<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 28, 1998
REGISTRATION NO. 333-59287
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
R.H. DONNELLEY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2741 36-2467635
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
R.H. DONNELLEY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2741 13-270040
(STATE OR JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
ONE MANHATTANVILLE ROAD
PURCHASE, NEW YORK 10577
(914) 933-6400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEPHEN B. WIZNITZER
R.H. DONNELLEY INC.
ONE MANHATTANVILLE ROAD
PURCHASE, NEW YORK 10577
(914) 933-6400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
JULIA K. COWLES
DAVIS POLK & WARDWELL
450 LEXINGTON AVENUE
NEW YORK, NEW YORK 10017
(212) 450-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the Registration Statement becomes effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
PROSPECTUS
SEPTEMBER 28, 1998
OFFER TO EXCHANGE
9 1/8% SENIOR SUBORDINATED NOTES DUE 2008
FOR ANY AND ALL OUTSTANDING
9 1/8% SENIOR SUBORDINATED NOTES DUE 2008
OF
R.H. DONNELLEY INC.
FULLY AND UNCONDITIONALLY GUARANTEED AS SET FORTH HEREIN BY
R.H. DONNELLEY CORPORATION
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON NOVEMBER 2, 1998, UNLESS EXTENDED
------------------------
R.H. Donnelley Inc. ("Donnelley") hereby offers, upon the terms and subject
to the conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (which together constitute the "Exchange Offer"), to exchange $1,000
principal amount of 9 1/8% Senior Subordinated Notes due 2008 (the "Exchange
Notes") of Donnelley for each $1,000 principal amount of the issued and
outstanding 9 1/8% Senior Subordinated Notes due 2008 (the "Old Notes," and
together with the Exchange Notes, the "Notes") of Donnelley. As of the date of
this Prospectus there were outstanding $150,000,000 principal amount of Old
Notes. The terms of the Exchange Notes are identical in all material respects to
the Old Notes except that the offer of the Exchange Notes will have been
registered under the Securities Act of 1933, as amended (the "Securities Act")
and, therefore, the Exchange Notes will not be subject to certain transfer
restrictions, registration rights and related liquidated damage provisions
applicable to the Old Notes.
Cash interest will be payable semi-annually on June 1 and December 1 of
each year, commencing December 1, 1998. See "Description of Notes." No interest
will have accrued on the Old Notes on the date of exchange for the Exchange
Notes and therefore no interest will be paid thereon. In addition, at any time
prior to June 1, 2001, up to 35% of the original aggregate principal amount of
the Notes will be redeemable at the option of Donnelley at a redemption price
equal to 109.125% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of redemption, out of the proceeds of Equity
Offerings (as defined) of Donnelley or of R.H. Donnelley Corporation ("Donnelley
Corp"). In addition, upon a Change of Control (as defined), Donnelley will be
required to offer to repurchase the Notes at a purchase price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase. There can be no assurance that Donnelley will have sufficient
funds available at the time of any Change of Control to repurchase the Notes or
that Donnelley would be able to refinance its outstanding indebtedness in order
to permit it to repurchase the Notes or, if such refinancing were to occur, that
such financing would be on terms favorable to Donnelley.
The Notes will be general unsecured obligations of Donnelley and will be
subordinated in right of payment to all existing and future Senior Debt (as
defined), will rank pari passu with all future senior subordinated debt of
Donnelley and will rank senior in right of payment to all of Donnelley's future
subordinated debt. The Notes will be guaranteed on a senior subordinated basis
by Donnelley Corp. and any future Restricted Subsidiaries (as defined) of
Donnelley and will be full and unconditional obligations of Donnelley Corp. and
any future Restricted Subsidiaries constituting a guarantee of payment.
Donnelley is a wholly-owned subsidiary of Donnelley Corp. Donnelley Corp. has no
other operations other than through the Donnelley subsidiary. Donnelley has an
aggregate of approximately $350 million of Senior Debt represented by borrowings
under the New Credit Facility (as defined). In addition, Donnelley has an
additional $50 million of unused capacity available under the revolving credit
portion of the New Credit Facility. The New Credit Facility will be secured by
substantially all the assets and the capital stock of Donnelley and will be
guaranteed by Donnelley Corp. See "Capitalization", "Description of New Credit
Facility" and "Description of Notes".
(continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE NOTES.
------------------------
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 PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<PAGE> 3
(continued from cover)
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of Donnelley under the Exchange and Registration Rights Agreement,
dated as of June 5, 1998, among Donnelley and the other signatories thereto (the
"Registration Rights Agreement"). Based upon interpretations contained in
letters issued to third parties by the staff of the Securities and Exchange
Commission (the "Commission"), Donnelley believes that the Exchange Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by each holder thereof (other than a
broker-dealer, as set forth below, and any such holder which is an "affiliate"
of Donnelley within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act; provided that such Exchange Notes are acquired in the ordinary
course of such holder's business and such holder has no arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes. Each holder wishing to accept the Exchange Offer must represent
to Donnelley in the Letter of Transmittal that such conditions have been met.
Each broker-dealer that receives Exchange Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. Notwithstanding the preceding sentence, selling
broker-dealers may be deemed to be "underwriters" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Old Notes where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. Donnelley has agreed that, for a period of 180 days after the
Expiration Date (as defined herein) or such time as such broker-dealers no
longer own any Registrable Notes (as defined in the Registration Rights
Agreement), it will make this Prospectus available to any broker-dealer for use
in connection with any such resale. See "Plan of Distribution."
Donnelley will not receive any proceeds from the Exchange Offer. The
expenses incident to the Exchange Offer will be reimbursed by New D&B (as
defined). Tenders of Old Notes pursuant to the Exchange Offer may be withdrawn
at any time prior to the Expiration Date. In the event Donnelley terminates the
Exchange Offer and does not accept for exchange any Old Notes, Donnelley will
promptly return all previously tendered Old Notes to the holders thereof. See
"The Exchange Offer."
Prior to this Exchange Offer, there has been no public market for the
Exchange Notes. Donnelley does not currently intend to list the Exchange Notes
on any securities exchange or to seek approval for quotation through any
automated quotation system. There can be no assurance that an active public
market for the Exchange Notes will develop.
ii
<PAGE> 4
MARKET DATA
Market data and competitive position data used throughout this Prospectus
are approximations based on internal research of the Company (as defined) or
surveys or studies conducted by National Yellow Pages Monitor, Simba Information
Inc. (appearing in its Yellow Pages Market Forecast, 1998) and other third
parties. Donnelley has not independently verified market data and competitive
position data provided by third parties or industry or general publications.
Similarly, internal research of the Company, while believed by Donnelley to be
accurate and reliable, has not been verified by any independent sources.
No person has been authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
Prospectus in connection with the offer made hereby and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any other person. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the date
hereof or that the information contained or incorporated by reference herein is
correct as of any time subsequent to it date. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy the securities
offered hereby by anyone in any jurisdiction in which such offer or solicitation
is not authorized or in which the person making such offer or solicitation is
not qualified to do so or to anyone to whom it is unlawful to make such offer or
solicitation.
FORWARD LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts
are "forward-looking" statements, which can be identified by the use of
forward-looking terminology such as "believes", "expects", "may", "will",
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy that involve risks and
uncertainties. In addition, from time to time Donnelley Corp., the Company or
the representatives of either have made or may make forward-looking statements,
orally or in writing.
Management wishes to caution the reader that these forward-looking
statements, such as the statements regarding the Company's ability to grow its
business in the markets in which it currently operates, the opportunities for
expansion in new markets from outsourcing by local telephone companies and from
cross-selling other advertising media, Donnelley's ability to capitalize on its
new publishing center in Raleigh, North Carolina, its relationship with
Donnelley Corp. following the Distribution (as defined), the Company's
anticipated future operating performance, capital expenditures and financing
sources, litigation and other statements contained in this Prospectus regarding
matters that are not historical facts, involve predictions. No assurance can be
given that the future results will be achieved; actual events or results may
differ materially as a result of risks and uncertainties facing the Company.
Such risks and uncertainties include, but are not limited to, the extent to
which local telephone companies will outsource their yellow pages sales and
publishing, Donnelley's ability to service the indebtedness it will incur in
connection with the Distribution and comply with the covenants contained in the
Indenture (as defined) and the New Credit Facility, Donnelley's maintenance of
its relationships with local telephone companies with which it has entered into
partnership, sales agency agreements and other contracts, Donnelley's exposure
to potential contingent liabilities, the outcome of pending litigation,
increased competition from competitors or other advertising media, changing
technology, changes in the yellow pages industry and the Company's markets,
Donnelley's ability to timely and cost-effectively resolve issues associated
with the year 2000, Donnelley's ability to obtain future financing on
satisfactory terms, the final allocation of assets and liabilities in connection
with the Distribution as well as regulatory, legislative and judicial
developments that could cause actual results to vary materially from future
results indicated, expressed or implied, in such forward-looking statements. See
"Risk Factors."
iii
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data, including
the financial statements and notes thereto, appearing elsewhere in this
Prospectus. Unless otherwise stated in this Prospectus, references to (i)
"Donnelley" shall mean R.H. Donnelley Inc., (ii) the "Company" shall mean
Donnelley, together with the partnerships in which it holds an equity interest,
(iii) the "Parent Company" shall mean, prior to the Distribution Date (as
defined), The Dun & Bradstreet Corporation, (iv) "Donnelley Corp." shall mean,
as of and after the Distribution Date and a name change of such entity, R.H.
Donnelley Corporation and (v) "New D&B" shall mean, prior to the Distribution
Date, The New Dun & Bradstreet Corporation and as of and after the Distribution
Date and a name change of such entity, The Dun & Bradstreet Corporation. On
August 24, 1998, Donnelley Corp. effected a reverse one-for-five stock split of
its outstanding common stock (the "Reverse Stock Split"). The share and per
share information provided herein has been adjusted to reflect such reverse
stock split.
THE COMPANY
The Company is the largest independent marketer of yellow pages advertising
in the United States. The Company sold over $1 billion of advertising in 1997
and is the leader in all of its major markets. 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, the Company provides services for 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.
The Company 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, the Company achieved average
advertising sales renewal rates ranging from 100% to 90% in its major markets.
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). The Company provides yellow
pages advertising marketing and sales in these markets through long-term
contractual agreements with subsidiaries of these incumbent telephone companies,
which are Ameritech Corporation ("Ameritech"), Bell Atlantic Corporation ("Bell
Atlantic") and Sprint Corporation ("Sprint"). Donnelley has a partnership
("DonTech") 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 Donnelley's long-term presence in its markets,
yellow pages marketing and publishing expertise, established infrastructure and
performance-focused, non-union sales force. The Company 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 the Company's markets.
Management believes that 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 the Company's existing markets, (ii) the
potential outsourcing of yellow pages operations by local telephone companies
(including those companies with which 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 the
Company for these future growth opportunities and improve earnings stability,
including the completion of 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, Donnelley sold the
majority of its proprietary yellow pages operations as part of its primary
objective of focusing on long-term
1
<PAGE> 6
alliances with major telephone service providers. In December 1997, Donnelley
sold for $122 million its East Coast proprietary yellow pages operations, which
included 34 directories in certain mid-Atlantic states. In May 1996, Donnelley
sold for $22 million its West Coast proprietary yellow pages operations, which
included 18 directories in southern California.
Set forth below is a chart depicting the structure of the Parent Company
and the Company.
[RHD CHART]
Donnelley's principal executive offices are located at One Manhattanville
Road, Purchase, NY 10577 and its telephone number is (914) 933-6400.
COMPETITIVE STRENGTHS
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, Donnelley has been able to
successfully manage significant strategic relationships with incumbent telephone
companies and complex systems integration issues inherent in its business.
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, the
Company 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. 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. The Company 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. Donnelley is affiliated with the incumbent local telephone company
in each of its major markets.
Leading Directory Market Shares. In each of the Company's major markets,
the directory with which the Company 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 Donnelley's markets in
2
<PAGE> 7
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 the
Company'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. Donnelley's advertising sales and
profitability are derived primarily from yellow pages advertising sales pursuant
to long-term contractual relationships with subsidiaries of 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, the Company'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
Donnelley's predictable cost structure and capital expenditure requirements,
provide Donnelley with a solid base from which to grow.
Experienced Management Team. Donnelley has assembled a strong and
experienced management team at both the corporate and operating levels.
Donnelley's management is responsible for the Company's long-term relationships
with incumbent telephone companies and its market leadership position. In
addition, Donnelley's account managers average over 12 years of experience in
the yellow pages industry.
BUSINESS STRATEGY
The Company has identified its major sources of potential growth and has
developed a business strategy to capitalize on these opportunities. Principal
elements of the Company's business strategy include:
Grow the Core Business in Existing Markets. The Company has developed
specialized sales and marketing techniques and infrastructure in order to
increase advertising sales. The Company leverages sophisticated information
systems, access to the local telephone company's extensive telephone subscriber
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, the Company 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. The Company believes that the trend toward outsourcing will result
from several factors, including the telephone companies' desire to focus on
business segments having greater future growth opportunities than those of
yellow pages advertising in the United States; the existence of a large number
of competitive local exchange carriers ("CLECs") that may not wish to incur
start-up costs related to sales of yellow page advertising and pre-press
publishing services for yellow page directory advertising in the United States
and the telephone providers' desire to deploy available capital to develop its
telecommunications infrastructure and pursue other non-yellow page directory
opportunities. Management believes that 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) 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 Donnelley became the exclusive advertising
3
<PAGE> 8
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. The
Company'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. 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 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,
Donnelley completed its $40 million publishing center in Raleigh, North
Carolina. 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 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 Donnelley has already completed.
Management also believes that smaller yellow pages publishers may decide not to
undertake such a significant investment program.
THE DISTRIBUTION AND THE FINANCINGS
On December 17, 1997, the Parent Company announced its intention to
separate itself into two independent, publicly-traded companies by means of a
pro rata tax-free distribution (the "Distribution") of all of the outstanding
common shares of New D&B to holders of the common shares of the Parent Company.
On June 3, 1998, the Board of Directors of the Parent Company declared the
Distribution and announced that the Distribution would be effected on June 30,
1998 (the "Distribution Date"). Following the Distribution, Donnelley Corp.'s
only remaining subsidiary is Donnelley, and each of Donnelley Corp. and New D&B
are independent, publicly-traded companies.
Prior to the Distribution, Donnelley entered into a $400 million senior
secured credit facility, consisting of a revolving credit facility of $100
million (the "Revolving Facility") and term loan facilities of $300 million (the
"Term Facilities" and, together with the Revolving Facility, the "New Credit
Facility"), and borrowed $350 million thereunder. The New Credit Facility is
secured by substantially all the assets and the capital stock of Donnelley and
is guaranteed by Donnelley Corp. Net proceeds from the New Credit Facility and
the Notes were dividended to the Parent Company to be used (i) to repay
indebtedness of the Parent Company, primarily commercial paper, (ii) to pay
costs and expenses related to the Distribution and (iii) to repay indebtedness
of the Parent Company to subsidiaries which, following the Distribution, are
subsidiaries of New D&B. Donnelley has $50 million of unused capacity available
under the Revolving Facility. In connection with the Distribution, the Parent
Company was renamed R.H. Donnelley Corporation and New D&B was renamed The Dun &
Bradstreet Corporation. See "Description of New Credit Facility" and "Use of
Proceeds". At June 30, 1998, the Company has total indebtedness of $500 million
and a shareholders' deficit of $226 million.
In connection with the Distribution, Donnelley Corp. and New D&B entered
into certain agreements governing their relationship following the Distribution
and providing for the allocation of tax, employee benefits and certain other
liabilities and obligations arising from periods prior to the Distribution. See
"Relationship Between Donnelley Corp. and The New Dun & Bradstreet Corporation
After the Distribution".
4
<PAGE> 9
THE EXCHANGE OFFER
Securities Offered............ $150,000,000 principal amount at maturity of
9 1/8% Senior Subordinated Notes due 2008. The
terms of the Exchange Notes and the Old Notes
are identical in all material respects, except
that the offer of the Exchange Notes will have
been registered under the Securities Act and,
therefore, the Exchange Notes will not be
subject to certain transfer restrictions,
registration rights and related special
interest provisions applicable to the Old
Notes.
The Exchange Offer............ Donnelley is offering, upon the terms and
subject to the conditions of the Exchange
Offer, to exchange $1,000 principal amount of
Exchange Notes for each $1,000 principal amount
of Old Notes. See "The Exchange Offer" for a
description of the procedures for tendering Old
Notes. The Exchange Offer is intended to
satisfy obligations of the Company under the
Exchange and Registration Rights Agreement,
dated as of June 5, 1998, among Donnelley, the
Parent Company and Goldman, Sachs & Co. and
Chase Securities Inc. (collectively, the
"Initial Purchasers").
Tenders, Expiration Date;
Withdrawal.................. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on November 2, 1998, or
such later date and time to which it is
extended. The tender of Old Notes pursuant to
the Exchange Offer may be withdrawn at any time
prior to the Expiration Date. Any Old Notes not
accepted for exchange for any reason will be
returned without expense to the tendering
holder thereof as promptly as practicable after
the expiration or termination of the Exchange
Offer.
Certain Federal Income Tax
Considerations.............. The exchange of Old Notes for Exchange Notes
pursuant to the Exchange Offer will not result
in any income, gain or loss to the holders or
the Company for federal income tax purposes.
See "Certain U.S. Federal Income Tax
Considerations."
Use of Proceeds............... There will be no proceeds to the Company from
the issuance of the Exchange Notes pursuant to
the Exchange Offer.
Exchange Agent................ The Bank of New York is serving as Exchange
Agent in connection with the Exchange Offer.
CONSEQUENCES OF EXCHANGING OLD NOTES
PURSUANT TO THE EXCHANGE OFFER
Based upon interpretations contained in letters issued to third parties by
the staff of the Commission, the Company believes that, generally, any holder of
Old Notes (other than a broker-dealer, as set forth below, and any holder who is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) who exchanges its Old Notes for Exchange Notes pursuant to the
Exchange Offer may offer such Exchange Notes for resale, resell such Exchange
Notes, or otherwise transfer such Exchange Notes without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
such Exchange Notes are acquired in the ordinary course of the holder's business
and such holder has no arrangement or understanding with any
5
<PAGE> 10
person to participate in a distribution of such Exchange Notes. Each holder
wishing to accept the Exchange Offer must represent to the Company in the Letter
of Transmittal that such conditions have been met. Each broker-dealer that
receives Exchange Notes for its own account in exchange for Old Notes must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Plan of Distribution." To comply with the securities
laws of certain jurisdictions, it may be necessary to qualify for sale or
register the Exchange Notes prior to offering or selling such Exchange Notes.
The Company does not currently intend to take any action to register or qualify
the Exchange Notes for resale in any such jurisdictions. If a holder of Old
Notes does not exchange such Old Notes for Exchange Notes pursuant to the
Exchange Offer, such Old Notes will continue to be subject to the restrictions
on transfer contained in the legend thereon. In general, the Old Notes may not
be offered or sold, unless registered under the Securities Act, except pursuant
to an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Any holder who tenders in the Exchange Offer
with the intention to participate, or for the purpose of participating, in a
distribution of Exchange Notes could not rely on the position of the staff of
the Commission enunciated in Exxon Capital Holdings Corporation (available May
13, 1988) or similar no-action letters and, in the absence of an exemption
therefrom, must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Failure to comply with such requirements in such instance may
result in such holder incurring liability under the Securities Act for which the
holder is not indemnified by the Company. See "The Exchange
Offer -- Consequences of Failure to Exchange."
SUMMARY DESCRIPTION OF THE EXCHANGE NOTES
Notes Offered................. $150,000,000 aggregate principal amount at
maturity of 9 1/8% of Senior Subordinated Notes
due 2008.
Maturity Date................. June 1, 2008.
Donnelley Corp. Guarantee..... Donnelley's payment obligations under the Notes
will be guaranteed on a senior subordinated
basis by Donnelley Corp. (the "Donnelley Corp.
Guarantee") and are full and unconditional
obligations of Donnelley Corp. constituting a
guarantee of payment. The Donnelley Corp.
Guarantee will be subordinated to all Donnelley
Corp. Senior Debt (as defined). See
"Description of Notes -- General".
Interest Payment Dates........ June 1 and December 1 of each year, commencing
December 1, 1998.
Optional Redemption........... The Notes will be redeemable, in whole or in
part, at the option of Donnelley at any time on
or after June 1, 2003, at the redemption prices
set forth herein plus accrued and unpaid
interest, if any, to the date of redemption. In
addition, at any time prior to June 1, 2001,
Donnelley may, at its option and subject to
certain requirements, use all or a portion of
the net proceeds from one or more Equity
Offerings (as defined) of Donnelley or of
Donnelley Corp. to redeem, from time to time,
in the aggregate up to 35% of the original
aggregate principal amount of the Notes at a
redemption price equal to 109.125% of the
principal amount thereof plus accrued and
unpaid interest, if any, to the redemption
date, provided that at least 65% of the
original aggregate principal amount of the
Notes remains outstanding after any such
redemption.
6
<PAGE> 11
Ranking....................... The Notes will constitute general unsecured
indebtedness of Donnelley, subordinated in
right of payment to all existing and future
Senior Debt of Donnelley. Donnelley has an
aggregate of approximately $350 million
principal amount of Senior Debt represented by
borrowings under the New Credit Facility. In
addition, Donnelley has $50 million of unused
capacity available under the Revolving Facility
portion of the New Credit Facility. See
"Capitalization" and "Description of
Notes -- Subordination".
Change of Control............. In the event of a Change of Control (as
defined), Donnelley will be required to offer
to repurchase the Notes at a purchase price
equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if
any, to the date of purchase. There can be no
assurance that Donnelley will have sufficient
funds available at the time of any Change of
Control to repurchase the Notes or that
Donnelley would be able to refinance its
outstanding indebtedness in order to permit it
to repurchase the Notes or, if such refinancing
were to occur, that such financing would be on
terms favorable to Donnelley. See "Description
of Notes -- Covenants -- Change of Control".
Sinking Fund.................. None.
Asset Sale Proceeds........... Donnelley may not make any Asset Disposition
(as defined) in one or more related
transactions unless (i) Donnelley receives fair
market value, as determined by the Board of
Directors, (ii) at least 75% of the
consideration consists of cash, readily
marketable cash equivalents or the assumption
of debt and (iii) all Net Available Proceeds
(as defined), less any amounts invested within
360 days of such disposition in assets related
to the business of Donnelley, are applied to
(a) the permanent repayment or reduction of
Senior Debt then outstanding, (b) an offer to
purchase any outstanding Notes at 100% of their
principal amount plus accrued and unpaid
interest, if any, to the date of purchase and,
to the extent required by their terms, any
other pari passu obligations and (c) any other
use not otherwise prohibited by the Indenture.
Certain Covenants............. The Indenture will contain certain covenants
which, among other things, will restrict the
ability of Donnelley and its Restricted
Subsidiaries, if any, to: (i) incur additional
Debt (as defined), (ii) pay dividends or make
distributions in respect of Donnelley's capital
stock or make other restricted payments, (iii)
incur certain liens, (iv) enter into
transactions with affiliates or (v) merge or
consolidate Donnelley.
RISK FACTORS
Investors should carefully consider all of the information set forth in
this Prospectus and, in particular, should evaluate the specific risk factors
set forth under "Risk Factors," beginning on page 11, for a discussion of
certain risks involved with an investment in the Notes.
7
<PAGE> 12
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
Donnelley is a wholly-owned subsidiary of Donnelley Corp. Donnelley Corp.
has no other operations other than through the Donnelley subsidiary. Therefore,
on a consolidated basis, the financial statements of Donnelley Corp. and
Donnelley are substantially identical. The historical summary consolidated
financial data of Donnelley Corp. 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 consolidated financial statements of Donnelley Corp. included
elsewhere herein. Donnelley Corp's audited consolidated financial statements
included elsewhere herein are presented as if Donnelley Corp. were a stand-alone
entity for all periods presented. The historical summary consolidated financial
data of Donnelley Corp. as of December 31, 1995, June 30, 1998 and for the six
months ended June 30, 1997 and 1998 are derived from the unaudited consolidated
financial statements of Donnelley Corp., 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 Donnelley Corp. in the future. The information set forth
below should be read in conjunction with, and is qualified in its entirety by,
the information under "Capitalization", "Selected Financial Data", "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------- ----------------------------------
HISTORICAL PRO FORMA(1) HISTORICAL PRO FORMA(1)
------------------------------------ ------------ ------------------- ------------
1995 1996 1997 1997 1997 1998 1998
---------- ---------- ---------- ------------ -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA(2):
Revenues........................... $ 312,940 $ 270,029 $ 239,865 $ 239,865 $ 80,664 $ 62,338 $ 62,338
Expenses:
Operating Expenses (3)........... 157,559 135,500 132,278 132,278 32,167 19,356 19,356
General and Administrative(3).... 75,754 83,803 81,089 81,089(4) 45,707 35,970 35,970(4)
Depreciation and Amortization.... 16,322 16,229 21,930 21,930 11,030 9,856 9,856
Restructuring Charges............ 17,690 -- -- -- -- -- --
---------- ---------- ---------- ---------- -------- -------- --------
Total Expenses................. 267,325 235,532 235,297 235,297 88,904 65,182 65,182
Income from Partnerships and
Related Fees..................... 137,180 132,945 130,171 130,171 15,739 62,225 62,225
Operating Income................... 182,795 167,442 134,739 134,739 7,499 59,381 59,381
Gain(Loss) on Dispositions......... -- (28,500) 9,412 9,412 -- -- --
Interest Expense................... -- -- -- 41,296(5) -- 3,015 20,648(5)
---------- ---------- ---------- ---------- -------- -------- --------
Income Before Provision for
Income Taxes................... 182,795 138,942 144,151 102,855 7,499 56,366 38,733
Provision for Income Taxes......... 74,398 60,857 59,246 42,728 3,000 22,546 15,493
---------- ---------- ---------- ---------- -------- -------- --------
Net Income(2)(4)................. $ 108,397 $ 78,085 $ 84,905 $ 60,127 $ 4,499 $ 33,820 23,240
========== ========== ========== ========== ======== ======== ========
EARNINGS PER SHARE DATA(6):
Basic............................ $ 3.20 $ 2.30 $ 2.49 $ 1.76 $ 0.13 $ 0.99 $ 0.68
Diluted.......................... $ 3.19 $ 2.29 $ 2.48 $ 1.76 $ 0.13 $ 0.98 $ 0.67
SHARES USED IN COMPUTING EARNINGS
PER SHARE(6):
Basic............................ 33,904 34,003 34,153 34,153 34,218 34,263 34,263
Diluted.......................... 33,977 34,058 34,213 34,213 34,264 34,574 34,574
OTHER FINANCIAL DATA:
EBITDA(2)(3)(7).................... $ 199,117 $ 183,671 $ 156,669 $ 156,669(4) $ 18,529 $ 69,237 $ 69,237
Cash Flows from Operating
Activities(8).................... $ 136,602 $ 100,538 $ 99,654 $ 74,876(5) $ 93,627 $ 35,761 $ 25,181(5)
Cash Flows from Investing
Activities(8).................... $ (43,012) $ (16,456) $ 105,732 $ 105,732 $(11,443) $ (7,344) $ (7,344)
Cash Flows from Financing
Activities(8).................... $ (92,146) $ (85,466) $ (205,414) $ (180,636)(5) $(82,187) $(28,241) $(17,661)
Capital Expenditures(9)............ $ 43,012 $ 37,824 $ 16,268 $ 16,268 $ 11,443 $ 7,344 $ 7,344
Gross Advertising Sales(10)........ $1,145,944 $1,115,560 $1,067,242 $1,067,242 $302,053 $402,082 $402,082
</TABLE>
8
<PAGE> 13
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
-------------------------------- --------------
HISTORICAL HISTORICAL
-------------------------------- --------------
1995 1996 1997 1998
-------- -------- -------- --------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Total Assets(2)................................... $520,214 $502,193 $382,286 $ 391,490
Long Term Debt.................................... -- -- -- 497,750
Shareholders' Equity (Deficit).................... $386,565 $379,184 $258,675 $(226,279)
</TABLE>
- ---------------
(1) See "Pro Forma Condensed Consolidated Financial Statements".
(2) The summary financial data above include amounts related to businesses that
have been sold and will not be included in Donnelley's results in future
periods. Donnelley's West Coast proprietary yellow pages business was sold
in May 1996 and Donnelley's East Coast proprietary yellow pages business
was sold in December 1997. The above summary financial data contain the
following amounts applicable to those businesses:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
1995 1996 1997 JUNE 30, 1997
-------- ------- ------- ------------------
<S> <C> <C> <C> <C>
Revenues......................... $140,104 $97,263 $77,979 $15,718
Operating Income................. $ 22,250 $18,587 $10,969 $ 124
Depreciation and Amortization.... $ 2,944 $ 1,323 $ 848 $ 426
Total Assets..................... $131,751 $80,962 -- $58,849
Gross Advertising Sales.......... $133,389 $89,939 $73,753 $18,601
</TABLE>
(3) Allocations of historical corporate expenses of the Parent Company are
included in operating expenses and general and administrative expenses.
Donnelley's management believes these allocations are reasonable. However,
the costs of these services and benefits allocated to Donnelley are not
necessarily indicative of the costs that would have been incurred if
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 $10.6 million and $10.0 million
for the six months ended June 30, 1997 and the six months ended June 30,
1998, respectively.
(4) 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 the Parent Company and $4.9 million more
than was allocated for the first six months of 1998. This amount is not
reflected in the applicable pro forma figures.
