTING MARKETS. R.H. Donnelley has developed
specialized sales and marketing techniques and infrastructure in order to
increase advertising sales. R.H. Donnelley leverages sophisticated information
systems, access to the local telephone company's extensive telephone subscriber
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databases and its experienced sales management team in order to (i) better
identify, segment and prioritize profitable sales opportunities, (ii) ensure
continuity with existing customers, (iii) identify the most cost-effective
customer contact method (e.g., mail, telephone or on-site visits) and (iv)
assign industry specialists, who offer customized products and services, to
certain high-potential accounts. Furthermore, R.H. Donnelley attempts to
increase advertisements and revenue per customer by (i) encouraging the use of
larger advertisements, specialized type face and other graphic features,
including color, (ii) increasing the number of headings in directories and (iii)
providing advertising sales for regional, neighborhood, bilingual and foreign
language directories that complement directories with greater geographic
coverage.
CAPTURE POTENTIAL OUTSOURCING OPPORTUNITIES IN NEW MARKETS. Management
anticipates that local telephone service providers, which accounted for 84% of
total U.S. yellow pages advertising sales in 1997, will outsource an increasing
amount of their non-core business, including yellow pages advertising sales and
publishing. Management believes that R.H. Donnelley is well positioned to
leverage certain of its existing strategic relationships into new markets and to
capture other potential outsourcing opportunities due to (i) R.H. Donnelley's
extensive experience and proven track record of success, (ii) its ability to
provide a cost-effective, integrated yellow pages advertising and publishing
solution and (iii) its neutral position as a non-competitor to local telephone
service providers. In addition, in May 1998 R.H. Donnelley became the exclusive
advertising sales agent, beginning with directories published in 1999, for Bell
Atlantic's 26 yellow pages directories in the greater Buffalo area, which were
previously outsourced by Bell Atlantic to another third-party marketer.
LEVERAGE EXISTING ACCOUNT RELATIONSHIPS TO NEW ADVERTISING MEDIA. R.H.
Donnelley's strategy is to provide its small to medium-sized advertisers with an
integrated solution to their advertising needs. For many of these businesses,
printed yellow pages advertising historically has been their principal form of
advertising, and in recent years an increasing number have been seeking to
expand their advertising programs. R.H. Donnelley began selling yellow
pages-style advertising for airing on cable television stations in 1995 and for
placement on the Internet in late 1996, and management believes that it has the
opportunity to expand its core business and cross-sell these growing advertising
media to its current customer base. In addition, certain local telephone
companies have expressed an interest in using R.H. Donnelley's established
yellow pages sales channels to market their telecommunications products and
services in the current, more competitive local telephone market.
CAPITALIZE ON NEW TECHNOLOGY AND ESTABLISHED INFRASTRUCTURE. In mid-1997,
R.H. Donnelley completed its $40 million publishing center in Raleigh, North
Carolina. R.H. Donnelley believes that this investment and its established
infrastructure are critical to marketing its yellow pages advertising sales and
publishing services to potential outsourcers. The new publishing center has
enabled R.H. Donnelley to reduce publishing costs by approximately 30% and
publishing cycle times by approximately 50%. The publishing center utilizes
state-of-the-art digital technology to support the entire yellow pages
advertising sales and publishing process on an integrated basis. Other
significant yellow pages publishers (primarily telephone service providers) are
making similar investments, but management believes that these publishers are at
varying stages in the conversion process which R.H. Donnelley has already
completed. Management also believes that smaller yellow pages publishers may
decide not to undertake such a significant investment program.
INDUSTRY OVERVIEW
The U.S. yellow pages advertising industry generated sales of approximately
$11.4 billion in 1997, with a total circulation for all yellow pages directories
of 489 million. Total advertising sales have increased steadily throughout the
nineties. Over the past five calendar years, yellow pages advertising sales in
the U.S. increased at a compound annual growth rate of 4.1%. Despite a decrease
in the number of U.S. yellow pages publishers from 298 in 1996 to 275 in 1997
due to consolidation in the industry, the number of directories printed
increased by 2.7%.
Yellow pages advertising is considered to be "directional" advertising, as
it is frequently used by consumers who are ready to purchase a product or
service. Industry sources estimate that over 80% of consumers who contact a
merchant after referring to a yellow pages directory intend to make a purchase
and
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approximately 60% actually do. These sources also estimate that a yellow pages
directory is present in 97% of all U.S. households, and that adults refer to a
yellow pages directory an average of 1.8 times weekly. Yellow pages directories
are easily accessible to consumers, with directories distributed to every home
and business that maintains a telephone.
Yellow pages advertising is the preferred form of advertising for many
businesses and service organizations due to its relatively low cost, broad
demographic and geographic distribution, enduring presence and high consumer
usage rates. While overall advertising tends to track an economy's business
cycle, yellow pages advertising tends to be more stable and does not fluctuate
widely with economic cycles due to its frequent use by small to medium-sized
businesses, often as their principal or sole form of advertising. Yellow pages
advertising also often comprises an integral part of the local advertising
strategy for larger national companies operating at the local level. Yellow
pages advertisers have a strong incentive to increase the size of and renew
their advertisements because advertisements are placed within each heading of a
directory based first on size and then on seniority.
Yellow pages directory advertising competes with all other forms of media
advertising, including television, radio, newspapers and direct mail. Sales from
all forms of advertising in the U.S. rose 6.3% to $186.7 billion in 1997, and
all categories of major media, including yellow pages, posted gains in
advertising sales. The yellow pages' share of the overall U.S. advertising
market remained steady at 6.1% in 1997 and its share of overall U.S. local
advertising sales remained relatively constant at 12.6% in 1997 compared with
12.8% in 1996.
The yellow pages directory business tends to be concentrated among a few
directory publishers. The eight leading yellow pages publishers (all of which
are telephone companies and with three of which R.H. Donnelley maintains
strategic relationships) had total U.S. directory-related advertising sales of
$10.4 billion in 1997 (including advertising sales attributable to R.H.
Donnelley), up from $9.8 billion in 1996. The limited number of yellow pages
publishers reflects the high start-up costs (e.g., marketing, sales, printing,
distribution and database) associated with producing a new directory and the
substantial infrastructure required to maintain a directory. The independent
publisher segment of the yellow pages industry (publishers that are not
affiliated with any telephone company) is highly fragmented and comprises only a
small portion of the total market for yellow pages advertising sales in the U.S.
Independent publishers' share of that market was 6.8% in 1997, compared to 6.4%
in 1996.
In 1997, yellow pages publishers continued to embrace the Internet as a
publishing platform. Most yellow pages publishers, including those with which
R.H. Donnelley maintains strategic relationships, have launched either a
national or regional directory.
DIRECTORY PRODUCTS
R.H. Donnelley's yellow pages advertising sales and publishing activities
principally relate to consumer, business-to-business, neighborhood, foreign
language and bilingual directories. The directories with which R.H. Donnelley is
affiliated are designed to meet the informational needs of consumers and the
advertising needs of local, regional and national businesses. These directories
typically consist of a listing of businesses by various headings along with
advertisements, as well as sections providing community reference information,
including a map of the local area, emergency and governmental telephone numbers
and information regarding area activities and attractions. This additional
information enhances the directory's value as a consumer resource.
Although R.H. Donnelley's focus is primarily on printed directories, it has
begun selling yellow pages-based advertising for new media, including cable
television (in 1995) and the Internet (in 1996). While management believes that
paper-based directory products will account for a significant majority of R.H.
Donnelley's revenues for the foreseeable future, R.H. Donnelley has made modest
commitments related to the growing electronic commerce market. In addition,
DonTech has an agreement to serve as Ameritech's exclusive advertising sales
agent if Ameritech begins a yellow pages Internet directory in Illinois or
northwest Indiana.
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Advertising space is sold throughout a directory, including in column and
display forms in the yellow pages, on color tab inserts, and via promotional
coupons and image advertisements on the back and inside covers. The Company
offers its customers a full range of customized artwork and enhanced features,
including full-color advertisements, which allows R.H. Donnelley to create
customized advertising programs that meet its customers' specific needs.
The directories with which R.H. Donnelley is affiliated are an efficient
source of information for consumers. With over 2,000 headings on average, these
directories are both comprehensive and conveniently organized. Management
believes that the completeness and accuracy of the data in these directories is
essential to consumer acceptance. Management believes that these directories
benefit in this regard from R.H. Donnelley's strategic relationships with
incumbent telephone companies, since R.H. Donnelley is assured of receiving
updated telephone account information from these telephone companies prior to
the publication of directories.
ADVERTISING SALES AND MARKETING
Yellow pages advertising is a direct sales business which requires both
servicing existing accounts and developing new customers. R.H. Donnelley has
direct overall sales responsibility for directories in its Bell Atlantic and
Sprint markets and participates in setting sales strategy for DonTech and
evaluating its results. The incumbent telephone companies with which R.H.
Donnelley maintains a strategic relationship typically include billing for
yellow pages advertising as part of a customer's telephone bill, which
management believes has historically benefitted R.H. Donnelley by resulting in
lower bad debt expenses related to yellow pages advertising at these telephone
companies than is experienced by independent yellow pages publishers.
R.H. Donnelley's sophisticated information systems and access to the local
telephone company's extensive telephone subscriber databases are critical to
maintaining and expanding its advertising sales. New listing updates from these
telephone subscriber databases are loaded into R.H. Donnelley's information
systems in order to identify and segment potentially profitable new advertising
sales opportunities, based on an analysis of these accounts' business and
potential advertising programs. For existing accounts, the linkage of these
telephone subscriber databases with R.H. Donnelley's information systems
facilitates the development of customer-specific sales strategies in current and
future sales campaigns as well as customer billing by the local telephone
company.
R.H. Donnelley's multi-tiered sales force and different customer contact
methods reflect its focus on segmenting and prioritizing yellow pages
advertising sales opportunities. R.H. Donnelley's advertising sales activities
are comprised of the following four tiers: (i) direct mail and telemarketing for
broad-based lead generation, coverage of small advertisers and order
confirmation, (ii) telephone sales by commissioned representatives who contact
small and medium-sized advertisers which require minimal ongoing account
maintenance, (iii) on-site visits by sales personnel who cover medium and large
existing and potential customers within specified geographic regions and (iv)
extensive coverage of major accounts by senior account executives. R.H.
Donnelley's sales force also includes industry specialists (who cover certain
potentially high-return accounts and offer customized products and services for
certain industries, such as health care) as well as bilingual sales
representatives who cover Bell Atlantic's foreign language and bilingual
directories in New York City. Generally, R.H. Donnelley's sales management
emphasizes sales person continuity in R.H. Donnelley's account relationships.
R.H. Donnelley employs approximately 500 sales representatives in its Bell
Atlantic, Sprint and Cincinnati markets. DonTech employs approximately 365 sales
representatives in its markets. R.H. Donnelley's approximately 80 account
managers average over 12 years of experience in the yellow pages industry. R.H.
Donnelley's and DonTech's sales forces are entirely non-union, which is a cost
advantage when compared to the union sales forces that are typical of other
marketers of yellow pages advertising, including major telephone service
providers. The non-union status of R.H. Donnelley's and DonTech's sales forces
also provides R.H. Donnelley and DonTech with greater latitude to redeploy sales
personnel. In addition, R.H. Donnelley's and DonTech's sales forces are largely
compensated based on performance, which aligns the sales forces' incentives with
important success factors to R.H. Donnelley's business, including account
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generation and retention. On average, approximately 55% of R.H. Donnelley's
sales force compensation is variable and based on performance.
R.H. Donnelley has well-established practices and procedures to manage the
productivity and effectiveness of its sales force. All of R.H. Donnelley's new
account representatives complete a formal seven week training program, which
consists of both classroom training and field training. Sales personnel may also
receive specialized in-campaign training, which is typically based on actual
feedback received during a sales campaign. Furthermore, R.H. Donnelley has
supplied its New York sales force with laptop computers and customized software,
which facilitates the sales process by allowing sales personnel to access
account information, interactively design advertisements and provide advertising
contracts while at a customer's location. R.H. Donnelley is considering
distributing laptop computers with such customized software to its sales forces
in other markets. The ability of R.H. Donnelley's sales management, sales force
and marketing department to successfully integrate their efforts and increase
advertising sales was recently demonstrated in New York City by R.H. Donnelley's
advertising sales for Bell Atlantic's foreign and bilingual neighborhood
directories, which were introduced during 1996 and 1997. Through advertising
sales for these five directories (which are Chinese-language and
Spanish-English), management estimates that R.H. Donnelley generated incremental
advertising sales of $4.0 million in 1997 in a mature urban market.
PUBLISHING AND PRODUCTION
R.H. Donnelley is a leading provider of pre-press publishing services for
yellow pages directories, including advertisement creation, sales contract
management, listing database management, sales reporting and commissions,
pagination, billing services and imaging. R.H. Donnelley recently completed its
$40 million publishing center in Raleigh, North Carolina, which utilizes
custom-designed, state-of-the-art digital technology and relational databases to
support the entire yellow pages advertising sales and publishing process on an
integrated basis, from lead generation and sales presentation to advertisement
creation and printer-ready final output. R.H. Donnelley also has a graphics
center in Dunmore, Pennsylvania which produces artwork for the majority of
advertisements and specialty pages included in the directories for which R.H.
Donnelley provides publishing services. The Dunmore graphics center is
electronically integrated with the Raleigh publishing center. R.H. Donnelley has
staffs of approximately 300 and 140 employees at the Raleigh publishing center
and the Dunmore graphics center, respectively. R.H. Donnelley provides
publishing services for Ameritech and Sprint, among others, pursuant to
agreements that extend through 2003 and 2004, respectively.
The Raleigh publishing center has enabled R.H. Donnelley to reduce
publishing costs by approximately 30% and publishing cycle times (i.e., the
number of days between closing of an advertising sales campaign and delivery to
the printer of a printer-ready paper or electronic version of the related
directory) by approximately 50%, and, with minimal additional infrastructure and
the potential addition of a second shift, would be able to expand its processing
capacity to meet additional demand. In 1997, the Raleigh and Dunmore centers
provided publishing services for 232 directories, produced over 82,000 pages of
directory advertising, created over 200,000 new advertisements and handled
approximately 1.5 million service order transactions for new or changed
telephone listings.
R.H. Donnelley also offers a broad range of production services to its
publishing-center customers once a printer-ready paper or electronic version of
their directory has been completed. These production services principally
involve R.H. Donnelley's contracting on behalf of these customers with outside
parties for printing, binding and distribution of directories. R.H. Donnelley
provides production services in varying degrees for Sprint.
NEW ADVERTISING MEDIA AND PRODUCTS
In 1995 R.H. Donnelley developed a cable advertising product known as
Yellow Pages Television(R) or YPTV(R). YPTV(R) advertisements begin with a
customer's printed yellow pages advertisement, which is enhanced by audio
content and graphics and aired in a 15 or 30 second spot on cable television.
R.H. Donnelley contracts with an outside party for creation of the YPTV(R)
advertisements. R.H. Donnelley
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currently offers YPTV(R) in selected Bell Atlantic and Sprint/CenDon markets.
R.H. Donnelley combines marketing of printed yellow pages advertisements with
YPTV(R) in these markets, so that only purchasers of printed advertisements may
advertise through YPTV(R). Management believes that this bundling of YPTV(R)
with printed yellow pages advertisements, together with R.H. Donnelley's
purchases of cable television airtime in bulk, increase this product's
cost-effectiveness to customers. YPTV(R) also typically refers the cable viewer
to the customer's printed yellow pages advertisement, which management expects
will stimulate usage of print directories. R.H. Donnelley generated net revenue
from YPTV(R) of $2.9 million in 1997 in its Bell Atlantic and Sprint/CenDon
markets.
R.H. Donnelley has gained useful experience in electronic commerce
advertising sales by acting as local sales agent for yellow pages advertising
placed on Digital City, an Internet service provided by America Online in
Cincinnati. In addition, DonTech has an agreement to serve as Ameritech's
exclusive advertising sales agent if Ameritech begins a yellow pages Internet
directory in Illinois or northwest Indiana. The Internet complements traditional
directory advertising, particularly by making it possible to update a yellow
pages advertisement as needed, as compared with typically once a year for a
printed advertisement. Management believes that R.H. Donnelley's experience in
successfully selling advertising in new classified directory products, such as
foreign language and bilingual directories, and its extensive reach into the
business and consumer sectors in its markets will augment its ability to
capitalize on emerging electronic directory opportunities.
In addition, certain local telephone companies have expressed an interest
in using R.H. Donnelley's established yellow pages sales channels to market
their telecommunications products and services in the current, more competitive
local telephone market. These products and services, which would be sold in
conjunction with yellow pages advertising, may include long distance, cellular
telephone, 800 numbers, Internet access and remote call forwarding.
STRATEGIC ALLIANCES/MARKETS SERVED
R.H. Donnelley has major relationships with Ameritech, Bell Atlantic and
Sprint (through their subsidiaries) and provides each of them with advertising
sales and/or publishing services. These relationships and R.H. Donnelley's
proprietary operations encompass directories in 13 states and such major
metropolitan areas as New York City, Chicago, Las Vegas and Orlando.
INFORMATION ON DIRECTORIES AND DIRECTORY ADVERTISEMENTS BY RELATIONSHIP (1997)
<TABLE>
<CAPTION>
AMERITECH(1) BELL ATLANTIC SPRINT/CENDON
------------ ------------- -------------
<S> <C> <C> <C>
Primary markets served............................ IL, IN NY NV, FL, VA, NC
Number of directories............................. 125 95 44
Total circulation (in millions)................... 10.3 14.7 5.5
Directory market share(2)......................... 79%(3) 90% 83%
Advertising sales account retention rate(4)....... 90% 82% 90%
Advertising sales renewal rate(5)................. 93% 88% 97%
Number of advertisers............................. 139,000 158,000(6) 63,000
Number of paid ads and paid listings.............. 787,000 721,000(6) 223,000
Average ad sales(7)............................... $566 $550(6) $767
</TABLE>
- ---------------
(1) Through the DonTech partnership.
(2) Represents R.H. Donnelley's percentage of yellow pages usage in the
applicable markets, based on third-party surveys.
(3) Represents directory market share for the Chicago metropolitan service area
in 1996; 1997 data not available.
(4) Represents the percentage of R.H. Donnelley's 1996 customers who advertised
in 1997 in the applicable markets, excluding customers who disconnected
their telephone service. Including customers who
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disconnected their telephone service, R.H. Donnelley's advertising sales
account retention rates were 86%, 78% and 87% in its Ameritech, Bell
Atlantic and Sprint/CenDon markets, respectively.
(5) Represents the percentage of R.H. Donnelley's 1996 advertising sales in the
applicable markets which were generated in 1997 from R.H. Donnelley's 1996
customers in those markets.
(6) Represents 1996 data; 1997 data not available.
(7) Average ad sales represents total advertising sales divided by the number of
advertisements sold.
AMERITECH
R.H. Donnelley's relationship with telephone companies currently owned by
Ameritech began in 1908 with the Chicago Telephone Company. Since then, R.H.
Donnelley has had a variety of contractual relationships with Ameritech
including, beginning in 1990, a series of partnerships (collectively referred to
as DonTech or the DonTech partnership). The current partnership arrangement
reflects R.H. Donnelley's goal of lengthening its agreements to provide
advertising sales and/or publishing services and was structured without an
expiration date in exchange for contractual reductions in R.H. Donnelley's
percentage share of DonTech's profits. These contractual reductions were
completed in 1997, and management does not anticipate any further such
reductions. DonTech is a 50/50 general partnership between R.H. Donnelley and a
subsidiary of Ameritech. DonTech is the exclusive advertising sales agent for
Ameritech's 125 printed and any future Internet directories in Illinois
(including the metropolitan Chicago area) and northwest Indiana. DonTech
receives a sales commission on advertising sold and recognizes these commissions
upon the signing of the related advertising contract. R.H. Donnelley receives
50% of the profits generated by DonTech on a monthly basis and also receives
directly from the Ameritech entity which publishes the directories fees which
are tied to advertising sales generated by DonTech. Income from these sources is
included in R.H. Donnelley's income statement as income from partnerships and
related fees. Under a separate agreement that extends through 2003, R.H.
Donnelley provides publishing services for Ameritech's Illinois and northwestern
Indiana directories on a negotiated basis; the related fees are recognized by
R.H. Donnelley as revenue. Historically, a disproportionate number of the
directories that DonTech sells advertising for were published in the fourth
quarter, which led to inefficient use of DonTech's sales force and R.H.
Donnelley's publishing infrastructure during other times of the year. In 1997, a
two-year program was initiated to reschedule the related directories'
publication dates in order to publish these directories more evenly throughout
the year.
Subject to regulatory approval and certain other conditions, Ameritech
recently agreed to be acquired by SBC Communications Inc. ("SBC"), which
currently conducts all of its yellow pages operations in-house. The proposed
acquisition will not trigger any change to the current contractual relationship
governing the DonTech partnership and the related yellow pages directories, and
SBC has announced it intends to continue using the Ameritech brand if such
acquisition is completed. There can be no assurance as to what effect, if any,
the proposed acquisition will have on the DonTech partnership.
BELL ATLANTIC
R.H. Donnelley's relationship with Bell Atlantic began with a contract with
New York Telephone Company entered into in 1909. Under the current agreement,
which was entered into in 1985 and extends through 2005, R.H. Donnelley is the
exclusive advertising sales agent for 95 Bell Atlantic directories, which cover
substantially all of New York State, including New York City. The arrangement
was originally with a subsidiary of NYNEX; with the Bell Atlantic/NYNEX merger
in 1997, the agreement was transferred to a subsidiary of Bell Atlantic. R.H.
Donnelley earns a sales commission on advertising sold and recognizes these
commissions upon the signing of the related advertising contract.
R.H. Donnelley's management expects to pursue potential outsourcing
opportunities with Bell Atlantic. Bell Atlantic currently operates in-house
yellow pages advertising sales operations in its service territory between Maine
and West Virginia, except in New York State. In May 1998, R.H. Donnelley became
the exclusive advertising sales agent, beginning with directories published in
1999, for Bell Atlantic's 26 yellow pages directories in the greater Buffalo
area, which previously were outsourced by Bell Atlantic to another
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third-party marketer. The contract between R.H. Donnelley and Bell Atlantic
which governs their relationship in the greater Buffalo area continues until
2002, unless extended by Bell Atlantic.
In 1997, R.H. Donnelley sold its East Coast proprietary yellow pages
business to an independent yellow pages publisher and as part of the sale
agreement agreed to forego certain business activities, including yellow pages
advertising sales, in certain mid-Atlantic states until September 1999.
SPRINT
The Sprint relationship began in 1980 when R.H. Donnelley began publishing
directories for predecessors or affiliates of Central Telephone Company and
United Telephone Company of Florida, both since merged into Sprint. R.H.
Donnelley has a partnership with a Sprint affiliate, known as the CenDon
partnership and sales agency agreements with CenDon and a separate affiliate of
Sprint.
CENDON. R.H. Donnelley and a Sprint affiliate each have a 50%
interest in CenDon, which publishes directories in selected Sprint markets
in Nevada (primarily Las Vegas), Florida (including Tallahassee), Virginia
and North Carolina. R.H. Donnelley earns a 50% share of CenDon's income and
records its share as income from partnerships, a component of R.H.
Donnelley's operating income.
In addition to the profits derived from its 50% stake in CenDon, R.H.
Donnelley has a contract to provide advertising sales, marketing and
customer service on an exclusive basis to CenDon and receives a sales
commission for its services. R.H. Donnelley recognizes these commissions as
revenues upon the publication of the related directory. The current CenDon
partnership agreement and the sales agency agreement were entered into in
1988 and extend through 2004. Pursuant to the partnership agreement, R.H.
Donnelley also provides publishing services to CenDon. Fees for these
publishing services are based upon a separate price schedule which extends
through 1999; these fees are recognized by R.H. Donnelley as revenue.
SPRINT SALES AGENCY. In the greater Orlando marketplace, R.H.
Donnelley is Sprint's exclusive advertising sales agent and earns sales
commissions on local advertising and national advertising sales. R.H.
Donnelley recognizes these commissions as revenues upon the signing of the
related advertising contract. The contract which governs this relationship
was entered into in 1994 and extends through 2004, but could be terminated
as a result of a five year performance review required no later than March
1, 2000. R.H. Donnelley also provides publishing services to Sprint
pursuant to this contract; the related fees are recognized by R.H.
Donnelley as revenues. The publishing services portion of this contract
could be terminated if a new price schedule for such services is not agreed
upon by March 1, 2000.
CINCINNATI PROPRIETARY OPERATION
R.H. Donnelley launched a proprietary directory operation in Cincinnati,
northern Kentucky and southeast Indiana in September 1997 and expects to publish
its first directories in the fall of 1998. R.H. Donnelley's historical agreement
with Cincinnati Bell to act as yellow pages advertising sales agent for
Cincinnati Bell's directories expired in August 1997. R.H. Donnelley's
Cincinnati Bell operations accounted for approximately 3% of its operating
income before corporate overhead and depreciation and amortization expense in
1997, which was partially offset by the start-up costs involved with the
proprietary directory operations in 1997.
COMPETITION
There is competition for yellow pages advertising sales to varying degrees
in R.H. Donnelley's markets from the sales forces of yellow pages publishers
with which R.H. Donnelley is not affiliated. These yellow pages publishers
include local telephone companies with which R.H. Donnelley does not maintain a
contractual relationship, independent publishers (publishers that are not
affiliated with any telephone company) and national yellow pages sales agents.
In the majority of its markets, R.H. Donnelley benefits from its long-term
contractual relationships with the largest potential competitor in a directory
market, the incumbent local telephone company. The market position of incumbent
local telephone companies may be
96
<PAGE> 99
impacted by the Telecommunications Act of 1996, which effectively opened local
telephone markets to increased competition. There is also competition for
advertising sales from other media, including newspapers, magazines, radio,
direct mail, on-line information services, television and cable television, and
advances in technology have brought to the industry new participants, new
products and new channels, including increasing use of the Internet as an
advertising media.
INTELLECTUAL PROPERTY
R.H. Donnelley owns and controls a number of trade secrets, confidential
information, trademarks, service marks, tradenames, copyrights and other
intellectual property rights which, in the aggregate, are of material importance
to R.H. Donnelley's business. Management believes that the "R.H. Donnelley" name
and related names, marks and logos are material to R.H. Donnelley's business.
R.H. Donnelley is licensed to use certain technology and other intellectual
property rights owned and controlled by others, and, similarly, other companies
are licensed to use certain technology and other intellectual property rights
owned and controlled by R.H. Donnelley. R.H. Donnelley considers its trademarks,
service marks, databases, software and other intellectual property to be
proprietary and R.H. Donnelley relies on a combination of copyright, trademark,
trade secret, non-disclosure and contract safeguards for protection. R.H.
Donnelley also benefits from the use of both the phrase "yellow pages" and the
walking fingers logo, which R.H. Donnelley believes to be in the public domain
in the United States.
The names of R.H. Donnelley's products and services referred to herein are
trademarks, servicemarks or registered trademarks or servicemarks owned by R.H.
Donnelley.
EMPLOYEES
As of March 31, 1998, R.H. Donnelley had approximately 1,417 full-time
employees, of which approximately 300 and 140 were employed at the Raleigh
publishing center and the Dunmore graphics center, respectively. This number
does not include the approximately 566 employees of DonTech. None of R.H.
Donnelley's employees are covered by collective bargaining agreements. R.H.
Donnelley considers its relations with its employees to be good and it has not
experienced any strikes or work stoppages.
PROPERTIES
R.H. Donnelley's operations are conducted from 21 leased locations in 7
states. R.H. Donnelley leases approximately 74,000 square feet for its
administrative headquarters and offices located in Purchase, New York, and
approximately 72,000 square feet in New York, New York for its New York sales
force. R.H. Donnelley's new $40 million Raleigh publishing center is located in
a 55,500 square foot building which R.H. Donnelley leases. R.H. Donnelley leases
20,000 square feet in a building for its graphics center in Dunmore,
Pennsylvania.
LITIGATION
Pursuant to the Distribution Agreement, New D&B will assume and indemnify
R.H. Donnelley against any payments to be made in respect of the IRI Action
under the Indemnity and Joint Defense Agreement, the 1996 Distribution Agreement
or otherwise, including any ongoing legal fees and expenses related thereto.
R.H. Donnelley is involved in legal proceedings, claims and litigation arising
in the ordinary course of business. In the opinion of R.H. Donnelley management,
the outcome of such legal proceedings will not materially affect R.H.
Donnelley's financial position or results of operations.
97
<PAGE> 100
R.H. DONNELLEY
MANAGEMENT AND EXECUTIVE COMPENSATION
Frank R. Noonan is currently Senior Vice President of D&B and President of
R.H. Donnelley and will be the President and Chief Executive Officer and a
director of R.H. Donnelley after the Distribution. The other directors of R.H.
Donnelley immediately after the Distribution will include certain persons who
are currently directors of D&B and certain persons who are not currently
directors of D&B. See "-- R.H. Donnelley Board of Directors". In addition to Mr.
Noonan, the other executive officers of R.H. Donnelley immediately after the
Distribution will be drawn from the current management of D&B and R.H.
Donnelley. See "-- R.H. Donnelley Corporation Executive Officers".
R.H. DONNELLEY CORPORATION BOARD OF DIRECTORS
Immediately after the Distribution, R.H. Donnelley expects to have a Board
of Directors composed of approximately six directors.
The following table sets forth the names, in alphabetical order, and
information as to the persons who are expected to serve as directors of R.H.
Donnelley following the Distribution, including information as to service with
D&B, if applicable.
<TABLE>
<CAPTION>
DIRECTOR
POSITIONS WITH OF D&B PRINCIPAL OCCUPATION DURING LAST FIVE OTHER
NAME D&B SINCE YEARS AGE* DIRECTORSHIPS
---- -------------- ---------- ------------------------------------- ---- -------------
<S> <C> <C> <C> <C> <C>
Frank R. Noonan.... Senior Vice April 1998 President, R.H. Donnelley, 8/91 to 55
President present; Senior Vice President, D&B,
8/91 to present; Senior Vice
President -- Finance, Dun &
Bradstreet Information Services, 5/89
to 8/91.
</TABLE>
- ---------------
* As of March 6, 1998
DIRECTOR'S COMPENSATION
It is anticipated that, following the Distribution, the Board of Directors
of R.H. Donnelley will adopt a non-employee director compensation program
providing for certain cash payments and deferred stock and stock option grants
annually to each non-employee director. Pursuant to this program, it is expected
that each non-employee director annually will receive a cash retainer of
$20,000, 7,500 deferred shares of common stock of R.H. Donnelley, an option to
purchase an additional 7,500 shares, $1,000 for each meeting attended and $2,000
for each committee of the Board of Directors chaired. In addition, it is
expected that each new non-employee director will receive a $25,000 deferred
stock grant under this program upon his or her appointment to the Board of
Directors. It is anticipated that such deferred share and option grants will
vest over a period of three years of future service, subject to acceleration in
the event of death, disability or retirement of the applicable non-employee
director or change in control of R.H. Donnelley.
COMMITTEES OF R.H. DONNELLEY CORPORATION BOARD OF DIRECTORS
Following the Distribution, R.H. Donnelley's Board of Directors will have
an Audit Committee, a Compensation and Benefits Committee and a Nominating
Committee. The Audit Committee will, among other matters; recommend independent
certified public accountants; review the scope of the audit examination,
including fees and staffing; review the independence of the auditors; review and
approve non-audit services provided by the auditors, if any; review findings and
recommendations of the auditors and management's response; and review the
internal audit and control function. The Compensation and Benefits Committee
will, among other matters: review management compensation programs; approve
compensation changes for executive officers; review compensation changes for
senior management; and administer stock plans for management. The Nominating
Committee will, among other matters: review potential candidates and nominate
persons to the Board of Directors for positions on the Board of Directors and
the various committees of the Board.
98
<PAGE> 101
R.H. DONNELLEY CORPORATION EXECUTIVE OFFICERS
Listed below is certain information as to the executive officers who have
been selected to serve after the Distribution.
<TABLE>
<CAPTION>
NAME, POSITION WITH R.H. DONNELLEY AND AGE BIOGRAPHICAL DATA
------------------------------------------ -----------------
<S> <C>
Frank R. Noonan, 55.......................... See information under "R.H. Donnelley
President and Chief Executive Officer Corporation Board of Directors".
Philip C. Danford, 54........................ Senior Vice President, R.H. Donnelley, 3/98
Senior Vice President and Chief Financial to present; Vice President and Treasurer,
Officer D&B, 9/92 to 3/98; Assistant Treasurer, D&B,
8/88 to 9/92.
Frederick J. Groser, 43...................... Executive Vice President -- Telco Operations,
Senior Vice President R.H. Donnelley, 7/97 to present; Executive
Vice President -- Strategic Marketing and New
Business Development, R.H. Donnelley, 10/95
to 7/97; Vice President and General
Manager -- Sprint Operations, R.H. Donnelley,
2/94 to 10/95; Vice President -- Sales, R.H.
Donnelley, 12/90 to 2/94.
Alexander R. Marasco, 45..................... Executive Vice President -- Operations and
Senior Vice President Systems Development, R.H. Donnelley, 10/95 to
present; Senior Vice President -- Planning,
R.H. Donnelley, 4/91 to 10/95; Assistant Vice
President of Strategic Planning, R.H.
Donnelley, 3/89 to 4/91.
Judith A. Norton, 54......................... Senior Vice President -- Human Resources,
Senior Vice President -- Human Resources R.H. Donnelley, 1/98 to present; Senior Human
Resources Consultant, 1/97 to 1/98; Senior
Vice President Human Resources, Chase
Manhattan Bank, 4/96 to 1/97; Senior Vice
President and Director of Staffing and
Development, Chemical Bank, 1/91 to 4/96.
David C. Swanson, 43......................... Executive Vice President and General
Senior Vice President Manager -- Proprietary Operations, R.H.
Donnelley, 7/97 to present; Executive Vice
President -- Sales, R.H. Donnelley, 10/95 to
7/97; Vice President and General
Manager -- Cincinnati Operations, R.H.
Donnelley, 9/93 to 10/95; Assistant Vice
President -- Operations, R.H. Donnelley, 1/93
to 9/93; General Sales Manager, R.H.
Donnelley, 1/92 to 1/93.
Stephen B. Wiznitzer, 47..................... Senior Vice President and General Counsel,
Senior Vice President and General Counsel R.H. Donnelley, 6/97 to present; Counsel,
NYNEX Corporation, 12/89 to 6/97.
</TABLE>
COMPENSATION OF R.H. DONNELLEY CORPORATION EXECUTIVE OFFICERS
The following table discloses the compensation paid by D&B or R.H.
Donnelley for services rendered to D&B or R.H. Donnelley in 1997 by R.H.
Donnelley's Chief Executive Officer and by each of the persons who are
anticipated to be one of the four other most highly compensated executive
officers of R.H. Donnelley following the Distribution. During the period
presented, the individuals were compensated in accordance with D&B's plans and
policies.
99
<PAGE> 102
SUMMARY COMPENSATION TABLE
FOR SERVICES WITH D&B OR R.H. DONNELLEY
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------------- ----------------------- ---------
(a) (b) (c) (d) (e) (f) (g) (h) (j)
SECURITIES
RESTRICTED UNDERLYING LONG-TERM
NAME AND PRINCIPAL STOCK OPTIONS/ INCENTIVE ALL OTHER
POSITION WITH SALARY BONUS(1) OTHER ANNUAL AWARD(S) SARS(3) PAYOUTS COMPENSATION(4)
R.H. DONNELLEY YEAR ($) ($) COMPENSATION(2)($) ($) ($) ($) ($)
------------------ ---- ------- -------- ------------------ ---------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Frank R. Noonan............ 1997 347,000 346,913 11,630 0 33,480 0 11,863
Chief Executive Officer
Philip C. Danford.......... 1997 265,000 238,582 0 0 27,571 0 8,787
Senior Vice President and
Chief Financial Officer
Frederick J. Groser........ 1997 195,000 41,288 29 0 13,340 0 6,238
Senior Vice President
Alexander R. Marasco....... 1997 207,900 91,200 6,590 0 13,340 0 6,742
Senior Vice President
David C. Swanson........... 1997 195,000 41,927 2,162 0 13,340 0 6,238
Senior Vice President
</TABLE>
- ---------------
(1) The 1997 bonus amounts shown were earned with respect to that year and paid
in 1998. Included in the 1997 amounts is one-half of the 1997 performance
share grant made under the Key Employees Performance Unit Plan for D&B and
its subsidiaries (the "PUP") and earned with respect to 1997. The remaining
one-half of the 1997 performance share grant is payable, pro rata, at the
time of the reorganization of D&B into two separate companies, based on
performance goals covering the period January, 1997 through the Distribution
Date and will be reflected as long-term incentive payouts in the Summary
Compensation Table appearing in R.H. Donnelley's 1999 Proxy Statement. The
performance shares will be paid in unrestricted shares of D&B Common Stock.
(2) Amounts shown represent reimbursement for taxes paid by the named executive
officers with respect to D&B-directed spousal travel and personal use of
automobiles and/or reimbursement for certain other expenses.
(3) Amounts shown represent the number of non-qualified stock options granted in
1997.
(4) Amounts shown represent aggregate annual D&B contributions for the account
of each named executive officer under the Dun & Bradstreet Profit
Participation Plan (the "PPP") and the Profit Participation Benefit
Equalization Plan (the "PPBEP"), which plans are open to employees of D&B
and certain subsidiaries. The PPP is a tax-qualified defined contribution
plan and the PPBEP is a non-qualified plan that provides benefits to
participants in the PPP equal to the amount of D&B contributions that would
have been made to the participant's PPP account but for certain Federal tax
laws.
OPTION GRANTS ON D&B COMMON STOCK TO
R.H. DONNELLEY CORPORATION EXECUTIVES IN LAST FISCAL YEAR
The following table provides information on fiscal year 1997 grants of
options to the named R.H. Donnelley executives to purchase shares of D&B Common
Stock. Upon the Distribution, options to acquire D&B Common Stock will become
options to purchase R.H. Donnelley Common Stock. See "Relationship Between The
New Dun & Bradstreet Corporation and R.H. Donnelley Corporation After the
Distribution -- Employee Benefits Agreement".
100
<PAGE> 103
OPTION GRANTS/SAR GRANTS IN LAST FISCAL YEAR TO PURCHASE D&B COMMON STOCK
<TABLE>
<CAPTION>
(a) (b) (d) (e) (f)
NUMBER OF (c)
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/SARS GRANTED TO EXERCISE OR GRANT DATE
GRANTED(1) EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE(2)
NAME (#) FISCAL YEAR ($/SHARE) DATE ($)
---- ------------ ------------ ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Frank R. Noonan........... 33,480 1.06% 30.2188 12/22/07 186,818
Philip C. Danford......... 13,340 0.42% 30.2188 12/22/07 74,437
14,231 0.45% 27.7188 7/16/07 75,140
Frederick J. Groser....... 13,340 0.42% 30.2188 12/22/07 74,437
Alexander R. Marasco...... 13,340 0.42% 30.2188 12/22/07 74,437
David C. Swanson.......... 13,340 0.42% 30.2188 12/22/07 74,437
</TABLE>
- ---------------
(1) Amounts shown represent the number of non-qualified stock options, without
tandem stock appreciation rights ("SARs"), granted in 1997. Options may not
be exercised for at least one year after grant and may then be exercised in
installments of 25% of the grant amount each year until they are 100%
vested. Payments for all options must be made in full upon exercise in cash
or D&B Common Stock. The option holder may elect to have shares of D&B
Common Stock issuable upon exercise withheld by D&B to pay withholding taxes
due. The options shown for Mr. Noonan include Limited SARs in tandem with
the options. Limited SARs are exercisable only if and to the extent that the
related option is exercisable and are exercisable only during the 30-day
period following the acquisition of at least 20% of the outstanding D&B
Common Stock pursuant to a tender or exchange offer not made by D&B. Each
Limited SAR permits the holder to receive cash equal to the excess over the
related option exercise price of the highest price paid pursuant to a tender
or exchange offer for D&B Common Stock which is in effect at any time during
the 60 days preceding the date upon which the Limited SAR is exercised.
Limited SARs can be exercised regardless of whether D&B supports or opposes
the offer.
(2) Grant date present value is based on the Black-Scholes option valuation
model applied to D&B prior to the Distribution, which makes the following
material assumptions for the July 16, 1997 grant and the December 22, 1997
grant: an expected stock-price volatility factor of 20.0%, a risk-free rate
of return of 6.06% and 5.71% respectively, a dividend yield of 3.3% and a
weighted average exercise date of 4.5 years from date of grant. These
assumptions may or may not be fulfilled. The amounts shown cannot be
considered predictions of future value. In addition, the options will gain
value only to the extent the stock price exceeds the option exercise price
during the life of the option.
101
<PAGE> 104
AGGREGATE D&B OPTION EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR END D&B
OPTION VALUES
The following table provides information on option exercises in 1997 by the
named executives of R.H. Donnelley and the value of each such executive's
unexercised options to acquire D&B Common Stock at December 31, 1997. See also,
"Relationship Between The New Dun & Bradstreet Corporation and R.H. Donnelley
Corporation After the Distribution -- Employee Benefits Agreement".
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
NUMBER OF SECURITIES VALUE OF UNEXERCISED,
UNDERLYING UNEXERCISED IN-THE-MONEY
D&B OPTIONS/SARS AT D&B OPTIONS/SARS AT
SHARES ACQUIRED VALUE FISCAL YEAR-END(#) FISCAL YEAR-END(2)($)
ON EXERCISE REALIZED(1) --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frank R. Noonan......... 0 0 110,593 87,423 1,148,181 455,428
Phillip C. Danford...... 0 0 34,630 38,432 282,389 143,915
Frederick J. Groser..... 0 0 24,337 34,450 225,489 176,427
Alexander R. Marasco.... 0 0 35,774 38,384 375,216 206,047
David C. Swanson........ 2,604 25,640 15,803 33,502 131,210 169,679
</TABLE>
- ---------------
(1) Amounts shown represent the value realized upon the exercise of stock
options during 1997, which equals the difference between the exercise price
of the options and the average of the high and low market price of the
underlying D&B Common Stock on the exercise date.
(2) The values shown equal the difference between the exercise price of
unexercised in-the-money options and the closing market price of the
underlying D&B Common Stock at December 31, 1997. Options are in-the-money
if the fair market value of the D&B Common Stock exceeds the exercise price
of the option.
LONG-TERM D&B INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
(a) (b) (f)
(c) (d) (e)
PERFORMANCE ESTIMATED FUTURE PAYOUTS
NO. OF OR OTHER UNDER NON-STOCK PRICE-BASED PLANS(2)
SHARES, UNITS PERIOD UNTIL ---------------------------------------
OR OTHER MATURATION THRESHOLD(#) TARGET(#) MAXIMUM(#)
NAME RIGHTS(1)(#) OR PAYOUT (0%) (100%) (200%)
---- ------------- ------------ ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Frank R. Noonan............... 11,200 Two Years 0 11,200 22,400
Phillip C. Danford............ 4,460 Two Years 0 4,460 8,920
Frederick J. Groser........... 4,460 Two Years 0 4,460 8,920
Alexander R. Marasco.......... 4,460 Two Years 0 4,460 8,920
David C. Swanson.............. 4,460 Two Years 0 4,460 8,920
</TABLE>
- ---------------
(1) Amounts shown represent the performance shares granted under the Dun &
Bradstreet Performance Unit Plan for the intended performance period of
1998-1999. At the time of the Distribution, each named executive officer
will receive a pro rata award of performance shares based on achievement of
performance goals from January, 1998 through the Distribution Date. Earned
pro rata awards will be paid in unrestricted shares of D&B Common Stock.
(2) Pro rata awards may range from 0 to 200% of the targeted performance shares
based on achievements within a range of performance goals.
102
<PAGE> 105
RETIREMENT BENEFITS
The following table sets forth the estimated aggregate annual benefits
payable under D&B's Retirement Account Plan, Supplemental Executive Benefit Plan
("SEBP") and Pension Benefit Equalization Plan ("PBEP") to persons in specified
average final compensation and credited service classification upon retirement
at age 65. Amounts shown in the table include U.S. Social Security benefits and
benefits payable under predecessor plans of D&B which would be deducted in
calculating benefits payable under these plans. These aggregate annual
retirement benefits do not increase as a result of additional credited service
after 20 years.
<TABLE>
<CAPTION>
ESTIMATED AGGREGATE ANNUAL RETIREMENT BENEFIT
AVERAGE ASSUMING CREDITED SERVICE OF:
FINAL --------------------------------------------------
COMPENSATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS
------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
$ 550,000.................................. $275,000 $ 330,000 $ 330,000 $ 330,000
700,000................................. 350,000 420,000 420,000 420,000
850,000................................. 425,000 510,000 510,000 510,000
1,000,000................................. 500,000 600,000 600,000 600,000
1,300,000................................. 650,000 780,000 780,000 780,000
1,600,000................................. 800,000 960,000 960,000 960,000
1,900,000................................. 950,000 1,140,000 1,140,000 1,140,000
</TABLE>
The number of years of credited service under the plans as of December 31,
1997 of Messrs. Noonan and Danford are 8 and 9, respectively.
Compensation, for the purpose of determining retirement benefits, consists
of salary, wages, regular cash bonuses, commissions and overtime pay. Severance
pay, contingent payments and other forms of special remuneration are excluded.
Bonuses included in the Summary Compensation Table are normally not paid until
the year following the year in which they are accrued and expensed; therefore,
compensation for purposes of determining retirement benefits varies from the
Summary Compensation Table amounts in that bonuses expensed in the previous
year, but paid in the current year, are part of retirement compensation in the
current year, and current year's bonuses accrued and included in the Summary
Compensation Table are not. For 1997, compensation for purposes of determining
retirement benefits also varies from the Summary Compensation Table in that the
amounts shown in the "Bonus" column include performance share payouts under the
PUP, which are not creditable compensation under the retirement plans.
For the reasons discussed above, compensation for determining retirement
benefits for the named executive officers differed by more than 10% from the
amounts shown in the Summary Compensation Table. 1997 compensation for purposes
of determining retirement benefits for Messrs. Noonan and Danford was $382,000
and $285,333, respectively.
Average final compensation is defined as the highest average annual
compensation during five consecutive twelve-month periods in the last ten
consecutive twelve-month periods of the member's credited service. Members vest
in their accrued retirement benefit upon completion of five years of service.
The benefits shown in the table above are calculated on a straight-life annuity
basis.
The Retirement Account Plan, together with the PBEP, provides retirement
income based on a percentage of annual compensation. The percentage of
compensation allocated annually ranges from 3% to 12.5%, based on age and
credited service. Amounts allocated also receive interest credits based on
30-year Treasuries with a minimum interest credit rate of 3%. Executives close
to or eligible to retire as of January 1, 1997 will receive the higher of
benefits provided by the final pay formula in effect prior to 1997 or the
Retirement Account formula.
The SEBP provides retirement benefits in addition to the benefits provided
under the Retirement Account Plan and the PBEP. The SEBP has the effect of
increasing the retirement benefits under the Retirement Account Plan and the
PBEP to the amounts depicted in the preceding table. The SEBP provides maximum
benefits after 20 years. Executives close to or eligible for retirement, as
approved by the Chairman and Chief Executive Officer, will receive maximum
benefits after 15 years.
Messrs. Groser, Marasco and Swanson participate in the Retirement Account
Plan and the PBEP, but do not participate in the SEBP.
103
<PAGE> 106
R.H. DONNELLEY
SECURITY OWNERSHIP BY CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
After the Distribution, shares of D&B Common Stock will be shares of R.H.
Donnelley Common Stock. The following table sets forth the number of shares of
D&B Common Stock, par value $1.00 per share, the only outstanding equity
security (other than stock options) or voting security of D&B, beneficially
owned by each of the directors, each of the executive officers named in the
Summary Compensation Table above, and all persons expected to be directors and
executive officers of D&B after the Distribution as a group, at December 31,
1997. The table also sets forth the name and address of the only persons known
to D&B to be the beneficial owners of more than 5% of the outstanding D&B Common
Stock (the "5% Owners") and the number of shares so owned, to D&B's knowledge,
on December 31, 1997. This information is based upon information furnished by
each such person (or, in the case of the 5% Owners, based upon a Schedule 13G
filed by the 5% Owners with the SEC). Please note that in certain cases shares
required under rules of the SEC to be shown as beneficially owned are shares as
to which the indicated person holds only rights to acquire within 60 days
through exercise of stock options. Unless otherwise stated, the indicated
persons have sole voting and investment power over the shares listed. All
persons expected to be directors and executive officers of R.H. Donnelley after
the Distribution as a group owned % of the D&B Common Stock on December 31,
1997 and are expected to own % of the R.H. Donnelley Common Stock as of the
Distribution Date. Percentages are based upon the number of shares of D&B Common
Stock outstanding at December 31, 1997, plus, where applicable, the number of
shares of D&B Common Stock that the indicated person or group had a right to
acquire within 60 days of such date. Percentages are based upon the number of
shares of D&B Common Stock outstanding on December 31, 1997, plus, where
applicable, the number of shares that the indicated person or group had a right
to acquire within 60 days of such date. The mailing address for each of the R.H.
Donnelley directors and executive officers listed below is One Manhattanville
Road, Purchase, NY 10577.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL NUMBER OF SHARES
OWNER AND NATURE OF OWNERSHIP PERCENT OF CLASS(1)
------------------------------ ---------------------------------------------------- -------------------
<S> <C> <C> <C>
Frank R. Noonan................... 6,465 Owned
110,593 Rights to Acquire Within 60 Days(2)
----------
117,058 --
Phillip C. Danford................ 539 Owned
34,630 Rights to Acquire Within 60 Days
----------
35,169 --
----------
Frederick J. Groser............... 1,325 Owned
24,337 Rights to Acquire Within 60 Days
----------
25,662 --
Alexander R. Marasco.............. 10,102 Owned
35,774 Rights to Acquire Within 60 Days
----------
45,876 --
David C. Swanson.................. 1,748 Owned
16,805 Rights to Acquire Within 60 Days
----------
18,553 --
All Directors and Executive
Officers as a Group............. Owned
Rights to Acquire Within 60 Days
----------
--
Harris Associates L.P. and its 8.72%
general partner, Harris
Associates, Inc. ............... 14,903,640(3)
Two North LaSalle Street,
Ste. 500
Chicago, Illinois 60602-3790
AMVESCAP, PLC and certain of its 7.05%
subsidiaries.................... 12,048,320(4)
11 Devonshire Square
London EC2M 4YR
England
</TABLE>
- ---------------
(1) Represents ownership of less than 1% of the outstanding D&B Common Stock
unless otherwise indicated.
104
<PAGE> 107
(2) Includes the following number of performance shares delivered under the D&B
1996 Non-Employee Directors' Stock Incentive Plan (the "1996 Directors'
Plan") (in the case of directors) and the D&B Key Employees Performance Unit
Plan (the "PUP") (in the case of executive officers) in February 1998 based
upon performance goals for the 1997 fiscal year: The balance of
the indicated shares represents stock options granted under a D&B plan.
(3) Harris Associates L.P. ("Harris") and its sole general partner, Harris
Associates, Inc.("Harris Inc."), jointly filed a Schedule 13G with the SEC
on February 11, 1998. This Schedule 13G shows that Harris, a registered
investment adviser, had as of December 31, 1997, shared voting power over
14,903,640 shares of D&B Common Stock. Of such shares, Harris had sole
dispositive power over 5,171,140 shares and shared dispositive power over
9,732,500 shares. In addition, Harris and Harris Inc. jointly filed an
amendment to their Schedule 13G with the SEC on April 4 , 1998. This amended
Schedule 13G shows that Harris had as of March 31, 1998 shared voting power
over 17,374,440 shares of D&B Common Stock. Of such shares, Harris had sole
dispositive power over 5,435,440 shares and shared dispositive power over
11,939,000 shares.