(5) Adjusted to reflect the Offering and borrowings under the New Credit
Facility, as if each were effected on January 1, 1997. In connection with
the Distribution, Donnelley borrowed $350 million under the New Credit
Facility and issued $150 million of Notes in the Offering of the Old Notes
(the "Offering"). The net proceeds of the Notes, along with Donnelley's
borrowings under the New Credit Facility, were used (i) to repay
indebtedness of the Parent Company, primarily commercial paper, (ii) to pay
costs and expenses related to the Distribution and (iii) to repay
indebtedness of the Parent Company to subsidiaries which, following the
Distribution, are subsidiaries of New D&B. This $500 million of debt is an
obligation of
9
<PAGE> 14
Donnelley after the Distribution. At June 30, 1998, the Company has total
indebtedness of $500 million and a shareholders' deficit of $226 million. As of
June 30, 1998 the debt is comprised of:
<TABLE>
<CAPTION>
BANK FINANCING
-------------------------------------------------------------------------------
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......... 7.19% 7.19% 7.44% 7.69% 9.13%
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>
Subsequent to borrowings under the New Credit Facility, Donnelley entered
into three interest rate swap transactions with respect to the LIBOR
component of the loans which effectively converted part of its floating
rates interest obligations to fixed rates. The swap transactions total in
aggregate $175 million of the $350 million of loans under the New Credit
Facility. As a result of the foregoing swaps, the weighted average interest
rate is 7.517% per annum. The swap agreements have terms of three to five
years. Therefore, at the end of the first three year period, the weighted
average interest rate will change.
Interest expense also includes the amortization of estimated financing
costs.
(6) On July 14, 1998, Donnelley Corp.'s Board of Directors approved a reverse
one-for-five stock split of its outstanding common stock subject to
approval by its shareholders. A special meeting of shareholders was held on
August 24, 1998 and the reverse one-for-five stock split was approved. The
share and per share information provided herein has been adjusted to
reflect such reverse stock split.
(7) EBITDA represents earnings before interest, taxes, depreciation,
amortization and gains and losses on dispositions of businesses. EBITDA is
a widely recognized financial indicator of a company's ability to service
or incur debt. EBITDA is not a measurement of operating performance
computed in accordance with generally accepted accounting principles and
should not be considered as a substitute for operating income, net income,
cash flows from operations or other statement of operations or cash flow
data prepared in conformity with generally accepted accounting principles,
or as a measure of profitability or liquidity. In addition, EBITDA may not
be comparable to similarly titled measures of other companies. EBITDA may
not be indicative of the historical operating results of Donnelley, nor is
it meant to be predictive of future results of operations or cash flows.
EBITDA as presented does not give effect to the sale of businesses
described in note 2 above or the increase in expenses described in note 4
above. The Company estimates that after giving effect to such items, its
EBITDA for 1997 would have been approximately $136,923.
(8) No data is available prior to the year ended December 31, 1995.
(9) Capital expenditures include Donnelley's investment in its new publishing
center in Raleigh, North Carolina, which totaled approximately $23 million
and $18 million in 1995 and 1996, respectively.
(10) The unaudited gross advertising sales figures represent the billing value
of advertisements sold by Donnelley and DonTech.
10
<PAGE> 15
RISK FACTORS
In addition to the other information set forth herein, prospective
investors should carefully consider the following information in evaluating the
Company and its business prior to accepting the Exchange Offer.
LEVERAGE AND ABILITY TO SERVICE DEBT; NEGATIVE SHAREHOLDERS' EQUITY
As of June 30, 1998, Donnelley has approximately $500 million of
indebtedness (of which $150 million consists of the Notes and the balance
consists of $350 million of borrowings under the New Credit Facility) and a
shareholder's deficit of approximately $226 million. At June 30, 1998, Donnelley
has $50 million of unused capacity available under the Revolving Facility
following the Offering. See "Capitalization". In addition, the Indenture and the
New Credit Facility will allow Donnelley to incur additional indebtedness under
certain circumstances. The ability of Donnelley to make payments with respect to
the Notes and to satisfy its other debt obligations will depend on the Company's
future operating performance, which will be affected by prevailing economic
conditions and financial, business, competitive and other factors, many of which
are beyond the Company's control.
Donnelley believes, based on current circumstances, that Donnelley's cash
flow, together with available credit capacity under the New Credit Facility,
will be sufficient to permit Donnelley to meet its operating expenses and
capital expenditures and to service its debt requirements as they become due for
the foreseeable future. Donnelley may, however, need to refinance all or a
portion of the Notes on or prior to maturity, and there can be no assurance that
Donnelley will generate sufficient cash flow or that future borrowings will be
available under the New Credit Facility in an amount sufficient to enable
Donnelley to service its indebtedness, including the Notes, or to fund its other
liquidity needs. If 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 Donnelley is leveraged could have important
consequences to holders of the Notes, including (i) Donnelley's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired; (ii)
approximately 75%-80% of Donnelley's cash flows from operations may be dedicated
to the payment of debt service on its indebtedness, thereby reducing the funds
available to Donnelley for its operations; (iii) Donnelley may be more leveraged
than certain of its competitors, which may place Donnelley at a relative
competitive disadvantage; (iv) Donnelley's flexibility in planning for, or
reacting to, changes in its business and industry may be limited; and (v)
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 Indenture and the New Credit Facility contain financial and other
restrictive covenants that will limit the ability of Donnelley to, among other
things, borrow additional funds. Failure by 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 Donnelley. In addition, the degree to
which Donnelley is leveraged could prevent it from repurchasing all of the Notes
tendered to it upon the occurrence of a Change of Control. See "Description of
Notes -- Covenants -- Change of Control" and "Description of New Credit
Facility".
SUBORDINATION OF THE NOTES; DONNELLEY CORP. GUARANTEE
The Notes and the Donnelley Corp. Guarantee will be subordinated in right
of payment to all current and future Senior Debt and Donnelley Corp. Senior
Debt. Upon any distribution to creditors of Donnelley or Donnelley Corp. in a
liquidation or dissolution of Donnelley or Donnelley Corp. or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to
Donnelley or Donnelley Corp. or its property, the holders of Senior Debt and
Donnelley Corp. Senior Debt will be
11
<PAGE> 16
entitled to be paid in full before any payment may be made with respect to the
Notes. In addition, the subordination provisions of the Indenture provide that
payments with respect to the Notes will be blocked in the event of a payment
default on Senior Debt and may be blocked for up to 179 of each 360 days in the
event of certain non-payment defaults on Senior Debt. In the event of a
bankruptcy, liquidation or reorganization of Donnelley or Donnelley Corp.,
holders of the Notes will participate ratably with all holders of subordinated
indebtedness of Donnelley or Donnelley Corp. that is deemed to be of the same
class as the Notes, and potentially with all other general creditors of
Donnelley, based upon the respective amounts owed to each holder or creditor, in
the remaining assets of Donnelley. In any of the foregoing events, there can be
no assurance that there would be sufficient assets to pay amounts due on the
Notes. As a result, holders of Notes may receive less, ratably, than the holders
of Senior Debt and other general creditors of Donnelley. As of June 30, 1998,
$350 million of Senior Debt is outstanding under the New Credit Facility.
Donnelley has $50 million of unused capacity under the Revolving Facility
following the Offering. The Indenture and the New Credit Facility permit the
incurrence of additional indebtedness, including Senior Debt, by Donnelley under
certain circumstances. See "Description of New Credit Facility" and "Description
of Notes".
RESTRICTIONS IMPOSED BY THE NEW CREDIT FACILITY AND THE INDENTURE
The New Credit Facility and the Indenture contain a number of significant
covenants that, among other things, limit or restrict the ability of 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 Donnelley's ability to finance its future operations
or capital needs or engage in other business activities that may be in the
interest of Donnelley. In addition, the New Credit Facility also requires
Donnelley to maintain compliance with certain financial ratios. The ability of
Donnelley to comply with such ratios may be affected by events beyond
Donnelley's control. A breach of any of these covenants or the inability of
Donnelley to comply with the required financial ratios could result in a default
under the Indenture and the New Credit Facility, as applicable. In the event of
any such default, (i) the indebtedness under the Notes could be accelerated and
(ii) the lenders under the New Credit Facility could elect to declare all
borrowings outstanding under the New Credit Facility, together with accrued
interest and other fees, to be due and payable, to require Donnelley to apply
all of its available cash to repay such borrowings or to prevent Donnelley from
making debt service payments on the Notes. If Donnelley were unable to repay any
such borrowings when due, the lenders could proceed against their collateral,
which consists of substantially all of Donnelley's assets. If the indebtedness
under the New Credit Facility or the Notes were to be accelerated, there can be
no assurance that the assets of Donnelley would be sufficient to repay such
indebtedness in full. See "Description of the Notes" and "Description of New
Credit Facility".
DEPENDENCE ON KEY CONTRACTS
Donnelley's business is dependent upon several significant partnership and
sales agency agreements. These agreements include the DonTech partnership, a
partnership with a subsidiary of Ameritech, and the CenDon partnership
("CenDon"), a partnership with a subsidiary of Sprint, as well as sales agency
agreements with subsidiaries of Bell Atlantic and Sprint. The equity income from
the DonTech partnership and the fees from other arrangements with an affiliate
of Ameritech, as well as the equity income from the CenDon partnership, are
included in Donnelley's (and Donnelley Corp.'s) income statement as income from
partnerships and related fees. The DonTech partnership and other arrangements
with an affiliate of Ameritech represented approximately 64%, and the CenDon
partnership and other arrangements with a subsidiary of Sprint represented
approximately 15%, of Donnelley's (and Donnelley Corp.'s) operating income
before corporate overhead and depreciation and amortization expense in 1997. The
Bell Atlantic sales agency
12
<PAGE> 17
agreement represented approximately 18% of Donnelley's (and Donnelley Corp.'s)
operating income before corporate overhead and depreciation and amortization
expense in 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 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 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 Donnelley's business, financial condition and results
of operations. In addition, although profits from the DonTech and CenDon
partnerships have historically been distributed to Donnelley on a monthly basis,
Donnelley does not control either partnership and its failure to receive
distributions from either for any reason would have a material adverse effect on
Donnelley's (and Donnelley Corp.'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 Donnelley and Donnelley Corp.,
including the DonTech partnership. The Distribution does not constitute a change
of control under these agreements.
From these relationships, 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 Donnelley with respect to these account receivable balances could
have a material adverse effect on 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. Donnelley provides yellow
pages advertising sales and publishing services to local telephone companies
pursuant to long-standing partnership and other agreements with subsidiaries of
Ameritech, Bell Atlantic and Sprint. 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 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.
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 Donnelley's
control, These factors include, among others, 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 Donnelley to increase its publishing services
capacity); and integrate the information systems, software and other technology
used by Donnelley's personnel in new markets with Donnelley's other information
systems, software and technology. There can be no assurance that Donnelley will
be able to effectively operate and manage any yellow pages advertising sales and
publishing business outsourced to it by local telephone companies.
13
<PAGE> 18
COMPETITION
There is competition for yellow pages advertising sales to varying degrees
in the Company's markets from the sales forces of yellow pages publishers with
which the Company is not affiliated. These yellow pages publishers include local
telephone companies with which the Company 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, Donnelley
benefits from its long-term contractual relationships with affiliates of the
largest potential competitor in a directory market, the incumbent local
telephone company. While 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 Company'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. The increasing use of the Internet by consumers and
businesses as a means to transact business may result in new technologies being
developed and services provided that could compete with the Company's products
and services. There can be no assurance that the Company will be able to
successfully compete in responding to any such developments.
TECHNOLOGICAL ADAPTATION AND COMPETITION
The Company 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
strategic relationships. 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, the
Company'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 the Company 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 Donnelley's business,
operating results and financial condition.
POTENTIAL CONTINGENT LIABILITIES
In connection with the Distribution, Donnelley Corp. and New D&B have
entered into an agreement (the "Distribution Agreement"), which, in part,
provides that New D&B has assumed substantially all liabilities of the Parent
Company and any subsidiaries of the Parent Company immediately prior to the
Distribution (except for certain liabilities which relate primarily to
Donnelley's business, the Offering and the borrowings under the New Credit
Facility) and that New D&B will indemnify Donnelley Corp. and Donnelley for all
such liabilities. The liabilities assumed by New D&B include contingent
liabilities stemming from the complaint filed on July 29, 1996 by Information
Resources, Inc. ("IRI") in the United States District Court for the Southern
District of New York, naming as defendants the Parent Company, A.C. Nielsen
Company ("A.C. Nielsen") and IMS International Inc. ("IMS") (the "IRI Action").
The complaint alleges, among other things, various violations of the antitrust
laws and seeks damages in excess of $350 million, which IRI is seeking to
14
<PAGE> 19
have trebled under the antitrust laws. IRI also seeks punitive damages of an
unspecified amount. Under the Distribution Agreement, New D&B has assumed and
will indemnify Donnelley and Donnelley Corp. against any payments to be made by
Donnelley or Donnelley Corp. in respect of the IRI Action. See "-- Litigation"
below. However, if such contingent liabilities were to become payable and New
D&B were unable to meet its obligations with respect to such liabilities, such
events could have a material adverse effect on the financial position of
Donnelley Corp. and Donnelley.
Pursuant to the Distribution Agreement, New D&B assumed certain significant
liabilities of the Parent Company. If New D&B were unable to meet its
obligations with respect to such liabilities, Donnelley Corp. might be obligated
to satisfy such liabilities. Such events could have a material adverse effect on
the financial position of Donnelley Corp. and Donnelley.
The Distribution Agreement provides that Donnelley Corp. and New D&B will
comply, and otherwise not take action inconsistent, with each representation and
statement made to the Internal Revenue Service ("IRS") in connection with the
Parent Company's request for a ruling as to certain tax aspects of the
Distribution. Although the Parent Company has received a ruling from the IRS to
the effect that the Distribution qualifies as a tax-free distribution, the
ruling is based on these representations and statements, and there can be no
assurance that events occurring subsequent to the Distribution, or events not
disclosed in the Parent Company's request for the ruling (of which Donnelley
Corp. believes there to be none), will not cause the Distribution to be deemed a
taxable distribution. In the event that the Distribution fails to constitute a
tax-free distribution, a corporate tax (which would be in the range of
approximately $1.5 to $2.0 billion) would be payable by the consolidated group,
of which Donnelley Corp. is the common parent, and each member of the
consolidated group, including Donnelley, would be jointly and severally liable
for any such tax.
LITIGATION
On July 29, 1996, IRI filed a complaint in the United States District Court
for the Southern District of New York, naming as defendants the Parent Company,
A.C. Nielsen and IMS (former subsidiaries of the Parent Company). The complaint
alleges, among other things, various violations of the antitrust laws and
damages in excess of $350 million, which IRI is seeking to have trebled under
the antitrust laws. IRI also seeks punitive damages in an unspecified amount.
Pursuant to the Distribution Agreement, New D&B will assume and indemnify
Donnelley Corp. and Donnelley against any payments to be made by Donnelley Corp.
or Donnelley in respect of the IRI Action pursuant to the 1996 Distribution
Agreement (as defined), pursuant to the Indemnity and Joint Defense Agreement
(as described below) or otherwise, including any ongoing legal fees and expenses
related thereto.
In addition to the indemnity within the Distribution Agreement generally
covering various liabilities, including the IRI Action, the Parent Company,
ACNielsen and Cognizant Corporation ("Cognizant"), formerly the parent Company
of IMS, have entered into an Indemnity and Joint Defense Agreement (the
"Indemnity and Joint Defense Agreement") pursuant to which ACNielsen has agreed
to be responsible for any potential liabilities which may ultimately be incurred
by the Parent Company 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, the Parent
Company and Cognizant have agreed that to the extent that ACNielsen is unable to
satisfy any such liabilities in full and remain financially viable, the Parent
Company 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 a distribution agreement, dated as of
October 28, 1996, among the Parent Company, Cognizant and ACNielsen, as a
condition to the Distribution, New D&B is required to undertake to be jointly
and severally liable with Donnelley Corp. to Cognizant and ACNielsen.
15
<PAGE> 20
TRANSITION TO AN INDEPENDENT PUBLIC COMPANY
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 Donnelley been operated independently during the periods
presented. Historically, the Parent Company has provided substantially all of
Donnelley's corporate services and employee benefits. While Donnelley's
management believes the costs of these services and benefits charged to
Donnelley have been reasonably equivalent to terms which could have been
obtained through arm's-length negotiations with the Parent Company, these costs
may not be indicative of the costs that would have been incurred if Donnelley
had performed or provided these services as an independent company. In addition,
following the Distribution, Donnelley will also be responsible for the
additional costs associated with 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
The Company derives its sales commissions and partnership income and
related fees from the sale of advertising in yellow pages directories.
Advertising sales by the Company, 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 Donnelley's business, operating results and financial condition.
POTENTIAL CONFLICTS OF INTEREST
In connection with the Distribution, Donnelley Corp. has determined certain
contractual and other relationships between itself (which currently holds
Donnelley as its only subsidiary), and New D&B (which currently holds Dun &
Bradstreet, Inc. and Moody's Investors Service, Inc. as subsidiaries). These
determinations will survive the Distribution and provide for the allocation
between those entities of tax, employee benefits and certain other liabilities
and obligations arising from periods prior to the Distribution, as well as for
the use of the net proceeds of the Offering by Donnelley and the borrowings
under the New Credit Facility. While Donnelley considers these contractual and
other relationships among Donnelley Corp. and New D&B to be equivalent to terms
which could have been obtained through arm's-length negotiations, these
contractual and other relationships generally were not the result of
arm's-length negotiations.
POTENTIAL INABILITY TO REPURCHASE NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, Donnelley will be required to
offer to repurchase the Notes at 101% of the principal amount of the Notes,
together with accrued and unpaid interest, if any, to the date of purchase. The
New Credit Facility contains, and future Senior Debt of Donnelley may also
contain, prohibitions on the purchase by Donnelley of any Notes prior to their
stated maturity, and provisions which require obligations thereunder to be
repurchased upon a Change of Control. In such circumstances, Donnelley will be
required to (i) repay all or a portion of the outstanding principal of, and pay
any accrued interest on, its Senior Debt, including indebtedness under the New
Credit Facility or (ii) obtain any requisite consent from its lenders (including
under the New Credit Facility) to permit the purchase of the Notes. If Donnelley
is unable to repay all of such indebtedness or is unable to obtain the necessary
consents, Donnelley may be unable to offer to repurchase the Notes, which would
constitute an Event of Default under the Indenture. There can be no assurance
that Donnelley will have sufficient funds available at the time of any Change of
Control to make any debt payment (including repurchases of the Notes) as
described above or that Donnelley would be able to refinance its outstanding
indebtedness in order to permit it to repurchase the Notes or, if such
refinancing were to occur, that such financing would be on terms favorable to
Donnelley. See "Description of Notes -- Covenants -- Change of Control".
16
<PAGE> 21
The events that constitute a Change of Control under the Indenture may also
be events of default under the New Credit Facility or other Senior Debt of
Donnelley. Such events may permit the holders under such debt instruments to
accelerate the payment of such debt and, if the debt is not paid, to proceed
against their collateral (which, in the case of the New Credit Facility, will
consist of substantially all of the assets and the capital stock of Donnelley),
if any, or to commence litigation that could ultimately result in a sale of
substantially all of the assets of Donnelley, thereby limiting Donnelley's
ability to raise cash to repurchase the Notes.
ABSENCE OF A PUBLIC MARKET FOR THE NOTES
The Exchange Notes are being offered to holders of Old Notes. The Exchange
Notes are new securities for which there currently is no established trading
market. Although the Initial Purchasers have informed the Company that they
currently intend to make a market in the Notes, they are not obligated to do so,
and any such market-making may be discontinued at any time without notice.
Accordingly, there can be no assurance as to the development or liquidity of any
market for the Notes, including the Exchange Notes. The Company does not intend
to apply for listing of the Notes on any securities exchange or for quotation
through NASDAQ. If a trading market develops for the Exchange Notes, future
trading prices of such securities will depend on many factors, including
prevailing interest rates, the Company's results of operations and financial
condition and the market for similar securities.
RISK OF FRAUDULENT TRANSFER
The net proceeds of the Offering and borrowings under the New Credit
Facility were dividended to the Parent Company to be used (i) to repay
indebtedness of the Parent Company, primarily commercial paper, (ii) to pay
costs and expenses related to the Distribution and (iii) to repay indebtedness
of the Parent Company to subsidiaries of New D&B. Under applicable provisions of
the U.S. Bankruptcy Code or comparable provisions of state fraudulent transfer
or conveyance laws, if Donnelley or Donnelley Corp., at the time it issued the
Notes or Donnelley Corp. Guarantee, as the case may be, (i) incurred such
indebtedness with the intent to hinder, delay or defraud creditors, or (ii) (a)
received less than reasonably equivalent value or fair consideration for
incurring such indebtedness and (b) (1) was insolvent at the time of incurrence,
(2) was rendered insolvent by reason of such incurrence (and the application of
the proceeds thereof), (3) was engaged or was about to engage in a business or
transaction for which the assets remaining with Donnelley or Donnelley Corp.
constituted unreasonably small capital to carry on its businesses, or (4)
intended to incur, or believed that it would incur, debts beyond its ability to
pay such debts as they mature, then, in each case, a court of competent
jurisdiction could void, in whole or in part, the Notes or the Donnelley Corp.
Guarantee, or, in the alternative, subordinate the Notes or Donnelley Corp.
Guarantee to existing and future indebtedness of Donnelley or Donnelley Corp. In
addition, the payment of interest and principal by Donnelley or Donnelley Corp.
pursuant to the Notes could be voided and required to be returned to the person
making such payment, or to a fund for the benefit of the creditors of Donnelley
or Donnelley Corp. The measure of insolvency for purposes of the foregoing will
vary depending upon the law applied in such case. Generally, however, Donnelley
or Donnelley Corp. would be considered insolvent if the sum of its debts,
including contingent liabilities, was greater than all of its assets at fair
valuation or if the present fair saleable value of its assets was less than the
amount that would be required to pay the probable liability on its existing
debts, including contingent liabilities, as they become absolute and mature, or
if it could not pay its debts as they become due.
On the basis of historical financial information, recent operating history
and other factors, Donnelley and Donnelley Corp. believe that, for purposes of
all such insolvency, bankruptcy and fraudulent transfer or conveyance laws, the
Notes and Donnelley Corp. Guarantee were (and in the case of the Exchange Notes,
are being) issued without the intent to hinder, delay or defraud creditors and
for proper purposes and in good faith and that Donnelley and Donnelley Corp.,
after
17
<PAGE> 22
the issuance of the Notes and the Donnelley Corp. Guarantee and the application
of the proceeds thereof, will be solvent, will have sufficient capital for
carrying on their business and will be able to pay their debts as they mature.
There can be no assurance, however, that a court passing on such questions would
agree with Donnelley's and Donnelley Corp.'s view.
YEAR 2000 ISSUE
The Year 2000 issue 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 Donnelley's currently
installed computer systems and software products have been tested for Year 2000
problems and Donnelley anticipates that these computer systems and software
products will be fully Year 2000 compliant. Also, 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, Donnelley believes that it
will be able to mitigate its exposure to the Year 2000 issue before 2000.
However, if continued modifications and conversions are not made, or are not
timely completed, the Year 2000 issue could have a material adverse effect on
Donnelley's operating results and financial condition.
Donnelley plans to have its Year 2000 compliance program substantially
completed by the end of 1998. Donnelley is targeting this date to provide itself
additional time in case of any unanticipated delays or in the event additional
complications arise. Through June 30, 1998, Donnelley has spent approximately
$2.9 million addressing the Year 2000 issue and estimates that it will spend an
additional $1.1 million in 1998 and approximately $1.1 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 Donnelley's computer systems, software, databases or other
technology interface or are integrated, or those of third parties with which
Donnelley maintains business relationships, may not accept input of, store,
manipulate and output dates in the year 2000 or thereafter without error or
interruption. 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. Donnelley is also querying applicable third parties with which it
maintains business relationships as to their progress in identifying and
addressing their Year 2000 issues. However, there can be no assurance that
Donnelley will identify all interface- or integration-related or third party
date-handling problems in advance of their occurrence, or that Donnelley will be
able to successfully remedy problems that are discovered. The expenses of
Donnelley's efforts to identify and address such problems, or the expenses or
liabilities to which Donnelley may become subject as a result of such problems,
could have a material adverse effect on its operating results and financial
condition.
18
<PAGE> 23
USE OF PROCEEDS
There will be no proceeds to the Company from the issuance of the Exchange
Notes pursuant to the Exchange Offer. In consideration for issuing the Exchange
Notes in exchange for the Old Notes as described in this Prospectus, the Company
will receive Old Notes in like principal amount. The Old Notes surrendered in
exchange for the Exchange Notes will be retired and canceled. Accordingly, the
issuance of the Exchange Notes will not result in any change in the indebtedness
of the Company. The net proceeds to Donnelley from the sale of the Old Notes was
approximately $145.3 million after deducting the Initial Purchasers' discount
and estimated expenses payable by Donnelley. The net proceeds, along with
Donnelley's borrowings under the New Credit Facility of $350 million
(approximately $344.2 million after deducting estimated fees and expenses), were
dividended to the Parent Company to be used (i) to repay indebtedness of the
Parent Company, primarily commercial paper, (ii) to pay costs and expenses
related to the Distribution and (iii) to repay indebtedness of the Parent
Company to subsidiaries of New D&B. Donnelley has $50 million of unused capacity
available under the Revolving Facility.
19
<PAGE> 24
CAPITALIZATION
The following table sets forth the capitalization of Donnelley Corp. as of
June 30, 1998. This table should be read in conjunction with "Selected Financial
Data", "Management's Discussion and Analysis of Financial Condition and Results
of Operations", "Use of Proceeds" and the financial statements and related notes
appearing elsewhere in this Prospectus. On July 14, 1998, Donnelley Corp.'s
Board of Directors approved a reverse one-for-five stock split of its
outstanding common stock subject to approval by its shareholders. A special
shareholders meeting was held on August 24, 1998 and the reverse stock split was
approved. The share and per share information provided herein has been adjusted
to reflect such reverse stock split.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
HISTORICAL
-------------------
(IN THOUSANDS
EXCEPT SHARE DATA)
<S> <C>
Cash and cash equivalents................................... $ 208(1)
Debt:
New Credit Facility(2).................................... $ 350,000
Notes..................................................... 150,000
---------
Total 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 -- 51,387,942 shares........... 51,388
Retained Earnings (Deficit)................................. (260,537)
Treasury Stock, at par, 17,129,679 shares................... (17,130)
---------
Total Equity (Deficit)................................. (226,279)
---------
Total capitalization........................................ $ 273,721
=========
</TABLE>
- ---------------
(1) In connection with the Distribution, Donnelley dividended substantially all
of its cash to the Parent Company for transfer to New D&B.
(2) The New Credit Facility provides for up to $100 million of revolving credit
borrowings under the Revolving Facility and up to $300 million of term loans
under the Term Facilities. Loans obtained under the Revolving Facility
mature in 2004, and loans obtained under the Term Facilities mature in
varying amounts from 1998 through 2006. Donnelley borrowed $50 million and
$300 million under the Revolving Facility and Term Facilities, respectively,
concurrently with the closing of the Offering. Donnelley has $50 million of
unused capacity available under the Revolving Facility. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Description of New
Credit Facility".
20
<PAGE> 25
SELECTED FINANCIAL DATA
Donnelley is a wholly-owned subsidiary of Donnelley Corp. Donnelley Corp.
has no other operations other than through the Donnelley subsidiary. Therefore,
on a consolidated basis, the financial statements of Donnelley Corp. and
Donnelley are substantially identical. The historical selected consolidated
financial data of Donnelley Corp. 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 consolidated financial statements of the Donnelley Corp. included
elsewhere herein. Donnelley Corp.'s audited consolidated financial statements
included elsewhere herein are presented as if Donnelley Corp. were a stand-alone
entity for all periods presented. The historical selected consolidated financial
data of Donnelley Corp. as of December 31, 1993, 1994 and 1995, and for the
years ended December 31, 1993 and 1994, are derived from the unaudited
consolidated financial statements of Donnelley Corp., 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 historical
selected consolidated financial data as of June 30, 1998 and for the six months
ended June 30, 1997 and 1998 have been derived from the unaudited interim
consolidated financial statements of Donnelley Corp., 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 Donnelley Corp. in the future. The information set forth
below should be read in conjunction with the information under "Capitalization",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere in
this Prospectus.