(4) AMVESCAP PLC and its subsidiaries, AVZ, Inc. (a holding company), AIM
Management Group Inc. (a holding company), INVESCO, Inc. (a holding
company), INVESCO North American Holdings, Inc. (a holding company), INVESCO
Capital Management, Inc. (a registered investment adviser), INVESCO Funds
Group, Inc. (a registered investment adviser), INVESVCO Management &
Research, Inc. (a registered investment adviser), and INVESCO Realty
Advisers, Inc. (a registered investment adviser), jointly filed a Schedule
13G with the SEC on February 11, 1998. This Schedule 13G shows that these
companies had, as of December 31, 1997, shared voting power and shared
dispositive power over 12,048,320 shares.
AVAILABLE INFORMATION
New D&B has filed with the SEC a Registration Statement on Form 10 with
respect to the shares of New D&B Common Stock to be received by the stockholders
of D&B in the Distribution. This Information Statement does not contain all of
the information set forth in the Form 10 Registration Statement and the exhibits
thereof, to which reference is hereby made. Statements made in this Information
Statement as to the contents of any contract, agreement or other documents
referred to herein are not necessarily complete. With respect to each such
contract, agreement or other documents filed as an exhibit to the Registration
Statement, reference is made to such exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement and the exhibits thereto
may be inspected and copied at the public reference facilities maintained by the
SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Regional Offices of the SEC at Seven World Trade Center, Suite 1300, New York,
New York 10048 and in the Citicorp Center, Suite 1400, 500 West Madison Street,
Chicago, Illinois 60662. In addition, copies of the Registration Statement and
related documents may be obtained through the SEC Internet address at
http://www.sec.gov.
REPORTS OF THE NEW DUN & BRADSTREET CORPORATION
After the Distribution, New D&B will be required to comply with the
reporting requirements of the Exchange Act and, in accordance therewith, to file
reports, proxy statements and other information with the SEC.
After the Distribution, such reports, proxy statements and other
information may be inspected and copied at the public reference facilities of
the SEC listed above and obtained by mail from the SEC as described above.
Application will be made for listing the shares of New D&B Common Stock on the
NYSE and, when such shares of New D&B Common Stock commence trading on the NYSE,
such reports, proxy statements and other information will be available for
inspection at the offices of the NYSE, 20 Broad Street, New York, New York
10005.
Additionally, New D&B will be required to provide annual reports,
containing audited financial statements, to its stockholders in connection with
its annual meetings of stockholders.
105
<PAGE> 108
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
THE DUN & BRADSTREET CORPORATION
Consolidated Financial Statements (Unaudited):
Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1997.......................... F-2
Consolidated Balance Sheets at March 31, 1998 and December
31, 1997............................................... F-3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997.......................... F-4
Notes to Unaudited Consolidated Financial Statements...... F-5
Report of Independent Accountants........................... F-9
Financial Statements:
Consolidated Statements of Operations for the Three Years
Ended December 31, 1997................................ F-10
Consolidated Balance Sheets at December 31, 1997 and
1996................................................... F-11
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1997................................ F-12
Consolidated Statements of Shareholders' Equity for the
Three Years Ended December 31, 1997.................... F-13
Notes to Consolidated Financial Statements................ F-14
THE NEW DUN & BRADSTREET CORPORATION
Report of Independent Accountants........................... F-36
Financial Statements:
Balance Sheet as of April 14, 1998........................ F-37
Notes to Financial Statements............................. F-38
THE REUBEN H. DONNELLEY CORPORATION
Financial Statements (Unaudited):
Statements of Operations for the Three Months Ended March
31, 1998 and 1997...................................... F-39
Balance Sheets at March 31, 1998 and December 31, 1997.... F-40
Statements of Cash Flows for the Three Months Ended March
31, 1998 and 1997...................................... F-41
Notes to Unaudited Financial Statements................... F-42
Report of Independent Accountants........................... F-44
Financial Statements:
Statements of Operations for the Three Years Ended
December 31, 1997...................................... F-45
Balance Sheets at December 31, 1997 and 1996.............. F-46
Statements of Cash Flows for the Three Years Ended
December 31, 1997...................................... F-47
Statements of Changes in Shareholder's Equity for the
Three Years Ended December 31, 1997.................... F-48
Notes to Financial Statements............................. F-49
DONTECH
Report of Independent Accountants........................... F-61
Financial Statements:
Combined Statements of Operations for the Three Years
Ended December 31, 1997................................ F-62
Combined Balance Sheets as of December 31, 1997 and
1996................................................... F-63
Combined Statements of Cash Flows for the Three Years
Ended December 31, 1997................................ F-64
Combined Statements of Partners' Capital for the Three
Years Ended December 31, 1997.......................... F-65
Notes to Combined Financial Statements.................... F-66
</TABLE>
F-1
<PAGE> 109
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1998 1997
--------- ----------
(AMOUNTS IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Operating Revenues.......................................... $471.1 $ 436.4
------ -------
Operating Costs............................................. 145.3 133.2
Selling and Administrative Expenses......................... 197.6 190.1
Depreciation and Amortization............................... 35.4 35.2
------ -------
Operating Income............................................ 92.8 77.9
------ -------
Interest Income............................................. 0.9 0.1
Interest Expense............................................ (7.3) (21.2)
Other Expense -- Net........................................ (6.5) (1.4)
------ -------
Non-Operating Expense -- Net................................ (12.9) (22.5)
------ -------
Income from Continuing Operations before Provision for
Income Taxes.............................................. 79.9 55.4
Provision for Income Taxes.................................. 28.4 18.9
------ -------
Income from Continuing Operations........................... 51.5 36.5
Income (Loss) from Discontinued Operations, Net of Income
Taxes of $8.1 for 1998 and Income Tax Benefit of $0.7 for
1997...................................................... 12.0 (1.6)
------ -------
Income before Cumulative Effect of Accounting Changes....... 63.5 34.9
Cumulative Effect of Accounting Changes, Net of Income Tax
Benefit of $104.1......................................... -- (150.6)
------ -------
Net Income (Loss)........................................... $ 63.5 $(115.7)
====== =======
Basic Earnings (Loss) Per Share of Common Stock:
Continuing Operations..................................... $ 0.30 $ 0.21
Discontinued Operations................................... 0.07 (0.01)
------ -------
Before Cumulative Effect of Accounting Changes............ 0.37 0.20
Cumulative Effect of Accounting Changes, Net of Income Tax
Benefit................................................ -- (0.88)
------ -------
Basic Earnings (Loss) Per Share of Common Stock............. $ 0.37 $ (0.68)
====== =======
Diluted Earnings (Loss) Per Share of Common Stock:
Continuing Operations..................................... $ 0.30 $ 0.21
Discontinued Operations................................... 0.07 (0.01)
------ -------
Before Cumulative Effect of Accounting Changes............ 0.37 0.20
Cumulative Effect of Accounting Changes, Net of Income Tax
Benefit................................................ -- (0.87)
------ -------
Diluted Earnings (Loss) Per Share of Common Stock........... $ 0.37 $ (0.67)
====== =======
Dividends Paid Per Share of Common Stock.................... $ 0.22 $ 0.22
------ -------
Weighted Average Number of Shares Outstanding -- Basic...... 171.2 171.2
------ -------
Weighted Average Number of Shares Outstanding -- Diluted.... 174.1 172.7
------ -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE> 110
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- --------------
(DOLLAR AMOUNTS IN MILLIONS,
ASSETS
EXCEPT PER SHARE DATA)
<S> <C> <C>
Current Assets
Cash and Cash Equivalents................................... $ 116.6 $ 81.8
Accounts Receivable -- Net of Allowance of $45.2 in 1998 and
$39.4 in 1997............................................. 474.5 454.5
Other Current Assets........................................ 244.8 269.2
--------- --------
Total Current Assets.............................. 835.9 805.5
--------- --------
Non-Current Assets
Investments and Notes Receivable............................ 12.8 12.3
Property, Plant and Equipment............................... 306.9 317.2
Prepaid Pension Costs....................................... 194.6 190.7
Computer Software........................................... 128.7 128.0
Goodwill.................................................... 186.9 194.6
Other Non-Current Assets.................................... 139.6 141.2
--------- --------
Total Non-Current Assets.......................... 969.5 984.0
Net Assets of Discontinued Operations....................... 282.5 296.5
--------- --------
Total Assets................................................ $ 2,087.9 $2,086.0
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes Payable............................................... $ 364.8 $ 451.5
Accrued and Other Current Liabilities....................... 449.2 472.0
Unearned Subscription Income................................ 640.4 573.5
--------- --------
Total Current Liabilities......................... 1,454.4 1,497.0
Postretirement and Postemployment Benefits.................. 387.1 389.0
Other Non-Current Liabilities............................... 390.7 388.3
Minority Interest........................................... 301.9 301.9
Shareholders' Equity
Preferred Stock, par value $1 per share,
authorized -- 10,000,000 shares; outstanding -- none
Common Stock, par value $1 per share,
authorized -- 400,000,000 shares; issued -- 188,420,996
shares for 1998 and 1997.................................. 188.4 188.4
Capital Surplus............................................. 80.2 80.2
Retained Earnings........................................... 396.2 405.2
Treasury Stock, at cost, 16,850,856 and 17,853,652 shares
for 1998 and 1997, respectively........................... (906.5) (964.0)
Cumulative Translation Adjustment........................... (167.1) (162.6)
Minimum Pension Liability Adjustment........................ (37.4) (37.4)
--------- --------
Total Shareholders' Equity.................................. (446.2) (490.2)
--------- --------
Total Liabilities and Shareholders' Equity.................. $ 2,087.9 $2,086.0
========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 111
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
------------------
1998 1997
------- -------
(DOLLAR AMOUNTS IN
MILLIONS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)........................................... $ 63.5 $(115.7)
Less: Income (Loss) from Discontinued Operations............ 12.0 (1.6)
------- -------
Income (Loss) from Continuing Operations.................. 51.5 (114.1)
Reconciliation of Net Income (Loss) to Net Cash
Provided by Operating Activities:
Cumulative Effect of Accounting Change, Net of Income Tax
Benefits............................................... -- 150.6
Depreciation and Amortization............................. 35.4 35.2
Postemployment Benefit Payments........................... (5.1) (9.9)
Net Decrease in Accounts Receivable....................... (25.3) (78.3)
Accrued Income Taxes...................................... 38.5 (10.4)
Increase in Long Term Liabilities......................... 4.5 30.0
Net Decrease in Other Working Capital Items............... 44.9 118.0
Other..................................................... (1.3) 1.8
------- -------
Net Cash Provided by Operating Activities:
Continuing Operations..................................... 143.1 122.9
Discontinued Operations................................... 28.4 59.9
------- -------
Net Cash Provided by Operating Activities................... 171.5 182.8
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Marketable Securities......................... 3.9 0.1
Payments for Marketable Securities.......................... (4.3) --
Capital Expenditures........................................ (10.0) (4.0)
Additions to Computer Software and Other Intangibles........ (16.1) (13.1)
Net Cash Used in Investing Activities of Discontinued
Operations................................................ (2.5) (8.7)
Other....................................................... (7.6) (8.9)
------- -------
Net Cash Used In Investing Activities....................... (36.6) (34.6)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Dividends........................................ (37.7) (37.7)
Payments for Purchase of Treasury Shares.................... -- (1.7)
Net Proceeds from Exercise of Stock Options................. 22.6 13.1
Decrease in Short-term Borrowings........................... (85.9) (99.2)
Other....................................................... (0.2) (0.3)
------- -------
Net Cash Used in Financing Activities....................... (101.2) (125.8)
------- -------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents............................................... 1.1 2.2
------- -------
Increase in Cash and Cash Equivalents....................... 34.8 24.6
Cash and Cash Equivalents, Beginning of Quarter............. 81.8 127.8
------- -------
Cash and Cash Equivalents, End of Quarter................... $ 116.6 $ 152.4
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 112
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
NOTE 1 INTERIM CONSOLIDATED FINANCIAL STATEMENTS
These interim consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and should be read in conjunction
with the consolidated financial statements and related notes of The Dun &
Bradstreet Corporation's (the "Company") 1997 Annual Report on Form 10-K. The
consolidated results for 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 1998
presentation.
NOTE 2 REORGANIZATION AND DISCONTINUED OPERATIONS
On December 17, 1997, the Board of Directors of the Company announced a
plan, subject to receiving a favorable ruling from the Internal Revenue Service,
to separate into two publicly traded companies -- The New Dun & Bradstreet
Corporation ("New D&B") and R.H. Donnelley Corporation ("R.H. Donnelley"). The
separation (the "Distribution") of the two companies will be accomplished
through a tax-free dividend of a new entity comprised of the Company's Risk
Management Services segment (Moody's Investors Service ("Moody's") and Dun &
Bradstreet, the operating company ("D&B")). The new entity, New D&B, will be
known as "The Dun & Bradstreet Corporation" and the continuing entity will
change its name to "R.H. Donnelley Corporation" and will consist of the
Company's Directory Information Services segment (R.H. Donnelley Inc., the
operating company, and the DonTech partnership). In April 1998, the Company
received a favorable ruling from the Internal Revenue Service with respect to
the tax-free treatment of the Distribution. The transaction is expected to be
completed in the summer of 1998. Due to the relative significance of the Risk
Management Services segment, the transaction will be accounted for as a reverse
spin-off, and as such the Risk Management Services and Directory Information
Services segments have been classified as continuing and discontinued
operations, respectively.
For purposes of governing certain of the ongoing relationships among the
Company and R.H. Donnelley as a result of the Distribution, the companies will
enter into various agreements, including a Distribution Agreement, Tax
Allocation Agreement, Employee Benefits Agreement, Intellectual Property
Agreement, Shared Transaction Services Agreement, Data Services Agreement and a
Transition Services Agreement.
Pursuant to Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of the Company have been
reclassified to reflect the Company's Directory Information Services segment as
discontinued operations.
For financial reporting purposes the assets and liabilities of the
Directory Information Services segment have been separately classified on the
balance sheet as "Net Assets of Discontinued Operations." A summary of these
assets and liabilities at March 31, 1998 and December 31, 1997 was as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
Current assets................................ $ 89.8 $ 92.7
Total assets.................................. 341.5 362.3
Current liabilities........................... 57.8 64.6
Total liabilities............................. 59.0 65.8
Net assets of discontinued operations......... 282.5 296.5
</TABLE>
F-5
<PAGE> 113
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The net operating results of the Directory Information Services segment
have been reported in the caption "Income (Loss) from Discontinued Operations,"
in the consolidated statements of operations. Summarized operating results for
the Directory Information Services segment for the quarters ended March 31, were
as follows:
<TABLE>
<CAPTION>
1998 1997*
----- -----
<S> <C> <C>
Operating revenues.......................................... $41.5 $19.0
Income before provision for income taxes.................... 20.1 (2.3)
Net income.................................................. 12.0 (1.6)
</TABLE>
- ---------------
* 1997 included the results of the East Coast proprietary operations of R.H.
Donnelley.
NOTE 3 RECONCILIATION OF WEIGHTED AVERAGE SHARES
<TABLE>
<CAPTION>
(SHARE DATA IN THOUSANDS) 1998 1997
------------------------- ------- -------
<S> <C> <C>
Weighted average number of shares -- basic.................. 171,153 171,189
Dilutive effect of shares issuable under stock options,
restricted stock and performance unit plans............... 2,731 1,257
Adjustment of shares applicable to stock options exercised
during the period and performance unit plans.............. 220 204
------- -------
Weighted average number of shares -- diluted................ 174,104 172,650
======= =======
</TABLE>
As required by Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share," the Company has provided a reconciliation of basic
weighted average shares to diluted weighted average shares within the table
outlined above. The conversion of diluted shares has no impact on the Company's
operating results. All options outstanding at March 31, 1998 and 1997 were
included in the computation of diluted earnings per share because the options'
exercise prices were less than the average market price of the Company's common
stock. The Company's options generally expire 10 years after the initial grant
date.
NOTE 4 COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement requires that all items recognized under
accounting standards as components of comprehensive earnings be reported in a
financial statement for the period in which they are recognized and displayed
with the same prominence as other financial statements. This statement also
requires that financial statements for prior periods are reclassified. The
Company's total comprehensive income for the three month period ended March 31,
was as follows:
<TABLE>
<CAPTION>
1998 1997
----- -------
<S> <C> <C>
Net income (loss).......................................... $63.5 $(115.7)
Other comprehensive loss -- foreign currency translation
adjustment............................................... (4.5) (7.5)
----- -------
Total comprehensive income................................. $59.0 $(123.2)
===== =======
</TABLE>
NOTE 5 NOTES PAYABLE
In connection with the Distribution, R.H. Donnelley will borrow
approximately $350 million under the R.H. Donnelley Credit Facility and issue
$150 million of senior subordinated notes under the R.H. Donnelley Indenture,
all of which will be guaranteed by D&B. A portion of the proceeds of this
indebtedness will be used to repay existing indebtedness of the Company. This
$500 million of debt will become an obligation of R.H. Donnelley after the
Distribution.
F-6
<PAGE> 114
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
NOTE 6 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company enters into interest rate swap agreements to manage exposure to
changes in interest rates. Interest rate swaps allow the Company to raise funds
at floating rates and effectively swap them into fixed rates that are lower than
those available to it if fixed-rate borrowings were made directly. If the
Company terminates a swap agreement, the gain or loss is amortized over the
shorter of the remaining original life of the swap or the debt. At March 31,
1998, the unrealized fair value of the interest rate swaps was a loss of $11.7
million, of which $3.8 million ($.6 million in the first quarter of 1998 and
$3.2 million in 1997) has been recognized in income relating to swaps which do
not qualify for settlement accounting. In connection with the Distribution and
repayment of outstanding notes payable, the Company will cancel all of its
interest rate swap agreements and will record into income the previously
unrecognized fair value loss at the time of termination.
NOTE 7 LITIGATION
The Company and its subsidiaries are involved in legal proceedings, claims
and litigation arising in the ordinary course of business. In the opinion of
management, the outcome of such current legal proceedings, claims and litigation
could have a material effect on quarterly or annual operating results or cash
flows when resolved in a future period. However, in the opinion of management,
these matters will not materially affect the Company's consolidated financial
position.
In addition to the litigation referred to above, on July 29, 1996,
Information Resources, Inc. ("IRI") filed a complaint in the United States
District Court for the Southern District of New York, naming as defendants the
Company, A.C. Nielsen Company (a subsidiary of ACNielsen) and IMS International,
Inc.
The complaint alleges various violations of United States antitrust laws,
including alleged violations of Section 1 and 2 of the Sherman Act. The
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 alleges SRG violated an alleged agreement with IRI when it agreed
to be acquired by the defendants and that the defendants induced SRG to breach
that agreement.
On October 15, 1996, defendants moved for an order dismissing all claims in
the complaint. On May 6, 1997, the United States District Court for the Southern
District of New York issued a decision dismissing IRI's claim of attempted
monopolization in the United States, with leave to replead within sixty days.
The Court denied defendants' motion with respect to the remaining claims in the
complaint. On June 3, 1997, defendants filed an answer denying the material
allegations in IRI's complaint, and A.C. Nielsen Company filed a counterclaim
alleging that IRI has made false and misleading statements about its services
and commercial activities. On July 7, 1997, IRI filed an Amended and Restated
Complaint repleading its alleged claim of monopolization in the United States
and realleging its other claims. By notice of motion dated August 18, 1997,
defendants moved for an order dismissing the amended claim. On December 1, 1997,
the Court denied the motion and, on December 16, 1997, defendants filed a
supplemental answer denying the remaining material allegations of the amended
complaint.
IRI's complaint alleges damages in excess of $350 million, which amount IRI
asked to be trebled under antitrust laws. IRI also seeks punitive damages in an
unspecified amount.
In connection with the IRI action, Cognizant, ACNielsen and the Company
entered into an Indemnity and Joint Defense Agreement (the "Indemnity and Joint
Defense Agreement") pursuant to which they have agreed (i) to certain
arrangements allocating potential liabilities ("IRI Liabilities") that may arise
out of or in connection with the IRI Action and (ii) to conduct a joint defense
of such action. In particular, the Indemnity and Joint Defense Agreement
provides that ACNielsen will assume exclusive liability for IRI Liabilities up
to
F-7
<PAGE> 115
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
a maximum amount to be calculated at such time such liabilities, if any, become
payable (the "ACN Maximum Amount"), and that the Company and Cognizant will
share liability equally for any amounts in excess of the ACN Maximum Amount. The
ACN Maximum Amount will be determined by an investment banking firm as the
maximum amount which ACNielsen is able to pay after giving effect to (i) any
plan submitted by such investment bank which is designed to maximize the claims
paying ability of ACNielsen without impairing the investment banking firm's
ability to deliver a viability opinion (but which will not require any action
requiring stockholder approval), and (ii) payment of related fees and expenses.
For these purposes, financial viability means the ability of ACNielsen, after
giving effect to such plan, the payment of related fees and expenses, and the
payment of the ACN Maximum Amount, to pay its debts as they become due and to
finance the current and anticipated operating and capital requirements of its
business, as reconstituted by such plan, for two years from the date any such
plan is expected to be implemented.
In connection with the Distribution, the Company and R.H. Donnelley will
enter into an agreement whereby the Company will retain all potential
liabilities arising from the IRI Action.
Management is unable to predict at this time the final outcome of the IRI
Action or whether the resolution of this matter could materially affect the
Company's results of operations, cash flows or financial position.
F-8
<PAGE> 116
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and the Board of Directors
of The Dun & Bradstreet Corporation:
We have audited the accompanying consolidated balance sheets of The Dun &
Bradstreet Corporation and Subsidiaries at December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years ended December 31, 1997, 1996 and 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Dun &
Bradstreet Corporation and Subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1997, 1996 and 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed certain revenue recognition accounting policies in 1997.
/s/ COOPERS & LYBRAND L.L.P.
--------------------------------------
COOPERS & LYBRAND L.L.P.