21
<PAGE> 26
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
PRO
HISTORICAL FORMA(1)
-------------------------------------------------------------- ----------
1993 1994 1995 1996 1997 1997
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED 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(4)
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................ -- -- -- -- -- 41,296(5)
---------- ---------- ---------- ---------- ---------- ----------
Income Before Provision for
Income Taxes................. 164,688 213,249 182,795 138,942 144,151 102,855
Provision for Income Taxes...... 65,875 85,300 74,398 60,857 59,246 42,728
---------- ---------- ---------- ---------- ---------- ----------
Net Income(2)(4)............. $ 98,813 $ 127,949 $ 108,397 $ 78,085 $ 84,905 $ 60,127
========== ========== ========== ========== ========== ==========
EARNINGS PER SHARE(6):
Basic.......................... $ 2.79 $ 3.76 $ 3.20 $ 2.30 $ 2.49 $ 1.76
Diluted........................ $ 2.79 $ 3.76 $ 3.19 $ 2.29 $ 2.48 $ 1.76
SHARES USED IN COMPUTING
EARNINGS PER SHARE(6):
Basic.......................... 35,440 33,989 33,904 34,003 34,153 34,153
Diluted........................ 35,440 33,989 33,977 34,058 34,213 34,213
OTHER FINANCIAL DATA:
EBITDA(2)(3)(7)................. $ 180,382 $ 228,693 $ 199,117 $ 183,671 $ 156,669 $ 156,669(4)
Cash Flow from Operating
Activities(8).................. -- -- $ 136,602 $ 100,538 $ 99,654 $ 74,876(5)
Cash Flows from Investing
Activities(8).................. -- -- $ (43,012) $ (16,456) $ 105,732 $ 105,732
Cash Flows from Financing
Activities(8).................. -- -- $ (92,146) $ (85,466) $ (205,414) $(180,636)(5)
Capital Expenditures(9)......... -- -- $ 43,012 $ 37,824 $ 16,268 $ 16,268
Ratio of Earnings to Fixed
Charges(10).................... -- -- -- -- -- 3.3x
Gross Advertising Sales(11)..... $1,151,700 $1,108,705 $1,145,944 $1,115,560 $1,067,242 $1,067,242
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
PRO
HISTORICAL FORMA(1)
------------------- --------
1997 1998 1998
-------- -------- --------
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA(2):
Revenues........................ $ 80,664 $ 62,338 $ 62,338
Expenses:
Operating Expenses(3).......... 32,167 19,356 19,356
General and Administrative(3).. 45,707 35,970 35,970(4)
Depreciation and Amortization.. 11,030 9,856 9,856
Restructuring Charges.......... -- -- --
-------- -------- --------
Total Expenses............... 88,904 65,182 65,182
Income from Partnerships and
Related Fees................... 15,739 62,225 62,225
Operating Income................ 7,499 59,381 59,381
Gain(Loss) on Dispositions...... -- -- --
Interest Expense................ -- 3,015 20,648(5)
-------- -------- --------
Income Before Provision for
Income Taxes................. 7,499 56,366 38,733
Provision for Income Taxes...... 3,000 22,546 15,493
-------- -------- --------
Net Income(2)(4)............. $ 4,499 $ 33,820 $ 23,240
======== ======== ========
EARNINGS PER SHARE(6):
Basic.......................... $ 0.13 $ 0.99 $ 0.68
Diluted........................ $ 0.13 $ 0.98 $ 0.67
SHARES USED IN COMPUTING
EARNINGS PER SHARE(6):
Basic.......................... 34,218 34,263 34,263
Diluted........................ 34,264 34,574 34,574
OTHER FINANCIAL DATA:
EBITDA(2)(3)(7)................. $ 18,529 $ 69,237 $ 69,237
Cash Flow from Operating
Activities(8).................. $ 93,627 $ 35,761 $ 25,181
Cash Flows from Investing
Activities(8).................. $(11,443) $ (7,344) $ (7,344)
Cash Flows from Financing
Activities(8).................. $(82,187) $(28,241) $(17,661)
Capital Expenditures(9)......... $ 11,443 $ 7,344 $ 7,344
Ratio of Earnings to Fixed
Charges(10).................... -- -- 2.7x
Gross Advertising Sales(11)..... $302,053 $402,082 $402,082
</TABLE>
22
<PAGE> 27
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------------------------ --------------
HISTORICAL HISTORICAL
------------------------------------------------------ --------------
1993 1994 1995 1996 1997 1998
-------- -------- ---------- -------- -------- --------------
(IN
(IN THOUSANDS) THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Total Assets(l)...................... $512,165 $526,168 $520,214 $502,193 $382,286 $ 391,490
Long Term Debt....................... -- -- -- -- -- 497,750
Shareholders' Equity (Deficit)....... $350,942 $370,314 $386,565 $379,184 $258,675 $(226,279)
</TABLE>
- ---------------
(1) See "Pro Forma Condensed Consolidated Financial Statements".
(2) The selected financial data above include amounts related to businesses
that have been sold and will not be included in Donnelley's results in
future periods. Donnelley's West Coast proprietary yellow pages business
was sold in May 1996 and Donnelley's East Coast proprietary yellow pages
business was sold in December 1997. The above selected financial data
contain the following amounts applicable to those businesses:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
1993 1994 1995 1996 1997 JUNE 30, 1997
-------- -------- -------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................ $166,176 $148,785 $140,104 $97,263 $77,979 $15,718
Operating Income................ $ 13,199 $ 27,926 $ 22,250 $18,587 $10,969 $ 124
Depreciation and Amortization... $ 4,095 $ 2,842 $ 2,944 $ 1,323 $ 848 $ 426
Total Assets.................... $163,440 $138,345 $131,751 $80,962 -- $58,849
Gross Advertising Sales......... $156,631 $139,060 $133,389 $89,939 $73,753 $18,601
</TABLE>
(3) Allocations of historical corporate expense of the Parent Company are
included in operating expenses and general and administrative expenses.
Donnelley's management believes these allocations are reasonable. However,
the costs of these services and benefits allocated to Donnelley are not
necessarily indicative of the costs that would have been incurred if
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 $10.6 million and $10.0 million
for the six months ended June 30, 1997 and the six months ended June 30,
1998, respectively. No data is available prior to the year ended December
31, 1995.
(4) 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 $8.6 million annually above the amount which was
allocated in 1997 from the Parent Company and $4.9 million more than was
allocated for the first six months of 1998. This amount is not reflected in
the applicable pro forma figures.
(5) Adjusted to reflect the Offering and borrowings under the New Credit
Facility, as if each were effected on January 1, 1997. In connection with
the Distribution, Donnelley borrowed $350 million under the New Credit
Facility and issued $150 million of Notes in the Offering. The net proceeds
of the Notes, along with Donnelley's anticipated borrowings under the New
Credit Facility, were used (i) to repay indebtedness of the Parent Company,
primarily commercial paper, (ii) to pay costs and expenses related to the
Distribution and (iii) to repay indebtedness of the Parent Company to
subsidiaries which, following the Distribution, are subsidiaries of New
D&B. This $500 million of debt is an obligation of Donnelley. At June 30,
1998, the Company has total indebtedness of $500 million and a
shareholders' deficit of $226 million. As of June 30, 1998, the debt is
comprised of:
<TABLE>
<CAPTION>
BANK FINANCING
-------------------------------------------------------------------------------------
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... 7.19% 7.19% 7.44% 7.69% 9.13%
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>
23
<PAGE> 28
Subsequent to borrowings under the New Credit Facility, Donnelley entered
into three interest rate swap transactions with respect to the LIBOR
component of the loans which effectively converted part of its floating
rates interest obligations to fixed rates. The swap transactions total in
aggregate $175 million of the $350 million of loans under the New Credit
Facility. As a result of the foregoing swaps, the weighted average
interest rate is 7.517% per annum. The swap agreements have terms of three
to five years. Therefore, at the end of the first three year period, the
weighted average interest rate will change.
Interest expense also includes the amortization of estimated financing
costs.
(6) On July 14, 1998, Donnelley Corp.'s Board of Directors approved a reverse
one-for-five stock split of its outstanding common stock subject to
approval by its shareholders. A special meeting of shareholders was held on
August 24, 1998 and the reverse one-for-five stock split was approved. The
share and per share information provided herein has been adjusted to
reflect such reverse stock split.
(7) EBITDA represents earnings before interest, taxes, depreciation,
amortization and gains and losses on dispositions of businesses. EBITDA is
a widely recognized financial indicator of a company's ability to service
or incur debt. EBITDA is not a measurement of operating performance
computed in accordance with generally accepted accounting principles and
should not be considered as a substitute for operating income, net income,
cash flows from operations or other statement of operations or cash flow
data prepared in conformity with generally accepted accounting principles,
or as a measure of profitability or liquidity. In addition, EBITDA may not
be comparable to similarly titled measures of other companies. EBITDA may
not be indicative of the historical operating results of Donnelley, nor is
it meant to be predictive of future results of operations or cash flows.
EBITDA as presented does not give effect to the sale of businesses
described in note 2 above or the increase in expenses described in note 4
above. The Company estimates that after giving effect to such items, its
EBITDA for 1997 would have been approximately $136,923.
(8) No data is available prior to the year ended December 31, 1995.
(9) Capital expenditures include Donnelley's investment in its new publishing
center in Raleigh, North Carolina, which totaled approximately $23 million
and $18 million in 1995 and 1996, respectively.
(10) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges by fixed charges. Fixed
charges consists of interest expense and one-third of operating rental
expense, which management believes is representative of the interest
component of rent expense.
(11) The unaudited gross advertising sales figures represent the billing value
of advertisements sold by Donnelley and DonTech.
24
<PAGE> 29
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed consolidated statements of
operations have been prepared giving effect to the Distribution as if it
occurred on January 1, 1997. The pro forma condensed statements of operations
set forth below do not purport to represent what Donnelley Corp.'s results of
operations actually would have been had the Distribution occurred on the date
indicated or to project Donnelley Corp.'s operating results for any future
period. The pro forma adjustments are based upon available information and
certain assumptions that Donnelley Corp.'s management believes are reasonable.
The pro forma condensed consolidated statements of operations set forth below
should be read in conjunction with, and are qualified in their entirety by, the
information under "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and in the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Registration Statement.
25
<PAGE> 30
R.H. DONNELLEY CORPORATION
PRO FORMA CONDENSED CONSOLIDATED 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.................................. -- $ 39,997(C) 41,296
1,299(D)
-------- -------- --------
Income before Provision for Income Taxes.......... 144,151 (41,296) 102,855
Provision for Income Taxes........................ 59,246 (16,518)(E) 42,728
-------- -------- --------
Net Income........................................ $ 84,905 $(24,778) $ 60,127
======== ======== ========
Earnings Per Share:
Basic........................................... $ 2.49 $ 1.76
======== ========
Diluted......................................... $ 2.48 $ 1.76
======== ========
Shares Used in Computing Earnings Per Share:
Basic........................................... 34,153 34,153
======== ========
Diluted......................................... 34,213 34,213
======== ========
</TABLE>
See notes to pro forma condensed consolidated statements of operations
26
<PAGE> 31
R.H. DONNELLEY CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998
---------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------ ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues............................................ $ 62,338 $ 62,338
Expenses:
Operating Expenses................................ 19,356 19,356
General and Administrative........................ 35,970 35,970(B)
Depreciation and Amortization..................... 9,856 9,856
-------- --------
Total Expenses................................. 65,182 65,182
Income from Partnerships and Other Related Fees..... 62,225 62,225
-------- --------
Operating Income.................................... 59,381 59,381
Interest Expense.................................... 3,015 $ 16,983(C) 20,648
650(D)
-------- -------- --------
Income before Provision for Income Taxes............ 56,366 (17,633) 38,733
Provision for Income Taxes.......................... 22,546 (7,053)(E) 15,493
-------- -------- --------
Net Income.......................................... $ 33,820 $(10,580) $ 23,240
======== ======== ========
Earnings Per Share:
Basic............................................. $ 0.99 $ 0.68
======== ========
Diluted........................................... $ 0.98 $ 0.67
======== ========
Shares Used in Computing Earnings Per Share:
Basic............................................. 34,263 34,263
======== ========
Diluted........................................... 34,574 34,574
======== ========
</TABLE>
See notes to pro forma condensed consolidated statements of operations
27
<PAGE> 32
R.H. DONNELLEY CORPORATION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
A. The pro forma condensed consolidated 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. Donnelley estimates a net increase in operating expense of as much as
approximately $8.6 million annually and $4.9 million more than was allocated
for the first six months of 1998 associated with operating as a publicly
owned company which is not reflected in the pro form condensed consolidated
financial statements.
C. In connection with the Distribution, Donnelley borrowed $350 million under
the New Credit Facility and issued $150 million of senior subordinated
notes. The net proceeds of the Offering, along with Donnelley's borrowings
under the New Credit Facility, were 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
are subsidiaries of New D&B. This $500 million of debt is an obligation of
Donnelley. At June 30, 1998, the Company has total indebtedness of $500
million and a shareholders' deficit of $226 million. As of June 30, 1998,
the debt is 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.......... 7.19% 7.19% 7.44% 7.69% 9.13%
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>
Subsequent to borrowings under the New Credit Facility, Donnelley entered
into three interest rate swap transactions with respect to the LIBOR
component of the loans which effectively converted part of its floating
rates interest obligations to fixed rates. The swap transactions total in
aggregate $175 million of the $350 million of loans under the New Credit
Facility. As a result of the foregoing swaps, the weighted average interest
rate is 7.517% per annum. The swap agreements have terms of three to five
years. Therefore, at the end of the first three year period, the weighted
average interest rate will change. For the year ended December 31, 1997 and
six months ended June 30, 1998, interest expense on the $500 million of debt
was based on a weighted average interest rate of 7.99% per annum.
D. 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.
E. To reflect the tax effect of the pro forma adjustments at the statutory tax
rate.
28
<PAGE> 33
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 Donnelley Corp. was a stand-alone entity for all
periods discussed. This discussion should be read in conjunction with the
financial statements and notes thereto included elsewhere in this Prospectus.
OVERVIEW
On June 3, 1998, the Board of Directors of the Parent Company declared the
Distribution and announced that the Distribution would be effected on June 30,
1998. Following the Distribution, Donnelley Corp.'s only remaining subsidiary is
Donnelley, and each of Donnelley Corp. and New D&B are independent,
publicly-traded companies. In connection with the Distribution, the Parent
Company has been renamed R.H. Donnelley Corporation and New D&B has been renamed
The Dun & Bradstreet Corporation. 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. 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).
Donnelley has retained all the assets and liabilities related to yellow pages
sales, marketing and publishing services after the Distribution. Donnelley is a
wholly-owned subsidiary of Donnelley Corp. Donnelley Corp. has no other
operations other than through the Donnelley subsidiary. Therefore, on a
consolidated basis, the financial statements of Donnelley Corp. and Donnelley
are substantially identical.
The financial statements generally reflect the financial position, results
of operations and cash flows of Donnelley Corp. as if it were a stand-alone
entity for all periods presented. The financial statements include allocations
of certain Parent Company 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 Parent Company corporate overhead) relating to
Donnelley's business which Donnelley's management believes to be reasonable.
However, the costs of these services and benefits charged to Donnelley are not
necessarily indicative of the costs that would have been incurred if Donnelley
had performed or provided these functions as a separate entity. 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 the Parent Company.
The financial information included herein may not necessarily reflect the
results of operations, financial position, changes in shareholder's equity and
cash flows of Donnelley Corp. 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 the Parent Company on a separate company basis.
These rates do not reflect the historical benefit of the Parent Company's global
tax planning actions which have resulted in lower consolidated tax rates.
Historically, the Parent Company used a centralized cash management system to
finance Donnelley's operations. Cash deposits from Donnelley's business were
transferred to the Parent Company on a daily basis and the Parent Company funded
Donnelley's disbursement bank accounts as required. No interest was charged on
these transactions with the Parent Company. Donnelley will not continue to
participate in New D&B's cash management system after the Distribution.
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, Donnelley Corp. and Donnelley after the Distribution and to provide for an
orderly transition, Donnelley Corp. and New D&B entered 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
further
29
<PAGE> 34
descriptions of these agreements see "Relationship Between Donnelley Corp. And
The New Dun & Bradstreet Corporation After The Distribution".
Donnelley earns income from three primary sources: sales commission
revenues, publishing services revenues and partnership income and related fees.
Sales commission revenues from Donnelley's Bell Atlantic operations and its
Sprint sales agency operations are recognized by Donnelley when an advertising
contract is signed with a customer. Sales commission revenues for advertising
sales for the CenDon partnership, for which CenDon is the publisher, are
recognized by Donnelley when a directory is published. Publishing services
revenues are recognized by Donnelley on a straight-line basis as services are
provided to a customer. Donnelley does not recognize the revenues of the DonTech
or CenDon partnerships.
Donnelley recognizes income from the DonTech partnership when an
advertising contract is signed with a customer. Donnelley also receives direct
fees ("Revenue Participation") from an affiliate of Ameritech, which are tied to
advertising sales generated by the DonTech partnership. Donnelley recognizes
income from the CenDon partnership when a directory is published. These items
are included in income from partnerships and related fees.
Since January 1997, certain events and transactions occurred which impact
the comparability of Donnelley's results from period to period. In August 1997,
Donnelley signed a series of agreements with an affiliate of Ameritech changing
the structure of the existing DonTech partnership. A new DonTech partnership was
formed ("DonTech II") and was appointed the exclusive sales agent, in
perpetuity, for yellow page directories which are now published by Ameritech in
Illinois and Northwest Indiana (the "DonTech Restructuring"). As a result of the
DonTech Restructuring, revenues and costs will be recognized more evenly
throughout the year. Prior to the restructuring, revenues and costs were
recognized when each annual directory was published. Under the new structure,
the Company will recognize revenues and costs when a customer signs a sales
contract for an advertisement in a directory, which is an on-going process
throughout the year. The total sales in any given year should be substantially
the same regardless if recognized on a one-time basis when a book is published
or an on-going basis when an advertisement is sold. Accordingly, the effect of
the restructuring should not, on an annual basis, result in materially different
financial results than in 1997. All revenues under the prior structure have been
recognized and are reflected in the 1997 financial results. Also subsequent to
the second quarter of 1997, the Company's contract with Cincinnati Bell expired
in August 1997 and in December 1997, the Company sold its P-East (as defined)
business. Finally, changes in scheduling of directory publication dates and
sales campaigns for both DonTech and Bell Atlantic make period to period
comparisons difficult.
RESULTS OF OPERATIONS
Six Months ended June 30, 1998 Compared with Six Months ended June 30, 1997
Gross advertising sales is the billing value of advertisements sold by the
Company including DonTech. Gross advertising sales figures set forth below are
presented on the same basis on which revenue is recognized (that is, when a
customer signs a sales contract where the Company is a sales agent or where the
directory is published where the Company is the publisher). Gross advertising
sales in the first half of 1998 increased $100.0 million from $302.1 million in
the first half of 1997 to $402.1 million in the first half of 1998. Excluding
P-East and Cincinnati Bell gross advertising sales of $18.6 million and $50.0
million, respectively, gross advertising sales increased by $168.6 million, of
which $139.0 million was due to the DonTech Restructuring. The remaining
increase of $29.6 million is primarily due to scheduling shifts for certain
sales campaigns in the Bell Atlantic region.
On a publication cycle basis (that is, reflecting sales when a directory is
published, regardless of the Company's role), gross advertising sales for 1998
were $458.3 million, compared to $452.1 million, exclusive of Cincinnati Bell
and P-East, for the first six months of 1997. Good growth at DonTech was offset
by lower sales in Bell Atlantic's New York City directories.
30
<PAGE> 35
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 $80.7 million in the first half of 1997 to
$62.3 million in the first half of 1998. Excluding P-East and Cincinnati Bell
revenues of $14.5 million and $13.1 million, respectively, in the first half of
1997, revenues increased from $53.1 million in 1997 to $62.3 million in 1998.
The increase is primarily due to the shift in the scheduling of certain sales
campaigns in the Company's Bell Atlantic markets, which resulted in a $5.7
million increase in revenues. Publishing revenues also increased by $3.3 million
principally due to publishing services which the Company began providing to an
independent yellow pages publisher in 1998 under a long-term agreement.
Partnership income and related fees increased by $46.5 million from $15.7
million in the first half of 1997 to $62.2 million in the first half of 1998.
This increase is attributable to the DonTech Restructuring. Under the terms of
the DonTech Restructuring, the Company receives 50% of the profits generated by
the partnership and receives direct fees (Revenue Participation) from Ameritech
which are tied to advertising sales generated by the partnership. As previously
discussed, DonTech partnership income and related fees are now recognized by
DonTech when a customer signs a sales contract for an advertisement in a
directory, which is an on-going process, whereas under the old structure, these
amounts were recognized when an annual directory was published. Accordingly, as
a result of the DonTech Restructuring, partnership income and related fees will
now be recognized more evenly throughout the year than under the previous
arrangement. The Company also receives 50% of the profits generated by the
CenDon partnership, a partnership between Donnelley and an affiliate of Sprint.
The Company's operating and general and administrative expenses decreased
by $22.6 million, from $77.9 million in the first half of 1997 to $55.3 million
in the first half of 1998. Excluding P-East and Cincinnati Bell operating
expenses of $15.2 million and $6.9 million in 1997, respectively, these costs
decreased by $0.5 million, primarily due to reduced corporate expenses.
The Company's operating income increased by $51.9 million from $7.5 million
in the first half of 1997 to $59.4 million in the first half of 1998. Excluding
P-East and Cincinnati Bell operating income of $0.1 million and $6.2 million in
the first half of 1997, respectively, operating income increased $58.2 million.
The higher operating income in the first half of 1998 is primarily due to an
increase of $46.5 million as a result of the DonTech Restructuring and increased
revenues from Bell Atlantic and publishing operations of $5.8 million and $3.4
million, respectively.
Interest expense of $3.0 million in the first half of 1998 represents the
interest on the debt relating to the New Credit Facility and the Notes for the
period June 5 through June 30 (see "-- Liquidity and Capital Resources").
Donnelley's net income before taxes for the first half of 1998 was $56.4
million compared to $7.5 million in the first half 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 the
Company. 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, Donnelley sold its East
Coast proprietary yellow pages business (P-East) and in May 1996, 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 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 the Company'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
31
<PAGE> 36
gross advertising sales growth in 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 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, the
Company'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 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 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.
Partnership income and related fees decreased in 1997 by 2.1%, from $132.9
million in 1996 to $130.2 million in 1997. Donnelley receives partnership income
primarily from two sources, the CenDon partnership and the DonTech partnership.
Donnelley receives 50% of the profits generated by the CenDon partnership.
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. 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 Donnelley's
share of DonTech's profits. In 1990, 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. In 1997, a two-year program was
instituted that is intended to correct the imbalance and increase the
effectiveness of DonTech's sales force and support operations. 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.
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 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 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.
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
32
<PAGE> 37
$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 Donnelley's Bell Atlantic markets, (ii) a decrease in
Donnelley's share of partnership income from DonTech, (iii) the first full year
of amortization costs related to 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.
Revenues decreased from $312.9 million in 1995 to $270.0 million in 1996,
primarily due to the sale of 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, Donnelley's
revenues were essentially flat with $172.8 million of revenues in 1995 and
$172.7 million in 1996. Revenue growth in 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 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 Donnelley's sales
commission.
Partnership income decreased in 1996 by 3.1%, from $137.2 million in 1995
to $132.9 million in 1996. 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 Donnelley's share of
DonTech's profits and the benefit in 1995 from extending the publishing cycles
for certain directories. 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. Donnelley's 1995 partnership income from CenDon included a
reversal of prior year excess provision accruals of $1.5 million.
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.
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
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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 Donnelley's lower sales commission rate, discussed above, on
sales in its Bell Atlantic markets 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, 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. 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,
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 Donnelley on a
separate company basis. Donnelley's effective tax rates were 40.7%, 43.8% and
41.1% in 1995, 1996 and 1997, respectively. The increase in the rate in 1996 is
related to non-deductible capital losses related to the sale of P-West which
increased the rate by 2.8%.
CHANGES IN FINANCIAL POSITION AT JUNE 30, 1998 COMPARED WITH DECEMBER 31, 1997
Donnelley's assets increased modestly in the first half of 1998. This
increase is primarily due to an increase in other long-term assets and deferred
contract costs, partially offset by a decrease in partnership investments. The
increase in other long term assets is primarily due to the payment and
capitalization of financing costs relating to the New Credit Facility. Deferred
contract costs represent incurred costs associated with revenue that is
recognized later in the year; this increase is consistent with prior years.
Donnelley's partnership investment decreased $19.3 million in the first half of
1998, which is primarily attributable to the wind down of the DonTech I
partnership as a result of the DonTech Restructuring. Also, as a result of the
DonTech Restructuring, the direct fees from an affiliate of Ameritech are
recorded as accounts receivable which resulted in a $31.9 million increase in
accounts receivable. However, total accounts receivable, net was essentially
unchanged because the aforementioned increase was offset by a $32.6 million
decrease due to normal cyclical operating collections in the Bell Atlantic and
Sprint businesses.
Donnelley's total liabilities increased by $494.1 million in the first half
of 1998, primarily due to the recording of the debt relating to the New Credit
Facility and the Notes.
CHANGES IN FINANCIAL POSITION AT DECEMBER 31, 1997 COMPARED WITH DECEMBER 31,
1996
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.
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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
Six Months Ended June 30, 1998 Compared with Six Months Ended June 30, 1997
Cash and cash equivalents at June 30, 1998 and June 30, 1997 were $208,000
and $57,000, respectively. These balances reflect the Parent Company's
centralized cash management system, where historically cash deposits were
transferred to the Parent Company on a daily basis and the Parent Company funded
Donnelley's disbursement bank accounts as required.
Net cash provided by operations was $35.8 million in the first half of 1998
and $93.6 million in the first half of 1997, a decrease of $57.8 million.
Excluding cash provided by P-East in the first half of 1997 of $16.4 million,
cash provided by operations in the first half of 1998 decreased by $41.4
million. Of this decrease, $34.3 million is primarily due to the DonTech
Restructuring, with $18.6 million attributable to taxes paid on accrued earnings
and $15.7 million attributable to the timing of cash distributions of DonTech
earnings and related fees. On a full year basis, the Company believes that cash
flow from DonTech for 1998 will be comparable to cash flow from DonTech for
1997. The balance of the decrease is primarily due to a receivable from New D&B
in connection with the Distribution relating to certain expenses incurred prior
to the effective date of the Distribution. The Company has available credit
capacity under the Revolving Facility which may be used as necessary to offset
any fluctuations in liquidity and for such other purposes as the Company may
from time to time determine.
Net cash used in investing activities was $7.3 million in the first half of
1998, compared to $11.4 million in the first half of 1997. The higher capital
spending in 1997 is primarily attributable to purchases of computer equipment
and furniture and fixtures in connection with office moves made late in 1996.
Currently, the Company has no material commitments for capital spending.
Net cash used in financing activities represents cash transferred to the
Parent Company throughout the first half of the year. As stated above,
historically all cash deposits have been transferred to the Parent Company on a
daily basis and the Parent Company has funded Donnelley's disbursement bank
accounts as required. The net amounts transferred to the Parent Company were
$518.8 million in the first half of 1998 and $82.2 million in the first half of
1997. The increased transfer in 1998 is primarily due to the net cash received
in connection with the debt relating to the New Credit Facility and the Notes.
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 the Parent
Company's centralized cash management system, where historically cash deposits
were transferred to the Parent Company on a daily basis and the Parent Company
funded Donnelley's disbursement bank accounts as required. The 1995 balance
reflects certain marketable securities held by Donnelley.
Net cash provided by operations was $136.6 million, $100.5 million and
$99.7 million in 1995, 1996 and 1997, respectively. In 1997, 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 Donnelley receives. After the
Distribution, Donnelley has approximately $50 million of unused capacity
available under the Revolving Facility, which will be
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used as necessary to off set 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 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 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.
Currently, Donnelley has no material commitments for capital expenditures.
Net cash used in financing activities represents cash transferred to the
Parent Company throughout the year. As stated above, all cash deposits were
transferred to the Parent Company on a daily basis and the Parent Company funded
Donnelley's disbursement bank accounts as required. The net amounts transferred
to the Parent Company 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, Donnelley issued the Notes and
borrowed approximately $350 million under the New Credit Facility. The net
proceeds of the Offering and the borrowings under the New Credit Facility were
dividended to the Parent Company to be used (i) to repay indebtedness of the
Parent Company, primarily commercial paper, (ii) to pay costs and expenses
related to the Distribution and (iii) to repay indebtedness of the Parent
Company to subsidiaries of New D&B. This approximately $500 million of debt is
an obligation of Donnelley after the Distribution. As of June 30, 1998, after
the effect of the indebtedness described above and the application of the
estimated net proceeds therefrom, Donnelley has approximately $500 million of
indebtedness and a shareholder's deficit of approximately $226 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 $25 million per
year. Donnelley has $50 million of unused capacity available under the Revolving
Facility portion of the New Credit Facility. Loans obtained under the New 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 New Credit
Facility. See "Description of New Credit Facility".
To reduce the impact of changes in interest rates on its floating rate
long-term debt under the New Credit Facility, Donnelley subsequently entered
into three interest rate swap agreements having a total notional principal
amount of $175 million. These agreements effectively change the interest rate on
$175 million of floating rate borrowing to fixed rates. The interest rate swap
agreements have terms of three to five years. Donnelley is exposed to credit
risk in the event of nonperformance by the other party to the interest rate swap
agreements. However, Donnelley does not anticipate nonperformance by the
counterparty. Donnelley believes, based on current circumstances, that
Donnelley's cash flow, together with available credit capacity under the New
Credit Facility, will be sufficient to permit 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. Donnelley adopted the statement in
1998. The adoption of SFAS No. 130 will have no impact on Donnelley's results of
operations, financial position and cash flows.
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 Donnelley effective December 31, 1998
and will require restatement of prior years. Donnelley is in the process of
evaluating the disclosure requirements. The adoption of SFAS No. 131 will have
no impact on 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. Donnelley is in
the process of evaluating the disclosure requirements. The adoption of SFAS No.
132 will have no impact on Donnelley's results of operations, financial position
or cash flows.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"), which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. Restatement of prior period financials are not required.
Donnelley is in the process of evaluating the effect this statement will have on
its financial statements and footnote disclosures.
YEAR 2000 ISSUE
The Year 2000 issue 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 Donnelley's currently
installed computer systems and software products have been tested for Year 2000
problems and Donnelley anticipates that these computer systems and software
products will be fully Year 2000 compliant. Also, 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, Donnelley believes that it
will be able to mitigate its exposure to the Year 2000 issue before 2000.
However, if continued modifications and conversions are not made, or are not
timely completed, the Year 2000 issue could have a material adverse effect on
Donnelley's operating results and financial condition.
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Donnelley plans to have its Year 2000 compliance program substantially
completed by the end of 1998. Donnelley is targeting this date to provide itself
additional time in case of any unanticipated delays or in the event additional
complications arise. Through June 30, 1998, Donnelley has spent approximately
$2.9 million addressing the Year 2000 issue and estimates that it will spend an
additional $1.1 million in 1998 and approximately $1.1 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 Donnelley's computer systems, software, databases or other
technology interface or are integrated or those of third parties with which
Donnelley maintains business relationships may not accept input of, store,
manipulate and output dates in the year 2000 or thereafter without error or
interruption. 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. Donnelley is also querying applicable third parties with which it
maintains business relationships as to their progress in identifying and
addressing their Year 2000 issues. However, there can be no assurance that
Donnelley will identify all interface- or integration-related or third-party
date-handling problems in advance of their occurrence, or that Donnelley will be
able to successfully remedy problems that are discovered. The expenses of
Donnelley's efforts to identify and address such problems, or the expenses or
liabilities to which Donnelley may become subject as a result of such problems,
could have a material adverse effect on its operating results and financial
condition.
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m., New
York City time, on November 2, 1998; provided, however, that if the Company, in
its sole discretion, has extended the period of time for which the Exchange
Offer is open, the term "Expiration Date" means the latest time and date to
which the Exchange Offer is extended.
As of the date of this Prospectus, $150,000,000 aggregate principal amount
at maturity of the Old Notes was outstanding. This Prospectus, together with the
Letter of Transmittal, is first being sent on or about the date set forth on the
cover page to all holders of Old Notes at the addresses set forth in the
security register with respect to Old Notes maintained by the Trustee (as
defined in "Description of the Notes"). The Company's obligations to accept Old
Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions as set forth under "Certain Conditions to the Exchange Offer" below.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance of any Old Notes, by giving oral (confirmed in writing)
or written notice of such extension to the Exchange Agent and notice of such
extension to the holders as described below. During any such extension, all Old
Notes previously tendered will remain subject to the Exchange Offer and may be
accepted for exchange by the Company. Any Old Notes not accepted for exchange
for any reason will be returned without expense to the tendering holder thereof
as promptly as practicable after the expiration or termination of the Exchange
Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted for
exchange, upon the occurrence of any of the conditions of the Exchange Offer
specified below under "Certain Conditions to the Exchange Offer." The Company
will give oral or written notice of any extension, amendment, non-
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acceptance or termination to the holders of the Old Notes as promptly as
practicable, such notice in the case of any extension to be issued by means of a
press release or other public announcement no later than 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of the State of Delaware or under the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and the rules and regulations of
the Commission thereunder.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal, to The Bank of New York (the "Exchange
Agent") at one of the addresses set forth below under "Exchange Agent" on or
prior to the Expiration Date. In addition, (i) a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such Old Notes, if such
procedure is available, into the Exchange Agent's account at The Depository
Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedure for
book-entry transfer described below, must be received by the Exchange Agent
prior to the Expiration Date, (ii) certificates for such Old Notes must be
received by the Exchange Agent along with the Letter of Transmittal or (iii) the
holder must comply with the guaranteed delivery procedures described below. THE
METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO
THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (collectively, "Eligible
Institutions"). If Old Notes are registered in the name of a person other than
the person signing the Letter of Transmittal, the Old Notes surrendered for
exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the registered holder with the
signature thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined by
the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right in its
sole discretion to waive any defects or irregularities
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or conditions of the Exchange Offer as to any particular Old Notes either before
or after the Expiration Date (including the right to waive the ineligibility of
any holder who seeks to tender Old Notes in the Exchange Offer). The
interpretation of the terms and conditions of the Exchange Offer as to any
particular Old Notes either before or after the Expiration Date (including the
Letter of Transmittal and the instructions thereto) by the Company shall be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with the tenders of Old Notes for exchange must be cured within
such reasonable period of time as the Company shall determine. Neither the
Company, the Exchange Agent nor any other person shall be under any duty to give
notification of any defect or irregularity with respect to any tender of Old
Notes for exchange, nor shall any of them incur any liability for failure to
give such notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered holder or holders of Old Notes, such Old Notes must be endorsed
or accompanied by appropriate powers of attorney, in either case signed exactly
as the name or names of the registered holder or holders that appear on the Old
Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such person should so indicate when signing and, unless waived by the
Company, proper evidence satisfactory to the Company of its authority to so act
must be submitted.
By tendering, each holder will represent to the Company that, among other
things, (i) the Exchange Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder, (ii) neither the
holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such Exchange Notes, (iii) if the
holder is not a broker-dealer, or is a broker-dealer but will not receive
Exchange Notes for its own account in exchange for Old Notes, neither the holder
nor any such other person is engaged in or intends to participate in the
distribution of such Exchange Notes and (iv) neither the holder nor any such
other person is an "affiliate", as defined under Rule 405 of the Securities Act,
of the Company. If the exchange offeree is a broker-dealer holding Old Notes
acquired for its own account as a result of market-making activities or other
trading activities, it will be required to acknowledge that it will deliver a
prospectus in connection with any resale of Exchange Notes received in exchange
for such Old Notes.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
the Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the Exchange Notes promptly after acceptance of
the Old Notes. See "-- Certain Conditions to the Exchange Offer" below. For
purposes of the Exchange Offer, the Company shall be deemed to have accepted
properly tendered Old Notes for exchange when, as and if the Company has given
oral (confirmed in writing) or written notice thereof to the Exchange Agent.
In all cases, issuance of Exchange Notes for Old Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Old Notes or a timely
Book-Entry Confirmation of such Old Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described below, a properly completed and duly executed Letter of Transmittal
and all other required documents. If any tendered Old Notes are not accepted for
any reason set forth in the terms and conditions of the Exchange Offer or if
certificates representing Old Notes are submitted for a greater principal amount
than the holder desires to exchange, such unaccepted or non-exchanged Old Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described below, such non-
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exchanged Old Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
INTEREST ON THE EXCHANGE NOTES
Cash interest on the Notes will accrue at the rate of 9 1/8% per annum and
will be payable in cash semi-annually on each June 1 and December 1, commencing
on December 1, 1998. No interest will have accrued on the Old Notes on the date
of the exchange for the Exchange Notes and therefore no interest will be paid
thereon to the holders.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer promptly after the date of this Prospectus. Any financial
institution that is a participant in the Book-Entry Transfer Facility's systems
may make book-entry delivery of Notes by causing the Book-Entry Transfer
Facility to transfer such Notes into the Exchange Agent's account in accordance
with the Book-Entry Transfer Facility's Automated Tender Offer Program ("ATOP")
procedures for transfer. However, the exchange for the Notes so tendered will
only be made after timely confirmation of such book-entry transfer of Notes into
the Exchange Agent's account, and timely receipt by the Exchange Agent of an
Agent's Message (as such term is defined in the next sentence) and any other
documents required by the Letter of Transmittal. The term "Agent's Message"
means a message, transmitted by the Book-Entry Transfer Facility and received by
the Exchange Agent and forming a part of a Book-Entry Confirmation, which states
that the Book-Entry Transfer Facility has received an express acknowledgment
from a participant tendering Notes that are the subject of such Book-Entry
Confirmation that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal, and that the Company may enforce such
agreement against such participant.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent receives from such Eligible Institution a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of Old Notes and the amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that within five New York
Stock Exchange ("NYSE") trading days after the date of execution of the Notice
of Guaranteed Delivery, the certificates of all physically tendered Old Notes,
in proper form for transfer, or a Book-Entry Confirmation, as the case may be,
and any other documents required by the Letter of Transmittal will be deposited
by the Eligible Institution with the Exchange Agent, and (iii) the certificates
for all physically tendered Old Notes, in proper form for transfer, or a
Book-Entry Confirmation, as the case may be, and all other documents required by
the Letter of Transmittal, are received by the Exchange Agent within five NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice
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<PAGE> 46
of withdrawal must specify the name of the person having tendered the Old Notes
to be withdrawn, identify the Old Notes to be withdrawn (including the principal
amount of such Old Notes), and (where certificates for Old Notes have been
transmitted) specify the name in which such Old Notes are registered, if
different from that of the withdrawing holder. If certificates for Old Notes
have been delivered or otherwise identified to the Exchange Agent, then, prior
to the release of such certificates, the withdrawing holder must also submit the
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution
unless such holder is an Eligible Institution. If Old Notes have been tendered
pursuant to the procedure for book-entry transfer described above, any note of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Old Notes and otherwise
comply with the procedures of such facility. All questions as to the validity,
form and eligibility (including time of receipt) of such notices will be
determined by the Company, whose determination shall be final and binding on all
parties. Any Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Old Notes which
have been tendered for exchange but which are not exchanged for any reason will
be returned to the holder thereof without cost to such holder (or, in the case
of Old Notes tendered by book-entry transfer into the Exchange Agent's account
at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Notes) as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be retendered by following one of the
procedures described under "-- Procedures for Tendering Old Notes" above at any
time on or prior to the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue Exchange Notes in
exchange for, any Old Notes and may terminate or amend the Exchange Offer if, at
any time before the acceptance of such Old Notes for exchange or the exchange of
the Exchange Notes for such Old Notes, such acceptance or issuance would violate
applicable law or any interpretation of the staff of the Commission.
The foregoing condition is for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise the foregoing rights shall not be deemed a waiver of any such right
and each such right shall be deemed an ongoing right which may be asserted at
any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no Exchange Notes will be issued in exchange for any such Old
Notes, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended (the "TIA").
EXCHANGE AGENT
The Bank of New York has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at one of the addresses set forth below. Questions and requests
for assistance, requests for additional copies of this
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<PAGE> 47
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent, addressed as
follows:
The Bank of New York
<TABLE>
<S> <C> <C>
By Registered or Certified Mail: By Facsimile Transmission: By Hand or Overnight Delivery:
The Bank of New York (For Eligible Institutions Only) The Bank of New York
101 Barclay Street, (212) 815-6339 101 Barclay Street,
Floor 7 East Ground Level
New York, New York 10286 To Confirm By Telephone or For Corporate Trust
Attention: Christopher Davis, Information Call: Services Window
Reorganization Section (212) 815-4997 New York, New York 10286
Attention: Christopher Davis,
Reorganization Section
</TABLE>
Delivery of this instrument to an address, or transmission via facsimile,
other than as set forth above, will not constitute a valid delivery.
FEES AND EXPENSES
The principal solicitation is being made by mail; however, additional
solicitation may be made by telegraph, telephone or in person by officers and
regular employees of the Company and its affiliates. No additional compensation
will be paid to any such officers and employees who engage in soliciting
tenders. The Company will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The estimated cash expenses to be incurred in connection with the Exchange
Offer are to be as follows:
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
Securities and Exchange Commission registration fee......... $ 44,250
Printing and engraving...................................... 85,000
Legal fees and expenses..................................... 90,000
Accounting fees and expenses................................ 50,000
--------
$269,250
========
</TABLE>
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who instruct
the Company to register Exchange Notes in the name of, or request that Old Notes
not tendered or not accepted in the Exchange Offer be returned to, a person
other than the registered tendering holder will be responsible for the payment
of any applicable transfer tax thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon. In general,
the Old Notes may not be offered or sold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. The Company does not
intend to register the Old Notes under the Securities Act. The Company believes
that, based upon interpretations
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<PAGE> 48
contained in letters issued to third parties by the staff of the Commission,
Exchange Notes issued pursuant to the Exchange Offer in exchange for Old Notes
may be offered for resale, resold or otherwise transferred by each holder
thereof (other than a broker-dealer, as set forth below, and any such holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such Exchange Notes are acquired
in the ordinary course of such holder's business and such holder has no
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes. If any holder has any arrangement or understanding with
respect to the distribution of the Exchange Notes to be acquired pursuant to the
Exchange Offer, such holder (i) could not rely on the applicable interpretations
of the staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Old Notes must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. See "Plan of
Distribution." In addition, to comply with the securities laws of certain
jurisdictions, if applicable, the Exchange Notes may not be offered or sold
unless they have been registered or qualified for sale in such jurisdiction or
an exemption from registration or qualification is available and is complied
with. The Company does not currently intend to take any action to register or
qualify the Exchange Notes for resale in any such jurisdictions.
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<PAGE> 49
BUSINESS
THE COMPANY
The Company is the largest independent marketer of yellow pages advertising
in the United States. The Company sold over $1 billion of advertising in 1997
and is the leader in all of its major markets. 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, the Company 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.
The Company 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, the Company achieved average
advertising sales renewal rates ranging from 100% to 90% in its major markets.
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). The Company provides yellow
pages advertising marketing and sales in these markets through long-term
contractual agreements with subsidiaries of these incumbent telephone companies,
which are Ameritech, Bell Atlantic and Sprint. 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 Donnelley's long-term presence in its markets,
yellow pages marketing and publishing expertise, established infrastructure and
performance-focused, non-union sales force. The Company 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 the Company's markets.
Management believes that 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 the Company's existing markets, (ii) the
potential outsourcing of yellow pages operations by local telephone companies
(including those companies with which 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 the
Company for these future growth opportunities and improve earnings stability,
including the completion of 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, 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, Donnelley sold for $122 million its East Coast
proprietary yellow pages operations, which included 34 directories in certain
mid-Atlantic states. In May 1996, Donnelley sold for $22 million its West Coast
proprietary yellow pages operations, which included 18 directories in southern
California.
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Set forth below is a chart depicting the structure of the Parent Company
and the Company.
[RHD CHART]
Donnelley's principal executive offices are located at One Manhattanville
Road, Purchase, NY 10577 and its telephone number is (914) 933-6400.
COMPETITIVE STRENGTHS
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, Donnelley has been able to
successfully manage significant strategic relationships with incumbent telephone
companies and complex systems integration issues inherent in its business.
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, the
Company 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. 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. The Company 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. Donnelley is affiliated with the incumbent local telephone company
in each of its major markets.
Leading Directory Market Shares. In each of the Company's major markets,
the directory with which the Company 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 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 the Company's established
relationships with advertisers and economies of scale.
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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. Donnelley's advertising sales and
profitability are derived primarily from yellow pages advertising sales pursuant
to long-term contractual relationships with subsidiaries of 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, the Company'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
Donnelley's predictable cost structure and capital expenditure requirements,
provide Donnelley with a solid base from which to grow.
Experienced Management Team. Donnelley has assembled a strong and
experienced management team at both the corporate and operating levels.
Donnelley's management is responsible for the Company's long-term relationships
with incumbent telephone companies and its market leadership position. In
addition, Donnelley's account managers average over 12 years of experience in
the yellow pages industry.
BUSINESS STRATEGY
The Company has identified its major sources of potential growth and has
developed a business strategy to capitalize on these opportunities. Principal
elements of the Company's business strategy include:
Grow the Core Business in Existing Markets. The Company has developed
specialized sales and marketing techniques and infrastructure in order to
increase advertising sales. The Company leverages sophisticated information
systems, access to the local telephone company's extensive telephone subscriber
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, the Company 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. The Company believes that the trend toward outsourcing will result
from several factors, including the telephone companies' desire to focus on
business segments having greater future growth opportunities than those of
yellow pages advertising in the United States; the existence of a large number
of CLECs that may not wish to incur start-up costs related to sales of yellow
pages advertising and pre-press publishing services for yellow pages
directories; and the telephone providers' desire to deploy available capital to
develop its telecommunications infrastructure and pursue other non-yellow page
directory opportunities. Management believes that 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) 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 Donnelley became the exclusive
advertising sales agent, beginning with directories published in 1999, for Bell
Atlantic's 26
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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. The
Company'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. 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 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,
Donnelley completed its $40 million publishing center in Raleigh, North
Carolina. 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 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 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 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
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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 Donnelley maintains strategic
relationships) had total U.S. directory-related advertising sales of $10.4
billion in 1997 (including advertising sales attributable to the Company), 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
Donnelley maintains strategic relationships, have launched either a national or
regional directory.
DIRECTORY PRODUCTS
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 the Company 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 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
Donnelley's revenues for the foreseeable future, Donnelley has made modest
commitments related to the growing electronic commerce market. In addition,
DonTech has an agreement to serve as Ameritech's exclusive local advertising
sales agent if Ameritech begins a yellow pages Internet directory in Illinois or
northwest Indiana.
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 the Company to create
customized advertising programs that meet its customers' specific needs.
The directories with which the Company 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 the Company's strategic relationships with incumbent
telephone companies, since the Company is assured of receiving updated telephone
account information from these telephone companies prior to the publication of
directories.
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ADVERTISING SALES AND MARKETING
Yellow pages advertising is a direct sales business which requires both
servicing existing accounts and developing new customers. 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 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 the Company by resulting in lower bad debt expenses related to yellow
pages advertising at these telephone companies than is experienced by
independent yellow pages publishers.
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 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 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.
The Company's multi-tiered sales force and different customer contact
methods reflect its focus on segmenting and prioritizing yellow pages
advertising sales opportunities. The Company'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.
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, the Company's sales management
emphasizes sales person continuity in the Company's account relationships.
Donnelley employs approximately 500 sales representatives in its Bell
Atlantic, Sprint and Cincinnati markets. Donnelley's approximately 80 account
managers average over 12 years of experience in the yellow pages industry.
Donnelley's and DonTech's sales forces are entirely nonunion, 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 Donnelley's and DonTech's sales forces also
provides Donnelley and DonTech with greater latitude to redeploy sales
personnel. In addition, Donnelley's and DonTech's sales forces are largely
compensated based on performance, which aligns the sales forces' incentives with
important success factors to the Company's business, including account
generation and retention. On average, approximately 55% of Donnelley's sales
force compensation is variable and based on performance.
The Company has well-established practices and procedures to manage the
productivity and effectiveness of its sales force. All of 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, 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. Donnelley is considering distributing
laptop computers with such customized software to its sales forces in other
markets. The ability of
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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 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
Donnelley generated incremental advertising sales of approximately $4.0 million
in 1997 in a mature urban market.
PUBLISHING AND PRODUCTION
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. 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. 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 Donnelley provides
publishing services. The Dunmore graphics center is electronically integrated
with the Raleigh publishing center. Donnelley has staffs of approximately 300
and 140 employees at the Raleigh publishing center and the Dunmore graphics
center, respectively. Donnelley provides publishing services for certain
Ameritech and Sprint directories, among others, pursuant to agreements that
extend through 2003 and 2004, respectively.
The Raleigh publishing center has enabled 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.
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 Donnelley's contracting on behalf of these customers with outside
parties for printing, binding and distribution of directories. Donnelley
provides production services in varying degrees for Sprint.
NEW ADVERTISING MEDIA AND PRODUCTS
In 1995 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. Donnelley
contracts with an outside party for creation of the YPTV(R) advertisements.
Donnelley currently offers YPTV(R) in selected Bell Atlantic and Sprint/CenDon
markets. 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 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. Donnelley generated net revenue from YPTV(R) of $2.9
million in 1997 in its Bell Atlantic and Sprint/CenDon markets. While the YPTV
program currently represents approximately 1.2% of Donnelley's revenues, the
program has
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enabled Donnelley to leverage its existing relationships with clients to
increase advertising sales. The program is financially viable because individual
customers obtain the benefits of the cost efficiencies obtained by Donnelley's
bulk purchasing of both cable television airtime and production services
associated with each individual advertisement.
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 local
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 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 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
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 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% 90%(3) 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 the Company'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 is not available.
(4) Represents the percentage of the Company's 1996 customers who advertised in
1997 in the applicable markets, excluding customers who disconnected their
telephone service. Including customers who disconnected their telephone
service, the Company's advertising sales account retention rates were 86%,
78% and 87% in its Ameritech, Bell Atlantic and Sprint/CenDon markets,
respectively.
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(5) Represents the percentage of the Company's 1996 advertising sales in the
applicable markets which were generated in 1997 from the Company'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
Donnelley's relationship with telephone companies currently owned by Ameritech
began in 1908 with the Chicago Telephone Company. Since then, Donnelley has had
a variety of contractual relationships with Ameritech including, beginning in
1984, a series of partnerships (collectively referred to as DonTech or the
DonTech partnership). The current partnership arrangement reflects 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 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 Donnelley and a subsidiary of Ameritech. DonTech is the
exclusive local 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. 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 Donnelley's
income statement as income from partnerships and related fees. Under a separate
agreement that extends through 2003, Donnelley provides publishing services for
Ameritech's Illinois and northwestern Indiana directories on a negotiated
basis; the related fees are recognized by 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 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 merge with SBC Communications Inc. ("SBC"), which currently
conducts all of its yellow pages operations in-house. The proposed merger 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 merger is
completed. There can be no assurance as to what effect, if any, the proposed
merger will have on the DonTech partnership.
Bell Atlantic
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, 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.
Donnelley earns a sales commission on advertising sold and recognizes these
commissions upon the signing of the related advertising contract.
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,
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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 third-party marketer. The contract which governs the relationship
between Donnelley and the relevant Bell Atlantic entity in the greater Buffalo
area continues until 2002, unless extended by Bell Atlantic.
In 1997, 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.
Subject to regulatory approval and certain other conditions, Bell Atlantic
recently agreed to merge with GTE Corporation ("GTE"), which currently conducts
all of its yellow pages operations in-house. The proposed merger will not
trigger any change to the current contractual relationship between Bell Atlantic
and Donnelley, and Bell Atlantic has announced it intends to continue using the
Bell Atlantic name if such merger is completed. There can be no assurance as to
what effect, if any, the proposed merger will have on the Donnelley/Bell
Atlantic relationship or the prospect for Donnelley to renew such contract on
expiration thereof.
Sprint
The Sprint relationship began in 1980 when Donnelley began publishing
directories for predecessors or affiliates of Central Telephone Company and
United Telephone Company of Florida, both since merged into Sprint. 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. 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. Donnelley earns a 50% share of CenDon's income and records its share
as income from partnerships, a component of Donnelley's operating income.
In addition to the profits derived from its 50% stake in CenDon, 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.
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, 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 Donnelley as revenue.
Sprint Sales Agency. In the greater Orlando marketplace, Donnelley is
Sprint's exclusive advertising sales agent and earns sales commissions on local
advertising and national advertising sales. 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. Donnelley also provides
publishing services to Sprint pursuant to this contract; the related fees are
recognized by 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
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. Donnelley's historical agreement with
Cincinnati Bell to act as yellow pages advertising sales agent for Cincinnati
Bell's directories expired in August 1997. Donnelley's Cincinnati Bell
operations
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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.
While Donnelley's overall strategy has been to divest itself of proprietary
operations, Donnelley will consider maintaining proprietary operations which can
leverage existing infrastructure. In 1997, the Donnelley contract with
Cincinnati Bell expired. As Donnelley had been in the Cincinnati Bell region
since 1907, management determined that it could use its existing sales
infrastructure and relationships with customers to publish a yellow pages
directory that could ultimately provide a viable competitor to the Cincinnati
Bell directory. Donnelley's management routinely evaluates the progress of the
Cincinnati proprietary directory and will continue to review strategic options
for this business.
COMPETITION
There is competition for yellow pages advertising sales to varying degrees
in the Company's markets from the sales forces of yellow pages publishers with
which the Company is not affiliated. These yellow pages publishers include local
telephone companies with which the Company 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, Donnelley benefits from its long-term contractual relationships
with affiliates of the largest potential competitor in a directory market, the
incumbent local telephone company. The market position of incumbent local
telephone companies may be 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, online 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
Donnelley owns and controls a number of trade secrets, confidential
information, trademarks, service marks, trade names, copyrights and other
intellectual property rights which, in the aggregate, are of material importance
to Donnelley's business. Management believes that the "Donnelley" name and
related names, marks and logos are material to Donnelley's business. 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 Donnelley. Donnelley considers its trademarks, service marks,
databases, software and other intellectual property to be proprietary and
Donnelley relies on a combination of copyright, trademark, trade secret,
non-disclosure and contract safeguards for protection. Donnelley also benefits
from the use of both the phrase "yellow pages" and the walking fingers logo,
which Donnelley believes to be in the public domain in the United States.
The names of Donnelley's products and services referred to herein are
trademarks, servicemarks or registered trademarks or servicemarks owned by
Donnelley.
EMPLOYEES
As of June 30, 1998, Donnelley had approximately 1,398 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 employees of DonTech. None of the Company's employees are covered by
collective bargaining agreements. Donnelley considers its relations with its
employees to be good and it has not experienced any strikes or work stoppages.
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PROPERTIES
Donnelley's operations are conducted from 21 leased locations in 7 states.
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. Donnelley's new
$40 million Raleigh publishing center is located in a 55,500 square foot
building which Donnelley leases. Donnelley leases 20,000 square feet in a
building for its graphics center in Dunmore, Pennsylvania.
LEGAL PROCEEDINGS
On July 29, 1996, IRI filed a complaint in the United States District Court
for the Southern District of New York, naming as defendants the Parent Company,
A.C. Nielsen and IMS (former subsidiaries of the Parent Company). The complaint
alleges, among other things, various violations of the antitrust laws and seeks
damages in excess of $350 million, which IRI is seeking to have trebled under
the antitrust laws. IRI also seeks punitive damages in an unspecified amount.
Pursuant to the Distribution Agreement, New D&B has assumed and will
indemnify Donnelley Corp. and Donnelley against any payments to be made by
Donnelley Corp. or Donnelley in respect of the IRI Action under the 1996
Distribution Agreement (the "1996 Distribution Agreement") among the Parent
Company, Cognizant and A.C. Nielsen, under the Indemnity and Joint Defense
Agreement or otherwise, including any ongoing legal fees and expenses related
thereto.
The Parent Company has entered into the Indemnity and Joint Defense
Agreement with two former subsidiaries of the Parent Company, ACNielsen and
Cognizant, pursuant to which ACNielsen has agreed to be responsible for any
potential liabilities which may ultimately be incurred by the Parent Company or
Cognizant as a result of the IRI 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 the maximum amount will be based on ACNielsen's ability to
satisfy such liabilities and remain financially viable, subject to certain
assumptions and limitations. The Parent Company and Cognizant have agreed that,
to the extent that ACNielsen is unable to satisfy any such liabilities in full
and remain financially viable, the Parent Company 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 a
distribution agreement, dated as of October 28, 1996, among the Parent Company,
Cognizant and ACNielsen, as a condition to the Distribution, New D&B is required
to undertake to be jointly and severally liable with Donnelley Corp. to
Cognizant and ACNielsen.
Other than the suit described above, Donnelley is involved in legal
proceedings, claims and litigation arising in the ordinary conduct of its
business. Although there can be no assurances, Donnelley management believes
that the outcome of such legal proceedings will not have a material adverse
affect on Donnelley's financial position or results of operations.
RELATIONSHIP BETWEEN DONNELLEY CORP. AND THE NEW DUN & BRADSTREET
CORPORATION AFTER THE DISTRIBUTION
As of June 30, 1998, the Parent Company effected the Distribution.
Accordingly, as of the date of this Prospectus, Donnelley Corp.'s only remaining
subsidiary is Donnelley and each of Donnelley Corp. and New D&B are independent,
publicly-traded companies. In connection with the Distribution, the Parent
Company was renamed R.H. Donnelley Corporation and New D&B was renamed The Dun &
Bradstreet Corporation. Except as described below, all contractual relationships
existing prior to the Distribution between Donnelley Corp. and New D&B were
terminated in connection with the Distribution.
In connection with the Distribution, Donnelley Corp. and New D&B have
entered into certain agreements, described below, governing the relationship
between Donnelley Corp. and New D&B
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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.
The Distribution Agreement provides for, among other things, certain
corporate transactions required to effect the Distribution and other
arrangements between Donnelley Corp. and New D&B subsequent to the Distribution.
The following paragraphs describe the major provisions of the Distribution
Agreement and related agreements.
DISTRIBUTION AGREEMENT
In general, pursuant to the terms of the Distribution Agreement, all assets
of the Parent Company prior to the Distribution Date, other than those relating
to Donnelley's 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 the Parent Company other than those
specified to be transferred to Donnelley on or prior to the Distribution Date or
to remain with Donnelley subsequent to the Distribution Date (which liabilities
primarily relate to Donnelley's business and assets, the Offering and the
borrowings under the New Credit Facility), to New D&B. See "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 Donnelley prior to the
Distribution, to New D&B.
Pursuant to the terms of a distribution agreement, dated as of October 28,
1996, among the Parent Company Cognizant Corporation ("Cognizant") and ACNielsen
Corporation ("ACNielsen") pursuant to which the Parent Company spun off
Cognizant and ACNielsen to its shareholders (the "1996 Distribution Agreement"),
as a condition to the Distribution, New D&B is required to undertake to be
jointly and severally liable with Donnelley Corp. to Cognizant and ACNielsen for
any liabilities arising thereunder. Pursuant to the Distribution Agreement, all
liabilities of the Parent Company under the 1996 Distribution Agreement and
related agreements will be liabilities of New D&B, and New D&B will indemnify
Donnelley Corp. against such liabilities. In addition, any rights of the Parent
Company arising under the 1996 Distribution Agreement and related agreements
will be rights of New D&B.
The Distribution Agreement provides that, in connection with the
Distribution, Donnelley Corp. will transfer cash to New D&B in an amount such
that, immediately following the Distribution, Donnelley Corp.'s net debt will be
approximately $500 million.
The Distribution Agreement provides that Donnelley Corp. and New D&B will
comply, and otherwise not take action inconsistent, with each representation and
statement made to the IRS in connection with the Parent Company's request for a
ruling letter as to certain tax aspects of the Distribution. Each of Donnelley
Corp. 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 Code,
to continue to own stock of certain operating subsidiaries constituting control
(within the meaning of Section 368(c) of the 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 Donnelley
Corp. 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, Donnelley Corp. 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
Donnelley Corp., 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 IRS that such action will not affect the tax-free treatment of the
Distribution. As a result of the representations in the request for a
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ruling letter and the covenants in the Distribution Agreement, the acquisition
of control of each of Donnelley Corp. and New D&B prior to the second
anniversary of the Distribution Date 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 Donnelley Corp., New D&B
or their shareholders to indemnify the other party and its shareholders from any
taxes arising therefrom.