New York, New York
February 13, 1998, except for the effect of the
1998 Distribution described in Note 2 for
which the date is April 15, 1998
F-9
<PAGE> 117
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ------------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Operating Revenues.......................................... $ 1,811.0 $ 1,781.7 $ 1,734.5
----------- ----------- ------------
Operating Costs............................................. 487.0 617.0 625.9
Selling and Administrative Expenses......................... 788.4 806.3 748.4
Depreciation and Amortization............................... 131.9 140.6 147.9
Reorganization Costs........................................ -- 161.2 --
----------- ----------- ------------
Operating Income............................................ 403.7 56.6 212.3
----------- ----------- ------------
Interest Income............................................. 1.8 4.4 10.2
Interest Expense............................................ (53.4) (37.1) (37.3)
Other Expense -- Net........................................ (19.7) (38.5) (40.9)
----------- ----------- ------------
Non-Operating Expense -- Net................................ (71.3) (71.2) (68.0)
----------- ----------- ------------
Income (Loss) from Continuing Operations before Provision
for Income Taxes.......................................... 332.4 (14.6) 144.3
Provision for Income Taxes.................................. 113.4 102.1 49.4
----------- ----------- ------------
Income (Loss) from Continuing Operations.................... 219.0 (116.7) 94.9
----------- ----------- ------------
Discontinued Operations:
Income from Discontinued Operations, Net of Income Taxes
of $52.2, $207.5 and $73.4 for 1997, 1996 and 1995,
respectively........................................... 92.0 230.5 225.9
Loss on Disposal, Net of Income Tax Benefit of $62.4 for
1996................................................... -- (158.2) --
----------- ----------- ------------
Income from Discontinued Operations......................... 92.0 72.3 225.9
----------- ----------- ------------
Income (Loss) before Cumulative Effect of Accounting
Changes................................................... 311.0 (44.4) 320.8
Cumulative Effect of Accounting Changes, Net of Income Tax
Benefit of $104.1......................................... (150.6) -- --
----------- ----------- ------------
Net Income (Loss)........................................... $ 160.4 $ (44.4) $ 320.8
=========== =========== ============
Basic Earnings (Loss) Per Share of Common Stock:
Continuing Operations..................................... $ 1.28 $ (0.69) $ 0.56
Discontinued Operations................................... 0.54 0.43 1.33
----------- ----------- ------------
Before Cumulative Effect of Accounting Changes............ 1.82 (0.26) 1.89
Cumulative Effect of Accounting Changes, Net of Income Tax
Benefit................................................ (0.88) -- --
----------- ----------- ------------
Basic Earnings (Loss) Per Share of Common Stock............. $ 0.94 $ (0.26) $ 1.89
=========== =========== ============
Diluted Earnings (Loss) Per Share of Common Stock:
Continuing Operations..................................... $ 1.27 $ (0.69) $ 0.55
Discontinued Operations................................... 0.53 0.43 1.32
----------- ----------- ------------
Before Cumulative Effect of Accounting Changes............ 1.80 (0.26) 1.87
Cumulative Effect of Accounting Changes, Net of Income Tax
Benefit................................................ (0.87) -- --
----------- ----------- ------------
Diluted Earnings (Loss) Per Share of Common Stock........... $ 0.93 $ (0.26) $ 1.87
=========== =========== ============
Weighted Average Number of Shares Outstanding:
Basic..................................................... 170,765,000 170,017,000 169,522,000
----------- ----------- ------------
Diluted................................................... 172,552,000 170,017,000 171,608,000
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-10
<PAGE> 118
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
----------- ------------
(DOLLAR AMOUNTS IN
MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
ASSETS
Current Assets
Cash and Cash Equivalents................................... $ 81.8 $ 127.8
Accounts Receivable -- Net of Allowance of $39.4 in 1997 and
$26.5 in 1996............................................. 454.5 442.4
Other Current Assets........................................ 269.2 190.1
-------- ---------
Total Current Assets.............................. 805.5 760.3
-------- ---------
Non-Current Assets
Investments and Notes Receivable............................ 12.3 58.5
Property, Plant and Equipment............................... 317.2 342.3
Prepaid Pension Costs....................................... 190.7 161.8
Computer Software........................................... 128.0 108.7
Goodwill.................................................... 194.6 216.2
Other Non-Current Assets.................................... 141.2 130.6
-------- ---------
Total Non-Current Assets.......................... 984.0 1,018.1
Net Assets of Discontinued Operations....................... 296.5 430.6
-------- ---------
Total Assets................................................ $2,086.0 $ 2,209.0
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes Payable............................................... $ 451.5 $ 1,120.7
Accrued and Other Current Liabilities....................... 472.0 550.1
Unearned Subscription Income................................ 573.5 297.0
-------- ---------
Total Current Liabilities......................... 1,497.0 1,967.8
Postretirement and Postemployment Benefits.................. 389.0 344.1
Other Non-Current Liabilities............................... 388.3 328.8
Minority Interest........................................... 301.9 --
Shareholders' Equity
Preferred Stock, par value $1 per share,
authorized -- 10,000,000 shares; outstanding -- none
Common Stock, par value $1 per share,
authorized -- 400,000,000 shares; issued -- 188,420,996
shares for 1997 and 1996.................................. 188.4 188.4
Capital Surplus............................................. 80.2 72.6
Retained Earnings........................................... 405.2 480.3
Treasury Stock, at cost, 17,853,652 and 17,612,776 shares
for 1997 and 1996, respectively........................... (964.0) (1,019.7)
Cumulative Translation Adjustment........................... (162.6) (153.3)
Minimum Pension Liability Adjustment........................ (37.4) --
-------- ---------
Total Shareholders' Equity.................................. (490.2) (431.7)
-------- ---------
Total Liabilities and Shareholders' Equity.................. $2,086.0 $ 2,209.0
======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-11
<PAGE> 119
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- -------
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)........................................... $ 160.4 $ (44.4) $ 320.8
Less:
Income (Loss) from Discontinued Operations................ 92.0 72.3 225.9
--------- ------- -------
Income (Loss) from Continuing Operations.................. 68.4 (116.7) 94.9
Reconciliation of Net Income (Loss) to Net Cash Provided by
Operating Activities:
Cumulative Effect of Accounting Change, Net of Income Tax
Benefit................................................ 150.6 -- --
Depreciation and Amortization............................. 131.9 140.6 147.9
(Gains) Loss from Sale of Businesses, Net of Income
Taxes.................................................. -- 68.2 (118.0)
Decrease (Increase) Note Receivable....................... 47.5 (55.3) 2.2
Non-Recurring Charge...................................... -- -- 188.5
Restructuring Payments.................................... -- (39.4) (60.1)
Postemployment Benefit Payments........................... (30.6) (50.3) (60.0)
Net Increase in Accounts Receivable....................... (33.8) (52.1) (44.0)
Deferred Income Taxes..................................... 7.0 83.2 (66.9)
Accrued Income Taxes...................................... (38.7) 16.2 27.2
Increase in Long Term Liabilities......................... 38.7 105.4 (21.0)
Net Decrease in Other Working Capital Items............... 84.3 90.1 41.6
Other..................................................... (45.3) (10.0) 6.2
--------- ------- -------
Net Cash Provided By Operating Activities:
Continuing Operations..................................... 380.0 179.9 138.5
Discontinued Operations................................... 120.4 152.1 730.2
--------- ------- -------
Net Cash Provided by Operating Activities................... 500.4 332.0 868.7
--------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sales of Marketable Securities................ 27.2 17.6 34.1
Payments for Marketable Securities.......................... (27.1) (2.4) (22.9)
Proceeds from Sale of Businesses............................ -- 93.9 230.0
Capital Expenditures........................................ (50.3) (57.9) (97.5)
Additions to Computer Software and Other Intangibles........ (78.8) (94.1) (118.3)
Net Cash Provided By (Used in) Investing Activities of
Discontinued Operations................................... 105.7 (180.5) (324.7)
Other....................................................... 7.4 13.3 (12.5)
--------- ------- -------
Net Cash (Used In) Provided By Investing Activities......... (15.9) (210.1) (311.8)
--------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Dividends........................................ (150.6) (310.8) (446.1)
Payments for Purchase of Treasury Shares.................... (60.1) (25.6) (72.3)
Net Proceeds from Exercise of Stock Options................. 40.8 63.7 42.2
Increase (Decrease) in Commercial Paper Borrowings.......... 421.6 (405.0) (38.7)
Increase in Minority Interest............................... 300.0 -- --
(Decrease) Increase in Other Short-Term Borrowings.......... (1,090.6) 1,116.2 --
Payment of Redeemable Partnership Interests................. -- (575.0) --
Net Cash Used in Financing Activities of Discontinued
Operations................................................ -- -- (23.1)
Other....................................................... 9.2 (1.1) (0.4)
--------- ------- -------
Net Cash Used In Financing Activities....................... (529.7) (137.6) (538.4)
--------- ------- -------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents............................................... (0.8) (2.1) 4.0
--------- ------- -------
(Decrease) Increase in Cash and Cash Equivalents............ (46.0) 17.8 22.5
Cash and Cash Equivalents, Beginning of Year................ 127.8 145.6 123.1
--------- ------- -------
Cash and Cash Equivalents, End of Year...................... $ 81.8 $ 127.8 $ 145.6
========= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-12
<PAGE> 120
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
THREE YEARS ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------------------------
MINIMUM
COMMON CUMULATIVE PENSION TOTAL
STOCK CAPITAL RETAINED TREASURY TRANSLATION LIABILITY SHAREHOLDERS'
($1 PAR VALUE) SURPLUS EARNINGS STOCK ADJUSTMENT ADJUSTMENT EQUITY
-------------- ------- --------- --------- ----------- ---------- -------------
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995............ $188.4 $67.2 $2,323.7 $(1,077.2) $(183.5) $ -- $ 1,318.6
------ ----- -------- --------- ------- ------ ---------
Net Income.......................... 320.8 320.8
Cash Dividends ($2.63 per share).... (446.1) (446.1)
Treasury Shares Reissued Under Stock
Options and Deferred Compensation
Plans (741,526)................... 2.8 34.2 37.0
Treasury Shares Reissued Under
Restricted Stock Plan (174,100)... 8.0 8.0
Treasury Shares Acquired
(1,297,138)....................... (72.3) (72.3)
Change in Cumulative Translation
Adjustment........................ 6.2 6.2
Unrealized Gains on Investments..... 10.3 10.3
------ ----- -------- --------- ------- ------ ---------
BALANCE, DECEMBER 31, 1995.......... 188.4 70.0 2,208.7 (1,107.3) (177.3) -- 1,182.5
------ ----- -------- --------- ------- ------ ---------
Net Loss............................ (44.4) (44.4)
Cash Dividends ($1.82 per share).... (310.8) (310.8)
Stock Dividend to Shareholders of
Cognizant and ACNielsen, Including
800,000 Treasury Shares........... (1,370.2) 49.5 79.8 (1,240.9)
Treasury Shares Reissued Under Stock
Options and Deferred Compensation
Plans (1,525,935)................. 2.6 59.0 61.6
Treasury Shares Reissued Under
Restricted Stock Plan (16,410).... 4.7 4.7
Treasury Shares Acquired
(923,199)......................... (25.6) (25.6)
Change in Cumulative Translation
Adjustment........................ (55.8) (55.8)
Unrealized Losses on Investments.... (3.0) (3.0)
------ ----- -------- --------- ------- ------ ---------
BALANCE, DECEMBER 31, 1996.......... 188.4 72.6 480.3 (1,019.7) (153.3) -- (431.7)
------ ----- -------- --------- ------- ------ ---------
Net Income.......................... 160.4 160.4
Cash Dividends ($.88 per share)..... (150.6) (150.6)
Adjustment to Stock Dividend to
Shareholders of Cognizant and
ACNielsen......................... (11.3) (11.3)
Treasury Shares Reissued Under Stock
Options and Deferred Compensation
Plans (2,010,091)................. 7.6 (72.4) 115.6 50.8
Treasury Shares Reissued Under
Restricted Stock Plan (20,884).... 0.2 0.2
Treasury Shares Acquired
(2,271,851)....................... (60.1) (60.1)
Change in Cumulative Translation
Adjustment........................ (9.3) (9.3)
Minimum Pension Liability
Adjustment........................ (37.4) (37.4)
Unrealized Losses on Investments.... (1.2) (1.2)
------ ----- -------- --------- ------- ------ ---------
BALANCE, DECEMBER 31, 1997.......... $188.4 $80.2 $ 405.2 $ (964.0) $(162.6) $(37.4) $ (490.2)
====== ===== ======== ========= ======= ====== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-13
<PAGE> 121
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include those of The Dun & Bradstreet
Corporation (the "Company") and its subsidiaries and investments in which the
Company has a controlling interest. Investments in companies over which the
Company has significant influence but not a controlling interest are carried on
an equity basis. The effects of all significant intercompany transactions have
been eliminated.
The financial statements of subsidiaries outside the United States and
Canada reflect a fiscal year ending November 30 to facilitate timely reporting
of the Company's consolidated financial results.
As discussed more thoroughly in Note 2, R.H. Donnelley, Cognizant
Corporation ("Cognizant"), ACNielsen Corporation ("ACNielsen"), Dun & Bradstreet
Software ("DBS") and NCH Promotional Services ("NCH") are presented as
discontinued operations.
Cash Equivalents
Marketable securities that mature within 90 days of purchase date are
considered cash equivalents and are stated at cost, which approximates fair
value.
Marketable Securities
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
marketable securities at December 31, 1997 and 1996, are classified as
"available for sale" and are reported at fair value, with net unrealized gains
and losses reported in shareholders' equity.
The fair value of current and non-current marketable securities was
estimated based on quoted market prices. Realized gains and losses on marketable
securities are determined on the specific identification method.
The Company's marketable securities, $53.0 million and $46.1 million at
December 31, 1997 and 1996, respectively, consisted primarily of debt securities
of the U.S. Government and its agencies.
Property, Plant and Equipment
Buildings, machinery and equipment are depreciated principally using the
straight-line method over a period of three to 40 years. Leasehold improvements
are amortized on a straight-line basis over the shorter of the term of the lease
or the estimated useful life of the improvement.
Computer Software, Goodwill and Intangible Assets
Certain computer software costs are capitalized in accordance with SFAS No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," and are reported at the lower of unamortized cost or net
realizable value. Costs in connection with business process reengineering are
expensed as incurred. Other intangibles result from acquisitions and database
enhancements. Computer software and other intangibles are being amortized, using
principally the straight-line method, over three to five years and five to 15
years, respectively. Goodwill represents the excess purchase price over the fair
value of identifiable net assets of businesses acquired and is amortized on a
straight-line basis over five to 40 years.
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121") in 1995. This statement requires that long-lived assets and
certain identifiable intangibles held and used by an entity be reviewed for
F-14
<PAGE> 122
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In general, this statement
requires recognition of an impairment loss when the sum of undiscounted expected
future cash flows is less than the carrying amount of such assets. The
measurement for such an impairment loss is then based on the fair value of the
asset (see Note 3).
At each balance sheet date, the Company reviews the recoverability of
goodwill, not identified with long-lived assets, based on estimated undiscounted
future cash flows from operating activities compared with the carrying value of
goodwill, and recognizes any impairment on the basis of such comparison. The
recognition and measurement of goodwill impairment is assessed at the business
unit level.
Revenue Recognition
The Company recognizes revenue as services are performed, information is
delivered and products and services are used by its customers. Amounts billed
for service and subscriptions are credited to unearned subscription income and
reflected in operating revenues over the subscription term, which is generally
one year.
Accounting Changes
Effective January 1, 1997, the Company changed its revenue recognition
method for its Credit Information Services business to recognize revenue as
products and services are used by its customers. Previously, the Company
recognized revenue ratably over the contract period. This change is consistent
with the Company's change in focus from a sales contract basis to a product
usage basis in order to drive revenue growth and increase customer satisfaction.
Additionally, the Company changed certain of its revenue recognition
methods in the Marketing Information Services, Receivables Management Services
and Moody's Investors Service ("Moody's") businesses to recognize revenue over
the service period from previously recognizing revenues and costs at the time of
shipment or billing. In the opinion of management, these accounting changes
bring revenue recognition methods more in line with the economics of the
business and provide a better measure of operating results.
In accordance with Accounting Principles Board Opinion ("APB") No. 20,
"Accounting Changes," the cumulative effect of changing the accounting for
certain of the Company's revenue recognition policies resulted in a pre-tax,
non-cash charge of $254.7 million ($150.6 million after tax or $.88 per share
basic, $.87 per share diluted). On a pro-forma basis these changes would have
increased 1996 and decreased 1995 net income by $3.7 million and $7.5 million,
respectively. The impact on basic and diluted earnings per share would have been
an increase in 1996 of $.02 per share and a decrease in 1995 of $.04 per share.
Foreign Currency Translation
For all operations outside the United States where the Company has
designated the local currency as the functional currency, assets and liabilities
are translated using the end-of-year exchange rates, and revenues and expenses
are translated using average exchange rates for the year. For these countries,
currency translation adjustments are accumulated in a separate component of
shareholders' equity, whereas realized transaction gains and losses are
recognized in other expense-net. For operations in countries that are considered
to be highly inflationary, where the U.S. dollar is designated as the functional
currency, monetary assets and liabilities are translated using end-of-year
exchange rates, nonmonetary accounts are translated using historical exchange
rates. Translation and transaction gains of $0.9 million in 1997 and $4.2
million in 1995 and losses of $0.9 million in 1996 are recognized in other
expense-net.
F-15
<PAGE> 123
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Earnings Per Share of Common Stock
The Company adopted SFAS No. 128, "Earnings per Share," ("SFAS No. 128"),
in 1997. As required by the statement, the Company restated all prior-period per
share data presented. SFAS No. 128 requires presentation of both basic and
diluted earnings per share. Basic earnings per share are calculated based on the
weighted average number of shares of common stock outstanding during the
reporting period. Diluted earnings per share are calculated giving effect to all
potentially dilutive common shares, assuming such shares were outstanding during
the reporting period.
Financial Instruments
At times, the Company uses forward foreign exchange contracts and interest
rate swaps to hedge existing assets, liabilities and firm commitments. The
Company does not use any derivatives for trading or speculative purposes.
Gains and losses on forward foreign exchange contracts that qualify as
hedges of existing assets or liabilities are included in the carrying amounts of
those assets or liabilities and are ultimately recognized in income as part of
those carrying amounts. Gains and losses related to qualifying hedges of firm
commitments are also deferred and are recognized in income or as adjustments of
carrying amounts when the hedged transactions occur. For forward foreign
exchange contracts, the risk reduction is assessed on a transaction basis, and
contract amounts and terms are matched to existing intercompany transactions.
The Company uses interest rate swaps to hedge interest rate risk on
commercial paper. Settlement accounting is accorded to the swaps that have
contractual, periodic payment terms considered to be aligned to the expected
future commercial paper issuances. The commercial paper issuances are expected
to continue through the term of the existing interest rate swaps. Periodic swap
payments and receipts under the interest rate swaps are recorded as part of
interest expense. Neither the swap contracts nor the gains or losses on these
contracts, which are designated and effective as hedges, are recognized in the
financial statements.
If a hedging instrument is sold or terminated prior to maturity, gains and
losses will continue to be deferred until the hedged item is recognized in
income. If a hedging instrument ceases to qualify for settlement accounting, any
subsequent gains and losses are recognized currently in income.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates. Estimates are used in the
determination of allowances for doubtful accounts, depreciation and
amortization, computer software, employee benefits plans, taxes and
contingencies, among others.
Reclassifications
As discussed in Note 2, the consolidated financial statements have been
reclassified to identify separately the results of operations, net assets and
cash flows of the Company's discontinued operations. In addition, certain
prior-year amounts have been reclassified to conform to the 1997 presentation.
NOTE 2 REORGANIZATION AND DISCONTINUED OPERATIONS
Pursuant to APB No. 30, "Reporting the Results of Operations -- Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," the
F-16
<PAGE> 124
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
consolidated financial statements of the Company have been reclassified to
reflect as discontinued operations, the companies that comprised the Company's
Directory Information Services business segment as a result of the expected 1998
Distribution and the companies that comprised the Company's Marketing
Information Services, Software Services and Other Business Services business
segments as a result of the 1996 Distribution.
1998 Distribution
On December 17, 1997, the Company announced a plan to separate into two
publicly traded independent companies -- The New Dun & Bradstreet Corporation
("New D&B") and The R.H. Donnelley Corporation. The separation (the "1998
Distribution") of the two companies will be accomplished through a tax-free
dividend of a new entity comprised of the Company's Risk Management Services
segment (Moody's Investors Service ("Moody's") and Dun & Bradstreet, the
operating company ("D&B")). The new entity, New D&B, will change its name to
"The Dun & Bradstreet Corporation" and the continuing entity will change its
name to "The R.H. Donnelley Corporation" and will consist of the Company's
Directory Information Services segment (R.H. Donnelley, the operating company
and the DonTech partnership). Due to the relative significance of the Risk
Management Services segment, the transaction will be accounted for as a reverse
spin-off, and as such the Risk Management Services and Directory Information
Services segments have been classified as continuing and discontinued
operations, respectively. In April 1998, the Company received a favorable ruling
from the Internal Revenue Service with respect to the tax-free treatment of the
1998 Distribution. The transaction is expected to be completed in the summer of
1998.
For purposes of governing certain of the ongoing relationships among the
Company and R.H. Donnelley as a result of the 1998 Distribution, the companies
will enter into various agreements, including a Distribution Agreement, Tax
Allocation Agreement, Employee Benefits Agreement, Intellectual Property
Agreement, Shared Transaction Services Agreement, Data Services Agreement and a
Transition Services Agreement.
For financial reporting purposes the assets and liabilities of the
Directory Information Services segment have been separately classified on the
balance sheet as "Net Assets of Discontinued Operations." A summary of these
assets and liabilities at December 31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Current assets............................. $ 92.7 $157.0
Total assets............................... 362.3 515.7
Current liabilities........................ 64.6 49.7
Total liabilities.......................... 65.8 85.1
Net assets of discontinued operations...... 296.5 430.6
</TABLE>
The net operating results of the Directory Information Services segment
have been reported in the caption "Income from Discontinued Operations," in the
consolidated statements of operations. Summarized operating results for the
Directory Information Services segment for the years ended December 31, were as
follows:
<TABLE>
<CAPTION>
1997* 1996* 1995
------ ------ ------
<S> <C> <C> <C>
Operating revenues............................... $343.4 $377.6 $423.7
Income before provision for income taxes......... 144.2 141.1 186.4
Net income....................................... 92.0 89.5 122.7
</TABLE>
- ---------------
* 1997 net income included a pre-tax gain on the sale of the East Coast
proprietary operations of R.H. Donnelley ("P-East") of $9.4 million and 1996
net income included a pre-tax loss on the sale of the West Coast proprietary
operations of R.H. Donnelley ("P-West") of $28.5 million.
F-17
<PAGE> 125
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
1996 Distribution
On November 1, 1996, the Company reorganized into three publicly traded
independent companies by spinning off through a tax-free distribution two of its
businesses to shareholders (the "1996 Distribution"). The Distribution resulted
in the following three companies: 1) The Dun & Bradstreet Corporation,
consisting of Dun & Bradstreet, the operating company ("D&B"), Moody's and R.H.
Donnelley, 2) ACNielsen; and 3) Cognizant, consisting of IMS International, Inc.
("IMS"), Gartner Group, Nielsen Media Research, Pilot Software, Cognizant
Technology Solutions Corporation, Cognizant Enterprises and Erisco. In
connection with the 1996 Distribution, DBS and NCH were sold. On October 10,
1996, following receipt of a ruling from the Internal Revenue Service that the
transaction would be tax-free to the Company and its U.S. shareholders, the
Company's Board of Directors declared a dividend distribution to shareholders of
record on October 21, 1996, consisting of one share of Cognizant common stock
for each share of the Company's common stock and one share of ACNielsen common
stock for every three shares of the Company's common stock held on such record
date. The 1996 Distribution was effected on November 1, 1996. These transactions
resulted in a non-cash dividend that reduced shareholders' equity by $1,240.9
million. During 1997, adjustments to the dividend of $11.3 million were
recorded, primarily as a result of employee benefits plan revisions.
For purposes of governing certain of the ongoing relationships among the
Company, Cognizant and ACNielsen as a result of the 1996 Distribution, the three
new companies entered into various agreements, including a Distribution
Agreement, Tax Allocation Agreement, Employee Benefits Agreement, Indemnity and
Joint Defense Agreement, Intellectual Property Agreement, Shared Transaction
Services Agreement, Data Services Agreement and a Transition Services Agreement.
These agreements set forth the principles to be applied in allocating certain
related costs and specified portions of contingent liabilities to be share if
certain amounts are exceeded, which by their nature, cannot be predicted at this
time, but could be significant.
The net operating results of the Company's Marketing Information Services,
Software Services and Other Business Services business segments have been
included in the Consolidated Statements of Operations in the caption "Net Income
(Loss) from Discontinued Operations." These segments included the companies that
made up Cognizant and ACNielsen, along with DBS and NCH. Summarized operating
results for those discontinued operations for the years ended December 31, were
as follows:
<TABLE>
<CAPTION>
1996* 1995
-------- --------
<S> <C> <C>
Operating revenues.............................. $2,761.6 $3,256.9
Income before provision for income taxes........ 297.0 113.0
Net income...................................... 141.1 103.3
</TABLE>
- ---------------
* 1996 revenues include the results of Cognizant, ACNielsen and DBS for the 10
months ended October 31, 1996, and the results of NCH for the full year.
The Company completed the sale of DBS on Novemer 1, 1996, for proceeds of
$191.3 million, including a note of $41.2 million, resulting in a pre-tax loss
of $220.6 million ($158.2 million after-tax). Pursuant to the Distribution
Agreement, the cash proceeds from the sale were transferred to Cognizant. During
the third quarter of 1997, cash was received from the buyer to satisfy the note
receivable, which was due in May 1998.
The sale of NCH was completed on December 31, 1996. Pursuant to the
Distribution Agreement, the proceeds of $20.5 million from the sale of NCH,
which included a note of $8.5 million, were transferred to Cognizant. At
December 31, 1996, the Company recorded a receivable of $20.5 million from the
buyer of NCH and a corresponding payable to Cognizant. These transactions were
settled in January 1997. The Company did not incur a gain or loss on the sale.
Also included in 1996 results, within discontinued operations, are tax
costs allocated to discontinued operations of $49.1 million.
F-18
<PAGE> 126
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
NOTE 3 NON-RECURRING ITEMS
The 1996 results for the Company reflect after-tax non-recurring charges of
$262.3 million, incurred as a result of the 1996 Distribution and the sale of
American Credit Indemnity ("ACI"). Of the $262.3 million, $229.4 million was
recorded in pre-tax income and a net tax cost of $32.9 million was recorded in
the provision for income taxes. The $229.4 million represents reorganization
costs of $161.2 million (professional and consulting fees of $75.0 million and
settlement of executive compensation plans and retention bonuses of $86.2
million) and $68.2 million resulting from the losses incurred on the sale of ACI
completed in October 1996.
In the fourth quarter of 1995, the Company recorded within operating costs
a charge of $188.5 million. This charge primarily reflected an impairment loss
in connection with the adoption of the provisions of SFAS No. 121 ($93.7
million), a provision for postemployment benefits ($56.3 million) under the
Company's severance plan, an accrual for contractual obligations that have no
future economic benefits and for penalties to cancel certain contracts ($19.8
million) and other asset revaluations ($18.7 million).
This non-recurring charge evolved from the Company's annual budget and
strategic planning process, which included a review of the Company's underlying
cost structure, products and services, and assets used in the business. Based
upon such analysis, management, having the authority to approve such business
decisions, committed in December 1995 to a plan to discontinue certain product
lines and dispose of certain other assets, resulting in the charge. These
decisions were not reversed or modified as a result of the Company's 1996
Distribution, which was reviewed and approved by the Board of Directors on
January 9, 1996.
Also in 1995, the Company recorded in operating costs a $28.0 million gain
related to the sale of warrants received in connection with the divestiture of
Donnelley Marketing and a $90.0 million gain relating to the sale of Interactive
Data Corporation ("IDC").
NOTE 4 RECONCILIATION OF WEIGHTED AVERAGE SHARES
<TABLE>
<CAPTION>
1997 1996 1995
(SHARE DATA IN THOUSANDS) ------- ------- -------
<S> <C> <C> <C>
Weighted average number of shares-basic..................... 170,765 170,017 169,522
Dilutive effect of shares issuable as of year-end under
stock options, restricted stock and performance unit
plans..................................................... 1,629 -- 2,061
Adjustment of shares applicable to stock options exercised
during the year and performance unit plans................ 158 -- 25
------- ------- -------
Weighted average number of shares-diluted................... 172,552 170,017 171,608
======= ======= =======
</TABLE>
As required by SFAS No. 128, the Company has provided a reconciliation of
basic weighted average shares to diluted weighted average shares within the
table outlined above. The conversion of dilutive shares has no impact on the
Company's operating results. The exercise of potentially dilutive shares has not
been assumed for the year ended December 31, 1996, since the result is
antidilutive. Options to purchase 3.1 million and 3.2 million shares of common
stock were outstanding at December 31, 1997 and 1995, respectively, but were not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market price of the Company's
common stock. The Company's options generally expire 10 years after the initial
grant date.
NOTE 5 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISKS
The Company uses interest rate swap agreements and forward foreign exchange
contracts to reduce exposure to fluctuations in interest and foreign exchange
rates. The Company does not use derivative financial instruments for trading or
speculative purposes. If a hedging instrument ceases to qualify as a hedge, any
F-19
<PAGE> 127
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
subsequent gains and losses are recognized currently in income. Collateral is
generally not required for these types of instruments.
By their nature, all such instruments involve risk, including the credit
risk of non-performance by counterparties. However, at December 31, 1997 and
1996, in management's opinion there was no significant risk of loss in the event
of non-performance of the counterparties to these financial instruments. The
Company controls its exposure to credit risk through monitoring procedures.
Interest Rate Swap Agreements
The Company enters into interest rate swap agreements to manage exposure to
changes in interest rates. Interest rate swaps allow the Company to raise funds
at floating rates and effectively swap them into fixed rates that are lower than
those available to it if fixed-rate borrowings were made directly. These
agreements involve the exchange of floating-rate for fixed-rate payments without
the exchange of the underlying principal amount. Fixed-interest-rate payments
are at rates ranging from 6.67% to 7.02%. Floating-rate payments received are
based on rates tied to prevailing short-term interest rates. If the Company
terminates a swap agreement, the gain or loss is amortized over the shorter of
the remaining original life of the debt or the swap. In the first quarter of
1997, $2.9 million was recorded in connection with the termination of swaps and
corresponding debt. At December 31, 1997, the unrealized fair value of the
interest rate swaps was a loss of $11.1 million, of which $3.2 million has been
recorded in 1997 relating to swaps which do not qualify for settlement
accounting. At December 31, 1996, the unrealized fair value of the interest rate
swaps was a loss of $15.8 million.
The following table indicates the type of swaps in use at December 31, 1997
and 1996, and their weighted average interest rates. Average variable rates are
those in effect at the reporting date and may change significantly over the
lives of the contracts.
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Variable to fixed swaps --
Notional amount.................................. $300.0 $600.0
Average pay (fixed) rate......................... 6.84% 6.94%
Average receive (variable) rate.................. 5.75% 5.57%
</TABLE>
The swap contracts expire from August 31, 2001, through January 15, 2005.
In connection with the 1998 Distribution and repayment of outstanding notes
payable, the Company will cancel the interest rate swap agreements and will
record into income the previously unrecognized fair value loss at the time of
termination.
Foreign Exchange
In order to reduce the risk of foreign currency exchange rate fluctuations,
the Company follows a policy of hedging substantially all cross-border
intercompany transactions denominated in a currency other than the functional
currency applicable to each of its various subsidiaries. The financial
instruments used to hedge these cross-border intercompany transactions are
forward foreign exchange contracts with maturities of six months or less. These
forward contracts are executed with creditworthy institutions and are
denominated primarily in the British Pound, German Mark, Swedish Krona and
Japanese Yen. The gains and losses on these forward contracts are recorded to
income or expense and are essentially offset by the gains and losses on the
underlying foreign currency transactions. The Company does not enter into
forward foreign exchange contracts for speculative or trading purposes.
At December 31, 1997 and 1996, the Company had approximately $117 million
and $114 million, respectively, of forward foreign exchange contracts
outstanding with various expiration dates through March
F-20
<PAGE> 128
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
1998 and March 1997, respectively. At December 31, 1997, unrealized gains on
these contracts were $1.5 million and the unrealized losses were $.4 million. At
December 31, 1996, unrealized gains on these contracts were $3.5 million and the
unrealized losses were $1.3 million.
NOTE 6 PENSION AND POSTRETIREMENT BENEFITS
Pension Plans
The Company has defined benefit pension plans covering substantially all
associates in the United States. The benefits to be paid to associates under
these plans are based on years of credited service and average final
compensation. Pension costs are determined actuarially and funded in accordance
with the Internal Revenue Code. Supplemental and excess plans in the United
States are maintained to provide retirement benefits in excess of levels allowed
by ERISA .
Effective January 1, 1997, the D&B Retirement Plan was amended to provide
retirement income based on a percentage of annual compensation, rather than
final pay. The percentage of compensation allocated annually to a retirement
account ranges from 3% to 12.5%, based on age and service. Amounts allocated
under the plan also receive interest credits based on 30-year Treasury Bonds
with a minimum interest credit rate of 3%. Associates close to or eligible for
retirement as of January 1, 1997, will receive the higher of benefits provided
by the final pay formula or retirement account formula.
In accordance with SFAS No. 87, "Employers' Accounting for Pensions," the
Company has recorded an additional minimum pension liability for each benefits
plan for which the accumulated benefits obligation exceeds plan assets. This
amount has been recorded as a long-term liability with an offsetting intangible
asset. To the extent that these additional liabilities exceeded related
unrecognized prior service cost and net transition obligation, the increase in
liabilities is charged directly to shareholders' equity. At December 31, 1997,
$37.4 million was reported as a separate reduction of shareholders' equity.
The Company has retained the obligation for pension benefits for personnel
who retired prior to November 1, 1996 from the businesses that comprise
discontinued operations from the 1996 Distribution. The Company will also retain
the obligation for pension benefits for personnel who retire from R.H. Donnelley
prior to the effective date of the 1998 Distribution. Pension obligations and
related plan assets for active employees of R.H. Donnelley determined in
accordance with Internal Revenue Code Section 414(l), will be transferred to
R.H. Donnelley at the Distribution. A net asset of $8.6 million is included in
net assets of discontinued operations at December 31, 1997.
The Company's non-U.S. subsidiaries provide retirement benefits for
associates consistent with local practices, primarily using defined benefit or
termination indemnity plans.
The components of net periodic pension costs for the years ended December
31, for both continuing and discontinued operations, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost............................. $18.4 $34.8 $43.1
Interest cost............................ 83.4 87.4 108.5
Actual return on plan assets............. (242.8) (173.2) (248.1)
Net amortization and deferral............ 137.5 67.3 126.8
------ ------ ------
Net periodic pension cost (income)....... $(3.5) $16.3 $30.3
====== ====== ======
</TABLE>
Discontinued operations were allocated pension expense of $1.0 million,
$11.5 million and $12.2 million in 1997, 1996 and 1995, respectively.
F-21
<PAGE> 129
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The status of defined benefit pension plans at December 31, 1997 and 1996
(which includes both the Company and R.H. Donnelley) is as follows:
<TABLE>
<CAPTION>
FUNDED UNFUNDED
------------------- ---------------------------------
U.S.(1) NON-U.S.
----------------- -------------
1997 1996 1997 1996 1997 1996
-------- -------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Fair value of plan assets.................... $1,328.7 $1,146.5 $ -- $ -- $ -- $ --
-------- -------- ------- ------- ----- -----
Actuarial present value of benefit
obligations:
Vested benefits............................ 954.5 811.8 162.0 95.8 6.3 7.1
Non-vested benefits........................ 18.4 35.7 3.4 4.6 -- --
-------- -------- ------- ------- ----- -----
Accumulated benefit obligations............ 972.9 847.5 165.4 100.4 6.3 7.1
Effect of projected future salary
increases............................... 69.3 89.7 18.3 60.5 -- --
-------- -------- ------- ------- ----- -----
Projected benefit obligations.............. 1,042.2 937.2 183.7 160.9 6.3 7.1
-------- -------- ------- ------- ----- -----
Plan assets in excess of (less than)
projected benefit obligations.............. 286.5 209.3 (183.7) (160.9) (6.3) (7.1)
Unrecognized net loss (gain)................. (59.0) 0.5 55.8 30.2 -- --
Unrecognized prior service cost.............. 9.9 6.7 23.9 22.8 -- --
Unrecognized net transition (asset)
obligation................................. (37.2) (44.4) 1.2 1.6 -- --
Adjustment to recognize minimum liability.... -- -- (62.6) (6.4) -- --
-------- -------- ------- ------- ----- -----
Prepaid (accrued) pension cost............... $ 200.2 $ 172.1 $(165.4) $(112.7) $(6.3) $(7.1)
======== ======== ======= ======= ===== =====
</TABLE>
- ---------------
(1) Represents supplemental and excess plans for which grantor trusts (with
assets of $57.4 million and $58.9 million at December 31, 1997 and 1996,
respectively) have been established to pay plan benefits.
The weighted average expected long-term rate of return on pension plan
assets was 9.70% for 1997 and 9.75% for 1996 and 1995. At December 31, 1997 and
1996, the projected benefit obligations were determined using weighted average
discount rates of 7.01% and 7.77%, respectively, and weighted average rates of
increase in future compensation levels of 4.46% and 5.15%, respectively. Plan
assets are invested in diversified portfolios that consist primarily of equity
and debt securities.
Postretirement Benefits
In addition to providing pension benefits, the Company provides various
health-care and life-insurance benefits for retired associates. Substantially
all of the Company's associates in the United States become eligible for these
benefits if they reach normal retirement age while working for the Company.
Certain of the Company's subsidiaries outside the United States have
postretirement benefit plans, although most participants are covered by
government sponsored or administered programs. The cost of Company sponsored
postretirement benefit plans outside the U.S. is not significant.
The Company has retained the obligation for postretirement benefits for
personnel who retired prior to November 1, 1996 from the businesses that
comprise discontinued operations. The Company will retain the obligation for
postretirement benefits for personnel who retire from R.H. Donnelley with
Company benefits prior to the effective date of the 1998 Distribution.
Postretirement benefit obligations for active employees of R.H. Donnelley
will be transferred to R.H. Donnelley at the Distribution. An obligation of
$10.7 million is included in net assets of discontinued operations at December
31, 1997.
F-22
<PAGE> 130
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The components of net periodic postretirement benefit cost other than
pensions for the years ended December 31, for both continuing and discontinued
operations are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Service cost................................ $ 3.5 $ 5.9 $ 5.1
Interest cost............................... 14.6 15.4 16.0
Net amortization and deferral............... (4.5) (4.8) (5.0)
----- ----- -----
Net periodic postretirement benefit cost.... $13.6 $16.5 $16.1
===== ===== =====
</TABLE>
Discontinued operations were allocated net periodic postretirement benefit
cost of $1.7 million, $6.3 million and $6.7 million in 1997, 1996 and 1995,
respectively.
The status of postretirement benefit plans other than pensions at December
31, 1997 and 1996 (which includes both the Company and R.H. Donnelley) is as
follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Actuarial present value of benefit obligation:
Retirees and dependents................................ $(175.6) $(165.9)
Active associates -- eligible.......................... (18.9) (15.7)
Active associates -- not yet eligible.................. (22.0) (15.0)
------- -------
Accumulated postretirement benefit obligation............ (216.5) (196.6)
Unrecognized net (gain) loss............................. 18.0 (0.2)
Unrecognized prior service credit........................ (7.3) (11.9)
------- -------
Accrued postretirement benefit obligation................ $(205.8) $(208.7)
======= =======
</TABLE>
Benefits are paid as incurred from general corporate assets.
The accumulated postretirement benefit obligation at December 31, 1997 and
1996 was determined using discount rates of 7.0% and 7.75%, respectively. The
assumed rate of future increases in per capita cost of covered health-care
benefits is 7.3% in 1998, decreasing gradually to 5.0% for the year 2021 and
remaining constant thereafter. Increasing the assumed health-care cost trend
rate by one percentage point in each year would increase the accumulated
postretirement benefit obligation by $22.3 million and would increase annual
aggregate service and interest costs by $1.9 million.
NOTE 7 EMPLOYEE STOCK PLANS
The Company has granted options to certain associates, under its Key
Employees Stock Option Plans, to purchase shares of its common stock at the
market price on the date of the grant. Under the plans, the options vest ratably
over a four year period and expire ten years from the date of the grant. The
1991 Key Employees Stock Option Plan provides for the granting of up to 17
million shares.
When the 1998 Distribution is completed, employees of D&B will be granted
substitute awards, preserving the economic value, as closely as possible, of the
options that existed immediately prior to the 1998 Distribution and any awards
or options held by them in respect of The R.H. Donnelley Corporation will be
surrendered. For employees of R.H. Donnelley, the number of shares subject to
options and the option exercise price will be adjusted immediately following the
1998 Distribution to preserve, as closely as possible the economic value of the
options that existed immediately prior to the 1998 Distribution. The remaining
holders of unexercised options, including retirees and certain other former
employees of the Company will be offered the choice of converting their options
to the Company's or continuing to hold The R.H. Donnelley Corporation options.
F-23
<PAGE> 131
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
In November 1996, in conjunction with the 1996 Distribution, those
individuals who became employees of Cognizant or ACNielsen were granted
substitute awards in the stock of their new employer, and any stock awards or
options held by them in respect of the Company were reflected as surrendered in
the following table. For the remaining holders of unexercised options, including
employees of the Company, retirees and certain other former employees of the
Company, the number of shares subject to options and the option exercise price
was adjusted immediately following the 1996 Distribution to preserve, as closely
as possible, the economic value of the options that existed prior to the 1996
Distribution, pursuant to the plans.
The Company applies APB No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for the stock option plans. The Company
has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). Had compensation cost for the
Company's stock option plan been determined based on the fair value at the grant
date for awards in 1997, 1996 and 1995 (excluding awards granted to employees of
discontinued operations) consistent with the provisions of SFAS No. 123, the
Company's income (loss) from continuing operations and earnings (loss) per share
would have been reduced to the pro-forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -----
<S> <C> <C> <C>
Income (loss) from continuing operations
As reported......................................... $219.0 $(116.7) $94.9
Pro forma........................................... $215.4 $(120.3) $94.9
Basic earnings (loss) per share of common stock from
continuing operations
As reported......................................... $ 1.28 $ (0.69) $0.56
Pro forma........................................... $ 1.26 $ (0.71) $0.56
Diluted earnings (loss) per share of common stock from
continuing operations
As reported......................................... $ 1.27 $ (0.69) $0.55
Pro forma........................................... $ 1.25 $ (0.71) $0.55
</TABLE>
The pro-forma disclosures shown are not representative of the effects on
income (loss) and earnings (loss) per share in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
AFTER 1996
PRIOR TO DISTRIBUTION
1996 AND FOR
1997 DISTRIBUTION CONVERSION
--------- ------------ ------------
<S> <C> <C> <C>
Expected dividend yield.................... 3.3% 4.7% 3.7%
Expected stock volatility.................. 20% 15% 17%
Risk-free interest rate.................... 5.73% 6.08% 5.85%
Expected holding period.................... 4.5 years 5.0 years 4.5 years
</TABLE>
Options outstanding at December 31, 1997 were granted during the years 1988
through 1997 and are exercisable over periods ending not later than 2007. At
December 31, 1997, 1996 and 1995, options for 8,133,155 shares, 8,313,166 shares
and 4,859,596 shares of common stock, respectively, were exercisable and
1,450,195 shares, 4,240,772 shares and 10,306,592 shares, respectively, were
available for future grants under the plans.
F-24
<PAGE> 132
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Changes in stock options for the three years ended December 31, 1997, are
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE EXERCISE
SHARES PRICE($)
---------- ----------------
<S> <C> <C>
Options outstanding, January 1, 1995.................. 8,733,172 53.57
Granted............................................. 1,821,780 63.35
Exercised........................................... (736,145) 46.11
Surrendered or expired.............................. (671,079) 56.63
---------- -----
Options outstanding, December 31, 1995................ 9,147,728 55.90
Granted............................................. 10,704 60.25
Exercised........................................... (977,042) 51.09
Surrendered or expired.............................. (689,297) 59.10
---------- -----
Options outstanding at October 31, 1996............... 7,492,093 56.23
Attributable to 1996 Distribution................... (2,958,686) 57.08
---------- -----
Options outstanding at October 31, 1996............... 4,533,407 55.68
---------- -----
Options converted at November 1, 1996................. 11,958,980 21.10
Granted............................................. 4,452,250 22.96
Exercised........................................... (543,354) 21.02
Surrendered or expired.............................. (451,416) 22.87
---------- -----
Options outstanding at December 31, 1996.............. 15,416,460 21.59
Granted............................................. 3,151,980 30.01
Exercised........................................... (2,008,234) 20.38
Surrendered or expired.............................. (840,878) 22.97
---------- -----
OPTIONS OUTSTANDING AT DECEMBER 31, 1997.............. 15,719,328 23.36
========== =====
</TABLE>
The options outstanding at December 31, 1997, include 1,410,088 of options
held by employees of R.H. Donnelley.
The weighted average fair value of options granted during 1997, 1996 and
1995 was $5.52, $3.61, and $7.61, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
STOCK OPTIONS STOCK OPTIONS
OUTSTANDING EXERCISABLE
---------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- --------------- ---------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$15.73 - $22.55 5,705,704 4.2 Years... $19.74 5,270,726 $19.68
$22.75 - $30.22 10,013,624 8.9 Years... $25.42 2,862,429 $23.50
---------- ---------
15,719,328 8,133,155
========== =========
</TABLE>
The plans also provide for the granting of stock appreciation rights and
limited stock appreciation rights in tandem with stock options to certain key
employees. At December 31, 1997, there were 34,048 stock appreciation rights
attached to stock options and 1,154,495 limited stock appreciation rights
("LSARs") attached to stock options, which are exercisable only if, and to the
extent that, the related option is exercisable and, in the case of LSARs, only
upon the occurrence of specified contingent events.
F-25
<PAGE> 133
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Under the 1989 Key Employees Restricted Stock Plan, key associates may be
granted restricted shares of the Company's stock. The plan provides for the
granting of up to 1,800,000 shares of the Company's common stock prior to
December 31, 1998. During 1997, 1996 and 1995, restricted shares of 20,000,
19,779 and 184,465, respectively, were awarded under the plan. Forfeitures in
1996 and 1995 totaled 6,877 and 10,365, respectively. There were no forfeitures
during 1997. The restrictions on the majority of such shares lapse over a period
of three years from the date of the grant and the cost is charged to
compensation expense ratably.
Under the 1997 Key Employees Performance Unit Plan, key associates may be
granted shares of the Company's stock based on the achievement of two year
revenue growth goals or other key operating objectives, where appropriate. At
the end of the performance period, Company performance at target will yield the
targeted amount of shares, while Company performance above or below target will
yield larger or smaller share awards, respectively. During 1997, 471,644 shares
were granted at a weighted average fair value of $30.94 per share. Recorded in
selling and administrative expenses in 1997 was compensation expense of $14.6
million for the plan.
NOTE 8 INCOME TAXES
Income before provision for income taxes consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
U.S.............................................. $321.8 $(15.9) $170.1
Non-U.S.......................................... 10.6 1.3 (25.8)
------ ------ ------
$332.4 $(14.6) $144.3
====== ====== ======
</TABLE>
The provision (benefit) for income taxes consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current tax provision:
U.S. Federal................................... $ 31.9 $ 40.6 $ 72.8
State and local................................ 52.9 (22.4) 14.6
Non-U.S. ...................................... 21.6 0.7 28.9
------ ------ ------
Total current tax provision...................... 106.4 18.9 116.3
------ ------ ------
Deferred tax (benefit) provision:
U.S. Federal................................... 36.5 52.7 (30.5)
State and local................................ (23.1) 15.0 (24.5)
Non-U.S. ...................................... (6.4) 15.5 (11.9)
------ ------ ------
Total deferred tax (benefit) provision:.......... 7.0 83.2 (66.9)
------ ------ ------
Provision for income taxes....................... $113.4 $102.1 $ 49.4
====== ====== ======
</TABLE>
F-26
<PAGE> 134
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and the Company's effective tax rate for financial
statement purposes.
<TABLE>
<CAPTION>
1997 1996 1995
----- ------- -----
<S> <C> <C> <C>
Statutory tax rate................................ 35.0% 35.0% 35.0%
State and local taxes, net of U.S. Federal tax
benefit......................................... 4.9 33.1 (4.5)
Non-U.S. taxes.................................... 4.6 (110.9) 8.9
Recognition of capital and ordinary losses........ (10.4) 181.4 (21.5)
Non-recurring reorganization costs................ -- (814.6) --
Repatriation of foreign earnings.................. -- (11.5) 16.3
Other............................................. -- (10.9) --
----- ------- -----
Effective tax rate................................ 34.1% (698.4%) 34.2%
----- ------- -----
</TABLE>
Income taxes paid were approximately $170.3 million, $170.2 million, $119.9
million in 1997, 1996, and 1995, respectively. Income taxes refunded were
approximately $37.6 million, $140.9 million, and $17.8 million in 1997, 1996 and
1995, respectively.
Deferred tax assets (liabilities) are consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Operating losses..................................... $ 53.7 $ 33.6 $ 117.6
Postretirement benefits.............................. 49.0 79.5 49.1
Postemployment benefits.............................. 12.8 22.5 34.5
Reorganization and restructuring costs............... 4.4 11.3 34.7
Bad debts............................................ 12.7 5.7 5.1
Other................................................ 12.3 13.4 18.2
------ ------- -------
Total deferred tax assets.............................. 144.9 166.0 259.2
Valuation allowance.................................... (53.7) (33.6) (16.4)
------ ------- -------
Net deferred tax asset................................. 91.2 132.4 242.8
------ ------- -------
Deferred tax liabilities:
Intangibles.......................................... (31.7) (47.4) (40.2)
Revenue recognition.................................. -- (12.3) (10.6)
Tax-leasing transactions............................. (22.1) (37.8) (68.9)
Depreciation......................................... (13.5) (4.0) (9.0)
------ ------- -------
Total deferred tax liability........................... (67.3) (101.5) (128.7)
------ ------- -------
Net deferred tax asset................................. $ 23.9 $ 30.9 $ 114.1
====== ======= =======
</TABLE>
At December 31, 1997, undistributed earnings of non-U.S. subsidiaries
aggregated approximately $98.1 million. Deferred tax liabilities have not been
recognized for these undistributed earnings because its management's intention
to reinvest such undistributed earnings outside the U.S. If all undistributed
earnings were remitted to the U.S., the amount of incremental U.S. Federal and
foreign income taxes payable, net of foreign tax credits, would be approximately
$39.3 million. During 1996, $467.9 million of non-U.S. earnings, primarily from
the Cognizant and ACNielsen businesses, were repatriated by the Company in order
to facilitate its 1996 reorganization. During the three year period ended
December 31, 1983, the Company invested $304.4 million in tax-leasing
transactions, varying in length from 4.5 to 25 years. These leases
F-27
<PAGE> 135
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
provided the Company with benefits from tax deductions in excess of taxable
income for Federal income tax purposes. These amounts are included in deferred
income taxes.
NOTE 9 NOTES PAYABLE
Notes payable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------ --------
<S> <C> <C>
Commercial paper................................. $421.6 $ --
Bank notes....................................... 29.9 1,120.7
------ --------
$451.5 $1,120.7
====== ========
</TABLE>
The Company had commercial paper borrowings of $421.6 million at December
31, 1997. Interest rates on these borrowings ranged from 5.62% to 6.10%.
The Company has two committed bank facilities that support the Company's
commercial paper borrowings. One of the facilities permits borrowings of up to
$750 million and matures in August 2001. The second facility permits borrowings
of up to $150 million and matures in August 1998. Under these facilities the
Company has the ability to borrow at prevailing short-term interest rates. At
December 31, 1997, there was no outstanding balance against these facilities. At
December 31, 1996, $880.0 million was borrowed against these facilities. The
Company also had non-committed lines of credit of $111 million at December 31,
1997. At year-end 1997, $29.9 million was borrowed against these non-committed
facilities. At December 31, 1996, $240.7 million was borrowed against
non-committed facilities of $305 million. None of these arrangements had
material commitment fees or compensating balance requirements.
The weighted average interest rates on commercial paper and notes payable
at December 31, 1997 and 1996 were 5.97% and 5.78%, respectively.
Interest paid totaled $49.6 million, $43.2 million and $28.3 million for
the years ended December 31, 1997, 1996 and 1995, respectively.
In connection with the 1998 Distribution, R.H. Donnelley will borrow
approximately $350 million under the R.H. Donnelley Credit Facility and issue
$150 million of senior subordinated notes under the R.H. Donnelley Indenture,
all of which will be guaranteed by D&B. A portion of the proceeds of this
indebtedness will be used to repay existing indebtedness of D&B. This $500
million of debt will be an obligation of R.H. Donnelley after the 1998
Distribution.
NOTE 10 INVESTMENT PARTNERSHIPS
During 1993, the Company participated in the formation of a limited
partnership to invest in various securities, including those of the Company.
Third-party investors held limited-partner and special investors interests
totaling $500.0 million. Funds raised by the partnership provided a source of
financing for the Company's repurchase in 1993 of 8.3 million shares of its
common stock. During the fourth quarter of 1996, the Company redeemed these
partnership interests. This redemption was financed with short-term borrowings.
The partnership is presently engaged in the business of licensing database
assets and computer software. One of the Company's subsidiaries serves as
managing general partner, and two subsidiaries hold limited-partner interests.
In April 1997, the partnership raised $300.0 million of minority interest
financing from a third-party investor. The Company's subsidiaries contributed
assets to the partnership, and the third-party investor contributed cash ($300.0
million) in exchange for a limited-partner interest. Funds raised by the
F-28
<PAGE> 136
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
partnership were loaned to the Company and used to repay existing short-term
debt in April 1997. At December 31, 1997, the third-party investment in this
partnership was included in minority interest.
For financial reporting purposes, the results of operations, assets,
liabilities and cash flows of the partnership described above are included in
the Company's consolidated financial statements.
NOTE 11 CAPITAL STOCK
In October 1988, the Company adopted a Shareholders' Rights Plan. The plan
is intended to protect the shareholders' interests in the event of an
unsolicited attempt to acquire the Company. The plan is not intended to prevent
a takeover of the Company on terms that are favorable and fair to all
shareholders and will not interfere with a merger approved by the Board of
Directors.
Under the plan, each share of the Company's common stock has a right that
trades with the stock until the right becomes exercisable. Each right entitles
the shareholders to buy 1/100 of a share of Series A participating preferred
stock at a purchase price of $230, subject to adjustment. The rights will not be
exercisable until a person or group ("Acquiring Person") acquires beneficial
ownership of, or commences a tender offer for, 20% or more of the Company's
outstanding common stock.
In the event the Company is acquired in a merger or other business
combination or subject to other transactions, as described in the Shareholders'
Rights Plan, each right will entitle its holder (other than the Acquiring
Person) to receive, upon exercise, stock with a value of two times the exercise
price in the form of the Company's common stock or, where appropriate, the
Acquiring Person's common stock. The Company may redeem the rights, which expire
in October 1998, for $.01 per right, under certain circumstances.
The shareholders have authorized the issuance of 10.0 million shares of $1
par value preferred stock. The preferred stock can be issued with varying terms,
as determined by the Board of Directors.
NOTE 12 LEASE COMMITMENTS
Certain of the Company's operations are conducted from leased facilities,
which are under operating leases that expire over the next 10 years. The Company
also leases certain computer and other equipment under operating leases that
expire over the next five years. These leases are frequently renegotiated or
otherwise changed as advancements in computer technology produce opportunities
to lower costs and improve performance. Additionally, the Company has agreements
with various third parties to purchase certain data processing and
telecommunications services extending beyond one year. Rental expenses under
operating leases were $80.9 million, $106.3 million and $110.7 million for the
years ended December 31, 1997, 1996 and 1995, respectively. Future minimum lease
payments under noncancelable leases at December 31, 1997, are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 77.1
1999........................................................ 63.5
2000........................................................ 40.1
2001........................................................ 28.6
2002........................................................ 22.6
Thereafter.................................................. 23.0
------
Total............................................. $254.9
======
</TABLE>
F-29
<PAGE> 137
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
NOTE 13 LITIGATION
The Company and its subsidiaries are involved in legal proceedings, claims
and litigation arising in the ordinary course of business. In the opinion of
management, the outcome of such current legal proceedings, claims and litigation
could have a material effect on quarterly or annual operating results or cash
flows when resolved in a future period. However, in the opinion of management,
these matters will not materially affect the Company's consolidated financial
position.