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 Securities and
Exchange Commission for registration of the New D&B common stock under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), 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
Donnelley Corp. and New D&B have entered into a Tax Allocation Agreement
(the "Tax Allocation Agreement") to the effect that New D&B will generally be
liable for all income taxes of the Parent Company and its subsidiaries
attributable to periods prior to the Distribution, provided that in the case of
any separate company state or local income taxes, Donnelley Corp. and its
subsidiaries, including Donnelley, 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 Donnelley Corp.
will be liable for taxes relating to Donnelley Corp. and its subsidiaries,
including Donnelley. For all other taxes, New D&B and its subsidiaries and
Donnelley Corp. and its subsidiaries, including Donnelley, will be responsible
for their own liabilities for all periods.
EMPLOYEE BENEFITS AGREEMENT
Donnelley Corp. and New D&B have entered 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 Donnelley Corp. will adopt a
new defined benefit pension plan and savings plan for its and Donnelley's
employees and that New D&B will assume and become the sponsor of the current
Parent Company plans 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 Parent Company pension plan and account balances
in the savings plan that are attributable to Donnelley Corp. and Donnelley
employees will be transferred to the new Donnelley Corp. plans.
Generally New D&B will assume and become the sponsor of the Parent
Company'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 Donnelley Corp. and Donnelley employees, New D&B
generally will retain only those liabilities that were vested prior to the
Distribution Date. Donnelley Corp. will guarantee payment of the benefits under
these plans to its and Donnelley's employees in the event that New D&B is unable
to satisfy its obligations.
The Employee Benefits Agreement also provides that Donnelley Corp. will
continue to sponsor its welfare plans for its and Donnelley's employees. As of
the Distribution Date, New D&B will adopt welfare plans for the benefit of its
employees and its former employees who terminated employment on or prior to the
Distribution Date. Donnelley Corp. will be responsible for providing retiree
welfare benefits, where applicable, to its employees and New D&B will be
responsible for providing retiree
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welfare benefits, where applicable, to its employees and its former employees
who terminated employment on or prior to the Distribution Date.
Donnelley Corp., Donnelley and New D&B 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 stock options for common stock of the pre-Distribution
Parent Company held by Donnelley Corp., Donnelley and New D&B employees as of
the Distribution Date will be adjusted to reflect the Distribution. The number
of shares covered by such options (which, for Donnelley Corp. and Donnelley
employees as of the Distribution Date, will be for Donnelley Corp. common stock,
and for New D&B employees as of the Distribution Date will be for New D&B common
stock) will be increased, and the exercise price per share will be decreased,
pursuant to a formula designed to cause the economic value of stock option
grants to remain the same after the Distribution. Unexercised stock options for
common stock of the pre-Distribution Parent Company 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 Donnelley Corp. and 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 stock options
for common stock of the pre-Distribution Parent Company.
Restricted stock of the pre-Distribution Parent Company 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 restricted stock of
the pre-Distribution Parent Company multiplied by the ratio for converting
unexercised stock options for common stock of the pre-Distribution Parent
Company at the Distribution Date into options for New D&B common stock and the
reciprocal of the ratio for the comparable conversion of such stock options into
Donnelley Corp. common shares, such replacement shares of New D&B restricted
stock to have the same terms as restricted stock of the pre-Distribution Parent
Company from which they arose.
If performance targets are met pursuant to the Performance Unit Plan of the
pre-Distribution Parent Company and Donnelley, Donnelley Corp. and Donnelley
employees shall receive promptly after the Distribution Date a number of shares
of Donnelley Corp. common stock equal to (i) the target number of performance
shares plus (ii) the target number of performance shares multiplied by the ratio
for converting unexercised stock options for common stock of the
pre-Distribution Parent Company at the Distribution Date into options for
Donnelley Corp. common stock and the reciprocal of the ratio for the comparable
conversion of such stock options into New D&B common shares. Outstanding
opportunities for New D&B employees to earn performance shares under the
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 performance shares of the pre-Distribution Parent
Company plus (ii) the target number of performance shares of the
pre-Distribution Parent Company multiplied by the ratio for converting
unexercised stock options for common stock of the pre-Distribution Parent
Company at the Distribution Date into options for New D&B common stock and the
reciprocal of the ratio for the comparable conversion of such stock options into
Donnelley Corp. common shares.
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 transferred
retirement and savings plan assets of Donnelley Corp. and Donnelley employees).
59
<PAGE> 64
INTELLECTUAL PROPERTY AGREEMENT
Donnelley Corp. and New D&B have entered into an Intellectual Property
Agreement (the "Intellectual Property 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 Donnelley Corp. and New D&B and their respective
subsidiaries as of the Distribution Date.
SHARED TRANSACTION SERVICES AGREEMENT
Donnelley Corp. and New D&B have entered into a Shared Transaction Services
Agreement (the "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
Donnelley Corp. and New D&B have entered into a Data Services Agreement
(the "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 New D&B to Donnelley Corp.
TRANSITION SERVICES AGREEMENT
Donnelley Corp. and New D&B have entered into a number of Transition
Services Agreements (the "Transition Services Agreements") pursuant to which the
respective parties have agreed to certain basic terms governing the provision by
New D&B to Donnelley Corp. of specified pension investment management services,
insurance services or other support services for a transitional period after the
Distribution Date.
60
<PAGE> 65
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information concerning the individuals who
will serve as executive officers and directors of Donnelley Corp.
<TABLE>
<CAPTION>
NAME AGE* POSITION(S)
- ---- ---- -----------
<S> <C> <C>
Frank R. Noonan.......................... 56 Chairman of the Board, President and
Chief Executive Officer
Philip C. Danford........................ 54 Senior Vice President and Chief Financial
Officer
Frederick J. Groser...................... 43 Senior Vice President
Alexander R. Marasco..................... 45 Senior Vice President
Judith A. Norton......................... 55 Senior Vice President -- Human Resources
David C. Swanson......................... 43 Senior Vice President
Stephen B. Wiznitzer..................... 47 Senior Vice President and General Counsel
Diane P. Baker........................... 44 Director
William G. Jacobi........................ 54 Director
Robert Kamerschen........................ 62 Director
Carol J. Parry........................... 57 Director
Barry Lawson Williams.................... 54 Director
</TABLE>
The following table sets forth information concerning the individuals who
serve as executive officers and directors of Donnelley.
<TABLE>
<CAPTION>
NAME AGE* POSITION(S)
- ---- ---- -----------
<S> <C> <C>
Frank R. Noonan.......................... 56 Director, President and Chief Executive
Officer
Philip C. Danford........................ 54 Director, Senior Vice President and Chief
Financial Officer
Frederick J. Groser...................... 43 Executive Vice President -- Telco
Operations
Alexander R. Marasco..................... 45 Executive Vice President -- Operations
and Technology
Judith A. Norton......................... 55 Senior Vice President -- Human Resources
David C. Swanson......................... 43 Executive Vice President -- Corporate
Strategy
Stephen B. Wiznitzer..................... 47 Director, Senior Vice President and
General Counsel
</TABLE>
- ---------------
* As of August 24, 1998.
FRANK R. NOONAN has been a director of the Parent Company since April 1998,
a director of Donnelley since February 1995, President since August 1991, and
has been Chief Executive Officer of Donnelley Corp. and Donnelley since June 30,
1998. Mr. Noonan joined the Parent Company in 1989 as Senior Vice President
Finance of Dun & Bradstreet Information Services. Prior to joining the Parent
Company, Mr. Noonan served as Senior Vice President and Chief Financial Officer
of UNUM Corporation and in various financial positions for the General Electric
Company. Mr. Noonan is Chairman of the board of trustees for United Hospital
Medical Center in Port Chester, New York, a member of the board of trustees of
Manhattanville College, the Vice Chairman of the board of governors for the
Buick Classic, and a member of the board of directors of the Yellow Pages
Publishers Association.
61
<PAGE> 66
PHILIP C. DANFORD is Senior Vice President and Chief Financial Officer of
Donnelley Corp. and has been a director of Donnelley since July 1, 1998, and is
Senior Vice President and Chief Financial Officer of Donnelley. Mr. Danford has
served as Senior Vice President and Chief Financial Officer for Donnelley since
March 1998, and prior thereto served as Vice President and Treasurer for the
Parent Company from September 1992. In 1988, Mr. Danford joined the Parent
Company as Assistant Treasurer. Before joining the Parent Company, Mr. Danford
served as Vice President and Treasurer at The Perkin-Elmer Corporation and as
Assistant Vice President and Manager at W.R. Grace & Co.
FREDERICK J. GROSER has been a Senior Vice President of Donnelley Corp.
since June 30 1998 and has served as Donnelley's Executive Vice
President -- Telco Operations since July 1997. Prior thereto, Mr. Groser served
as Donnelley's Executive Vice President -- Strategic Marketing and New Business
Development from October 1995, as Donnelley's Vice President and General
Manager -- Sprint Operations from February 1994 and as a Vice President -- Sales
from December 1990. Mr. Groser joined Donnelley in 1978 as a yellow pages
account representative in New York.
ALEXANDER R. MARASCO has been a Senior Vice President of Donnelley Corp.
since June 30, 1998 and has served as Donnelley's Executive Vice
President -- Operations and Technology since October 1995. Prior thereto, Mr.
Marasco served as a Senior Vice President -- Planning for Donnelley from April
1991, and as an Assistant Vice President of Strategic Planning for Donnelley
from March 1989. Mr. Marasco joined the Parent Company in 1976 in its strategic
planning department in New York.
JUDITH A. NORTON has been a Senior Vice President -- Human Resources of
Donnelley Corp. since June 30, 1998 and has served as Donnelley's Senior Vice
President -- Human Resources since January 1998. Prior thereto, Ms. Norton was
an independent human resources consultant from January 1997, a Senior Vice
President-Human Resources for The Chase Manhattan Bank from April 1996, and a
Senior Vice President and Director of Staffing and Development for Chemical Bank
from January 1991.
DAVID C. SWANSON has been a Senior Vice President of Donnelley Corp. since
June 30, 1998, and has served as Donnelley's Executive Vice President Corporate
Strategy since June 24, 1998. Prior thereto, Mr. Swanson was an Executive Vice
President and General Manager for Proprietor Operations from July 1997, an
Executive Vice President -- Sales for Donnelley from October 1995, Donnelley's
Vice President and General Manager -- Cincinnati Operations from September 1993,
an Assistant Vice President-Operations for Donnelley from January 1993 and a
General Sales Manager for Donnelley from January 1992.
STEPHEN B. WIZNITZER is a Senior Vice President and General Counsel of
Donnelley Corp., has been a director of Donnelley since July 1, 1998, and is
Senior Vice President and General Counsel of Donnelley. Mr. Wiznitzer has served
as Donnelley's Senior Vice President and General Counsel since June 1997. Prior
thereto, Mr. Wiznitzer served as counsel for NYNEX Corporation from December
1989. Earlier, Mr. Wiznitzer had been Senior Counsel for SSMC, Inc., when it was
spun off from the Singer Company in 1986.
DIANE P. BAKER. Diane P. Baker has been a director of Donnelley Corp.
since June 30, 1998. Ms. Baker was Senior Vice President and Chief Financial
Officer of The New York Times Company from 1995 to 1998. From 1990 through 1995,
Ms. Baker was the Group Senior Vice President and Chief Financial Officer of
R.H. Macy & Co., Inc.
WILLIAM G. JACOBI. William G. Jacobi has been a director of Donnelley
Corp. since June 30, 1998. Mr. Jacobi has been the non-employee chairman of
Nielsen Media Research, Inc., (formerly an affiliate of the Parent Company and
Donnelley) since November 1996. Prior to July 1, 1998, Mr. Jacobi was employed
at Cognizant Corporation where he served as Executive Vice President and
Chairman of Nielsen Media Research from 1996. Mr. Jacobi was also Chairman of
Erisco and Chairman of IMS International. Mr. Jacobi was Executive Vice
President of Dun & Bradstreet
62
<PAGE> 67
Corporation from 1995 to 1996. Previously, he was Senior Vice President of NCH
Promotional Services, Senior Vice President of Erisco, Senior Vice President of
Sales Technologies, Senior Vice President of Dun & Bradstreet Pension Services
and Plan Services, Inc., and President, Chief Operating Officer and Executive
Vice President of Nielsen Media Research.
ROBERT KAMERSCHEN. Robert Kamerschen has been a director of Donnelley
Corp. since June 30, 1998. Mr. Kamerschen has been Chairman and Chief Executive
Officer of ADVO, Inc. since 1988. Mr. Kamerschen currently serves on the Board
of ADVO, Inc., IMS Health Incorporated, General Signal Network, Inc. and
Micrografx, Inc.
CAROL J. PARRY. Carol J. Parry has been a director of Donnelley Corp.
since June 30, 1998. Ms. Parry has been Executive Vice President of Community
Development Group at Chase Manhattan Bank since 1996, its Managing Director from
1992 to 1996 and serves on the bank's Policy Council, the central governing body
of the bank. Ms. Parry currently serves on the board of directors of Health
Insurance Plan of Greater New York, and on a number of not-for-profit
organizations.
BARRY LAWSON WILLIAMS. Barry Lawson Williams has been a director of
Donnelley Corp. since June 30, 1998. Mr. Williams has been President and Founder
of Williams Pacific Ventures, Inc. since 1987, Senior Mediator of
JAMS/Endispute, Inc. since 1993, Adjunct Professor, Entrepreneurship at Haas
School Of Business since 1995, and General Partner of WDG Ventures since 1987.
Mr. Williams serves on the Boards of CH2M Hill, Inc., CompUSA, Inc., Newhall
Land & Farming Company, Northwestern Mutual Life Insurance Company, Inc.,
Pacific Gas & Electric Company and USA Group, Inc.
Ms. Parry, a director of Donnelley Corp. since June 30, 1998, is the
Executive Vice President of the Community Development Group at Chase Manhattan
Bank (the "Bank") and a member of the Bank's Policy Council, the central
governing body of the Bank. The Bank is Administrative Agent for and one of the
banks which provided the Company with its New Credit Facility and an affiliate
of the Bank was one of the Initial Purchasers of the Notes. In connection with
serving in such roles, the Bank and its affiliate received customary fees.
DIRECTOR'S COMPENSATION
The Board of Directors of Donnelley Corp. has adopted 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, each non-employee director annually will receive a cash
retainer of $20,000, 1,500 deferred shares of common stock of Donnelley Corp.,
an option to purchase an additional 1,500 shares, $1,000 for each meeting
attended and an annual fee of $2,000 for each committee of the Board of
Directors chaired. In addition, each new non-employee director will receive a
grant of an additional 1,500 deferred shares under this program upon his or her
appointment to the Board of Directors. 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 Donnelley Corp.
COMMITTEES OF THE BOARD OF DIRECTORS
On July 2, 1998, Donnelley Corp.'s Board of Directors established an Audit
& Finance Committee, a Compensation & Benefits Committee and a Nominating
Committee. The Audit & Finance 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 Audit and
Finance Committee members are Barry Lawson Williams (chairperson), Diane P.
Baker and Carol J. Parry. The Compensation & Benefits Committee will, among
other matters: review management compensation programs; approve compensation
changes for executive officers; review compensation changes for senior
management; and adminis-
63
<PAGE> 68
ter stock plans for management. The Compensation and Benefits Committee members
are Robert Kamerschen (chairperson), Diane P. Baker and Barry Lawson Williams.
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. The Nominating Committee
members are Carol J. Parry (chairperson), William G. Jacobi and Robert
Kamerschen.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Parent Company
or Donnelley for services rendered to the Parent Company or Donnelley in 1997 by
Donnelley's President and by each of the persons who are anticipated to be one
of the four other most highly compensated executive officers of Donnelley Corp.
following the Distribution. During the period presented, the individuals were
compensated in accordance with the Parent Company's plans and policies.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS PAYOUTS
ANNUAL COMPENSATION -----------------------------------
----------------------------------------- SECURITIES
OTHER RESTRICTED UNDERLYING LONG-TERM
ANNUAL STOCK OPTIONS/ INCENTIVE ALL OTHER
NAME AND PRINCIPAL SALARY BONUS(1) COMPENSATION(2) AWARD(S) SARS(3) PAYOUTS COMPENSATION(4)
POSITION POST-DISTRIBUTION YEAR ($) ($) ($) ($) ($) ($) ($)
- -------------------------- ---- ------- -------- --------------- ---------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Frank R. Noonan......... 1997 347,000 346,913 11,630 0 68,607 0 11,863
President and Chief
Executive Officer
Philip C. Danford....... 1997 265,000 238,582 0 0 56,498 0 8,787
Senior Vice President
and Chief Financial
Officer
Frederick J. Groser..... 1997 195,000 41,288 29 0 27,336 0 6,238
Senior Vice President
Alexander R. Marasco.... 1997 207,900 91,200 6,590 0 27,336 0 6,742
Senior Vice President
David C. Swanson........ 1997 195,000 41,927 2,162 0 27,336 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 the
pre-Distribution Parent Company 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 Distribution, based on
performance goals covering the period January 1997 through the Distribution
Date. The performance shares will be paid in unrestricted shares of
Donnelley Corp. common stock.
(2) Amounts shown represent reimbursement for taxes paid by the named executive
officers with respect to Parent Company-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. The exercise price and number of shares underlying such options have
been adjusted to give effect to the Distribution and the Reverse Stock
Split.
(4) Amounts shown represent aggregate annual Parent Company contributions for
the account of each named executive officer under the Parent Company's
Profit Participation Plan (the "PPP") and the Profit Participation Benefit
Equalization Plan (the "PPBEP"), which plans were open to employees of the
Parent Company and certain subsidiaries. The PPP is a tax-qualified defined
contribution plan and the PPBEP is a non-qualified plan that provides
benefits
64
<PAGE> 69
to participants in the PPP equal to the amount of Parent Company
contributions that would have been made to the participant's PPP account but
for certain Federal tax laws.
OPTION GRANTS ON PARENT COMPANY COMMON STOCK TO CERTAIN EXECUTIVE OFFICERS IN
1997
The following table provides information on fiscal year 1997 grants of
options to the named Donnelley Corp. executives to purchase shares of common
stock of the pre-Distribution Parent Company. Following the Distribution, the
number of shares covered by and the exercise price for options to acquire
Donnelley Corp. common stock have been adjusted. See "Relationship Between
Donnelley Corp. and The New Dun & Bradstreet Corporation After the
Distribution -- Employee Benefits Agreement".
OPTION GRANTS/SAR GRANTS IN 1997
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR GRANT DATE
GRANTED(1) FISCAL YEAR BASE PRICE EXPIRATION PRESENT VALUE(2)
NAME (#) (%) ($/SHARE) DATE ($)
- ---- ------------ ------------ ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Frank R. Noonan...... 68,607 1 14.7465 12/22/07 186,818
Philip C. Danford.... 27,336 0.4 14.7465 12/22/07 74,437
29,162 0.5 13.5265 7/16/07 75,140
Frederick J.
Groser............. 27,336 0.4 14.7465 12/22/07 74,437
Alexander R.
Marasco............ 27,336 0.4 14.7465 12/22/07 74,437
David C. Swanson..... 27,336 0.4 14.7465 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 Parent Company common stock. The option holder may elect to have shares
of Parent Company common stock issuable upon exercise withheld by the Parent
Company 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 Parent Company common stock pursuant to a
tender or exchange offer not made by the Parent Company. 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 Parent Company 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 the Parent
Company supports or opposes the offer. The exercise price and number of
shares underlying such options have been adjusted to give effect to the
Distribution and the Reverse Stock Split.
(2) Grant date present value is based on the Black-Scholes option valuation
model applied to the Parent Company 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.
65
<PAGE> 70
AGGREGATE PARENT COMPANY OPTION EXERCISES IN 1997 AND YEAR-END PARENT COMPANY
OPTION VALUES
The following table provides information on option exercises in 1997 by the
named executives of Donnelley Corp. and the value of each such executive's
unexercised options to acquire common stock of the pre-Distribution Parent
Company at December 31, 1997. See also, "Relationship Between Donnelley Corp.
and The New Dun & Bradstreet Corporation After the Distribution -- Employee
Benefits Agreement".
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED,
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS/SARS AT FISCAL
SHARES OPTIONS/SARS YEAR END(2)(3)
ACQUIRED ON VALUE AT FISCAL YEAR-END(#) ($)
EXERCISE REALIZED(1) --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frank R. Noonan......... 0 0 226,626 179,147 1,127,472 439,062
Philip C. Danford....... 0 0 70,963 78,755 275,903 136,731
Frederick J. Groser..... 0 0 49,870 70,594 220,928 169,976
Alexander R. Marasco.... 0 0 73,307 78,656 368,513 198,859
David C. Swanson........ 2,604 25,640 32,381 68,654 128,244 163,414
</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 Parent Company common stock on the exercise date.
(2) The exercise price and number of shares underlying such options have been
adjusted to give effect to the Distribution and the Reverse Stock Split.
(3) The values shown equal the difference between the exercise price of
unexercised in-the-money options and the closing market price of the Parent
Company common stock at December 31, 1997. Options are in-the-money if the
fair market value of the Parent Company common stock exceeds the exercise
price of the option.
LONG-TERM PARENT COMPANY INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF
SHARES, PERFORMANCE UNDER NON-STOCK PRICE-BASED PLANS (2)
UNITS OR OR OTHER ESTIMATED FUTURE PAYOUTS
OTHER PERIOD UNTIL ------------------------------------------
RIGHTS(1) MATURATION THRESHOLD(#) TARGET(#) MAXIMUM(#)
NAME (#) OR PAYOUT (0%) (100%) (200%)
- ---- ------------ ------------ ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Frank R. Noonan........ 23,892 Two Years 0 23,892 47,784
Philip C. Danford...... 9,514 Two Years 0 9,514 19,028
Frederick J. Groser.... 9,514 Two Years 0 9,514 19,028
Alexander R. Marasco... 9,514 Two Years 0 9,514 19,028
David C. Swanson....... 9,514 Two Years 0 9,514 19,028
</TABLE>
- ---------------
(1) Amounts shown represent the performance shares granted under the Performance
Unit Plan of the pre-Distribution Parent Company 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 Donnelley Corp. common stock. The number of such shares have been
adjusted to give effect to the Distribution and the Reverse Stock Split.
(2) Pro rata awards may range from 0 to 200% of the targeted performance shares
based on achievements within a range of performance goals.
66
<PAGE> 71
RETIREMENT BENEFITS
The following table sets forth the estimated aggregate annual benefits
payable under the Parent Company'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
the Parent Company 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
ASSUMING CREDITED SERVICE OF:
--------------------------------------------------
AVERAGE 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 Treasury rates 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
67
<PAGE> 72
approved by the chairman and chief executive officer of the Parent Company, 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding capital stock of Donnelley is owned by Donnelley
Corp. The following table sets forth the number of shares of Donnelley Corp.
common stock beneficially owned as of September 2, 1998 by (i) owners of more
than 5% of the outstanding shares of Donnelley Corp.'s common stock, (ii) each
of the directors of Donnelley Corp. and Donnelley, (iii) each of Donnelley
Corp.'s executive officers named in the Summary Compensation Table above, and
(iv) all of the Donnelley Corp. directors and executive officers as a group.
Except as indicated in the footnotes to the table, Donnelley Corp. believes that
the persons named in the table have sole voting and investment power with
respect to all shares owned beneficially by them. The mailing address for each
of the Donnelley Corp.'s directors and executive officers listed below is One
Manhattanville Road, Purchase, NY 10577.
<TABLE>
<CAPTION>
SHARES OF DONNELLEY CORP. COMMON STOCK
------------------------------------------
AMOUNT BENEFICIALLY PERCENTAGE OF
BENEFICIAL OWNERS OWNED(1) CLASS
- ----------------- ------------------------- -------------
<S> <C> <C>
Frank R. Noonan....................................... 233,580(2) *
Philip C. Danford..................................... 82,009(3) *
Frederick J. Groser................................... 50,451(4) *
Alexander R. Marasco.................................. 76,650(5) *
David C. Swanson...................................... 35,115(6) *
Diane P. Baker........................................ 3,000(7) *
William G. Jacobi..................................... 4,116(7) *
Robert J. Kamerschen.................................. 8,000(7) *
Carol J. Parry........................................ 3,000(7) *
Barry Lawson Williams................................. 3,000(7) *
All Directors and Executive Officers as a Group....... 594,060(8) 1.68%
Harris Associates L.P. and its general partner,....... 3,474,888(9) 10.14%
Harris Associates, Inc.
Two North LaSalle Street,
Ste. 500
Chicago, Illinois 60602-3790
AMVESCAP, PLC and certain of its subsidiaries......... 2,409,664(10) 7.03%
11 Devonshire Square
London EC2M 4YR
England
Fir Tree, Inc. d/b/a Fir Tree Partners................ 2,322,020(11) 6.80%
535 Fifth Avenue
31st Floor
New York, New York 10017
</TABLE>
- ---------------
* Represents ownership of less than 1%.
(1) The amounts and percentage of Donnelley Corp.'s common stock beneficially
owned are reported on the basis of rules and regulations of the Securities
and Exchange Commission (the "Commission") governing the determination of
beneficial ownership of securities. Under such rules and regulations, a
person is deemed to be a "beneficial owner" of a security if that person
has or shares "voting power", which includes the power to vote or to direct
the voting of such security, or "investment power", which includes the
power to dispose of or to direct
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<PAGE> 73
the disposition of such security. A person is also deemed to be a
beneficial owner of any securities which that person has a right to acquire
beneficial ownership of within 60 days. Under these rules and regulations,
more than one person may be deemed a beneficial owner of the same
securities and a person may be deemed to be a beneficial owner of
securities in which he has no economic interest.
(2) Includes 228,577 shares of Donnelley Corp.'s common stock which may be
acquired pursuant to options exercisable as of June 30, 1998 or within 60
days thereafter.
(3) Includes 78,253 shares of Donnelley Corp.'s common stock which may be
acquired pursuant to options exercisable as of June 30, 1998 or within 60
days thereafter.
(4) Includes 49,870 shares of Donnelley Corp.'s common stock which may be
acquired pursuant to options exercisable as of June 30, 1998 or within 60
days thereafter.
(5) Includes 73,307 shares of Donnelley Corp.'s common stock which may be
acquired pursuant to options exercisable as of June 30, 1998 or within 60
days thereafter.
(6) Includes 34,436 shares of Donnelley Corp.'s common stock which may be
acquired pursuant to options exercisable as of June 30, 1998 or within 60
days thereafter.
(7) Includes (i) options to purchase 1,500 shares of Donnelley Corp.'s common
stock, which options will become exercisable in equal increments on each of
the first three anniversary's of the date of the grant, July 14, 1998, and
(ii) 1,500 deferred shares of Company's common stock which will vest in
equal increments on each of the first three anniversary's of the date of
the grant, July 14, 1998.
(8) Includes options to purchase 556,218 shares of Donnelley Corp.'s common
stock.
(9) Harris Associates L.P. ("Harris") and its sole general partner, Harris
Associates, Inc. ("Harris Inc."), jointly filed a Schedule 13G with the
Commission on February 11, 1998. According to such Schedule 13G, Harris, a
registered investment adviser, had as of December 31, 1997, shared voting
power over 2,980,728 shares of Donnelley Corp.'s common stock. Of such
shares, Harris had sole dispositive power over 1,034,228 shares and shared
dispositive power over 1,946,500 shares. On April 9, 1998, Harris and
Harris Inc. jointly filed an amendment to their Schedule 13G with the
Commission which reported that as of March 31, 1998 Harris shared voting
power over 3,474,888 shares of Donnelley Corp.'s common stock. Of such
shares, Harris had sole dispositive power over 1,087,088 shares and shared
dispositive power over 2,387,800 shares. The foregoing Schedule 13G and the
amendments thereto related to the common stock of The Dun & Bradstreet
Corporation, the predecessor of Donnelley Corp.
(10) AMVESCAP PLC and its subsidiaries, ADZ, 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), INVESCO Management &
Research, Inc. (a registered investment adviser), and INVESCO Realty
Advisers, Inc. (a registered investment adviser), jointly filed a Schedule
13G with the Commission on February 11, 1998. This Schedule 13G reported
that these companies had, as of December 31, 1997, shared voting power and
shared dispositive power over 2,409,664 shares of Donnelley Corp.'s common
stock. The foregoing Schedule 13G related to the common stock of The Dun &
Bradstreet Corporation, the predecessor of the Company.
(11) Fir Tree, Inc. d/b/a Fir Tree Partners ("Fir Tree") and Mr. Jeffery
Tannenbaum, the sole shareholder, executive officer, director and principal
of Fir Tree, filed a 13G with the Commission on August 6, 1998. This
Schedule 13G reported that as of August 5, 1998, Fir Tree and Mr.
Tannenbaum were the beneficial owners of 2,322,020 shares of common stock
for the account of Fir Tree Value Fund, Fir Tree Institutional or Fir Tree
LDC, as the case may be, and that Fir Tree and Mr. Tannenbaum have sole
voting and dispositive power over the 2,322,020 shares.
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<PAGE> 74
DESCRIPTION OF NEW CREDIT FACILITY
Donnelley has entered into the New Credit Facility (the "Credit Agreement")
with The Chase Manhattan Bank ("Chase"), Chase Securities Inc. ("CSI") and
Goldman Sachs Credit Partners L.P. ("Goldman Sachs Credit Partners" and,
together with Chase, the "Lenders") pursuant to which the Lenders have provided,
subject to the terms and conditions set forth in the Credit Agreement, (i) a
senior secured Revolving Facility of $100 million and (ii) senior secured Term
Facilities in aggregate of $300 million. The Term Facilities consist of $75
million in aggregate principal amount of Tranche A Term Loans, $125 million in
aggregate principal amount of Tranche B Term Loans and $100 million in aggregate
principal amount of Tranche C Term Loans. CSI and Goldman Sachs Credit Partners
managed the syndication of the New Credit Facility.
The following summary of the New Credit Facility does not purport to be
complete and is qualified in its entirety by reference to the definitive
documentation for the New Credit Facility, a copy of which has been filed as an
exhibit to the Registration Statement.
The obligations of Donnelley under the New Credit Facility are
unconditionally guaranteed by Donnelley Corp. and each future domestic direct or
indirect subsidiary of Donnelley (the "Credit Facility Subsidiary Guarantors").
The New Credit Facility and the guarantees are secured by substantially all of
the assets and the capital stock of Donnelley and the Credit Facility Subsidiary
Guarantors.
The Revolving Facility and the Tranche A Term Loans will mature in June
2004. The Tranche B Term Loans will mature in December 2005 and the Tranche C
Term Loans will mature in December 2006. The Term Facilities in aggregate will
amortize in quarterly installments commencing in September 1998. Donnelley will
be required to repay $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 New Credit Facility.
The loans under the New Credit Facility bear interest based on, at
Donnelley's election, LIBOR or ABR (both as defined in the New Credit Facility),
plus a certain spread which is based on Donnelley's ratio of total debt to
EBITDA. Indebtedness under the Revolving Facility and Tranche A Term Loans will
initially (subject to adjustment based on Donnelley's total debt to EBITDA
ratio) bear interest at a rate of, at Donnelley's option, either LIBOR plus
1.50% or ABR plus 0.5%. Indebtedness under the Tranche B Term Loans will
initially (subject to adjustment based on Donnelley's total debt to EBITDA
ratio) bear interest at a rate of, at Donnelley's option, either LIBOR plus
1.75% or ABR plus 0.75%. Indebtedness under the Tranche C Term Loans will
initially (subject to adjustment based on Donnelley's total debt to EBITDA
ratio) bear interest at a rate of, at Donnelley's option, either LIBOR plus
2.00% or ABR plus 1.00%.
The New Credit Facility contains a number of covenants that, among other
things, restrict the ability of Donnelley and any future subsidiaries (and, in
some instances, restrict Donnelley from voting its partnership interests) to
engage in mergers, consolidations and asset sales, make certain changes of
business or other fundamental changes, engage in certain transactions with
affiliates, amend or waive terms of material contracts (including the agreements
entered into in connection with the Distribution), create liens on assets, incur
additional indebtedness, enter into sale-leasebacks, make investments, prepay
debt, pay dividends or make capital distributions and otherwise restrict
corporate activities. In addition, the New Credit Facility will require
Donnelley to meet certain financial tests, including (i) total debt to EDITDA
ratio and (ii) EDITDA to fixed charge ratio.
The New Credit Facility contains customary events of default, including the
failure to pay principal when due or any interest or other amount that becomes
due within three business days after the due date, a default in the performance
of certain covenants, breach of representations or warranties, invalidity of any
guarantee or security document, certain insolvency events, cross
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<PAGE> 75
default, certain change of control events, failure to consummate the
Distribution within 45 days of the closing of the New Credit Facility, and
termination of certain material contracts.
DESCRIPTION OF NOTES
The Exchange Notes will be issued under an Indenture, dated as of June 5,
1998 (the "Indenture"), between Donnelley and The Bank of New York, as trustee
(the "Trustee"), which has been filed as a exhibit to the Registration Statement
of which this Prospectus constitutes a part. The statements under this caption
relating to the Notes and the Indenture are summaries and do not purport to be
complete, and are subject to, and are qualified in their entirety by reference
to, all the provisions of the Indenture, including the definitions of certain
terms therein. The Indenture is by its terms subject to and governed by the
Trust Indenture Act of 1939, as amended. Unless otherwise indicated, references
under this caption to sections, "sec." or articles are references to the
Indenture. Where reference is made to particular provisions of the Indenture or
to defined terms not otherwise defined herein, such provisions or defined terms
are incorporated herein by reference. Copies of the Indenture referred to below
will be available at the corporate trust office of the Trustee.
GENERAL
The terms of the Exchange Notes are identical in all material respects to
the Old Notes, except for certain transfer restrictions relating to the Old
Notes and except that, if (i) the registration statement relating to the
Exchange Offer has not been filed within 60 days following the Closing, (ii) the
Registration Statement has not become effective within 120 days following the
Closing or (iii) the Exchange Offer has not been consummated within 60 business
days after the effective date of the Exchange Offer Registration Statement or
(iv) any registration statement required by the Registration Rights Agreement is
filed and declared effective but shall thereafter cease to be effective (except
as specifically permitted therein) without being succeeded immediately by an
additional registration statement filed and declared effective (any such event
referred to in clauses (i) through (iv), a "Registration Default"), then the per
annum interest rate on the Notes will increase, for the period from the
occurrence of the Registration Default until such time as no Registration
Default is in effect (at which time the interest rate will be reduced to its
initial rate) by 0.25% during the first 90-day period following the occurrence
of such Registration Default, which rate shall increase by an additional 0.25%
during each subsequent 90-day period, up to a maximum of 1.0%.
The Notes are unsecured obligations of Donnelley and mature on June 1,
2008.
The Notes are unconditionally guaranteed on a senior subordinated basis
(the "Donnelley Corp. Guarantee") by Donnelley Corp. The Donnelley Corp.
Guarantee is subordinated to all Donnelley Corp. Senior Debt.
At the original issue date of the Notes, Donnelley had no Restricted
Subsidiaries. Donnelley covenanted to cause any future Restricted Subsidiaries
to unconditionally guarantee the Notes, jointly and severally on a subordinated
basis (such guarantees, the "Subsidiary Guarantees" and such guarantors, the
"Subsidiary Guarantors"), provided that each such Restricted Subsidiary will
cease to be a Subsidiary Guarantor when it ceases to be a Restricted Subsidiary.
The ranking and effectiveness of the Subsidiary Guarantees are subject to
certain legal considerations and are therefore uncertain. See "Risk
Factors -- Risk of Fraudulent Transfer" above.
Notes bear interest at a rate of 9.125% per annum from June 5, 1998 or from
the most recent Interest Payment Date to which interest has been paid or
provided for, payable semiannually on June 1 and December 1 of each year,
commencing December 1, 1998, to the Person in whose name the Note (or any
predecessor Note) is registered at the close of business on the preceding May 15
or November 15, as the case may be. Settlement for the Notes will be made in
immediately available funds and payments by Donnelley in respect of the Notes
(including principal, premium, if any, and
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<PAGE> 76
interest) will be made in immediately available funds. Interest on the Notes
will be computed on the basis of a 360-day year comprised of twelve 30-day
months. (sec.sec. 301, 307 and 310)
Principal of and premium, if any, and interest on the Notes will be
payable, and the Notes may be presented for registration of transfer and
exchange, at the office or agency of Donnelley maintained for that purpose in
the Borough of Manhattan, The City of New York, provided that at the option of
Donnelley, payment of interest on the Notes may be made by check mailed to the
address of the Person entitled thereto as it appears in the Note Register. Until
otherwise designated by Donnelley, such office or agency will be the principal
corporate trust office of the Trustee, as Paying Agent and Registrar. (sec.sec.
301, 305 and 1002)
FORM, DENOMINATION, TRANSFER, EXCHANGE AND BOOK-ENTRY PROCEDURES
Notes will be issued only in fully registered form, without interest
coupons, in denominations of $1,000 and integral multiples thereof. Notes will
not be issued in bearer form.
Global Notes. The Exchange Notes initially will be represented by one or
more Notes in registered, global form without interest coupons (collectively,
the "Global Note"). The Global Notes will be deposited upon issuance with the
Trustee as custodian for The Depository Trust Company ("DTC"), in New York, New
York, and registered in the name of DTC or its nominee, in each case for credit
to an account of a direct or indirect participant in DTC as described below.
Transfers of beneficial interests in the Global Notes will be subject to
the applicable rules and procedures of DTC and its direct or indirect
participants (including, if applicable, those of Euroclear and CEDEL), which may
change from time to time.
Except as set forth below, the Global Notes may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for Notes
in certificated form except in the limited circumstances described below under
"-- Exchanges of Book-Entry Notes for Certificated Notes".
Exchanges of Book-Entry Notes for Certificated Notes. A beneficial
interest in a Global Note may not be exchanged for a Note in certificated form
unless (i) DTC (x) notifies Donnelley that it is unwilling or unable to continue
as Depositary for the Global Note or (y) has ceased to be a clearing agency
registered under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in either case Donnelley thereupon fails to appoint a successor
Depositary, (ii) Donnelley, at its option, notifies the Trustee in writing that
it elects to cause the issuance of the Notes in certificated form or (iii) there
shall have occurred and be continuing an Event of Default with respect to the
Notes. In all cases, certificated Notes delivered in exchange for any Global
Note or beneficial interests therein will be registered in the names, and issued
in any approved denominations, requested by or on behalf of the Depositary (in
accordance with its customary procedures). Any certificated Note issued in
exchange for an interest in a Global Note will bear the legend restricting
transfers that is borne by such Global Note. Any such exchange will be effected
through the DWAC System and an appropriate adjustment will be made in the
records of the Security Registrar to reflect a decrease in the principal amount
of the relevant Global Note.
Certain Book-Entry Procedures. The descriptions of the operations and
procedures of DTC, Euroclear and CEDEL that follow are provided solely as a
matter of convenience. These operations and procedures are solely within the
control of the respective settlement systems and are subject to changes by them
from time to time. Donnelley takes no responsibility for these operations and
procedures and urges investors to contact the system or their participants
directly to discuss these matters.
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer promptly after the date of this Prospectus. Any financial
institution that is a participant in the Book-Entry Transfer Facility's systems
may make book-entry delivery of Old Notes by causing the Book-Entry Transfer
Facility to
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<PAGE> 77
transfer such Old Notes into the Exchange Agent's account in accordance with the
Book-Entry Transfer Facility's Automated Tender Offer Program ("ATOP")
procedures for transfer. However, the exchange for the Old Notes so tendered
will only be made after timely confirmation of such book-entry transfer of Old
Notes into the Exchange Agent's account, and timely receipt by the Exchange
Agent of an Agent's Message (as such term is defined in the next sentence) and
any other documents required by the Letter of Transmittal. The term "Agent's
Message" means a message, transmitted by the Book-Entry Transfer Facility and
received by the Exchange Agent and forming a part of a Book-Entry Confirmation,
which states that the Book-Entry Transfer Facility has received an express
acknowledgment from a participant tendering Old Notes that are the subject of
such Book-Entry Confirmation that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal, and that the Company may
enforce such agreement against such participant.
DTC has advised Donnelley as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants ("participants") and facilitate the clearance
and settlement of securities transactions between participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical transfer and delivery of certificates.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. Indirect
access to the DTC system is available to other entities such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants").
DTC has advised Donnelley that its current practice, upon the issuance of
the Global Note, is to credit, on its internal system, the respective principal
amount of the individual beneficial interests represented by such Global Notes
to the accounts with DTC of the participants through which such interests are to
be held. Ownership of beneficial interests in the Global Notes will be shown on,
and the transfer of that ownership will be effected only through, records
maintained by DTC or its nominees (with respect to interests of participants)
and the records of participants and indirect participants (with respect to
interests of persons other than participants).
AS LONG AS DTC, OR ITS NOMINEE, IS THE REGISTERED HOLDER OF A GLOBAL NOTE,
DTC OR SUCH NOMINEE, AS THE CASE MAY BE, WILL BE CONSIDERED THE SOLE OWNER AND
HOLDER OF THE NOTES REPRESENTED BY SUCH GLOBAL NOTE FOR ALL PURPOSES UNDER THE
INDENTURE AND THE NOTES. Except in the limited circumstances described above
under "-- Exchanges of Book-Entry Notes for Certificated Notes", owners of
beneficial interests in a Global Note will not be entitled to have any portions
of such Global Note registered in their names, will not receive or be entitled
to receive physical delivery of Notes in definitive form and will not be
considered the owners or Holders of the Global Note (or any Note represented
thereby) under the Indenture or the Notes.
Investors may hold their interests in the Global Note directly through DTC,
if they are participants in such system, or indirectly through organizations
(including Euroclear and CEDEL) which are participants in such system. CEDEL and
Euroclear will hold interests in the Global Note on behalf of their participants
through customers' securities accounts in their respective names on the books of
their respective depositories. The depositories, in turn, will hold such
interests in such Global Notes in customers' securities accounts in the
depositories' names on the books of DTC. All interests in a Global Note,
including those held through Euroclear or CEDEL, will be subject to the
procedures and requirements of DTC. Those interests held through Euroclear or
CEDEL will also be subject to the procedures and requirements of such system.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Note to such persons may be limited to
that extent. Because DTC can act only on behalf of its participants,
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<PAGE> 78
which in turn act on behalf of indirect participants and certain banks, the
ability of a person having a beneficial interest in a Global Note to pledge such
interest to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interest, may be affected by the lack
of a physical certificate evidencing such interest.
Payments of the principal of, premium, if any, and interest on Global Notes
will be made to DTC or its nominee as the registered owner thereof. Neither
Donnelley, the Trustee nor any of their respective agents will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
Donnelley expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note representing any Notes held by
it or its nominee, will immediately credit participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the
principal amount of such Global Note for such Notes as shown on the records of
DTC or its nominee. Donnelley also expects that payments by participants to
owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is the case with securities held for the accounts of customers registered in
"street name". Such payment will be the responsibility of such participants.
Except for trades involving only Euroclear and CEDEL participants,
interests in the Global Note will trade in DTC's settlement system and secondary
market trading activity in such interests will therefore settle in immediately
available funds, subject in all cases to the rules and procedures of DTC and its
participants. Transfers between participants in DTC will be effected in
accordance with DTC's procedures, and will be settled in same-day funds.
Transfers between participants in Euroclear and CEDEL will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer and exchange provisions applicable
to the Notes described elsewhere herein, cross-market transfers between DTC
participants, on the one hand, and Euroclear or CEDEL participants, on the other
hand, will be effected by DTC in accordance with DTC's rules on behalf of
Euroclear or CEDEL, as the case may be, by its respective depositary; however,
such cross-market transactions will require delivery of instructions to
Euroclear or CEDEL, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or CEDEL, as the case may be, will, if
the transaction meets its settlement requirements, deliver instructions to its
respective depository to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Note in DTC, and making
or receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC Euroclear participants and CEDEL participants may
not deliver instructions directly to the depositories for Euroclear or CEDEL.
Because of time zone differences, the securities account of a Euroclear or
CEDEL participant purchasing an interest in a Global Note from a DTC participant
will be credited, and any such crediting will be reported to the relevant
Euroclear or CEDEL participant, during the securities settlement processing day
(which must be a business day for Euroclear and CEDEL) immediately following the
DTC settlement date. Cash received in Euroclear or CEDEL as a result of sales of
interests in a Global Note by or through a Euroclear or CEDEL participant to a
DTC participant will be received with value on the DTC settlement date but will
be available in the relevant Euroclear or CEDEL cash account only as of the
business day for Euroclear or CEDEL following the DTC settlement date.
DTC has advised Donnelley that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account with DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of the Notes as to which such
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participant or participants has or have given such direction. However, if there
is an Event of Default (as defined below) under the Notes, the Global Notes will
be exchanged for legended Notes in certificated form, and distributed to DTC's
participants.
Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures
in order to facilitate transfers of beneficial ownership interests in the Global
Notes among participants of DTC, Euroclear and CEDEL, they are under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. None of Donnelley, the Trustee nor
any of their respective agents will have any responsibility for the performance
by DTC, Euroclear and CEDEL, their participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations, including maintaining, supervising or reviewing the records relating
to, or payments made on account of, beneficial ownership interests in Global
Notes.
OPTIONAL REDEMPTION
The Notes will be subject to redemption, at the option of Donnelley, in
whole or in part, at any time on or after June 1, 2003 and prior to maturity,
upon not less than 30 nor more than 60 days' notice mailed to each Holder of
Notes to be redeemed at such Holder's address appearing in the Note Register, in
amounts of $1,000 or an integral multiple of $1,000, at the following Redemption
Prices (expressed as percentages of the principal amount) plus accrued interest
to but excluding the Redemption Date (subject to the right of Holders of record
on the relevant Regular Record Date to receive interest due on an Interest
Payment Date that is on or prior to the Redemption Date), if redeemed during the
12-month period beginning June 1 of the years indicated:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2003..................................................... 104.563%
2004..................................................... 103.042%
2005..................................................... 101.521%
2006 and thereafter...................................... 100.000%
</TABLE>
(sec.sec. 203, 1101, 1105 and 1107)
In addition, at any time prior to June 1, 2001 in the event Donnelley Corp. or
Donnelley receives net cash proceeds from the sale of its Common Stock in one or
more Equity Offerings, Donnelley (to the extent it receives such proceeds and
has not used such proceeds, directly or indirectly, to redeem or repurchase
other securities pursuant to optional redemption provisions) may, at its option,
use all or a portion of any such net proceeds to redeem, from time to time,
Notes in an aggregate principal amount of up to 35% of the original aggregate
principal amount of the Notes, provided, however, that Notes having a principal
amount equal to at least 65% of the original aggregate principal amount of the
Notes remain outstanding after such redemption. Such redemption must occur on a
Redemption Date within 120 days of such sale and upon not less than 30 nor more
than 60 days' notice mailed to each Holder of Notes to be redeemed at such
Holder's address appearing in the Note Register, in amounts of $1,000 or an
integral multiple of $1,000, at a redemption price of 109.125% of the principal
amount of the Notes plus accrued interest to but excluding the Redemption Date
(subject to the right of Holders of record on the relevant Regular Record Date
to receive interest due on an Interest Payment Date that is on or prior to the
Redemption Date).
If less than all the Notes are to be redeemed, the Trustee shall select, in
such manner as it shall deem fair and appropriate, the particular Notes to be
redeemed or any portion thereof that is an integral multiple of $1,000. (sec.
1104)
The Notes will not have the benefit of any sinking fund.
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SUBORDINATION
The indebtedness evidenced by the Notes will, to the extent set forth in
the Indenture, be subordinate in right of payment to the prior payment in full
of all Senior Debt. Upon any payment or distribution of assets to creditors upon
any liquidation, dissolution, winding-up, reorganization, assignment for the
benefit of creditors or marshaling of assets of Donnelley, whether voluntary or
involuntary, or any bankruptcy, insolvency, receivership or similar proceedings
of Donnelley, the holders of all Senior Debt will first be entitled to receive
payment in full of such Senior Debt, or provision made for such payment, before
the Holders of the Notes will be entitled to receive any payment in respect of
the principal of or premium, if any, or interest on, or any obligation to
repurchase, the Notes. In the event that notwithstanding the foregoing, the
Trustee or the Holder of any Note receives any payment or distribution of assets
of Donnelley of any kind or character (including any such payment or
distribution which may be payable or deliverable by the reason of the payment of
any other indebtedness of Donnelley being subordinated to the payment of the
Notes), before all the Senior Debt is so paid in full, then such payment or
distribution will be required to be paid over or delivered forthwith to the
trustee in bankruptcy or other person making payment or distribution of assets
of Donnelley for application to the payment of all Senior Debt remaining unpaid,
to the extent necessary to pay the Senior Debt in full.
No payments on account of principal of, premium, if any, or interest on, or
in respect of the purchase or other acquisition of, the Notes, and no defeasance
of the Notes, may be made if there shall have occurred and be continuing a
Senior Payment Default. "Senior Payment Default" means any default in the
payment of any principal of or premium, if any, or interest on Senior Debt when
due, whether at the stated maturity of any such payment or by declaration of
acceleration, call for redemption or otherwise.
Upon the occurrence of a Senior Nonmonetary Default and receipt of written
notice by Donnelley and the Trustee of the occurrence of such Senior Nonmonetary
Default from any holder of Senior Debt (or any trustee, agent or other
representative for such holder) which is the subject of such Senior Nonmonetary
Default, no payments on account of principal of, premium, if any, or interest
on, or in respect of the purchase or other acquisition of, the Notes, and no
defeasance of the Notes, may be made for a period (the "Payment Blockage
Period") commencing on the date of the receipt of such notice and ending the
earlier of (i) the date on which such Senior Nonmonetary Default shall have been
cured or waived or ceased to exist or all Senior Debt the subject of such Senior
Nonmonetary Default shall have been discharged and (ii) the 179th day after the
date of the receipt of such notice. In any event, no more than one Payment
Blockage Period may be commenced during any 360-day period and there shall be a
period of at least 181 days during each 360-day period when no Payment Blockage
Period is in effect. In addition, no Senior Nonmonetary Default that existed or
was continuing on the date of the commencement of a Payment Blockage Period may
be made the basis of the commencement of a subsequent Payment Blockage Period
whether or not within a period of 360 consecutive days, unless such Senior
Nonmonetary Default shall have been cured for a period of not less than 90
consecutive days. "Senior Nonmonetary Default" means the occurrence or existence
and continuance of an event of default with respect to Senior Debt, other than a
Senior Payment Default, permitting the holders of the Senior Debt (or a trustee
or other agent on behalf of the holders thereof) then to declare such Senior
Debt due and payable prior to the date on which it would otherwise become due
and payable.
The failure to make any payment on the Notes by reason of the provisions of
the Indenture described under this caption "Subordination" will not be construed
as preventing the occurrence of an Event of Default with respect to the Notes
arising from any such failure to make payment. Upon termination of any period of
payment blockage Donnelley shall resume making any and all required payments in
respect of the Notes, including any missed payments.
"Senior Debt" means (i) the principal of (and premium, if any) and interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to Donnelley
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whether or not such claim for post-petition interest is allowed in such
proceeding) on, and penalties and any obligation of Donnelley for reimbursement,
indemnities and fees relating to, any Credit Facility and (ii) the principal of
(and premium, if any) and interest on Debt of Donnelley for money borrowed,
whether Incurred on or prior to the date of original issuance of the Notes or
thereafter, and any amendments, renewals, extensions, modifications,
refinancings and refundings of any such Debt and (iii) Permitted Interest Rate,
Currency or Commodity Price Agreements entered into with respect to Debt
described in clauses (i) and (ii) above; provided, however, that the following
shall not constitute Senior Debt: (1) any Debt as to which the terms of the
instrument creating or evidencing the same provide that such Debt is not
superior in right of payment to the Notes, (2) any Debt which is subordinated in
right of payment in any respect to any other Debt of Donnelley, (3) Debt
evidenced by the Notes, (4) any Debt owed to a Person when such Person is a
Subsidiary of Donnelley, (5) any obligation of Donnelley arising from Redeemable
Stock of Donnelley, (6) that portion of any Debt which is Incurred in violation
of the Indenture and (7) Debt which, when Incurred and without respect to any
election under Section 1111 (b) of Title 11, United States Code, is without
recourse to Donnelley.
By reason of such subordination, in the event of insolvency, creditors of
Donnelley who are not holders of Senior Debt or of the Notes may recover less,
ratably, than holders of Senior Debt and more, ratably, than Holders of the
Notes.
The subordination provisions described above will not be applicable to
payments in respect of the Notes from a defeasance trust established in
connection with any defeasance or covenant defeasance of the Notes as described
under "-- Defeasance." (Article Thirteen)
REGISTRATION COVENANT; EXCHANGE OFFER
Holders of Old Notes are entitled to certain registration rights pursuant
to the Registration Rights Agreement. Pursuant to the Registration Rights
Agreement, the Company agreed, for the benefit of the holders of the Old Notes,
(i) to file with the Commission, within 60 days following the time of delivery
of the Notes (the "Closing"), a registration statement (the "Exchange Offer
Registration Statement") under the Securities Act relating to an exchange offer
(the "Exchange Offer") pursuant to which the Exchange Notes would be offered in
exchange for the Old Notes tendered at the option of the holders thereof and
(ii) to use its reasonable best efforts to cause the Exchange Offer Registration
Statement to become effective as soon as practicable thereafter. Donnelley has
further agreed to commence the Exchange Offer promptly after the Exchange Offer
Registration Statement has become effective, hold the offer open for at least 30
days, and exchange the Exchange Notes for all Old Notes validly tendered and not
withdrawn before the expiration of the offer.
Under existing Commission interpretations, the Exchange Notes would in
general be freely transferable after the Exchange Offer without further
registration under the Securities Act, except that broker-dealers
("Participating Broker-Dealers") receiving Exchange Notes in the Exchange Offer
will be subject to a prospectus delivery requirement with respect to resales of
those Exchange Notes. The Commission has taken the position that participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the Exchange Notes (other than a resale of an unsold allotment from the
original sale of the Notes) by delivery of the prospectus contained in the
Exchange Offer Registration Statement. Under the Registration Rights Agreement,
Donnelley is required to allow Participating Broker-Dealers and other persons,
if any, subject to similar prospectus delivery requirements to use the
prospectus contained in the Exchange Offer Registration Statement in connection
with the resale of such Exchange Notes. The Exchange Offer Registration
Statement will be kept effective for a period of 180 days after the Exchange
Offer has been consummated in order to permit resales of Exchange Notes acquired
by broker-dealers in aftermarket transactions. Each holder of Old Notes (other
than certain specified holders) who wishes to exchange such Old Notes for
Exchange Notes in the Exchange Offer will be required to represent that any
Exchange Notes to be received by it will be acquired in the ordinary course of
its
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business, that at the time of the commencement of the Exchange Offer it has no
arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes and that it is not an
Affiliate of Donnelley.
However, if (i) on or before the date of consummation of the Exchange
Offer, the existing Commission interpretations are changed such that the
Exchange Notes would not in general be freely transferable in such manner on
such date, (ii) the Exchange Offer has not been consummated within 210 days
following the Closing or (iii) the Initial Purchasers so request within 60 days
after the consummation of the Exchange Offer with respect to any Notes held by
them following consummation of the Exchange Offer, Donnelley will, in lieu of
(or, in the case of clause (iii), in addition to) effecting registration of
Exchange Notes, use its best efforts to cause a registration statement under the
Securities Act relating to a shelf registration of the Notes for resale by
holders or, in the case of clause (iii), of the Notes held by the Initial
Purchasers for resale by the Initial Purchasers (the "Resale Registration") to
become effective and to remain effective until two years following the Closing
(or such earlier date as of which all of the Notes shall have been sold
thereunder). Donnelley will, in the event of the Resale Registration, provide to
the holder or holders of the applicable Notes copies of the prospectus that is a
part of the registration statement filed in connection with the Resale
Registration, notify such holder or holders when the Resale Registration for the
applicable Notes has become effective and take certain other actions as are
required to permit unrestricted resales of the applicable Notes. A holder of
Notes that sells such Notes pursuant to the Resale Registration generally would
be required to be named as a selling securityholder in the related prospectus
and to deliver a prospectus to purchasers, will be subject to certain of the
civil liability provisions under the Securities Act in connection with such
sales and will be bound by the provisions of the Registration Rights Agreement
that are applicable to such a holder (including certain indemnification
obligations).
In the event that (i) Donnelley has not filed, if applicable, the Resale
Registration within 60 days following the Closing or (ii) the registration
statement relating to the Exchange Offer has not become effective within 120
days following the Closing or (iii) the Exchange Offer has not been consummated
within 60 business days after the effective date of the Exchange Offer
Registration Statement or (iv) any registration statement required by the
Registration Rights Agreement is filed and declared effective but shall
thereafter cease to be effective (except as specifically permitted therein)
without being succeeded immediately by an additional registration statement
filed and declared effective (any such event referred to in clauses (i) through
(iv), a "Registration Default"), then the per annum interest rate on the Notes
will increase, for the period from the occurrence of the Registration Default
until such time as no Registration Default is in effect (at which time the
interest rate will be reduced to its initial rate) by 0.25% during the first
90-day period following the occurrence of such Registration Default, which rate
shall increase by an additional 0.25% during each subsequent 90-day period, up
to a maximum of 1.0%.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which will be available upon request to the Trustee or
Donnelley.
The Old Notes and the Exchange Notes will be considered collectively to be
a single class for all purposes under the Indenture, including, without
limitation, waivers, amendments, redemptions and Offers to Purchase, and for
purposes of this Description of Notes (except under this caption "Registration
Covenant; Exchange Offer") all references herein to "Notes" shall be deemed to
refer collectively to Old Notes and any Exchange Notes, unless the context
otherwise requires.
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COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Consolidated Debt
Donnelley may not, and may not permit any Restricted Subsidiary of
Donnelley to, Incur any Debt unless immediately after giving pro forma effect to
the Incurrence of such Debt and the receipt and application of the proceeds
thereof, the Consolidated Cash Flow Coverage Ratio of Donnelley would be greater
than 2 to 1.
Notwithstanding the foregoing limitation, Donnelley may, and may permit any
Restricted Subsidiary to, incur the following Debt:
(i) Debt Incurred pursuant to any Credit Facility; provided, however,
that, after giving effect to any such Incurrence, the aggregate principal
amount of all Debt Incurred under this clause (i) then outstanding does not
exceed $400 million less the sum of all principal payments with respect to
such Debt pursuant to clause (iii) (1) of the covenant described under
"-- Limitation on Asset Disposition";
(ii) the original issuance by Donnelley of the Debt evidenced by the
Notes and any Guarantees of the Notes;
(iii) Debt (other than Debt described in another clause of this
paragraph) outstanding on the date of original issuance of the Notes after
giving effect to the application of the proceeds of the Notes;
(iv) Debt owed by Donnelley to any Wholly Owned Restricted Subsidiary
of Donnelley for which fair value has been received or Debt owed by a
Restricted Subsidiary of Donnelley to Donnelley or a Wholly Owned
Restricted Subsidiary of Donnelley; provided, however, that upon either (1)
the transfer or other disposition by such Wholly Owned Restricted
Subsidiary or Donnelley of any Debt so permitted to a Person other than
Donnelley or another Wholly Owned Restricted Subsidiary of Donnelley or (2)
the issuance (other than directors' qualifying shares), sale, lease,
transfer or other disposition of shares of Capital Stock (including by
consolidation or merger) of such Wholly Owned Restricted Subsidiary to a
Person other than Donnelley or another such Wholly, Owned Restricted
Subsidiary, the provisions of this clause (iv) shall no longer be
applicable to such Debt and such Debt shall be deemed to have been Incurred
at the time of such transfer or other disposition;
(v) Debt consisting of Permitted Interest Rate, Currency or Commodity
Price Agreements;
(vi) Debt of a Restricted Subsidiary that does not violate the
covenant described under "-- Limitation on Debt of Restricted
Subsidiaries";
(vii) Refinancing Debt in respect of Debt Incurred pursuant to the
first paragraph of this covenant or pursuant to clause (ii), (iii) or (vi)
or this clause (vii); provided, however, that to the extent such
Refinancing Debt directly or indirectly Refinances Debt of a Restricted
Subsidiary Incurred pursuant to clause (vi), such Refinancing Debt shall be
incurred only by such Subsidiary; and
(viii) Debt not otherwise permitted to be Incurred pursuant to clauses
(i) through (vii) above, which, together with any other outstanding Debt
Incurred pursuant to this clause (viii), has an aggregate principal amount
not in excess of $5 million at any time outstanding. (Section 1007)
For purposes of determining compliance with the foregoing covenant, (i) in
the event that an item of Debt meets the criteria of more than one of the types
of Debt described above, Donnelley, in its sole discretion, will classify such
item of Debt and will only be required to include the amount and type of such
Debt in one of the above clauses, (ii) an item of Debt may be divided and
classified in
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more than one of the types of Debt described above and (iii) any other
obligation of the obligor on any item of Debt (or of any other Person who could
have Incurred such Debt under this covenant) arising under any Guarantee, Lien
or letter of credit supporting such Debt shall be disregarded to the extent that
it secures the principal amount of such Debt.