INFORMATION RESOURCES
On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in
the United States District Court for the Southern District of New York, naming
as defendants the Company, A.C. Nielsen Company (a subsidiary of ACNielsen) and
IMS International, Inc.
The complaint alleges various violations of United States antitrust laws,
including alleged violations of Section 1 and 2 of the Sherman Act. The
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 alleges SRG violated an alleged agreement with IRI when it agreed
to be acquired by the defendants and that the defendants induced SRG to breach
that agreement.
On October 15, 1996, defendants moved for an order dismissing all claims in
the complaint. On May 6, 1997, the United States District Court for the Southern
District of New York issued a decision dismissing IRI's claim of attempted
monopolization in the United States, with leave to replead within 60 days. The
Court denied defendants' motion with respect to the remaining claims in the
complaint. On June 3, 1997, defendants filed an answer denying the material
allegations in IRI's complaint, and A.C. Nielsen Company filed a counterclaim
alleging that IRI has made false and misleading statements about its services
and commercial activities. On July 7, 1997, IRI filed an Amended and Restated
Complaint repleading its alleged claim of monopolization in the United States
and realleging its other claims. By notice of motion dated August 18, 1997,
defendants moved for an order dismissing the amended claim. On December 1, 1997,
the Court denied the motion and, on December 16, 1997, defendants filed a
supplemental answer denying the remaining material allegations of the amended
complaint.
IRI's complaint alleges damages in excess of $350 million, which amount IRI
asked to be trebled under antitrust laws. IRI also seeks punitive damages in an
unspecified amount.
In connection with the IRI action, Cognizant, ACNielsen and the Company
entered into an Indemnity and Joint Defense Agreement (the "Indemnity and Joint
Defense Agreement") pursuant to which they have agreed (i) to certain
arrangements allocating potential liabilities ("IRI Liabilities") that may arise
out of or in connection with the IRI Action and (ii) to conduct a joint defense
of such action. In particular, the Indemnity and Joint Defense Agreement
provides that ACNielsen will assume exclusive liability for IRI Liabilities up
to a maximum amount to be calculated at such time such liabilities, if any,
become payable (the "ACN Maximum Amount"), and that the Company and Cognizant
will share liability equally for any amounts in excess of the ACN Maximum
Amount. The ACN Maximum Amount will be determined by an investment banking firm
as the maximum amount that ACNielsen is able to pay after giving effect to (i)
any plan submitted by such investment bank which is designed to maximize the
claims-paying ability of ACNielsen without impairing the investment banking
firm's ability to deliver a viability opinion (but which will not require any
action requiring stockholder approval) and (ii) payment of related fees and
expenses. For these purposes, financial viability means the ability of
ACNielsen, after giving effect to such plan, the payment of related fees and
expenses and the payment of the ACN Maximum Amount, to pay its debts as they
become due and to
F-30
<PAGE> 138
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
finance the current and anticipated operating and capital requirements of its
business, as reconstituted by such plan, for two years from the date any such
plan is expected to be implemented.
In connection with the 1998 Distribution, the Company and R.H. Donnelley
will enter into an agreement whereby the Company will retain all potential
liabilities arising from the IRI Action.
Management is unable to predict at this time the final outcome of the IRI
Action or whether the resolution of this matter could materially affect the
Company's results of operations, cash flows or financial position.
NOTE 14 SUPPLEMENTAL FINANCIAL DATA
Other Current Assets:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------
1997 1996
------ ------
<S> <C> <C>
Deferred taxes............................................. $ 67.1 $ 50.3
Prepaid expenses........................................... 200.0 136.0
Other...................................................... 2.1 3.8
------ ------
$269.2 $190.1
====== ======
</TABLE>
Property, Plant and Equipment -- Net, carried at cost:
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997 1996
-------- --------
<S> <C> <C>
Buildings................................................ $203.1 $197.8
Machinery and equipment.................................. 455.1 447.8
------ ------
658.2 645.6
Less accumulated depreciation............................ 398.6 364.4
------ ------
259.6 281.2
Leasehold improvements, less: accumulated amortization of
$52.6 and $48.0........................................ 28.7 32.1
Land..................................................... 28.9 29.0
------ ------
$317.2 $342.3
====== ======
</TABLE>
F-31
<PAGE> 139
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Computer Software and Goodwill:
<TABLE>
<CAPTION>
COMPUTER
SOFTWARE GOODWILL
-------- --------
<S> <C> <C>
January 1, 1996.......................................... $ 80.1 $282.0
Additions at cost........................................ 82.4 0.8
Amortization............................................. (33.6) (7.6)
Other deductions and reclassifications................... (20.2) (59.0)(1)
------ ------
December 31, 1996........................................ 108.7 216.2
Additions at cost........................................ 68.7 --
Amortization............................................. (50.6) (5.1)
Other deductions and reclassifications................... 1.2 (16.5)(2)
------ ------
December 31, 1997........................................ $128.0 $194.6
====== ======
</TABLE>
- ---------------
(1) Sale of ACI in 1996.
(2) Impact of foreign currency fluctuations.
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
For the year ended December 31, 1997................ $26.5 $9.0 $ 3.9 $39.4
For the year ended December 31, 1996................ $14.5 $7.2 $ 4.8 $26.5
For the year ended December 31, 1995................ $15.4 $7.8 $(8.7) $14.5
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Other Expense -- Net:
Minority interest......................................... $16.9 $33.4 $45.7
Other..................................................... 2.8 5.1 (4.8)
----- ----- -----
$19.7 $38.5 $40.9
===== ===== =====
</TABLE>
NOTE 15 SEGMENT INFORMATION
The Company, operating in 38 countries, provides commercial credit and
business marketing information, receivable management services, debt rating and
financial information for investors. Intersegment sales are immaterial.
F-32
<PAGE> 140
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
Geographic Segments
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING REVENUES:
United States............................................. $1,240.5 $1,186.5 $1,158.9
Europe.................................................... 467.6 481.6 465.5
Other Non-U.S............................................. 102.9 113.6 110.1
-------- -------- --------
Total....................................................... $1,811.0 $1,781.7 $1,734.5
======== ======== ========
OPERATING INCOME (LOSS):
United States(1).......................................... $ 396.4 $ 41.2 $ 220.1
Europe(2)................................................. 8.8 12.9 3.5
Other Non-U.S. (3)........................................ (1.5) 2.5 (11.3)
-------- -------- --------
Total....................................................... 403.7 56.6 212.3
Non-Operating Expense -- Net.............................. (71.3) (71.2) (68.0)
-------- -------- --------
Income from Continuing Operations before Provision for
Income Taxes.............................................. $ 332.4 $ (14.6) $ 144.3
======== ======== ========
ASSETS:
United States............................................. $1,104.2 $ 995.4 $1,151.9
Europe.................................................... 583.6 660.0 774.1
Other Non-U.S............................................. 101.7 123.0 50.3
Discontinued Operations................................... 296.5 430.6 1,652.2
-------- -------- --------
Total....................................................... $2,086.0 $2,209.0 $3,628.5
======== ======== ========
</TABLE>
- ---------------
(1) 1996 Operating Income included a loss on the sale of ACI of $68.2 million
and reorganization costs of $161.2 million. 1995 included a fourth-quarter
non-recurring charge of $167.0 million partially offset by gains on the sale
of IDC of $90.0 million and the sale of warrants received in connection with
the sale of Donnelley Marketing of $28.0 million.
(2) 1995 Operating Income included a fourth-quarter non-recurring charge of $8.4
million.
(3) 1995 Operating Loss included a fourth-quarter non-recurring charge of $13.1
million.
F-33
<PAGE> 141
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
NOTE 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1997(1)(2)(3)
Operating Revenues................................... $ 436.4 $440.9 $447.8 $ 485.9 $1,811.0
------- ------ ------ ------- --------
Operating Income..................................... $ 77.9 $ 89.1 $ 97.8 $ 138.9 $ 403.7
------- ------ ------ ------- --------
Income (Loss):
Continuing Operations, Net of Income Taxes......... $ 36.5 $ 47.7 $ 54.6 $ 80.2 $ 219.0
Discontinued Operations, Net of Income Taxes(4).... (1.6) 6.3 30.6 56.7 92.0
------- ------ ------ ------- --------
Before Cumulative Effect of Accounting Changes....... 34.9 54.0 85.2 136.9 311.0
Cumulative Effect of Accounting Changes, Net of
Income Tax Benefit................................. (150.6) -- -- -- (150.6)
------- ------ ------ ------- --------
Net Income (Loss).................................... $(115.7) $ 54.0 $ 85.2 $ 136.9 $ 160.4
------- ------ ------ ------- --------
Basic Earnings (Loss) Per Share of Common Stock:
Continuing Operations.............................. $ 0.21 $ 0.28 $ 0.32 $ 0.47 $ 1.28
Discontinued Operations............................ (0.01) 0.04 0.18 0.33 0.54
------- ------ ------ ------- --------
Before Cumulative Effect of Accounting Changes..... 0.20 0.32 0.50 0.80 1.82
Cumulative Effect of Accounting Changes, Net of
Income Tax Benefit............................... (0.88) -- -- -- (0.88)
------- ------ ------ ------- --------
Basic Earnings (Loss) Per Share of Common Stock...... $ (0.68) $ 0.32 $ 0.50 $ 0.80 $ 0.94
------- ------ ------ ------- --------
Diluted Earnings (Loss) Per Share of Common Stock(5):
Continuing Operations.............................. $ 0.21 $ 0.28 $ 0.31 $ 0.46 $ 1.27
Discontinued Operations............................ (0.01) 0.03 0.18 0.33 0.53
------- ------ ------ ------- --------
Before Cumulative Effect of Accounting Changes..... 0.20 0.31 0.49 0.79 1.80
Cumulative Effect of Accounting Changes, Net of
Income Tax Benefit............................... (0.87) -- -- -- (0.87)
------- ------ ------ ------- --------
Diluted Earnings (Loss) Per Share of Common Stock.... $ (0.67) $ 0.31 $ 0.49 $ 0.79 $ 0.93
======= ====== ====== ======= ========
1996(2)(3)
Operating Revenues................................... $ 429.0 $438.2 $442.0 $ 472.5 $1,781.7
------- ------ ------ ------- --------
Operating Income (Loss)(6)........................... $ 53.0 $ (3.4) $ 54.8 $ (47.8) $ 56.6
------- ------ ------ ------- --------
Income (Loss):
Continuing Operations, Net of Income Taxes......... $ 28.6 $(25.1) $(12.6) $(107.6) $ (116.7)
Discontinued Operations, Net of Income Taxes(7).... 35.6 (18.5) 63.5 (8.3) 72.3
------- ------ ------ ------- --------
Net Income (Loss).................................... $ 64.2 $(43.6) $ 50.9 $(115.9) $ (44.4)
======= ====== ====== ======= ========
Basic Earnings (Loss) Per Share of Common Stock(5):
Continuing Operations.............................. $ 0.17 $(0.15) $(0.07) $ (0.63) $ (0.69)
Discontinued Operations............................ 0.21 (0.11) 0.37 (0.05) 0.43
------- ------ ------ ------- --------
Basic Earnings (Loss) Per Share of Common Stock...... $ 0.38 $(0.26) $ 0.30 $ (0.68) $ (0.26)
======= ====== ====== ======= ========
Diluted Earnings (Loss) Per Share of Common Stock(5):
Continuing Operations.............................. $ 0.17 $(0.15) $(0.07) $ (0.63) $ (0.69)
Discontinued Operations............................ 0.21 (0.11) 0.37 (0.05) 0.43
------- ------ ------ ------- --------
Diluted Earnings (Loss) Per Share of Common Stock.... $ 0.38 $(0.26) $ 0.30 $ (0.68) $ (0.26)
======= ====== ====== ======= ========
</TABLE>
- ---------------
(1) In 1997, the Company changed its revenue recognition methods as discussed in
Note 1. This resulted in a one-time non-cash cumulative effect charge of
$150.6 million, after tax, effective January 1, 1997. As a result of this
accounting change, results for the first three quarters of 1997 have been
restated as follows: Revenue decreased by $3.6 million, increased by $6.8
million and decreased by $2.7 million; Operating Income decreased by $4.7
million, increased by $5.8 million and decreased by $3.8 million; Net Income
(Loss) decreased by $153.6 million, increased by $3.8 million and decreased
by $2.5 million, respectively.
F-34
<PAGE> 142
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
(2) In connection with the Company's adoption of SFAS No. 128, all prior-period
earnings per share data were restated to reflect basic and diluted earnings
per share.
(3) Results have also been reclassified to reflect R.H. Donnelley as
discontinued operations.
(4) Income from Discontinued Operations included a $9.4 million pre-tax gain on
the sale of P-East in the quarter ended December 31, 1997.
(5) The number of weighted average shares outstanding changes as common shares
are issued for employee plans and other purposes or as shares are
repurchased. For this reason, the sum of quarterly earnings per common share
may not be the same as earnings per common share for the year.
(6) Operating Income (Loss) included reorganization costs of $1.4 million, $7.6
million, $18.9 million and $133.3 million incurred in the quarters ended
March 31, June 30, September 30 and December 31, 1996, respectively, and
loss on the sale of ACI of $63.8 million and $4.4 million for quarters ended
June 30 and September 30, 1996, respectively.
(7) Income (Loss) from Discontinued Operations included a pre-tax loss on the
sale of P-West of $25.0 million and $3.5 million in the quarters ended June
30 and September 30, 1996, respectively.
F-35
<PAGE> 143
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of The New Dun & Bradstreet Corporation:
We have audited the accompanying balance sheet of The New Dun & Bradstreet
Corporation, a wholly owned subsidiary of The Dun & Bradstreet Corporation, as
of April 14, 1998. This financial statement is the responsibility of the
management of The New Dun & Bradstreet Corporation. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosure in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of The New Dun & Bradstreet
Corporation as of April 14, 1998, in conformity with generally accepted
accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
--------------------------------------
COOPERS & LYBRAND L.L.P.
New York, New York
April 15, 1998
F-36
<PAGE> 144
THE NEW DUN & BRADSTREET CORPORATION
BALANCE SHEET
APRIL 14, 1998
ASSETS
<TABLE>
<S> <C>
Cash........................................................ $10.00
======
</TABLE>
LIABILITIES AND SHAREHOLDER'S EQUITY
<TABLE>
<S> <C>
Common Stock, par value $0.01 per share; authorized -- 1,000
shares; issued and
outstanding -- 1,000 shares............................... $10.00
======
</TABLE>
F-37
<PAGE> 145
THE NEW DUN & BRADSTREET CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
On April 8, 1998, The New Dun & Bradstreet Corporation (the "Company") was
incorporated under the General Corporation Law of the State of Delaware. The
Company has the authority under its Certificate of Incorporation to issue 1,000
shares of common stock, par value $0.01 per share, one thousand shares of which
were issued to The Dun & Bradstreet Corporation ("D&B") on April 14, 1998. The
Company has no assets other than cash and has not commenced operations. The
Company's activities to date have been solely related to its incorporation.
NOTE 2. PROPOSED REORGANIZATIONS
On December 17, 1997, the Board of Directors of D&B announced a plan to
distribute the Common Stock of the Company to all holders of outstanding shares
of Common Stock of D&B (the "Distribution"). Through a series of transactions to
be effected prior to the Distribution, the businesses of Dun & Bradstreet Inc.
and Moody's Investors Service will become part of the Company. After the
Distribution, the Company will operate as an independent company providing
commercial credit and business marketing information, receivable management
services, debt rating and financial information for investors, in approximately
38 countries. In connection with the Distribution, application has been made to
list the Common Stock on the New York Stock Exchange.
NOTE 3. AMENDED CERTIFICATE OF INCORPORATION
Prior to the date of the Distribution, the Company will file a Restated
Certificate of Incorporation which will authorize the issuance of 420,000,000
shares of all classes of stock of which 10,000,000 shares will represent shares
of preferred stock, par value $.01 per share, 400,000,000 shares will represent
shares of Common Stock, par value $.01 per share, and 10,000,000 shares will
represent shares of Series Common Stock, par value $.01 per share.
F-38
<PAGE> 146
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------------
1998 1997
---- ----
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Revenues.................................................... $ 24,344 $ 20,200
Expenses:
Operating Expenses........................................ 7,093 5,553
General and Administrative................................ 17,695 16,963
Depreciation and Amortization............................. 4,952 5,416
-------- --------
Total Expenses.................................... 29,740 27,932
Income from Partnerships and Related Fees................... 25,642 5,442
-------- --------
Operating Income.................................. 20,246 (2,290)
Provision for (Benefit from) Income Taxes................... 8,098 (916)
-------- --------
Net Income (Loss)................................. $ 12,148 $ (1,374)
======== ========
Pro Forma Earnings Per Share
Basic..................................................... $ 0.07 $ (0.01)
======== ========
Diluted................................................... $ 0.07 $ (0.01)
======== ========
Shares Used in Computing Pro Forma Earnings Per Share
Basic..................................................... 171,153 171,189
Diluted................................................... 172,396 171,189
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-39
<PAGE> 147
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents................................. $ 17 $ 32
Accounts Receivable:
Billed................................................. 1,605 5,208
Unbilled............................................... 122,580 129,620
Allowance for Doubtful Accounts........................ (5,657) (4,014)
-------- --------
Total Accounts receivable -- net.................. 118,528 130,814
Deferred Contract Costs................................... 16,645 6,944
Other Current Assets...................................... 1,530 4,950
-------- --------
Total Current Assets.............................. 136,720 142,740
Property and Equipment -- net............................. 23,607 25,460
Prepaid Pension Costs..................................... 9,530 9,530
Computer Software -- net.................................. 36,895 37,546
Partnership Investments................................... 152,422 167,010
-------- --------
Total Assets...................................... $359,174 $382,286
======== ========
Current Liabilities:
Accounts Payable.......................................... $ 967 $ 1,395
Accrued and Other Current Liabilities..................... 49,560 58,070
-------- --------
Total Current Liabilities......................... 50,527 59,465
Postretirement and Postemployment Benefits................ 12,920 12,920
Deferred Income Taxes..................................... 34,456 34,456
Other Liabilities......................................... 15,384 16,770
-------- --------
Total Liabilities................................. 113,287 123,611
Commitments and Contingencies
Shareholder's Equity:
Common Stock, No Par Value, 100 Shares Authorized; 100
Shares Issued and Outstanding.......................... 12,002 12,002
Capital Surplus........................................... 101,032 101,032
Retained Earnings......................................... 132,853 145,641
-------- --------
Total Shareholders' Equity........................ 245,887 258,675
-------- --------
Total Liabilities and Shareholders' Equity........ $359,174 $382,286
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-40
<PAGE> 148
THE RUEBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income................................................ $ 12,148 $ (1,374)
Reconciliation of Net Income to Net Cash Provided by
Operating Activities
Depreciation and Amortization.......................... 4,952 5,416
Provision for Doubtful Accounts........................ 1,262 1,104
Cash Received in Excess of Income from Partnerships.... 14,588 33,347
Loss on Sale of Property and Equipment................. 37 483
Net Decrease in Accounts Receivable.................... 11,023 50,516
Change in Other Current Assets......................... 3,420 4,731
Change in Deferred Contract Costs...................... (9,701) (28,434)
Change in Accounts Payable, Accrued and Other Current
Liabilities........................................... (8,938) (10,535)
Change in Postretirement and Postemployment
Liabilities........................................... -- 2,900
Change in Other Liabilities............................ (1,386) (450)
-------- --------
Net Cash Provided by Operating Activities......... 27,405 57,704
-------- --------
Cash Flows from Investing Activities
Additions to Property and Equipment....................... (651) (6,704)
Additions to Computer Software............................ (1,834) (1,986)
-------- --------
Net Cash Used by Investing Activities............. (2,485) (8,690)
-------- --------
Cash Flows from Financing Activities
Net Distributions to Parent............................... (24,935) (49,010)
-------- --------
Net Cash Used by Financing Activities............. (24,935) (49,010)
-------- --------
Increase (Decrease) in Cash and Cash Equivalents.......... (15) 4
Cash and Cash Equivalents, Beginning of Quarter............. 32 60
-------- --------
Cash and Cash Equivalents, End of Quarter................... $ 17 $ 64
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-41
<PAGE> 149
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BACKGROUND AND BASIS OF PRESENTATION
On December 17, 1997, the Board of Directors of The Dun & Bradstreet
Corporation ("D&B") approved in principle a plan to separate into two
publicly-traded companies -- The Reuben H. Donnelley Corporation ("R.H.
Donnelley") and The New Dun & Bradstreet Corporation ("New D&B").
The financial statements reflect the financial position, results of
operations, and cash flows of R.H. Donnelley as if R.H. Donnelley were a
separate entity. The financial statements of R.H. Donnelley include allocations
of certain D&B corporate headquarters assets, liabilities and expenses relating
to R.H. Donnelley's businesses that will be transferred to R.H. Donnelley from
D&B. Management believes these allocations are reasonable. However, the costs of
these services and benefits charged to R.H. Donnelley are not necessarily
indicative of the costs that would have been incurred if R.H. Donnelley had
performed or provided these functions as a separate entity.
These interim financial statements have been prepared in accordance with
the instructions to Form 10-Q and should be read in conjunction with the
financial statements and related notes of R.H. Donnelley for the year ended
December 31, 1997 included in this Information Statement. 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.
2. RECONCILIATION OF SHARES USED IN COMPUTING PRO FORMA EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Weighted average number of shares -- basic.................. 171,153 171,189
Effect of potentially dilutive stock options................ 1,243 --
Weighted average number of shares -- diluted................ 172,396 171,189
</TABLE>
As required by SFAS No. 128, R.H. Donnelley has provided a reconciliation
of basic weighted average shares to diluted weighted average shares within the
table outlined above. The conversion of diluted shares has no impact on
operating results. For 1997, the effect of potentially diluted stock options
would be antidilutive and have not been included in the calculation. R.H.
Donnelley's options generally expire 10 years after the initial grant date.
3. COMPREHENSIVE INCOME
Effective January 1, 1998, R.H. Donnelley adopted SFAS No. 130, "Reporting
Comprehensive Income". This statement requires that all items recognized under
accounting standards as components of comprehensive earnings be reported in a
financial statement for the period in which they are recognized and displayed
with the same prominence as other financial statements. There were no additional
components of comprehensive income and, as a result, R.H. Donnelley's total
comprehensive income for the three month period ended March 31, 1998 and 1997
were equal to net income for those periods.
4. COMMITMENT
In connection with the Distribution, R.H. Donnelley will borrow $350
million under a New Credit Facility (the "New Credit Facility") and will issue
$150 million of senior subordinated notes. The net proceeds of the offering of
the notes, along with R.H. Donnelley's anticipated borrowings under the New
Credit Facility, will be used (i) to repay indebtedness of D&B, primarily
commercial paper, (ii) to pay costs
F-42
<PAGE> 150
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
and expenses related to the Distribution and (iii) to repay indebtedness of D&B
to subsidiaries which, following the Distribution, will be subsidiaries of New
D&B.
5. LITIGATION
On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in
the United States District Court for the Southern District of New York, naming
as defendants D&B, A.C. Nielson Company and IMS International Inc. (the "IRI
Action"). New D&B will assume and indemnify R.H. Donnelley against any payments
to be made by R.H. Donnelley in respect to the IRI Action under the 1996
Distribution Agreement, under the Indemnity and Joint Defense Agreement or
otherwise, including any ongoing legal fees and expenses related thereto.
In the normal course of business, R.H. Donnelley is subject to proceedings,
lawsuits and other claims. In the opinion of R.H. Donnelley's management, the
outcome of such current legal proceedings, claims and litigation will not
materially affect R.H. Donnelley's financial position or results of operations.
6. DONTECH PARTNERSHIPS
In 1991, R.H. Donnelley formed a general partnership with Ameritech
Corporation ("Ameritech"), the DonTech Partnership ("DonTech I"). Prior to
August 1997, DonTech I published various directories, solicited advertising, and
manufactured and delivered directories in Illinois and Northwest Indiana. During
August 1997, R.H. Donnelley signed a series of agreements with Ameritech
changing the structure of the existing partnership. A new partnership was formed
("DonTech II" and, together with DonTech I, "DonTech" or the "DonTech
Partnerships") appointing DonTech the exclusive agent in perpetuity for yellow
page directories published by Ameritech in Illinois and Northwest Indiana.
The following are summarized combined financial information (unaudited) of
the DonTech Partnerships:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Gross Revenues........................................... $91,542 $10,900
Operating Income......................................... $58,556 $ 300
Net Income Before Taxes.................................. $58,556 $ 300
</TABLE>
F-43
<PAGE> 151
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of The Reuben H. Donnelley Corporation:
We have audited the accompanying balance sheets of The Reuben H. Donnelley
Corporation (a wholly owned subsidiary of the The Dun & Bradstreet Corporation)
at December 31, 1997 and 1996, and the related statements of operations,
shareholder's equity and cash flows for each of the years in the three year
period ended December 31, 1997. These financial statements are the
responsibility of The Reuben H. Donnelley Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Reuben H. Donnelley
Corporation at December 31, 1997 and 1996, and the results of its operations and
cash flows for each of the years in the three year period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
--------------------------------------
COOPERS & LYBRAND L.L.P.
New York, New York
March 31, 1998
F-44
<PAGE> 152
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues................................................... $239,865 $270,029 $312,940
Expenses:
Operating Expenses....................................... 132,278 135,500 157,559
General and Administrative............................... 81,089 83,803 75,754
Depreciation and Amortization............................ 21,930 16,229 16,322
Restructuring Charges.................................... -- -- 17,690
-------- -------- --------
Total Expenses................................... 235,297 235,532 267,325
Income from Partnerships and Related Fees.................. 130,171 132,945 137,180
-------- -------- --------
Operating Income................................. 134,739 167,442 182,795
Gain (Loss) on Dispositions................................ 9,412 (28,500) --
-------- -------- --------
Income Before Provision for Income Taxes......... 144,151 138,942 182,795
Provision for Income Taxes................................. 59,246 60,857 74,398
-------- -------- --------
Net Income....................................... $ 84,905 $ 78,085 $108,397
======== ======== ========
Pro Forma Earnings Per Share:
Basic.................................................... $ 0.50 $ 0.46 $ 0.64
======== ======== ========
Diluted.................................................. $ 0.50 $ 0.46 $ 0.64
======== ======== ========
Shares Used in Computing Pro Forma Earnings Per Share:
Basic.................................................... 170,765 170,017 169,522
Diluted.................................................. 171,065 170,289 169,883
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-45
<PAGE> 153
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents................................. $ 32 $ 60
Accounts Receivable:
Billed................................................. 5,208 21,322
Unbilled............................................... 129,620 143,443
Allowance for Doubtful Accounts........................ (4,014) (11,607)
-------- --------
Total Accounts Receivable -- net.................. 130,814 153,158
Deferred Contract Costs................................... 6,944 17,301
Other Current Assets...................................... 4,950 13,630
-------- --------
Total Current Assets.............................. 142,740 184,149
Property and Equipment -- net............................. 25,460 30,752
Prepaid Pension Costs..................................... 9,530 10,329
Computer Software -- net.................................. 37,546 40,050
Partnership Investments................................... 167,010 233,706
Other Non-Current Assets.................................. -- 3,207
-------- --------
Total Assets...................................... $382,286 $502,193
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts Payable.......................................... $ 1,395 $ 785
Accrued and Other Current Liabilities..................... 58,070 57,764
-------- --------
Total Current Liabilities......................... 59,465 58,549
Postretirement and Postemployment Benefits................ 12,920 10,020
Deferred Income Taxes..................................... 34,456 53,990
Other Liabilities......................................... 16,770 450
-------- --------
Total Liabilities................................. 123,611 123,009
Commitments and Contingencies
SHAREHOLDER'S EQUITY:
Common Stock, No Par Value, 100 Shares Authorized; 100
Shares Issued and Outstanding.......................... 12,002 12,002
Capital Surplus........................................... 101,032 101,032
Retained Earnings......................................... 145,641 266,150
-------- --------
Total Shareholder's Equity........................ 258,675 379,184
-------- --------
Total Liabilities and Shareholder's Equity........ $382,286 $502,193
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-46
<PAGE> 154
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income.............................................. $ 84,905 $ 78,085 $108,397
Reconciliation of Net Income to Net Cash Provided by
Operating Activities:
Depreciation and Amortization........................ 21,930 16,229 16,322
Provision for Doubtful Accounts...................... 11,815 11,743 10,861
(Gain) Loss from Sales of Businesses................. (9,412) 28,500 --
Cash Received in Excess of (Less Than) Income from
Partnerships....................................... 62,540 (18,593) (11,609)
Loss on Sale of Property, Plant and Equipment........ 1,551 724 1,149
Net Increase in Accounts Receivable.................. (37,519) (5,616) (11,000)
Change in Other Current Assets....................... 8,460 6,709 (1,715)
Change in Deferred Contracts Costs................... (6,746) (8,403) 262
Change in Accounts Payable, Accrued and Other Current
Liabilities........................................ (38,993) (26,781) 7,396
Change in Postretirement and Postemployment
Liabilities........................................ 2,900 (5,100) 4,120
Change in Other Liabilities.......................... 16,320 -- 450
Change in Deferred Income Taxes...................... (19,534) 23,586 11,969
Other................................................ 1,437 (545) --
--------- -------- --------
Net Cash Provided by Operating Activities....... 99,654 100,538 136,602
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Sale of Businesses........................ 122,000 21,368 --
Additions to Property and Equipment..................... (9,078) (15,965) (19,289)
Additions to Computer Software.......................... (7,190) (21,859) (23,723)
--------- -------- --------
Net Cash (Used In) Provided by Investing
Activities.................................... 105,732 (16,456) (43,012)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Distributions to D&B................................ (205,414) (85,466) (92,146)
--------- -------- --------
Net Cash Used In Financing Activities........... (205,414) (85,466) (92,146)
--------- -------- --------
Increase (Decrease) in Cash and Cash
Equivalents................................... (28) (1,384) 1,444
Cash and Cash Equivalents, Beginning of Year.............. 60 1,444 --
--------- -------- --------
Cash and Cash Equivalents, End of Year.................... $ 32 $ 60 $ 1,444
========= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-47
<PAGE> 155
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
COMMON TOTAL
STOCK CAPITAL RETAINED SHAREHOLDER'S
(NO PAR VALUE) SURPLUS EARNINGS EQUITY
--------------- -------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995................. $12,002 $101,032 $ 257,280 $ 370,314
Net Income............................... 108,397 108,397
Net Distributions to D&B................. (92,146) (92,146)
------- -------- --------- ---------
BALANCE, DECEMBER 31, 1995............... 12,002 101,032 273,531 386,565
------- -------- --------- ---------
Net Income............................... 78,085 78,085
Net Distributions to D&B................. (85,466) (85,466)
------- -------- --------- ---------
BALANCE, DECEMBER 31, 1996............... 12,002 101,032 266,150 379,184
------- -------- --------- ---------
Net Income............................... 84,905 84,905
Net Distributions to D&B................. (205,414) (205,414)
------- -------- --------- ---------
BALANCE, DECEMBER 31, 1997............... $12,002 $101,032 $ 145,641 $ 258,675
======= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-48
<PAGE> 156
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. BACKGROUND AND BASIS OF PRESENTATION
On December 17, 1997, the Board of Directors of The Dun & Bradstreet
Corporation ("D&B") approved in principle a plan to separate into two
publicly-traded companies -- The Reuben H. Donnelley Corporation ("R.H.
Donnelley") and The New Dun & Bradstreet Corporation ("New D&B"). The
distribution ("Distribution") is the method by which D&B will distribute to its
stockholders shares of New D&B Common Stock, which will represent a continuing
interest in D&B's businesses to be conducted by New D&B. After the Distribution,
D&B's only subsidiary will be R.H. Donnelley. Shares of D&B Common Stock held by
D&B stockholders will represent a continuing ownership interest in R.H.
Donnelley. In connection with the Distribution, D&B will change its name to
"R.H. Donnelley Corporation" and therefore from and after the Distribution, D&B
Common Stock will be R.H. Donnelley Corporation Common Stock and New D&B will
change its name to "The Dun & Bradstreet Corporation." D&B has received a ruling
from the Internal Revenue Service to the effect that the Distribution will be
tax-free for Federal income tax purposes. Due to the relative significance of
D&B to R.H. Donnelley, the transaction will be accounted for as a reverse
spin-off. Historically R.H. Donnelley has operated through a number of long-term
strategic alliances with affiliates of Ameritech, Bell Atlantic, Sprint and with
other smaller local telephone service providers or yellow pages publishers
acting as publisher, partner or sales agent based on its contractual business
relationships. The Ameritech relationship has no expiration date, the Sprint and
Bell Atlantic contracts expire in 2004 and 2005, respectively. R.H. Donnelley's
revenue and cash flow is principally derived from commissions received from the
sale of advertisements placed in yellow pages directories. In addition, R.H.
Donnelley also receives revenue for publishing services such as advertisement
creation and database management on a negotiated fee basis.
R.H. Donnelley was incorporated on August 9, 1961 with 100 shares of Common
Stock authorized, and outstanding with no par value, all of which are owned by
D&B. R.H. Donnelley provides sales, marketing and publishing services for yellow
pages and other directory products and is the largest independent marketer of
yellow pages advertising in the United States. R.H. Donnelley will retain all
the assets and liabilities related to the yellow pages and other directory
product sales, marketing and publishing service businesses after the
Distribution.
The financial statements reflect the financial position, results of
operations, and cash flows of R.H. Donnelley as if it were a separate entity for
all periods presented. The financial statements include allocations of certain
D&B corporate headquarters assets (including prepaid pension assets) and
liabilities (including postretirement benefits), and expenses (including cash
management, legal, accounting, tax, employee benefits, insurance services, data
services and other D&B corporate overhead) relating to R.H. Donnelley's
businesses that will be transferred to R.H. Donnelley from D&B. Management
believes these allocations are reasonable. However, the costs of these services
and benefits charged to R.H. Donnelley are not necessarily indicative of the
costs that would have been incurred if R.H. Donnelley had performed or provided
these functions as a separate entity.
The financial information included herein may not necessarily reflect the
results of operations, financial position, changes in shareholder's equity and
cash flows of R.H. Donnelley in the future or what they would have been had it
been a separate, stand-alone entity during the periods presented.
For purposes of governing certain of the ongoing relationships between R.H.
Donnelley and D&B after the Distribution and to provide for orderly transition,
R.H. Donnelley and D&B will enter into various agreements including a
Distribution Agreement, Tax Allocation Agreement, Employee Benefits Agreement,
Shared Transaction Services Agreements, Intellectual Property Agreement, Data
Services Agreements, and Transition Services Agreement. Summaries of these
agreements are set forth elsewhere in this Information Statement.
F-49
<PAGE> 157
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
Cash equivalents include highly liquid investments with a maturity of less
than three months at the time of acquisition.
Property and Equipment
Machinery and equipment are depreciated over their estimated useful lives
using principally the straight-line method. Estimated useful lives are five
years for machinery and equipment, ten years for furniture and fixtures, and
three to five years for computer equipment. Leasehold improvements are amortized
on a straight-line basis over the shorter of the term of the lease or the
estimated useful life of the improvement.
Capitalized Software Costs
Certain direct costs incurred for computer software to meet the internal
needs of R.H. Donnelley are capitalized. These costs are amortized on a
straight-line basis, over five years.
Long-Lived Assets
R.H. Donnelley adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121") in 1995. This
statement requires that long-lived assets and certain identifiable intangibles
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. In general, this statement requires recognition of an impairment
loss when the sum of undiscounted expected future cash flows is less than the
carrying amount of such assets. The measurement for such an impairment loss is
then based on the fair value of the asset.
Revenue Recognition
R.H. Donnelley recognizes revenue as earned, which is based on contractual
relationships. For relationships where R.H. Donnelley acts as a sales agent,
revenue is comprised of sales commissions and is recognized upon execution of
contracts for the sale of advertising. For relationships where R.H. Donnelley is
the publisher, revenues are recognized when directories are published.
Publishing services are recognized throughout the year as the services are
performed.
Income from Partnerships and Related Fees
R.H. Donnelley has significant influence, but not a controlling interest
over its partnerships and accounts for them under the equity method of
accounting. Income from partnerships represent R.H. Donnelley's share of the
profits generated by the DonTech Partnerships, the Cendon Partnership and the
C-Don Partnership with Commonwealth Telephone Company during 1997, 1996 and
1995, and of the UniDon Partnership with United Telephone Company during 1995.
Other related fees represents R.H. Donnelley's revenue participation earnings in
1997 from APIL Partners Partnership ("APIL"), a subsidiary of Ameritech
Corporation.
Unbilled Receivables
For sales agency relationships, unbilled receivables represent revenues
earned from the sale of advertising in directories that are scheduled to be
published by the publisher. These receivables will be billed upon
F-50
<PAGE> 158
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
directory publication in accordance with contractual provisions. For businesses
where R.H. Donnelley is the publisher, unbilled receivables represent revenues
earned on published directories. Customers are billed ratably over the life of
the directories, generally 12 months.
Income Taxes
R.H. Donnelley has been included in the Federal and certain state income
tax returns of D&B. The provision for income taxes in the financial statements
has been calculated on a separate-company basis; income taxes paid on behalf of
R.H. Donnelley by D&B are included in equity. After the Distribution, R.H.
Donnelley will file separate income tax returns.
Concentration of Credit Risk
R.H. Donnelley maintains significant accounts receivable balances from its
relationships with affiliates of Ameritech, Bell Atlantic and with the CenDon
Partnership.
Deferred Contract Costs
Direct costs incurred by R.H. Donnelley as publisher are deferred until
these directories are published. Direct costs on contracts for which R.H.
Donnelley is a sales agent are expensed in the year in which they are incurred.
Contract Fees
All costs associated with the renegotiation and extension of contracts are
expensed when incurred.
Financial Instruments
At December 31, 1997, R.H. Donnelley's financial instruments included cash,
receivables, and accounts payable. At December 31, 1997, the fair values of
cash, receivables and accounts payable approximated carrying values because of
the short-term nature of these instruments.
Pro Forma Earnings Per Share of Common Stock
In 1997, R.H. Donnelley adopted SFAS No. 128, "Earnings Per Share." Basic
earnings per share are calculated by dividing net income by D&B's historical
weighted average common shares outstanding, reflecting the one-for-one
distribution ratio. Diluted earnings per share are calculated by dividing net
income by the sum of D&B's historical weighted average common shares outstanding
and potentially dilutive R.H. Donnelley common shares. Potentially dilutive
common shares are calculated in accordance with the treasury stock method, which
assumes that proceeds from the exercise of all employee options are used to
repurchase common stock at market value. The amount of shares remaining after
the proceeds are exhausted represent the potentially dilutive effect of the
options.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the disclosure of contingent assets and liabilities. Actual
results could differ from those estimates. Estimates are used in the
determination of allowances for doubtful accounts, depreciation and
amortization, computer software, employee benefit plans, taxes and contingencies
among others.
F-51
<PAGE> 159
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. RECONCILIATION OF SHARES USED IN COMPUTING PRO FORMA EARNINGS PER SHARE
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Weighted average number of shares -- basic.................. 170,765 170,017 169,522
Effect of potentially dilutive stock options as of year
end....................................................... 300 272 361
------- ------- -------
Weighted average number of shares -- diluted................ 171,065 170,289 169,883
======= ======= =======
</TABLE>
As required by SFAS No. 128, R.H. Donnelley has provided a reconciliation
of basic weighted average shares to diluted weighted average shares within the
table outlined above. The conversion of diluted shares has no impact on
operating results. The R.H. Donnelley's options generally expire 10 years after
the initial grant date.
4. NON-RECURRING ITEMS
Sale of Businesses
In 1997, included in the operating results was a pretax gain of $9,412,
related to the sale of its East Coast proprietary operations ("P-East"). In
connection with the sale of the P-East business, R.H. Donnelley has accrued for
the continuing obligation to provide publishing service through the year 2002.
The 1996 results reflect a pre-tax charge of $28,500, incurred as a result
of the sale of the West Coast proprietary operations ("P-West").
Restructuring
In 1995, R.H. Donnelley recorded a restructuring charge of $17,690 in
connection with the closing of the Terre Haute publishing facility. R.H.
Donnelley moved its publishing operations from Terre Haute, Indiana to Raleigh,
North Carolina. The restructuring charge was recorded to cover fixed asset
write-offs, severance, legal costs, publishing costs, and advertising claims. At
December 31, 1997, no restructuring reserve remains.
5. PARTNERSHIPS
DonTech
In 1991, R.H. Donnelley formed a general partnership with Ameritech
Corporation ("Ameritech"), the DonTech Partnership ("DonTech I"). Prior to
August 1997, DonTech I published various directories, solicited advertising, and
manufactured and delivered directories in Illinois and Northwest Indiana. Under
this agreement, R.H. Donnelley's share in DonTech I declined 1% each year
between 1995 and 1997, from 55% to 53%. In August 1997, R.H. Donnelley signed a
series of agreements with Ameritech changing the structure of the existing
partnership. A new partnership was formed ("DonTech II" and, together with
DonTech I, "DonTech" or the "DonTech Partnerships") appointing DonTech the
exclusive sales agent in perpetuity for yellow page directories published by
Ameritech in Illinois and Northwest Indiana. Under the new sales agency
partnership of which R.H. Donnelley receives a 50% share of the profits, DonTech
performs the advertising sales function for the directories and earns a
commission while APIL serves as the directories publisher. R.H. Donnelley
receives an ongoing revenue participation fee from APIL in exchange for
exclusive publishing rights. R.H. Donnelley receives payments directly from APIL
for publishing services pursuant to a contract valid through the year 2003.
R.H. Donnelley recognized equity earnings of $64,618, $121,354, and
$125,578 from the DonTech partnership during 1997, 1996, and 1995, respectively.
In addition, R.H. Donnelley recognized Revenue
F-52
<PAGE> 160
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Participation earnings from APIL of $51,610 during 1997. Together, they
represent 86%, 72% and 69% of R.H. Donnelley's operating income for the three
years ended December 31, 1997, respectively.
R.H. Donnelley's investment in DonTech was $151,979 and $215,373 at
December 31, 1997 and 1996, respectively.
CenDon
R.H. Donnelley has a partnership, the CenDon Partnership ("CenDon") with
the Sprint Corporation ("Sprint") through a subsidiary of Sprint. R.H. Donnelley
has a 50% interest in CenDon which publishes directories in selected Sprint
markets in Nevada, Florida, Virginia and North Carolina. R.H. Donnelley earns a
50% share of CenDon's income. R.H. Donnelley provides sales and publishing
services for the CenDon partnership. The partnership is billed upon the
publication of each directory based on a contractual rate for sales and is
billed pro rata during the year for publishing for services based on a
contractual fee. Sales and publishing services revenue for R.H. Donnelley were
$35,126, $32,258, and $29,800 for 1997, 1996 and 1995, respectively. The CenDon
partnership agreement extends until 2004. RHD recognized equity earnings of
$12,219, $9,695 and $9,451 from the CenDon partnership during 1997, 1996 and
1995, respectively. RHD's investment in CenDon was $15,031 and $15,902 at
December 31, 1997 and 1996, respectively.
6. OTHER TRANSACTIONS WITH AFFILIATES
D&B uses a centralized cash management system to finance its operations.
Cash deposits from the R.H. Donnelley's businesses are transferred to D&B on a
daily basis and D&B funds the R.H. Donnelley's disbursement bank accounts as
required. No interest has been charged on these transactions
D&B provided certain centralized services (see Note 1 to the financial
statements) to R.H. Donnelley. Expenses related to these services were allocated
to R.H. Donnelley based on utilization of specific services or, where an
estimate could not be determined, based on R.H. Donnelley's revenues in
proportion to D&B's total revenues. Management believes these allocation methods
are reasonable. However, the costs of these services and benefits charged to
R.H. Donnelley are not necessarily indicative of the costs that would have been
incurred if R.H. Donnelley had performed or provided these services as a
separate entity. These allocations were $21,531, $18,626 and $24,111 in 1997,
1996, and 1995 respectively, and are included in operating expenses and general
and administrative expenses in the Statement of Operations. Amounts due to D&B
for these expenses are included in equity.
Net distributions to D&B, included in equity, includes net cash transfers
third party liabilities paid on behalf of R.H. Donnelley by D&B, amounts due
to/from D&B for services and other charges. No interest has been charged on
these intercompany transactions.
7. COMMITMENTS AND CONTINGENCIES
Certain of the R.H. Donnelley's operations are conducted from leased
facilities, which are under operating leases. Rent expense under real estate
operating leases for the years 1997, 1996, and 1995 was
F-53
<PAGE> 161
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
$8,612, $9,482 and $10,068, respectively. The approximate minimum rent for real
estate operating leases that have remaining noncancelable lease terms in excess
of one year at December 31, 1997, are:
<TABLE>
<S> <C>
1998....................................................... $8,031
1999....................................................... 6,325
2000....................................................... 5,365
2001....................................................... 4,874
2002....................................................... 5,030
Thereafter................................................. 27,742
-------
Total............................................ $57,367
=======
</TABLE>
R.H. Donnelley also leases certain computer and other equipment under
operating leases. Rent expense under computer and other equipment leases was
$2,245, $1,762 and $1,072 for 1997, 1996, and 1995 respectively. At December 31,
1997 the approximate minimum annual rental obligation for computer and other
equipment under operating leases that have remaining noncancelable lease terms
in excess of one year is not significant.
On July 29, 1996, Information Resources, Inc. ("IRI") filed a complaint in
the United States district court for the Southern district of New York, having
as defendant D&B, A.C. Nielson Company, and IMS International Inc. ("the IRI
Action"). New D&B will assume and indemnify R.H. Donnelley against any payments
to be made by R.H. Donnelley in respect to the IRI Action under the Distribution
Agreement, under the Indemnity and Joint Defense Agreement or otherwise,
including any ongoing legal fees and expenses related thereto.
In the normal course of business, R.H. Donnelley is subject to proceedings,
lawsuits and other claims. In the opinion of R.H. Donnelley management, the
outcome of such current legal proceedings, claims and litigation will not
materially affect R.H. Donnelley's financial position or results of operations.
8. PENSION AND POSTRETIREMENT BENEFITS
Upon the Distribution, R.H. Donnelley will assume responsibility for
pension benefits for active employees of R.H. Donnelley, DonTech active
employees and DonTech vested terminated employees with benefits under the D&B
Retirement Plan. The responsibility for R.H. Donnelley retirees and vested
terminated employees prior to the Distribution will remain with New D&B. R.H.
Donnelley will assume responsibility for postretirement benefits for active
employees of R.H. Donnelley and a portion of the cost of postretirement benefits
for certain DonTech employees. An allocation of assets and liabilities related
to active employee benefits has been included in the financial statements.
Pension
R.H. Donnelley participates in D&B's defined benefit pension plan covering
substantially all employees. Effective January 1, 1997, the D&B Retirement Plan
was amended to provide retirement income based on a percentage of annual
compensation, rather than final pay. R.H. Donnelley accounts for the plan as a
multi-employer plan. Accordingly, RHD has recorded pension costs as allocated by
D&B totaling $996, $1,082, and $1,077 for the years 1997, 1996 and 1995,
respectively. The assumptions of the multi-employer plan are described below.
The weighted average expected long-term rate of return on pension plan
assets was 9.70% for 1997 and 9.75% for 1996, and 1995. At December 31, 1997 and
1996, the projected benefit obligations were determined using weighted average
discount rates of 7.01% and 7.77%, respectively, and weighted average rates of
increase
F-54
<PAGE> 162
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
in future compensation levels of 4.46% and 5.15%, respectively. Plan assets are
invested in diversified portfolios that consist primarily of equity and debt
securities.
Savings Plan
Certain employees of R.H. Donnelley are also eligible to participate in the
D&B sponsored defined contribution plan. RHD makes a matching contribution of up
to 50% of employees' contribution based on specified limits of the employee's
salary. R.H. Donnelley's expense related to this plan was $2,243, $2,268, and
$3,288 for the years 1997, 1996 and 1995, respectively.
Postretirement Benefits
In addition to providing pension benefits, D&B provides various health-care
and life-insurance benefits for retired employees. Employees are eligible for
these benefits if they reach normal retirement age while working for R.H.
Donnelley.
R.H. Donnelley accounts for the plan as a multi-employer plan. Accordingly,
R.H. Donnelley has recorded postretirement benefits costs as allocated by D&B
totaling $1,724, $1,873, and $1,864 for the years 1997, 1996 and 1995. The
assumption used for the multi-employer plan follows.
The accumulated postretirement benefits obligation at December 31, 1997 and
1996, was determined using discount rates of 7.0% and 7.75%, respectively. The
assumed rate of future increases in per capita cost of covered health-care
benefits is 7.3% in 1998, decreasing gradually to 5.0% for the year 2021 and
remaining constant thereafter.
9. EMPLOYEE STOCK OPTION PLANS
Under D&B's Key Employees Stock Option Plans, certain employees of R.H.
Donnelley are eligible for the grant of stock options, stock appreciation rights
and limited stock appreciation rights in tandem with stock options. These awards
are granted at the market price on the date of the grant.
Immediately following the Distribution, outstanding awards under the
post-Distribution D&B Key Employees Stock Option Plans held by R.H. Donnelley
employees will be replaced by substitute awards under the R.H. Donnelley's plan.
The substitute awards will have the same ratio of the exercise price per option
to the market value per share, the same aggregate difference between market
value and exercised price and the same vesting provisions, option periods and
other terms and conditions as the options they replace.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which requires that companies with stock-based compensation plans
either recognize compensation expense based on the fair value of options granted
or continue to apply the existing accounting rules and disclose pro forma net
income and earnings per share assuming the fair value method had been applied.
R.H. Donnelley has chosen to continue applying Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for the fixed stock option
plans. Had compensation cost for R.H. Donnelley's stock-based compensation plans
been determined based on the fair value at the grant dates for awards to R.H.
Donnelley's employees under those plans, consistent with the
F-55
<PAGE> 163
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
method of SFAS No. 123, R.H. Donnelley's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Net income:
As reported................................ $84,905 $78,085 $108,397
Pro forma.................................. $84,542 $77,844 $108,397
Pro forma basic earnings per share of
common stock
As reported............................. $ 0.50 $ 0.46 $ 0.64
Pro forma............................... $ 0.50 $ 0.46 $ 0.64
Pro forma diluted earnings per share of
common stock
As reported............................. $ 0.50 $ 0.46 $ 0.64
Pro forma............................... $ 0.49 $ 0.46 $ 0.64
</TABLE>
The pro-forma disclosures shown are not representative of the effects on
income and earnings per share in future years.
The fair value of D&B's stock options used to compute the R.H. Donnelley's
pro forma income disclosures is the estimated present value at grant date using
the Black-Scholes option-pricing model. The weighted average assumptions used
for 1997 were as follows dividend yield of 3.3%, expected volatility of 20%,
risk-free interest rate of 5.73%, and an expected holding period of 4.5 years.
The following weighted average assumptions were used to value grants made prior
to the November 1, 1996 distribution: dividend yield of 4.7%, expected
volatility of 15%, a risk-free interest rate of 6.08%, and an expected holding
period of five years. The incremental fair value of the R.H. Donnelley's options
converted on October 31, 1996, used to compute pro-forma income disclosures and
the value of new grants after November 1, 1996, was determined using the
Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield of 3.7%, expected volatility of 17%, a risk-free
interest rate of 5.85%, and an expected holding period of 4.5 years. The D&B
assumptions used in the option-pricing model may not be valid for R.H. Donnelley
on a going forward basis.