Limitation on Debt of Restricted Subsidiaries
Donnelley may not cause, and may not permit, any Restricted Subsidiary of
Donnelley to Incur any Debt except: (i) guarantees not prohibited by the
covenant described under "-- Limitation on Issuance of Guarantees of
Subordinated Debt"; (ii) Debt outstanding on the date of the Indenture; (iii)
Debt of Restricted Subsidiaries permitted by clauses (iv) and (vii) of the
covenant described under "-- Limitation on Consolidated Debt"; or (iv) Debt or
Preferred Stock Incurred by a Person prior to the time (A) such Person became a
Restricted Subsidiary of Donnelley, (B) such Person merges into or consolidates
with a Restricted Subsidiary of Donnelley or (C) another Restricted Subsidiary
of Donnelley merges into or consolidates with such Person (in a transaction in
which such Person becomes a Restricted Subsidiary of Donnelley), which Debt or
Preferred Stock was not Incurred or issued in anticipation of such transaction
and was outstanding prior to such transaction. (sec. 1008)
Limitation on Senior Subordinated Debt
Donnelley may not incur any Debt which by its terms is both (i)
subordinated in right of payment to any Senior Debt and (ii) senior in right of
payment to the Notes. (sec. 1009)
Limitation on Issuance of Guarantees of Subordinated Debt
Donnelley may not permit any Restricted Subsidiary, directly or indirectly,
to assume, guarantee or in any other manner become liable with respect to any
Debt of Donnelley that by its terms is subordinate or junior in right of payment
to the Notes. (sec. 1010)
Limitation on Liens
Donnelley may not, and may not permit any Restricted Subsidiary to, create,
incur or assume any Lien on or with respect to any property or assets of
Donnelley or any such Restricted Subsidiary now owned or hereafter acquired to
secure Debt which is pari passu with or subordinated in right of payment to the
Notes without making, or causing such Restricted Subsidiary to make, effective
provision for securing the Notes (and, if Donnelley shall so determine, any
other Debt of Donnelley which is not subordinate to the Notes or of such
Restricted Subsidiary) (x) equally and ratably with such Debt as to such
property or assets for so long as such Debt shall be so secured or (y) in the
event such Debt is Debt of Donnelley which is subordinate in right of payment to
the Notes, prior to such Debt as to such property for so long as such Debt will
be so secured.
Limitation on Restricted Payments
Donnelley (i) may not, directly or indirectly, declare or pay any dividend
or make any distribution (including any payment in connection with any merger or
consolidation derived from assets of Donnelley or any Restricted Subsidiary) in
respect of its Capital Stock, excluding any dividends or distributions by
Donnelley payable solely in shares of its Capital Stock (other than Redeemable
Stock) or in options, warrants or other rights to acquire its Capital Stock
(other than Redeemable Stock), (ii) may not, and may not permit any Restricted
Subsidiary to, purchase, redeem, or otherwise acquire or retire for value (a)
any Capital Stock of Donnelley or any Related Person of Donnelley or (b) any
options, warrants or other rights to acquire shares of Capital Stock of
Donnelley or any Related Person of Donnelley or any securities convertible or
exchangeable into shares of Capital Stock of Donnelley or any Related Person of
Donnelley, (iii) may not make, or permit any Restricted Subsidiary to make, any
Investment other than a Permitted Investment, and
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(iv) may not, and may not permit any Restricted Subsidiary to, redeem,
repurchase, defease or otherwise acquire or retire for value prior to any
scheduled maturity, repayment or sinking fund payment Debt of Donnelley which is
subordinate in right of payment to the Notes (each of clauses (i) through (iv)
being a "Restricted Payment") if: (1) an Event of Default, or an event that with
the passing of time or the giving of notice, or both, would constitute an Event
of Default, shall have occurred and is continuing or would result from such
Restricted Payment, or (2) after giving effect to such Restricted Payment
Donnelley could not Incur at least $1.00 of additional Debt pursuant to the
terms of the Indenture described in the first paragraph of "-- Limitation on
Consolidated Debt" above, or (3) upon giving effect to such Restricted Payment,
the aggregate of all Restricted Payments from the date of issuance of the Notes
exceeds the sum of: (a) 50% of cumulative Consolidated Net Income (or, in the
case Consolidated Net Income shall be negative, less 100% of such deficit) of
Donnelley since the first day of the first full fiscal quarter commencing
immediately following the date of issuance of the Notes through the last day of
the last full fiscal quarter ending immediately preceding the date of such
Restricted Payment for which quarterly or annual financial statements are
available (taken as a single accounting period); plus (b) 100% of the aggregate
net proceeds received by Donnelley after the date of original issuance of the
Notes, including the fair market value of property other than cash (determined
in good faith by the Board of Directors as evidenced by a resolution of the
Board of Directors filed with the Trustee), from contributions of capital or the
issuance and sale (other than to a Restricted Subsidiary) of Capital Stock
(other than Redeemable Stock) of Donnelley, options, warrants or other rights to
acquire Capital Stock (other than Redeemable Stock) of Donnelley and Debt of
Donnelley that has been converted into or exchanged for Capital Stock (other
than Redeemable Stock and other than by or from a Restricted Subsidiary) of
Donnelley after the date of original issuance of the Notes, provided that any
such net proceeds received by Donnelley from an employee stock ownership plan
financed by loans from Donnelley or a Restricted Subsidiary of Donnelley shall
be included only to the extent such loans have been repaid with cash on or prior
to the date of determination; plus (c) an amount equal to the sum of (i) the net
reduction in Investments in any Person resulting from dividends, repayments of
loans or advances or other transfers of assets, in each case to Donnelley or any
Restricted Subsidiary from such Person, and (ii) the portion (proportionate to
Donnelley's equity interest in any Subsidiary) of the fair market value of the
net assets of an Unrestricted Subsidiary at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary; provided, however, that the
foregoing sum shall not exceed, in the case of any Person, the amount of
Investments previously made (and treated as a Restricted Payment) by Donnelley
or any Restricted Subsidiary in such Person; plus (d) $25 million. Prior to the
making of any Restricted Payment, Donnelley shall deliver to the Trustee an
Officers' Certificate setting forth the computations by which the determinations
required by clauses (2) and (3) above were made and stating that no Event of
Default, or event that with the passing of time or the giving of notice, or
both, would constitute an Event of Default, has occurred and is continuing or
will result from such Restricted Payment.
Notwithstanding the foregoing, so long as no Event of Default, or event
that with the passing of time or the giving of notice, or both, would constitute
an Event of Default, shall have occurred and is continuing or would result
therefrom, (i) Donnelley may pay any dividend on Capital Stock of any class
within 60 days after the declaration thereof if, on the date when the dividend
was declared, Donnelley could have paid such dividend in accordance with the
foregoing provisions; (ii) Donnelley may refinance any Debt otherwise permitted
by clause (vii) of the second paragraph under "-- Limitation on Consolidated
Debt" above solely in exchange for or out of the net proceeds of the
substantially concurrent sale (other than from or to a Restricted Subsidiary or
from or to an employee stock ownership plan financed by loans from Donnelley or
a Restricted Subsidiary of Donnelley) of shares of Capital Stock (other than
Redeemable Stock) of Donnelley, provided that the amount of net proceeds from
such exchange or sale shall be excluded from the calculation of the amount
available for Restricted Payments pursuant to the preceding paragraph; (iii)
Donnelley may purchase, redeem, acquire or retire any shares of Capital Stock of
Donnelley solely in exchange for or out of the net proceeds of the substantially
concurrent sale (other than from or to a
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Restricted Subsidiary or from or to an employee stock ownership plan financed by
loans from Donnelley or a Restricted Subsidiary of Donnelley) of shares of
Capital Stock (other than Redeemable Stock) of Donnelley; and (iv) Donnelley may
dividend to the Parent Company the net proceeds from the issuance of the Notes
and the proceeds of the initial borrowings under the New Credit Facility in an
aggregate amount not in excess of $500 million; and (v) Donnelley may dividend
to the Parent Company up to all its cash on the date prior to or on the date of
the Distribution. Any payment made pursuant to clause (i) or (iii) of this
paragraph shall be a Restricted Payment for purposes of calculating aggregate
Restricted Payments pursuant to the preceding paragraph and any payment made
pursuant to clause (ii), (iv) or (v) of this paragraph shall be excluded from
Restricted Payments for purposes of such calculation. (sec. 1012)
Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries
Donnelley may not, and may not permit any Restricted Subsidiary to,
directly or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction on the ability of any Restricted
Subsidiary of Donnelley (i) to pay dividends (in cash or otherwise) or make any
other distributions in respect of its Capital Stock or pay any Debt or other
obligation owed to Donnelley or any other Restricted Subsidiary; (ii) to make
loans or advances to Donnelley or any other Restricted Subsidiary; or (iii) to
transfer any of its property or assets to Donnelley or any other Restricted
Subsidiary. Notwithstanding the foregoing, Donnelley may, and may permit any
Restricted Subsidiary to, suffer to exist any such encumbrance or restriction
(a) pursuant to any agreement in effect on the date of original issuance of the
Notes; (b) pursuant to an agreement relating to any Debt Incurred by a Person
(other than a Restricted Subsidiary of Donnelley existing on the date of
original issuance of the Notes or any Restricted Subsidiary carrying on any of
the businesses of any such Restricted Subsidiary) prior to the date on which
such Person became a Restricted Subsidiary of Donnelley and outstanding on such
date and not Incurred in anticipation of becoming a Restricted Subsidiary, which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person so acquired; (c) pursuant to an
agreement effecting a renewal, refunding or extension of Debt Incurred pursuant
to an agreement referred to in clause (a) or (b) above, provided, however, that
the provisions contained in such renewal, refunding or extension agreement
relating to such encumbrance or restriction are no more restrictive in any
material respect than the provisions contained in the agreement the subject
thereof, as determined in good faith by the Board of Directors and evidenced by
a resolution of the Board of Directors filed with the Trustee; (d) in the case
of clause (iii) above, restrictions contained in any security agreement
(including a capital lease) securing Debt of a Restricted Subsidiary otherwise
permitted under the Indenture, but only to the extent such restrictions restrict
the transfer of the property subject to such security agreement; (e) in the case
of clause (iii) above, customary nonassignment provisions entered into in the
ordinary course of business in leases and other contracts to the extent such
provisions restrict the transfer or subletting of any such lease or the
assignment of rights under any such contract; (f) any restriction with respect
to a Restricted Subsidiary of Donnelley imposed pursuant to an agreement which
has been entered into for the sale or disposition of all or substantially all of
the Capital Stock or assets of such Restricted Subsidiary, provided that
consummation of such transaction would not result in an Event of Default or an
event that, with the passing of time or the giving of notice or both, would
constitute an Event of Default, that such restriction terminates if such
transaction is closed or abandoned and that the closing or abandonment of such
transaction occurs within one year of the date such agreement was entered into;
or (g) such encumbrance or restriction is the result of applicable corporate law
or regulation relating to the payment of dividends or distributions. (sec. 1013)
Limitation on Asset Dispositions
Donnelley may not, and may not permit any Restricted Subsidiary to, make
any Asset Disposition in one or more related transactions unless: (i) Donnelley
or the Restricted Subsidiary, as the case may be, receives consideration for
such disposition at least equal to the fair market
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value for the assets sold or disposed of as determined by the Board of Directors
in good faith and evidenced by a resolution of the Board of Directors filed with
the Trustee; (ii) at least 75% of the consideration for such disposition
consists of cash or readily marketable cash equivalents or the assumption of
Debt (other than Debt that is subordinated to the Notes) relating to such assets
and release from all liability on the Debt assumed; and (iii) all Net Available
Proceeds, less any amounts invested within 360 days of such disposition in
assets related to the business of Donnelley, are applied within 360 days of such
disposition (1) first, to the permanent repayment or reduction of Senior Debt
then outstanding under any agreements or instruments which would require such
application or prohibit payments pursuant to clause (2) following, (2) second,
to the extent of remaining Net Available Proceeds, to make an Offer to Purchase
outstanding Notes at 100% of their principal amount plus accrued interest to the
date of purchase and, to the extent required by the terms thereof, any other
Debt of Donnelley that is pari passu with the Notes at a price no greater than
100% of the principal amount thereof plus accrued interest to the date of
purchase, and (3) third, to the extent of any remaining Net Available Proceeds,
to any other use as determined by Donnelley which is not otherwise prohibited by
the Indenture. (sec. 1014)
Transactions with Affiliates and Related Persons
Donnelley may not, and may not permit any Restricted Subsidiary of
Donnelley to, enter into any transaction (or series of related transactions)
with an Affiliate or Related Person of Donnelley (other than Donnelley or a
Wholly Owned Restricted Subsidiary of Donnelley), including any Investment,
either directly or indirectly, unless such transaction is in the best interests
of Donnelley or such Restricted Subsidiary and is on terms no less favorable to
Donnelley or such Restricted Subsidiary than those that could be obtained in a
comparable arm's-length transaction with an entity that is not an Affiliate or
Related Person (or, in the event that there are no comparable transactions
involving persons who are not Affiliates or Related Persons of Donnelley or the
relevant Restricted Subsidiary to apply for comparative purposes, is otherwise
on terms that, taken as a whole, Donnelley has determined to be fair to
Donnelley or the relevant Restricted Subsidiary). For any transaction that
involves in excess of $1,000,000, a majority of the disinterested members of the
Board of Directors shall determine that the transaction satisfies the above
criteria and shall evidence such a determination by a Board Resolution filed
with the Trustee. For any transaction that involves in excess of $5,000,000,
Donnelley shall also obtain an opinion from a nationally recognized expert with
experience in appraising the terms and conditions of the type of transaction (or
series of related transactions) for which the opinion is required stating that
such transaction (or series of related transactions) is on terms no less
favorable to Donnelley or such Restricted Subsidiary than those that could be
obtained in a comparable arm's-length transaction with an entity that is not an
Affiliate or Related Person of Donnelley, which opinion shall be filed with the
Trustee. The foregoing limitations shall not apply to (i) transactions with
DonTech, CenDon and any similar joint venture or partnership with a Person that
is not a Related Person that are pursuant to the agreements between Donnelley
and DonTech and CenDon in effect on the date of original issuance of the Notes
or any other substantially similar agreements, as the same may be amended or
modified in a manner not materially adverse to the interests of the holders of
the Notes, (ii) transactions between Donnelley and its Subsidiaries and New D&B
and its Subsidiaries pursuant to agreements in effect on the date of the
Distribution and any similar arrangements approved by the Board of Directors of
Donnelley or Donnelley Corp., as the same may be amended or modified in a manner
not materially adverse to the interests of the holders of the Notes or (iii) any
Restricted Payment permitted to be made pursuant to the covenant described under
"-- Limitation on Restricted Payments". (sec. 1015)
Change of Control
Within 30 days following the date on which a Person files with the
Commission a Schedule 13D under the Securities Exchange Act of 1934, evidencing
of the occurrence of a Change of Control, Donnelley will be required to make an
Offer to Purchase all Outstanding Notes at a purchase price equal to 101% of
their principal amount plus accrued interest to the date of purchase. A "Change
of
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Control" will be deemed to have occurred at such time as either (a) any Person
or any Persons acting together that would constitute a "group" (a "Group") for
purposes of Section 13(d) of the Securities Exchange Act of 1934, or any
successor provision thereto, together with any Affiliates or Related Persons
thereof, shall beneficially own (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, or any successor provision thereto), directly
or indirectly, at least 50% of the aggregate voting power of all classes of
Voting Stock of Donnelley (for the purposes of this clause (a) a person shall be
deemed to beneficially own the Voting Stock of a corporation that is
beneficially owned (as defined above) by another corporation (a "parent
corporation"), if such person beneficially owns (as defined above) at least 50%
of the aggregate voting power of all classes of Voting Stock of such parent
corporation); (b) any Person or Group, together with any Affiliates or Related
Persons thereof, shall succeed in having a sufficient number of its nominees
elected to the Board of Directors of Donnelley Corp. such that such nominees,
when added to any existing director remaining on the Board of Directors of
Donnelley Corp. after such election who was a nominee of or is an Affiliate or
Related Person of such Person or Group, will constitute a majority of the Board
of Directors of Donnelley Corp.; or (c) Donnelley shall, directly or indirectly,
transfer, sell, lease or otherwise dispose of all or substantially all of its
assets; or (d) there shall be adopted a plan of liquidation or dissolution of
Donnelley, provided, however, that a transaction effected to create a holding
company of Donnelley or Donnelley Corp., (i) pursuant to which Donnelley or
Donnelley Corp. becomes a wholly owned Subsidiary of such holding company, and
(ii) as a result of which the holders of Capital Stock of such holding company
are substantially the same as the holders of Capital Stock of Donnelley or
Donnelley Corp. immediately prior to such transaction, shall not be deemed to
involve a "Change of Control". (sec. 1016)
In the event that Donnelley makes an Offer to Purchase the Notes, Donnelley
intends to comply with any applicable securities laws and regulations, including
any applicable requirements of Section 14(e) of, and Rule 14e-1 under, the
Securities Exchange Act of 1934.
Provision of Financial Information
For so long as any of the Notes are outstanding, Donnelley shall file with
the Commission the annual reports, quarterly reports and other documents which a
reporting company is required to file with the Commission pursuant to Section 13
(a) or 15 (d) of the Securities Exchange Act of 1934 or any successor provisions
thereto. (sec. 1017)
UNRESTRICTED SUBSIDIARIES
Donnelley may designate any Subsidiary of Donnelley to be an "Unrestricted
Subsidiary" as provided below in which event such Subsidiary and each other
Person that is then or thereafter becomes a Subsidiary of such Subsidiary will
be deemed to be an Unrestricted Subsidiary. "Unrestricted Subsidiary" means (1)
any Subsidiary designated as such by the Board of Directors as set forth below
where (a) neither Donnelley nor any of its other Subsidiaries (other than
another Unrestricted Subsidiary) (i) provides credit support for, or any
Guarantee of, any Debt of such Subsidiary or any Subsidiary of such Subsidiary
(including any undertaking, agreement or instrument evidencing such Debt) or
(ii) is directly or indirectly liable for any Debt of such Subsidiary or any
Subsidiary of such Subsidiary, and (b) no default with respect to any Debt of
such Subsidiary or any Subsidiary of such Subsidiary (including any right which
the holders thereof may have to take enforcement action against such Subsidiary)
would permit (upon notice, lapse of time or both) any holder of any other Debt
of Donnelley and its Subsidiaries (other than another Unrestricted Subsidiary)
to declare a default on such other Debt or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity and (2) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Subsidiary to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, any other
Subsidiary of Donnelley which is not a Subsidiary of the Subsidiary to be so
designated or otherwise an Unrestricted Subsidiary, provided that either (x) the
Subsidiary to be so designated has total
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assets of $1,000 or less or (y) immediately after giving effect to such
designation, Donnelley could Incur at least $1.00 of additional Debt pursuant to
the first paragraph under "-- Limitation on Consolidated Debt" and provided,
further, that Donnelley could make a Restricted Payment in an amount equal to
the greater of the fair market value and book value of such Subsidiary pursuant
to "-- Limitation on Restricted Payments" and such amount is thereafter treated
as a Restricted Payment for the purpose of calculating the aggregate amount
available for Restricted Payments thereunder. (sec. 101)
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
Donnelley may not, in a single transaction or a series of related
transactions, (i) consolidate with or merge into any other Person or permit any
other Person to consolidate with or merge into Donnelley or (ii) directly or
indirectly, transfer, sell, lease or otherwise dispose of all or substantially
all of its assets unless: (1) in a transaction in which Donnelley does not
survive or in which Donnelley transfers, sells, leases or otherwise disposes of
all or substantially all of its assets, the successor entity to Donnelley is
organized under the laws of the United States of America or any State thereof or
the District of Columbia and shall expressly assume, by a supplemental indenture
executed and delivered to the Trustee in form satisfactory to the Trustee, all
of Donnelley's obligations under the Indenture; (2) immediately before and after
giving effect to such transaction and treating any Debt which becomes an
obligation of Donnelley or a Restricted Subsidiary as a result of such
transaction as having been Incurred by Donnelley or such Restricted Subsidiary
at the time of the transaction, no Event of Default or event that with the
passing of time or the giving of notice, or both, would constitute an Event of
Default shall have occurred and be continuing; (3) immediately after giving
effect to such transaction, the Consolidated Net Worth of Donnelley (or other
successor entity to Donnelley) is equal to or greater than that of Donnelley
immediately prior to the transaction; (4) except with respect to a merger of
Donnelley with or into a Wholly Owned Restricted Subsidiary, immediately after
giving effect to such transaction and treating any Debt which becomes an
obligation of Donnelley or a Restricted Subsidiary as a result of such
transaction as having been Incurred by Donnelley or such Restricted Subsidiary
at the time of the transaction, Donnelley (including any successor entity to
Donnelley) could Incur at least $1.00 of additional Debt pursuant to the
provisions of the Indenture described in the first paragraph under
"-- Limitation on Consolidated Debt" above; and (5) certain other conditions are
met. (sec. 801)
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided. (sec. 101)
"Acquired Debt" of any particular Person means Debt of any other Person
existing at the time such other Person merged with or into or became a
Subsidiary of such particular Person or assumed by such particular Person in
connection with the acquisition of assets from any other Person, and not
Incurred by such other Person in connection with, or in contemplation of, such
other Person merging with or into such particular Person or becoming a
Subsidiary of such particular Person or such acquisition.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing; provided however, that,
for the purposes of the covenant described under "-- Transactions with
Affiliates and Related Persons", a joint venture, partnership or similar Person
which is engaged in a principal business of Donnelley and its Restricted
Subsidiaries or in a business related thereto and all of the equity interests in
which are held by Donnelley or a Restricted Subsidiary and
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another Person or Persons that are not Related Persons of Donnelley or such
Restricted Subsidiary shall not be deemed an "Affiliate" of Donnelley or such
Restricted Subsidiary.
"Asset Disposition" by any Person means any transfer, conveyance, sale,
lease or other disposition in one or more related transactions by such Person or
any of its Restricted Subsidiaries (including any issuance or sale by a
Restricted Subsidiary of Capital Stock of such Restricted Subsidiary and
including a consolidation or merger or other sale of any such Restricted
Subsidiary with, into or to another Person in a transaction in which such
Restricted Subsidiary ceases to be a Restricted Subsidiary, but excluding a
disposition by a Restricted Subsidiary of such Person to such Person or a Wholly
Owned Restricted Subsidiary of such Person or by such Person to a Wholly Owned
Restricted Subsidiary of such Person) of (i) shares of Capital Stock (other than
directors' qualifying shares) or other ownership interests of a Restricted
Subsidiary of such Person, (ii) substantially all of the assets of such Person
or any of its Restricted Subsidiaries representing a division or line of
business or (iii) other assets or rights of such Person or any of its Restricted
Subsidiaries outside of the ordinary course of business, provided in each case
that the aggregate consideration for such transfer, conveyance, sale, lease or
other disposition is equal to $5 million or more.
"Average Life" means, as of the date of determination, with respect to any
Debt, the quotient obtained by dividing (i) the sum of the products of the
numbers of years from the date of determination to the dates of each successive
scheduled principal payment of such Debt multiplied by the amount of such
payment by (ii) the sum of all such payments.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required to
be classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with generally accepted accounting
principles. The stated maturity of such obligation shall be the date of the last
payment of rent or any other amount due under such lease prior to the first date
upon which such lease may be terminated by the lessee without payment of a
penalty. The principal amount of such obligation shall be the capitalized amount
thereof that would appear on the face of a balance sheet of such Person in
accordance with generally accepted accounting principles.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of such Person.
"Cash Equivalents" means (i) direct obligations of the United States of
America or any agency thereof having maturities of not more than one year from
the date of acquisition, (ii) time deposits and certificates of deposit of any
domestic commercial bank of recognized standing having capital and surplus in
excess of $500 million, with maturities of not more than one year from the date
of acquisition, (iii) repurchase obligations issued by any bank described in
clause (ii) above with a term not to exceed 30 days; (iv) commercial paper rated
at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent
thereof by Moody's, in each case maturing within one year after the date of
acquisition and (v) shares of any money market mutual fund, or similar fund, in
each case having assets in excess of $500 million, which invests predominantly
in investments of the types describes in clauses (i) through (iv) above.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
the Consolidated Net Income of Donnelley and its Restricted Subsidiaries for
such period increased by the sum of (i) Consolidated Interest Expense of
Donnelley and its Restricted Subsidiaries for such period, plus (ii)
Consolidated Income Tax Expense of Donnelley and its Restricted Subsidiaries for
such period, plus (iii) the consolidated depreciation and amortization expense
included in the income statement
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of Donnelley and its Restricted Subsidiaries for such period, plus (iv) all
other non-cash items reducing Consolidated Net Income of Donnelley and its
Restricted Subsidiaries, unless and until such time as cash disbursements are
made in respect of such items (at which time the amount of any such cash
disbursements shall be deducted from Consolidated Cash Flow Available for Fixed
Charges), and less all non-cash items increasing Consolidated Net Income of
Donnelley and its Restricted Subsidiaries; provided, however, that there shall
be excluded therefrom the Consolidated Cash Flow Available for Fixed Charges (if
positive) of any Restricted Subsidiary of Donnelley (calculated separately for
such Restricted Subsidiary in the same manner as provided above for Donnelley)
that is subject to a restriction which prevents the payment of dividends or the
making of distributions to Donnelley or another Restricted Subsidiary of
Donnelley to the extent of such restriction, except to the extent of the amount
of dividends or other distributions actually paid by such Restricted Subsidiary
to Donnelley or to a Restricted Subsidiary not subject to such a restriction
during such period. Notwithstanding any other provision of the Indenture to the
contrary, Consolidated Cash Flow Available for Fixed Charges of Donnelley for
any period will be deemed to include 100% of the cash distributions to Donnelley
or any of its Restricted Subsidiaries not subject to such a restriction in
respect of such period from DonTech, CenDon or any similar partnership or joint
venture, to the extent not otherwise included in Consolidated Cash Flow
Available for Fixed Charges in respect of such period.
"Consolidated Cash Flow Coverage Ratio" as of any date of determination
means the ratio of (i) Consolidated Cash Flow Available for Fixed Charges of
Donnelley and its Restricted Subsidiaries for the period of the most recently
completed four consecutive fiscal quarters for which quarterly or annual
financial statements are available to (ii) Consolidated Fixed Charges of
Donnelley and its Restricted Subsidiaries for such period; provided, however,
that Consolidated Fixed Charges shall be adjusted to give effect on a pro forma
basis to any Debt that has been Incurred by Donnelley or any Restricted
Subsidiary since the beginning of such period that remains outstanding and to
any Debt that is proposed to be Incurred by Donnelley or any Restricted
Subsidiary as to which such determination is to be made, as if in each case such
Debt had been Incurred on the first day of such period and as if any Debt that
(i) is or will no longer be outstanding as the result of the Incurrence of any
such Debt or (ii) had been repaid or retired during such period had not been
outstanding as of the first day of such period; provided further, that in making
such computation, the Consolidated Interest Expense of Donnelley and its
Restricted Subsidiaries attributable to interest on any proposed Debt bearing a
floating interest rate shall be computed on a pro forma basis as if the rate in
effect on the date of computation had been the applicable rate for the entire
period; and provided further that, in the event Donnelley or any of its
Restricted Subsidiaries has made Asset Dispositions or acquisitions of assets
not in the ordinary course of business (including acquisitions of other Persons
by merger, consolidation or purchase of Capital Stock) during or after such
period, such computation shall be made on a pro forma basis as if the Asset
Dispositions or acquisitions had taken place on the first day of such period.
"Consolidated Fixed Charges" for any period means the sum of (i)
Consolidated Interest Expense and (ii) the consolidated amount of interest
capitalized by Donnelley and its Restricted Subsidiaries during such period
calculated in accordance with generally accepted accounting principles.
"Consolidated Income Tax Expense" for any period means the consolidated
provision for income taxes of Donnelley and its Restricted Subsidiaries for such
period calculated on a consolidated basis in accordance with generally accepted
accounting principles.