Options outstanding at December 31, 1997, were granted during the years
1988 through 1997 and are exercisable over periods ending not later than 2007.
At December 31, 1997 and 1996, options for 606,459 shares and 575,941 shares of
common stock, respectively, were exercisable and 1,450,195 shares, 4,240,772
shares and 10,306,592 shares, respectively, were available for future grants
under the plans at December 31, 1997, 1996 and 1995, respectively.
F-56
<PAGE> 164
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Changes in stock options for the three years ended December 31, 1997, are
summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE($)
--------- --------
<S> <C> <C>
Options outstanding, January 1, 1995: 340,730 $53.48
Granted................................................... 79,228 63.20
Exercised................................................. (27,619) 44.54
Surrendered or expired.................................... -- --
--------- ------
Options outstanding, December 31, 1995: 392,339 56.07
Granted................................................... -- --
Exercised................................................. (52,133) 51.99
Surrendered or expired.................................... (8,034) 57.18
--------- ------
Options outstanding, October 31, 1996....................... 332,172 56.68
--------- ------
Options converted, November 1, 1996......................... 876,137 21.48
Granted................................................... 474,305 22.87
Exercised................................................. (9,053) 20.95
Surrendered or expired.................................... (15,816) 22.12
--------- ------
Options outstanding, December 31, 1996:..................... 1,325,573 21.97
Granted................................................... 378,991 29.95
Exercised................................................. (175,064) 20.45
Surrendered or expired.................................... (119,412) 22.87
--------- ------
Options outstanding, December 31, 1997...................... 1,410,088 $24.23
========= ======
</TABLE>
The weighted average fair value of options granted during 1997, 1996 and
1995 was $5.54, $3.60 and $7.60, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
---------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES SHARES LIFE PRICE SHARES PRICE
-------------- --------- ----------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
$ 15.73-$20.46 271,096 4 years $19.36 230,672 $19.17
$ 20.94-$24.75 767,626 6.7 years $23.13 375,787 $23.05
$ 27.72-$30.22 371,366 9.8 years $30.06 -- $ --
--------- -------
1,410,088 606,459
========= =======
</TABLE>
F-57
<PAGE> 165
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
10. INCOME TAXES
Provision for income taxes consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current Tax Provision:
U.S. Federal............................. $ 63,629 $ 28,634 $ 48,839
State and local.......................... 8,660 15,675 13,232
-------- -------- --------
Total current tax provision...... 72,289 44,309 62,071
Deferred tax (benefit) provision
U.S. Federal............................. (15,777) 19,347 9,473
State and local.......................... 2,734 (2,799) 2,854
-------- -------- --------
Total deferred tax (benefit)
provision...................... (13,043) 16,548 12,327
-------- -------- --------
Provision for income taxes............... $ 59,246 $ 60,857 $ 74,398
======== ======== ========
</TABLE>
The following table summarizes the significant differences between the U.S.
Federal statutory tax rate and R.H. Donnelley's effective tax rate for financial
statement purposes.
<TABLE>
<CAPTION>
1997 1996 1995
------ ----- -----
<S> <C> <C> <C>
Statutory tax rate................................. 35.0% 35.0% 35.0%
State and local taxes, net of U.S. Federal tax
benefit.......................................... 5.1 6.0 5.7
Non-deductible capital losses...................... 0.0 2.8 0.0
Non-deductible expense............................. 1.0 0.0 0.0
------ ----- -----
Effective tax rate................................. 41.1% 43.8% 40.7%
====== ===== =====
</TABLE>
Deferred tax assets (liabilities) consisted of the following at December
31,
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits................................ $ 4,288 $ 4,008
Postemployment benefits................................ 3,210 1,718
Reorganization and restructuring costs................. 937 1,606
Bad debts.............................................. 1,606 4,643
Intangibles............................................ 2,571 2,367
Other.................................................. 15,535 401
------- -------
Total deferred tax asset................................. 28,147 14,743
------- -------
Deferred tax liabilities:
Revenue recognition.................................... 45,160 51,270
Pension................................................ 3,812 4,132
Plant, property and equipment.......................... 829 906
Capitalized project costs.............................. 12,802 12,425
------- -------
Total deferred tax liabilities........................... 62,603 68,733
------- -------
Net deferred tax liability............................... $34,456 $53,990
======= =======
</TABLE>
F-58
<PAGE> 166
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
11. SUPPLEMENTAL FINANCIAL INFORMATION
Property and Equipment, Net:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Computer equipment..................................... $ 35,516 $ 38,971
Machinery and equipment................................ 4,949 5,368
Furniture and fixtures................................. 7,927 8,417
Leasehold improvements................................. 7,193 5,541
-------- --------
Total at cost................................ 55,585 58,297
Less accumulated depreciation.......................... (30,125) (27,545)
-------- --------
Total net fixed assets................................. $ 25,460 $ 30,752
======== ========
</TABLE>
Computer Software:
<TABLE>
<CAPTION>
COMPUTER
SOFTWARE
--------
<S> <C>
January 1, 1996............................................. $22,101
Additions at cost........................................... 21,859
Amortization................................................ (3,910)
-------
December 31, 1996...................................... 40,050
Additions at cost........................................... 7,190
Transfer in................................................. 95
Amortization................................................ (9,789)
-------
December 31, 1997...................................... $37,546
=======
</TABLE>
Accumulated amortization on computer software costs was $14,001 and $5,896
at December 31, 1997 and 1996, respectively.
F-59
<PAGE> 167
THE REUBEN H. DONNELLEY CORPORATION
(A WHOLLY OWNED SUBSIDIARY OF THE DUN & BRADSTREET CORPORATION)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
12. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS(A) PERIOD
- ------------------------------------------------- ------------ ----------- ------------- ----------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
For the year ended December 31, 1997........... $11,607 $11,815 $19,408 $ 4,014
For the year ended December 31, 1996........... 21,167 11,743 21,303 11,607
For the year ended December 31, 1995........... 32,421 10,861 22,115 21,167
</TABLE>
- ---------------
(a) Includes accounts written off.
13. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------- YEAR ENDED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 DECEMBER 31
-------- -------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
1997
Revenues........................ $20,207 $ 60,465 $62,728 $ 96,465 $239,865
Operating income (loss)......... $(2,290) $ 9,789 $46,833 $ 80,407 $134,739
Net income...................... $(1,374) $ 5,873 $28,100 $ 52,306 $ 84,905
Pro forma earning per share
data:
Basic......................... $ (0.01) $ 0.03 $ 0.16 $ 0.32 $ 0.50
Diluted....................... $ (0.01) $ 0.03 $ 0.16 $ 0.32 $ 0.50
1996
Revenues........................ $23,170 $ 64,615 $57,743 $124,501 $270,029
Operating income (loss)......... $ 6,921 $ (4,400) $27,468 $137,453 $167,442
Net income...................... $ 3,889 $(18,490) $15,437 $ 77,249 $ 78,085
Pro forma earning per share
data:
Basic......................... $ 0.02 $ (0.11) $ 0.09 $ 0.46 $ 0.46
Diluted....................... $ 0.02 $ (0.11) $ 0.09 $ 0.46 $ 0.46
</TABLE>
F-60
<PAGE> 168
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Partners of DonTech
We have audited the accompanying combined balance sheets of AM-DON (doing
business as "DonTech" and hereafter referred to as "DonTech I") and the DonTech
II Partnership ("DonTech II") as of December 31, 1997 and 1996, and the related
combined statements of operations, partners' capital, and cash flows for each of
the years in the three year period ended December 31, 1997. These financial
statements are the responsibility of the management of DonTech I and DonTech II.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of DonTech I and
DonTech II as of December 31, 1997 and 1996, and the combined results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ COOPERS & LYBRAND L.L.P.
--------------------------------------
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
January 8, 1998
F-61
<PAGE> 169
DONTECH
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales...................................................... $503,912 $459,083 $442,952
Less Allowances............................................ 77,788 50,202 51,076
-------- -------- --------
Net Sales........................................ 426,124 408,881 391,876
Expenses:
Salary and Wages......................................... 12,133 -- --
Commission............................................... 4,558 -- --
Telephone Company Fees................................... 83,210 83,532 83,995
Printing and Manufacturing............................... 39,085 35,221 34,632
Selling.................................................. 36,236 33,060 30,464
Compilation.............................................. 8,888 9,067 9,870
Delivery................................................. 7,703 7,316 10,950
Administrative........................................... 7,696 3,444 6,138
Occupancy and Depreciation............................... 9,880 8,148 6,175
Other.................................................... 12,489 9,476 8,980
-------- -------- --------
Total Operating Expenses......................... 221,878 189,264 191,204
-------- -------- --------
Income from Operations........................... 204,246 219,617 200,672
Other Income............................................... 2,064 2,677 3,775
-------- -------- --------
Net Income....................................... $206,310 $222,294 $204,447
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-62
<PAGE> 170
DONTECH
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and Cash Equivalents................................. $ 6,824 $ 4,559
Accounts Receivable, Net of Allowance for Doubtful
Accounts of $35,581 (1997) and $13,908 (1996).......... 225,240 261,252
Deferred Expenses......................................... 41,513 86,329
Commission Receivable..................................... 43,681 --
Other..................................................... 6,241 3,057
-------- --------
Total Current Assets.............................. 323,499 355,197
Fixed Assets, Net of Accumulated Depreciation and
Amortization.............................................. 4,898 6,621
-------- --------
Total Assets...................................... $328,397 $361,818
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Accounts Payable.......................................... $ 21,417 $ 23,720
Accrued Liabilities....................................... 5,623 5,106
Deferred Sales Revenue.................................... 162,760 174,105
-------- --------
Total Current Liabilities......................... 189,800 202,931
Partners' Capital........................................... 165,597 158,887
Partnership Contributions Receivable........................ (27,000) --
-------- --------
Total Partners' Capital........................... 138,597 158,887
-------- --------
Total Liabilities and Partners' Capital........... $328,397 $361,818
======== ========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-63
<PAGE> 171
DONTECH
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income............................................ $ 206,310 $ 222,294 $ 204,447
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization...................... 3,246 3,526 2,806
Provision for Uncollectible Accounts............... 32,474 7,105 6,190
Changes in Assets and Liabilities:
Increase in Accounts Receivable.................. (40,144) (27,791) (28,295)
(Increase) Decrease in Deferred Printing and
Manufacturing................................. 20,788 (5,460) (2,476)
(Increase) Decrease in Deferred Selling.......... 13,076 (1,430) (4,957)
Decrease in Deferred Compilation................. 5,309 255 1,046
Decrease in Deferred Delivery.................... 1,895 19 518
Decrease in Deferred Directory Operating
Service....................................... 1,468 322 630
(Increase) Decrease in Deferred Other............ 2,280 702 (1,616)
(Increase) Decrease in Other Current Assets...... (3,184) (1,675) 75
Increase (Decrease) in Accounts Payable.......... (2,303) 923 (3,433)
Increase (Decrease) in Accrued Liabilities....... 517 (5,420) 712
Increase (Decrease) in Deferred Sales Revenue.... (11,345) 5,280 17,920
--------- --------- ---------
Total Adjustments............................. 24,077 (23,644) (10,880)
--------- --------- ---------
Net Cash Provided by Operating Activities..... 230,387 198,650 193,567
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Fixed Assets............................. (1,522) (1,029) (5,850)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partner Contributions................................. 2,998 -- --
Distributions to Partners............................. (229,598) (195,553) (191,200)
--------- --------- ---------
Net Cash Used in Financing Activities......... (226,600) (195,553) (191,200)
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents.... 2,265 2,068 (3,483)
Cash and Cash Equivalents, Beginning of Year............ 4,559 2,491 5,974
--------- --------- ---------
Cash and Cash Equivalents, End of Year.................. $ 6,824 $ 4,559 $ 2,491
========= ========= =========
NONCASH FINANCING ACTIVITIES:
Partnership Capital Contributions Receivable.......... $ 27,000 $ -- $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-64
<PAGE> 172
DONTECH
COMBINED STATEMENTS OF PARTNERS' CAPITAL
THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE
REUBEN H. AMERITECH
DONNELLEY PUBLISHING OF
CORPORATION ILLINOIS, INC. TOTAL
----------- -------------- ---------
<S> <C> <C> <C>
Balance, December 31, 1994............................. $ 67,749 $ 51,150 $ 118,899
Net Income............................................. 112,446 92,001 204,447
Distributions to Partners.............................. (107,525) (83,675) (191,200)
--------- --------- ---------
Balance, December 31, 1995............................. 72,670 59,476 132,146
Net Income............................................. 120,039 102,255 222,294
Distributions to Partners.............................. (106,920) (88,633) (195,553)
--------- --------- ---------
Balance, December 31, 1996............................. 85,789 73,098 158,887
Contributions, Per Agreement........................... 13,500 13,500 27,000
Contributions Receivable............................... (13,500) (13,500) (27,000)
Net Income............................................. 118,162 88,148 206,310
Distributions to Partners.............................. (121,688) (104,912) (226,600)
--------- --------- ---------
Balance, December 31, 1997............................. $ 82,263 $ 56,334 $ 138,597
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the combined financial
statements.
F-65
<PAGE> 173
DONTECH
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. FORM OF ORGANIZATION AND NATURE OF BUSINESS
AM-DON d.b.a. DonTech ("DonTech") is a general partnership between The
Reuben H. Donnelley Corporation ("R.H. Donnelley"), a Delaware corporation, and
Ameritech Publishing of Illinois, Inc. ("API/IL"), an Illinois corporation,
doing business as Ameritech advertising services ("Aas"). Under a new structure
as defined in the "Master Agreement" dated August 19, 1997, the existing
partnership is defined as "DonTech I". Concurrently, API/IL and Donnelley formed
a new partnership defined as "DonTech II".
DonTech I participated in a Directory Agreement with R.H. Donnelley,
Illinois Bell Telephone Company ("IBT"), doing business as Ameritech Illinois,
API/IL and Aas. DonTech I also participated in a Subcontracting Agreement with
API to perform certain of API's obligations under the Publishing Services
Contract between API and Indiana Bell Telephone Company, Incorporated ("Indiana
Bell"), doing business as Ameritech Indiana. DonTech I published various
directories, as identified in the Directory Agreements, solicited advertising,
its primary source of revenues, and manufactured and delivered such directories.
DonTech I's net income was allocated to each partner based on a predefined
percentage as set forth in the amended partnership agreement.
In accordance with the Second Amended and Restated AM-Don Partnership
Agreement, effective August 19, 1997, the DonTech I partnership ceased
publishing directories as of January 1, 1998. The partnership will recognize the
deferred revenue and expenses recorded as of December 31, 1997 over the
remaining life of those directories published prior to January 1, 1998. Upon
completion of the earnings process, the partnership will thereafter wind up in
accordance with the agreement.
In August 1997, R.H. Donnelley and API/IL reached an agreement regarding a
revised partnership structure through which a new DonTech partnership became the
exclusive sales agent in perpetuity for the yellow page directories to be
published in Illinois and Northwest Indiana by APIL Partners Partnership (the
"Publisher"). The new partnership, known as "DonTech II", receives a 27%
commission on sales, net of provisions (capped at 6.1%), from the Publisher.
DonTech II's cost structure includes only sales, sales operations, office
services, finance, facilities and related overhead. DonTech II profits are
shared equally between the partners.
A Board of Directors (the "Board") was appointed to administer the
activities of each partnership. From time to time during the term of the
partnerships, the Board may call for additional capital contributions in equal
amounts from each of the partners if, in the opinion of the Board, additional
capital is required for the operation of the partnerships.
The accompanying financial statements of DonTech I and DonTech II are shown
on a combined basis. As DonTech II was formed in August 1997, the combined
statements of operations for the three years in the period ended December 31,
1997 only include the results of operations of DonTech II for the period from
August 1997 through December 1997. All significant affiliated accounts and
transactions have been eliminated in preparation of the combined financial
statements.
2. SIGNIFICANT ACCOUNTING POLICIES
a. Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an
initial maturity date of three months or less. The carrying value of cash
equivalents estimates fair value due to the short-term nature.
b. Revenue Recognition
Substantially all DonTech I sales made to customers in the cities covered
by the directories are recorded as deferred sales revenue and accounts
receivable in the month of publication. Revenue related to these sales
F-66
<PAGE> 174
DONTECH
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
is recognized over the lives of the directories, generally twelve months. Sales
made to customers outside the cities covered by the directories are recognized
each quarter. Sales for national accounts are recognized in full in the month of
publication.
For DonTech II, revenue is comprised of sales commissions and is recognized
upon execution of contracts for the sale of advertising.
c. Fixed Assets
Fixed assets are recorded at cost and are depreciated on a straight-line
basis over the estimated useful lives of the assets. Upon asset retirement or
other disposition, cost and the related accumulated depreciation are removed
from the accounts, and gain or loss is included in the statement of operations.
Amounts for repairs and maintenance are charged to operations as incurred.
d. Deferred Expenses
The printing, manufacturing, compilation, sales, delivery and
administrative costs of DonTech I publications are deferred and recognized in
proportion to revenue.
e. Postretirement Benefits Other Than Pensions
The partnerships are obligated to provide postretirement benefits
consisting mainly of life and health insurance to substantially all employees
and their dependents. The accrual method of accounting is utilized for
postretirement health care and life insurance benefits.
f. Income Taxes
No provision for income taxes is made as the proportional share of each
partnership's income is the responsibility of the individual partners.
3. DEFERRED EXPENSES
Deferred expenses consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Printing and manufacturing.................................. $13,932 $34,720
Selling..................................................... 20,331 33,407
Compilation................................................. 3,310 8,619
Delivery.................................................... 1,089 2,984
Directory operating services................................ 750 2,218
Other....................................................... 2,101 4,381
------- -------
$41,513 $86,329
======= =======
</TABLE>
F-67
<PAGE> 175
DONTECH
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
4. FIXED ASSETS
Fixed assets consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Machinery and equipment..................................... $18,816 $17,329
Furniture and fixtures...................................... 3,727 3,712
Leasehold improvements...................................... 995 974
------- -------
23,538 22,015
Less accumulated depreciation and amortization.............. 18,640 15,394
------- -------
$ 4,898 $ 6,621
======= =======
</TABLE>
5. RELATED PARTY TRANSACTIONS
DonTech I
Under the Directory Agreement, DonTech I is obligated to pay IBT a minimum
of $75 million per year in exchange for billing and collection services
performed by IBT. The base fee for these services is $75 million for each
calendar year until the Directory Agreement is terminated. Under the terms of
the recently revised partnership agreement the responsibility for payment of
these fees is transferred to Ameritech effective January 1, 1998.
In addition to the base fee, DonTech I has agreed to pay IBT an amount
equal to 7 1/2% of the increase in total revenue received from certain sources
identified in the Directory Agreement over such revenues received in the
immediately preceding calendar year. The additional fee due to IBT was $609,
$1,122 and $487 in 1997, 1996 and 1995, respectively. IBT also provides
directory operations services (white pages compilation) to DonTech I. DonTech I
paid approximately $2 million to IBT in 1997, 1996 and 1995 for these services.
However, effective January 1, 1998, under the terms of the revised partnership
agreement the cost of these services becomes the responsibility of Ameritech.
R.H. Donnelley provides compilation, photocomposition, and data processing
services to DonTech I. The Dun & Bradstreet Corporation, of which R.H. Donnelley
is a wholly owned subsidiary, provides employee benefits and administrative
services, and certain business insurance coverages for each partnership. The
amount paid for these services is determined at the beginning of each year based
upon estimated activity and adjusted to actual at the end of each year. The
amount paid for these services was approximately $22 million in each of the
years ended December 31, 1997, 1996 and 1995. The amount paid for employee
benefits includes the administration of each partnership's Profit Sharing and
401(k) Plans as well as its health care, long and short term disability, dental
and pension plans. Effective June 1, 1997, DonTech I became self-insured for
health care, long and short term disability and dental plans at which time it
terminated its coverages for these plans through The Dun & Bradstreet
Corporation. DonTech II will assume the obligations of these plans.
DonTech I also entered into subcontracting agreements for the publishing of
certain Indiana Bell directories. For the first four months of 1997, under a
Directory Fulfillment Memorandum of Understanding, DonTech I was obligated to
perform certain directory fulfillment services for Aas. The obligation for these
services was transferred to an outside vendor effective May 1, 1997.
Amended Partnership Allocation
In 1997, the partners negotiated a settlement agreement regarding excessive
bad debt write-offs incurred by DonTech I during the year ended December 31,
1997. The agreement provided for a special allocation of
F-68
<PAGE> 176
DONTECH
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
the excessive bad debts between the partners based upon a negotiated ratio. The
effect of this settlement agreement has been included in the allocation of net
income as presented in the statement of partners' capital at December 31, 1997.
DonTech II
Under the terms of the DonTech II partnership agreement, The Dun &
Bradstreet Corporation provides certain employee benefits and administrative
services. These include the administration of the partnership's profit Sharing
and 401(k) Plans, as well as its pension plans. Also, certain business insurance
coverages for the partnership will be provided by both The Dun & Bradstreet
Corporation and Ameritech.
Under the provisions of the "Revenue Participation Agreement" dated August
19, 1997, in exchange for exclusive publishing rights, the Publisher agreed to
pay R.H. Donnelley revenue participation interests. The revenue participation
interests are based upon gross revenues of DonTech II, net of provisions (capped
at 6.1% per annum) and sales commissions paid by DonTech II. The revenue
participation interest is as follows:
<TABLE>
<S> <C>
1997................................................. 43.7%
1998................................................. 34.8%
1999 and thereafter.................................. 35.9%
</TABLE>
6. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject each partnership to
concentration of credit risk consist principally of commercial paper and
accounts receivables. The partnerships invest their excess cash in commercial
paper with an investment rating of AA or higher and have not experienced any
losses on these investments.
Each partnership's trade accounts receivable are primarily composed of
amounts due from customers whose businesses are in the state of Illinois.
Collateral is generally not required from either partnership's customers.
7. PARTNERSHIP CONTRIBUTION RECEIVABLE
For DonTech II, the respective partner capital contributions are to be made
in equal proportion according to the Initial Capital Schedule as reflected in
the DonTech II Partnership Agreement. As of December 31, 1997, the total amount
of capital required to be contributed by the partners was $27,000.
At December 31, 1997, the respective partnership capital accounts have been
credited with the amount of required capital contributions and have been offset
by a corresponding contributions receivable as the funds had not been received.
8. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expense during the reporting
period. Actual results could differ from those estimates.
F-69
<PAGE> 177
DONTECH
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
9. LEASE COMMITMENTS
DonTech I leases certain office and warehouse facilities under
noncancelable lease arrangements. These leases and the related obligations will
be assumed by Don Tech II. Rent expense under these operating leases was
approximately $2,603, $2,564 and $2,323 in 1997, 1996 and 1995, respectively.
The future minimum lease payments required under noncancelable operating
leases that have initial or remaining lease terms in excess of one year as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
1998................................................ $1,814
1999................................................ 843
2000................................................ 814
2001................................................ 726
2002................................................ 466
Thereafter.......................................... 831
------
$5,494
======
</TABLE>
10. EMPLOYEE RETIREMENT AND PROFIT PARTICIPATION PLANS
Each partnership participates in a defined benefit pension plan covering
substantially all of its respective employees (the "Principal Plan"). The
Principal Plan's assets are invested in equity funds, fixed income funds and
real estate. The components of net periodic pension costs for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Service cost................................................ $ 935 $ 909 $ 945
Interest cost............................................... 1,185 1,020 1,093
Actual return on plan assets................................ (3,465) (1,618) 185
Net amortization and deferral............................... 2,465 870 (549)
------- ------- -------
Net periodic pension cost................................... $ 1,120 $ 1,181 $ 1,674
======= ======= =======
</TABLE>
The reconciliation of the funded status of the Principal Plan at December
31 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Fair value of plan assets................................... $ 20,195 $ 13,863
-------- --------
Actuarial present value of benefit obligations:
Vested benefits........................................... (12,706) (10,540)
Nonvested benefits........................................ (1,086) (1,285)
-------- --------
Accumulated benefit obligations............................. (13,792) (11,825)
Effect of future salary increases........................... 3,895 3,773
Projected benefit obligations............................... (17,686) (15,598)
-------- --------
Plan assets in excess of (less than) projected benefit
obligations............................................... 2,509 (1,735)
Unrecognized net (gain)/loss................................ (2,093) 43
Unrecognized prior service cost............................. 2,826 2,751
Adjustment to recognize minimum liability................... (148) (189)
-------- --------
Prepaid (accrued) pension cost.............................. $ 3,094 $ 870
======== ========
</TABLE>
F-70
<PAGE> 1
EXHIBIT 99.2
, 1998
To all Dun & Bradstreet Stockholders:
On , 1998, the Board of Directors of The Dun & Bradstreet
Corporation ("D&B") declared a dividend of shares of The New Dun & Bradstreet
Corporation ("New D&B") to achieve the reorganization of D&B into two separate
companies.
If you are a stockholder of D&B as of the close of business on ,
1998, the record date for the dividend, certificates representing shares in New
D&B will be mailed to you automatically. For each share of D&B you hold, you
will receive one share of New D&B.
In connection with the Distribution, D&B will change its name to "R.H.
Donnelley Corporation" and New D&B will change its name to "The Dun & Bradstreet
Corporation". Stock certificates representing your shares in New D&B will be
sent to you on or about , 1998. After the Distribution, the D&B stock
certificates you currently hold will represent your investment in the "new" R.H.
Donnelley Corporation. D&B stockholders should not send in their D&B stock
certificates.
Shares of New D&B will trade "regular way" on the New York Stock Exchange
beginning , 1998. The symbol for New D&B will be "DNB" and the symbol
for the "new" R.H. Donnelley Corporation will become "RHD".
Detailed information on the reorganization plan and the businesses of New
D&B and R.H. Donnelley is contained in the accompanying document, which we urge
you to read carefully.
The Board believes the reorganization will enhance management focus on the
businesses allowing the two companies to pursue opportunities that will improve
their competitive position, enhance their valuation and create wealth for
stockholders.
Sincerely,
Volney Taylor
Chairman and Chief Executive Officer
The Dun & Bradstreet Corporation