"Consolidated Interest Expense" means for any period the consolidated
interest expense included in a consolidated income statement (without deduction
of interest income) of Donnelley and its Restricted Subsidiaries for such period
calculated on a consolidated basis in accordance with generally accepted
accounting principles, including without limitation or duplication (or, to the
extent not so included, with the addition of), (i) the amortization of Debt
discounts; (ii) any payments or fees with respect to letters of credit, bankers'
acceptances or similar facilities; (iii) fees
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with respect to interest rate swap or similar agreements or foreign currency
hedge, exchange or similar agreements; (iv) Preferred Stock dividends of
Restricted Subsidiaries of Donnelley (other than with respect to Redeemable
Stock) declared and paid or payable; (v) accrued Redeemable Stock dividends of
Donnelley and its Restricted Subsidiaries, whether or not declared or paid; (vi)
interest on Debt guaranteed by Donnelley and its Restricted Subsidiaries; and
(vii) the portion of any rental obligation allocable to interest expense.
"Consolidated Net Income" for any period means the consolidated net income
(or loss) of Donnelley and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with generally accepted
accounting principles; provided that there shall be excluded therefrom (a) the
net income (or loss) of any Person acquired by of Donnelley or a Restricted
Subsidiary of Donnelley in a pooling-of-interests transaction for any period
prior to the date of such transaction, (b) the net income (or loss) of any
Person that is not a Subsidiary of Donnelley except to the extent of the amount
of dividends or other distributions actually paid to Donnelley or a Subsidiary
of Donnelley by such Person during such period, (c) gains or losses on Asset
Dispositions by Donnelley or its Restricted Subsidiaries, (d) all extraordinary
gains and extraordinary losses, (e) the cumulative effect of changes in
accounting principles and (f) the tax effect of any of the items described in
clauses (a) through (e) above; provided, further, that for purposes of any
determination pursuant to the provisions described under "-- Limitation on
Restricted Payments", there shall further be excluded therefrom the net income
(but not net loss) of any Restricted Subsidiary of Donnelley that is subject to
a restriction which prevents the payment of dividends or the making of
distributions to Donnelley or another Restricted Subsidiary of Donnelley to the
extent of such restriction, except to the extent of the amount of dividends or
other distributions actually paid to Donnelley or a Restricted Subsidiary not
subject to such a restriction by such Restricted Subsidiary during such period.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
generally accepted accounting principles, less amounts attributable to
Redeemable Stock of such Person; provided that, with respect to Donnelley,
adjustments following the date of the Indenture to the accounting books and
records of Donnelley in accordance with Accounting Principles Board Opinions
Nos. 16 and 17 (or successor opinions thereto) or otherwise resulting from the
acquisition of control of Donnelley by another Person shall not be given effect
to.
"Credit Facility" means, with respect to Donnelley or any Restricted
Subsidiary, one or more debt or commercial paper facilities with banks or other
institutional lenders (including the New Credit Facility) providing for
revolving credit loans, term loans, receivables or inventory financing
(including through the sale of receivables or inventory to such lenders or to
special purpose, bankruptcy remote entities formed to borrow from such lenders
against such receivables or inventory) or letters of credit, in each case
together with any amendments, supplements, modifications (including by any
extension of the maturity thereof), refinancing or replacements thereof by a
lender or syndicate of lenders in one or more successive transactions (including
any such transaction that changes the amount available thereunder, replaces such
agreement or document, or provides for other agents or lenders).
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent, (i) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, including obligations Incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) every obligation of such
Person issued or assumed as the deferred purchase price of property or services
(including securities repurchase agreements but excluding trade accounts payable
or accrued liabilities arising in the ordinary course of business which are not
overdue or which are being contested in good faith), (v) every Capital Lease
Obligation of such Person, (vi) all
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Receivables Sales of such Person, together with any obligation of such Person to
pay any discount, interest, fees, indemnities, penalties, recourse, expenses or
other amounts in connection therewith, (vii) all Redeemable Stock issued by such
Person, (viii) Preferred Stock of Restricted Subsidiaries of such Person held by
Persons other than such Person or one of its Wholly Owned Restricted
Subsidiaries, (ix) every obligation under Interest Rate, Currency or Commodity
Price Agreements of such Person and (x) every obligation of the type referred to
in clauses (i) through (ix) of another Person and all dividends of another
Person the payment of which, in either case, such Person has Guaranteed or is
responsible or liable for, directly or indirectly, as obligor, Guarantor or
otherwise. The "amount" or "principal amount" of Debt at any time of
determination as used herein represented by (a) any Receivables Sale, shall be
the amount of the unrecovered capital or principal investment of the purchaser
(other than Donnelley or a Wholly Owned Restricted Subsidiary of Donnelley)
thereof, excluding amounts representative of yield or interest earned on such
investment and (b) any Redeemable Stock, shall be the maximum fixed redemption
or repurchase price in respect thereof.
"Equity Offering" means a primary public or private offering of Common
Stock of Donnelley or of Donnelley Corp. pursuant to an effective registration
statement under the Securities Act or pursuant to an exemption to the
registration requirements of the Securities Act.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing, or having the economic effect of guaranteeing, any
Debt of any other Person (the "primary obligor") in any manner, whether directly
or indirectly, and including, without limitation, any obligation of such Person,
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Debt or to purchase (or to advance or supply funds for the purchase of)
any security for the payment of such Debt, (ii) to purchase property, securities
or services for the purpose of assuring the holder of such Debt of the payment
of such Debt, or (iii) to maintain working capital, equity capital or other
financial statement condition or liquidity of the primary obligor so as to
enable the primary obligor to pay such Debt (and "Guaranteed", "Guaranteeing"
and "Guarantor" shall have meanings correlative to the foregoing); provided,
however, that the Guarantee by any Person shall not include endorsements by such
Person for collection or deposit, in either case, in the ordinary course of
business.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
or the recording, as required pursuant to generally accepted accounting
principles or otherwise, of any such Debt or other obligation on the balance
sheet of such Person (and "Incurrence", "Incurred", "Incurable" and "Incurring"
shall have meanings correlative to the foregoing); provided, however, that a
change in generally accepted accounting principles that results in an obligation
of such Person that exists at such time becoming Debt shall not be deemed an
Incurrence of such Debt.
"Interest Rate, Currency or Commodity Price Agreement" of any Person means
any forward contract, futures contract, swap, option or other financial
agreement or arrangement (including, without limitation, caps, floors, collars
and similar agreements) relating to, or the value of which is dependent upon,
interest rates, currency exchange rates or commodity prices or indices
(excluding contracts for the purchase or sale of goods in the ordinary course of
business).
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of cash
or other property to others or payments for property or services for the account
or use of others, or otherwise) to, or purchase or acquisition of Capital Stock,
bonds, notes, debentures or other securities or evidence of Debt issued by, any
other Person, including any payment on a Guarantee of any obligation of such
other Person.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, Receivables Sale, deposit
arrangement, security interest, lien, charge, easement (other than any easement
not materially impairing usefulness or marketability), encum-
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brance, preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever on or with respect to such property
or assets (including, without limitation, any conditional sale or other title
retention agreement having substantially the same economic effect as any of the
foregoing).
"Moody's" means Moody's Investors Services, Inc.
"Net Available Proceeds" from any Asset Disposition by any Person means
cash or readily marketable cash equivalents received (including by way of sale
or discounting of a note, installment receivable or other receivable, but
excluding any other consideration received in the form of assumption by the
acquiree of Debt or other obligations relating to such properties or assets)
therefrom by such Person, net of (i) all legal, title and recording tax
expenses, commissions and other fees and expenses Incurred and all federal,
state, provincial, foreign and local taxes required to be accrued as a liability
as a consequence of such Asset Disposition, (ii) all payments made by such
Person or its Restricted Subsidiaries on any Debt which is secured by such
assets in accordance with the terms of any Lien upon or with respect to such
assets or which must by the terms of such Lien, or in order to obtain a
necessary consent to such Asset Disposition or by applicable law, be repaid out
of the proceeds from such Asset Disposition, (iii) all distributions and other
payments made to minority interest holders in Restricted Subsidiaries of such
Person or joint ventures as a result of such Asset Disposition and (iv)
appropriate amounts to be provided by such Person or any Restricted Subsidiary
thereof, as the case may be, as a reserve in accordance with generally accepted
accounting principles against any liabilities associated with such assets and
retained by such Person or any Restricted Subsidiary thereof, as the case may
be, after such Asset Disposition, including, without limitation, liabilities
under any indemnification obligations and severance and other employee
termination costs associated with such Asset Disposition, in each case as
determined by the Board of Directors, in its reasonable good faith judgment
evidenced by a resolution of the Board of Directors filed with the Trustee;
provided, however, that any reduction in such reserve following the consummation
of such Asset Disposition will be treated for all purposes of the Indenture and
the Notes as a new Asset Disposition at the time of such reduction with Net
Available Proceeds equal to the amount of such reduction.
"Offer to Purchase" means a written offer (the "Offer") sent by Donnelley
by first class mail, postage prepaid, to each Holder at his address appearing in
the Note Register on the date of the Offer offering to purchase up to the
principal amount of Notes specified in such Offer at the purchase price
specified in such Offer (as determined pursuant to the Indenture). Unless
otherwise required by applicable law, the Offer shall specify an expiration date
(the "Expiration Date") of the Offer to Purchase which shall be, subject to any
contrary requirements of applicable law, not less than 30 days or more than 60
days after the date of such Offer and a settlement date (the "Purchase Date")
for purchase of Notes within five Business Days after the Expiration Date.
Donnelley shall notify the Trustee at least 15 Business Days (or such shorter
period as is acceptable to the Trustee) prior to the mailing of the Offer of
Donnelley's obligation to make an Offer to Purchase, and the Offer shall be
mailed by Donnelley or, at Donnelley's request, by the Trustee in the name and
at the expense of Donnelley. The Offer shall contain information concerning the
business of Donnelley and its Restricted Subsidiaries which Donnelley in good
faith believes will enable such Holders to make an informed decision with
respect to the Offer to Purchase (which at a minimum will include (i) the most
recent annual and quarterly financial statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained in the
documents required to be filed with the Trustee pursuant to the Indenture (which
requirements may be satisfied by delivery of such documents together with the
Offer), (ii) a description of material developments in Donnelley's business
subsequent to the date of the latest of such financial statements referred to in
clause (i) (including a description of the events requiring Donnelley to make
the Offer to Purchase), (iii) if applicable, appropriate pro forma financial
information concerning the Offer to Purchase and the events requiring Donnelley
to make the Offer to Purchase and (iv) any other information required by
applicable law to be included therein. The Offer shall
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contain all instructions and materials necessary to enable such Holders to
tender Notes pursuant to the Offer to Purchase. The Offer shall also state:
(1) the Section of the Indenture pursuant to which the Offer to
Purchase is being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the Outstanding Notes offered to
be purchased by Donnelley pursuant to the Offer to Purchase (including, if
less than 100%, the manner by which such amount has been determined
pursuant to the Indenture provision requiring the Offer to Purchase) (the
"Purchase Amount");
(4) the purchase price to be paid by Donnelley for each $1,000
aggregate principal amount of Notes accepted for payment (as specified
pursuant to the Indenture) (the "Purchase Price");
(5) that the Holder may tender all or any portion of the Notes
registered in the name of such Holder and that any portion of a Note
tendered must be tendered in an integral multiple of $1,000 principal
amount;
(6) the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that interest on any Note not tendered or tendered but not
purchased by Donnelley pursuant to the Offer to Purchase will continue to
accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
(9) that each Holder electing to tender a Note pursuant to the Offer
to Purchase will be required to surrender such Note at the place or places
specified in the Offer prior to the close of business on the Expiration
Date (such Note being, if Donnelley or the Trustee so requires, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to Donnelley and the Trustee duly executed by, the Holder
thereof or his attorney duly authorized in writing);
(10) that Holders will be entitled to withdraw all or any portion of
Notes tendered if Donnelley (or their Paying Agent) receives, not later
than the close of business on the Expiration Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of the Note the Holder tendered, the certificate number of
the Note the Holder tendered and a statement that such Holder is
withdrawing all or a portion of his tender;
(11) that (a) if Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant
to the Offer to Purchase, Donnelley shall purchase all such Notes and (b)
if Notes in an aggregate principal amount in excess of the Purchase Amount
are tendered and not withdrawn pursuant to the Offer to Purchase, Donnelley
shall purchase Notes having an aggregate principal amount equal to the
Purchase Amount on a pro rata basis (with such adjustments as may be deemed
appropriate so that only Notes in denominations of $1,000 or integral
multiples thereof shall be purchased); and
(12) that in the case of any Holder whose Note is purchased only in
part, Donnelley shall execute, and the Trustee shall authenticate and
deliver to the Holder of such Note without service charge, a new Note or
Notes, of any authorized denomination as requested by such Holder, in an
aggregate principal amount equal to and in exchange for the unpurchased
portion of the Note so tendered.
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Any Offer to Purchase shall be governed by and effected in accordance with
the Offer for such Offer to Purchase.
"Donnelley Corp. Senior Debt" means (i) the principal of (and premium, if
any) and interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to Donnelley Corp. whether
or not such claim for post-petition interest is allowed in such proceeding) on,
and penalties and any obligation of Donnelley Corp. for reimbursement,
indemnities and fees relating to, any Credit Facility and (ii) the principal of
(and premium, if any) and interest on Debt of Donnelley Corp. for money
borrowed, whether Incurred on or prior to the date of original issuance of the
Notes or thereafter, and any amendments, renewals, extensions, modifications,
refinancings and refundings of any such Debt and (iii) Permitted Interest Rate,
Currency or Commodity Price Agreements entered into with respect to Debt
described in clauses (i) and (ii) above; provided, however, that the following
shall not constitute Donnelley Corp. Senior Debt: (1) any Debt as to which the
terms of the instrument creating or evidencing the same provide that such Debt
is not superior in right of payment to the Donnelley Corp. Guarantee, (2) any
Debt which is subordinated in right of payment in any respect to any other Debt
of Donnelley Corp., (3) any Debt owed to a Person when such Person is a
Subsidiary of Donnelley Corp., (4) any obligation of Donnelley Corp. arising
from Redeemable Stock of Donnelley Corp., and (5) Debt which, when Incurred and
without respect to any election under Section 1111 (b) of Title 11, United
States Code, is without recourse to Donnelley Corp.
"Permitted Interest Rate, Currency or Commodity Price Agreement" of any
Person means any Interest Rate, Currency or Commodity Price Agreement entered
into with one or more financial institutions in the ordinary course of business
that is designed to protect such Person against fluctuations in interest rates
or currency exchange rates with respect to Debt Incurred and which shall have a
notional amount no greater than the payments due with respect to the Debt being
hedged thereby, or in the case of currency or commodity protection agreements,
against currency exchange rate or commodity price fluctuations in the ordinary
course of business relating to then existing financial obligations or then
existing or sold production and not for purposes of speculation.
"Permitted Investments" means (i) an Investment in Donnelley or a
Wholly-Owned Restricted Subsidiary of Donnelley; (ii) an Investment in a Person,
if such Person or a Subsidiary of such Person will, as a result of the making of
such Investment and all other contemporaneous related transactions, become a
Wholly Owned Restricted Subsidiary of Donnelley or be merged or consolidated
with or into or transfer or convey all or substantially all its assets to
Donnelley or a Wholly Owned Restricted Subsidiary of Donnelley; (iii) a
Temporary Cash Investment; (iv) payroll, travel and similar advances to cover
matters that are expected at the time of such advances ultimately to be treated
as expenses in accordance with generally accepted accounting principles; (v)
stock, obligations or securities received in settlement of debts owing to
Donnelley or a Restricted Subsidiary of Donnelley as a result of bankruptcy or
insolvency proceedings or upon the foreclosure, perfection, enforcement or
agreement in lieu of foreclosure of any Lien in favor of Donnelley or a
Restricted Subsidiary of Donnelley; (vi) Investments in the Notes; (vii)
Investments in Permitted Interest Rate, Currency or Commodity Price Agreements
and (viii) Investments in an entity which is engaged in a principal business of
Donnelley and its Restricted Subsidiaries or a business related thereto not in
excess of $10 million.
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Receivables" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money.
"Receivables Sale" of any Person means any sale of Receivables of such
Person (pursuant to a purchase facility or otherwise), other than in connection
with a disposition of the business
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operations of such Person relating thereto or a disposition of defaulted
Receivables for purpose of collection and not as a financing arrangement.
"Redeemable Stock" of any Person means any Capital Stock of such Person
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or otherwise (including upon the occurrence of
an event) matures or is required to be redeemed (pursuant to any sinking fund
obligation or otherwise) or is convertible into or exchangeable for Debt or is
redeemable at the option of the holder thereof, in whole or in part, at any time
prior to the final Stated Maturity of the Notes; provided that "Redeemable
Stock" shall not include any Capital Stock that is payable at maturity, or upon
required redemption or redemption at the option of the holder thereof, or that
is automatically convertible or exchangeable, solely in or into Common Stock of
such Person.
"Refinance" means, in respect of any Debt, to refinance, extend, renew,
refund, repay, prepay, redeem, defease or retire, or to issue other Debt in
exchange or replacement for, such Debt. "Refinanced" and "Refinancing" shall
have correlative meanings.
"Refinancing Debt" means Debt that Refinances any Debt of Donnelley or any
Restricted Subsidiary existing on the date of original issuance of the Notes or
Incurred in compliance with the Indenture, including Debt that Refinances
Refinancing Debt; provided, however, that (i) such Refinancing Debt has a Stated
Maturity no earlier than the Stated Maturity of the Debt being Refinanced, (ii)
in the case of any refinancing of Debt which is pari passu to the Notes, such
Refinancing Debt is made pari passu to the Notes or subordinated to the Notes,
(iii) such Refinancing Debt constitutes Subordinated Debt in the case of any
refinancing of Debt which is subordinated to the Notes, (iv) such Refinancing
Debt does not permit redemption or other retirement (including pursuant to an
offer to purchase) of such Debt at the option of the holder thereof prior to the
Stated Maturity of the Debt being refinanced, other than a redemption or other
retirement at the option of the holder of such Debt which is conditioned upon
provisions substantially similar to those described under "-- Change of Control"
and "-- Limitation on Asset Dispositions"; (v) such Refinancing Debt has an
Average Life at the time such Refinancing Debt is Incurred that is equal to or
greater than the Average Life of the Debt being Refinanced and (vi) such
Refinancing Debt has an aggregate principal amount (or if Incurred with original
issue discount, an aggregate issue price) that is equal to or less than the
aggregate principal amount (or if Incurred with original issue discount, the
aggregate accreted value) then outstanding or committed (plus accrued interest
and fees and expenses, including any premium and defeasance costs) under the
Debt being Refinanced; provided further, however, that Refinancing Debt shall
not include (x) Debt of a Subsidiary that Refinances Debt of Donnelley or (y)
Debt of Donnelley or a Restricted Subsidiary that Refinances Debt of an
Unrestricted Subsidiary.
"Related Person" of any Person means any other Person directly or
indirectly owning (a) 5% or more of the Outstanding Common Stock of such Person
(or, in the case of a Person that is not a corporation, 5% or more of the equity
interest in such Person) or (b) 5% or more of the combined voting power of the
Voting Stock of such Person.
"Restricted Subsidiary" means any Subsidiary, whether existing on or after
the date of the Indenture, unless such Subsidiary is an Unrestricted Subsidiary.
"S&P" means Standard & Poor's Rating Group, a division of McGraw-Hill, Inc.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Debt" means Debt of Donnelley as to which the payment of
principal of (and premium, if any) and interest and other payment obligations in
respect of such Debt shall be
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subordinate to the prior payment in full of the Notes to at least the following
extent: (i) no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Debt may be permitted for so long as any
default in the payment of principal (or premium, if any) or interest on the
Notes exists; (ii) in the event that any other default that with the passing of
time or the giving of notice, or both, would constitute an event of default
exists with respect to the Notes, upon notice by 25% or more in principal amount
of the Notes to the Trustee, the Trustee shall have the right to give notice to
Donnelley and the holders of such Debt (or trustees or agents therefore) of a
payment blockage, and thereafter no payments of principal of (or premium, if
any) or interest on or otherwise due in respect of such Debt may be made for a
period of 179 days from the date of such notice; and (iii) such Debt may not (x)
provide for payments of principal of such Debt at the Stated Maturity thereof or
by way of a sinking fund applicable thereto or by way of any mandatory
redemption, defeasance, retirement or repurchase thereof by Donnelley (including
any redemption, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of acceleration
of such Debt upon an event of default thereunder), in each case prior to the
final Stated Maturity of the Notes or (y) permit redemption or other retirement
(including pursuant to an offer to purchase made by Donnelley) of such other
Debt at the option of the holder thereof prior to the final Stated Maturity of
the Notes, other than a redemption or other retirement at the option of the
holder of such Debt (including pursuant to an offer to purchase made by
Donnelley) which is conditioned upon a change of control of Donnelley pursuant
to provisions substantially similar to those described under "-- Change of
Control" (and which shall provide that such Debt will not be repurchased
pursuant to such provisions prior to Donnelley's repurchase of the Notes
required to be repurchased by Donnelley pursuant to the provisions described
under Change of Control").
"Subsidiary" of any Person means (i) a corporation more than 50% of the
combined voting power of the outstanding Voting Stock of which is owned,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person or by such Person and one or more Subsidiaries thereof or (ii) any
other Person (other than a corporation) in which such Person, or one or more
other Subsidiaries of such Person or such Person and one or more other
Subsidiaries thereof, directly or indirectly, has at least a majority ownership
and power to direct the policies, management and affairs thereof.
"Temporary Cash Investments" means any Investment in the following kinds of
instruments: (A) readily marketable obligations issued or unconditionally
guaranteed as to principal and interest by the United States of America or by
any agency or authority controlled or supervised by and acting as an
instrumentality of the United States of America if, on the date of purchase or
other acquisition of any such instrument by Donnelley or any Restricted
Subsidiary of Donnelley, the remaining term to maturity or interest rate
adjustment is not more than two years; (B) obligations (including, but not
limited to, demand or time deposits, bankers' acceptances and certificates of
deposit) issued or guaranteed by a depository institution or trust company
incorporated under the laws of the United States of America, any state thereof
or the District of Columbia, provided that (1) such instrument has a final
maturity nor more than one year from the date of purchase thereof by Donnelley
or any Restricted Subsidiary of Donnelley and (2) such depository institution or
trust company has at the time of Donnelley's or such Restricted Subsidiary's
Investment therein or contractual commitment providing for such Investment, (x)
capital, surplus and undivided profits (as of the date of such institution's
most recently published financial statements) in excess of $100 million and (y)
the long-term unsecured debt obligations (other than such obligations rated on
the basis of the credit of a Person other than such institution) of such
institution, at the time of Donnelley's or such Restricted Subsidiary's
Investment therein or contractual commitment providing for such Investment, are
rated in the highest rating category of both S&P and Moody's; (C) commercial
paper issued by any corporation, if such commercial paper has, at the time of
Donnelley's or any Restricted Subsidiary's Investment therein or contractual
commitment providing for such Investment credit ratings of at least A-1 by S&P
and P-1 by Moody's; (D) money market mutual or similar funds having assets in
excess of $100 million; (E) readily marketable debt obligations issued by any
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corporation, if at the time of Donnelley's or any Restricted Subsidiary's
Investment therein or contractual commitment providing for such Investment (1)
the remaining term to maturity is not more than two years and (2) such debt
obligations are rated in one of the two highest rating categories of both S&P
and Moody's; (F) demand or time deposit accounts used in the ordinary course of
business with commercial banks the balances in which are at all times fully
insured as to principal and interest by the Federal Deposit Insurance
Corporation or any successor thereto; and (G) to the extent not otherwise
included herein, Cash Equivalents. In the event that either S&P or Moody's
ceases to publish ratings of the type provided herein, a replacement rating
agency shall be selected by Donnelley with the consent of the Trustee, and in
each case the rating of such replacement rating agency most nearly equivalent to
the corresponding S&P or Moody's rating, as the case may be, shall be used for
purposes hereof.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to
pay principal of (or premium, if any, on) any Note when due; (b) failure to pay
any interest on any Note when due, continued for 30 days; (c) default in the
payment of principal and interest on Notes required to be purchased pursuant to
an Offer to Purchase as described under "-- Change of Control" and
"-- Limitation on Certain Asset Dispositions" when due and payable; (d) failure
to perform or comply with the provisions described under "-- Mergers,
Consolidations and Certain Sales of Assets"; (e) failure to perform any other
covenant or agreement of Donnelley under the Indenture or the Notes continued
for 60 days after written notice to Donnelley by the Trustee or Holders of at
least 25% in aggregate principal amount of Outstanding Notes; (f) default under
the terms of any instrument evidencing or securing Debt for money borrowed by
Donnelley or any Restricted Subsidiary having an outstanding principal amount of
$5 million individually or in the aggregate which default results in the
acceleration of the payment of such indebtedness or constitutes the failure to
pay such indebtedness when due; (g) the rendering of a final judgment or
judgments (not subject to appeal) against Donnelley or any Restricted Subsidiary
in an amount in excess of $5 million which remains undischarged or unstayed for
a period of 60 days after the date on which the right to appeal has expired; and
(h) certain events of bankruptcy, insolvency or reorganization affecting
Donnelley or any Restricted Subsidiary. (sec. 501) Subject to the provisions of
the Indenture relating to the duties of the Trustee in case an Event of Default
(as defined) shall occur and be continuing, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any of the Holders, unless such Holders shall have
offered to the Trustee reasonable indemnity. (sec. 603) Subject to such
provisions for the indemnification of the Trustee, the Holders of a majority in
aggregate principal amount of the Outstanding Notes will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee. (sec. 512)
If an Event of Default (other than an Event of Default described in Clause
(h) above) shall occur and be continuing, either the Trustee or the Holders of
at least 25% in aggregate principal amount of the Outstanding Notes may
accelerate the maturity of all Notes; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the Holders
of a majority in aggregate principal amount of Outstanding Notes may, under
certain circumstances,
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rescind and annul such acceleration if all Events of Default, other than the
non-payment of accelerated principal, have been cured or waived as provided in
the Indenture. If an Event of Default specified in Clause (h) above occurs, the
Outstanding Notes will ipso facto become immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder. (sec. 502)
For information as to waiver of defaults, see "-- Modification and Waiver".
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default (as defined) and unless also the Holders of at least 25% in aggregate
principal amount of the Outstanding Notes shall have made written request, and
offered reasonable indemnity, to the Trustee to institute such proceeding as
trustee, and the Trustee shall not have received from the Holders of a majority
in aggregate principal amount of the Outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. (sec. 507) However, such limitations do not apply to a suit instituted by
a Holder of a Note for enforcement of payment of the principal of or premium, if
any, or interest on such Note on or after the respective due dates expressed in
such Note. (sec. 508)
Donnelley will be required to furnish to the Trustee quarterly a statement
as to the performance by Donnelley of certain of its obligations under the
Indenture and as to any default in such performance. (sec. 1020)
SATISFACTION AND DISCHARGE OF THE INDENTURE
The Indenture will cease to be of further effect as to all outstanding
Notes (except as to (i) rights of registration of transfer and exchange and
Donnelley's right of optional redemption, (ii) substitution of apparently
mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of Holders to
receive payment of principal and interest on the Notes, (iv) rights, obligations
and immunities of the Trustee under the Indenture and (v) rights of the Holders
of the Notes as beneficiaries of the Indenture with respect to any property
deposited with the Trustee payable to all or any of them), if (x) Donnelley will
have paid or caused to be paid the principal of and interest on the Notes as and
when the same will have become due and payable or (y) all outstanding Notes
(except lost, stolen or destroyed Notes which have been replaced or paid) have
been delivered to the Trustee for cancellation.
DEFEASANCE
The Indenture will provide that, at the option of Donnelley, (a) if
applicable, Donnelley will be discharged from any and all obligations in respect
of the Outstanding Notes or (b) if applicable, Donnelley may omit to comply with
certain restrictive covenants, and that such omission shall not be deemed to be
an Event of Default under the Indenture and the Notes, in either case (A) or (B)
upon irrevocable deposit with the Trustee, in trust, of money and/or U.S.
government obligations which will provide money in an amount sufficient in the
opinion of a nationally recognized firm of independent certified public
accountants to pay the principal of and premium, if any, and each installment of
interest, if any, on the Outstanding Notes. With respect to clause (B), the
obligations under the Indenture other than with respect to such covenants and
the Events of Default other than the Events of Default relating to such
covenants above shall remain in full force and effect. Such trust may only be
established if, among other things (i) with respect to clause (A), Donnelley has
received from, or there has been published by, the Internal Revenue Service a
ruling or there has been a change in law, which in the Opinion of Counsel
provides that Holders of the Notes will not recognize gain or loss for Federal
income tax purposes as a result of such deposit, defeasance and discharge and
will be subject to Federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such deposit, defeasance
and discharge had not occurred; or, with respect to clause (B), Donnelley has
delivered to the Trustee an Opinion of Counsel to the effect that the Holders of
the Notes will not recognize gain or loss for Federal income tax purposes as a
result of such deposit and defeasance and will be subject to Federal income tax
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on the same amounts, in the same manner and at the same times as would have been
the case if such deposit and defeasance had not occurred; (ii) no Event of
Default or event that with the passing of time or the giving of notice, or both,
shall constitute an Event of Default shall have occurred or be continuing; (iii)
Donnelley has delivered to the Trustee an Opinion of Counsel to the effect that
such deposit shall not cause the Trustee or the trust so created to be subject
to the Investment Company Act of 1940; and (iv) certain other customary
conditions precedent are satisfied.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by Donnelley and
the Trustee with the consent of the Holders of a majority in aggregate principal
amount of the Outstanding Notes; provided, however, that no such modification or
amendment may, without the consent of the Holder of each Outstanding Note
affected thereby, (a) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, (b) reduce the principal amount of, (or
the premium) or interest on, any Note, (c) change the place or currency of
payment of principal of (or premium), or interest on, any Note, (d) impair the
right to institute suit for the enforcement of any payment on or with respect to
any Note, (e) reduce the above-stated percentage of Outstanding Notes necessary
to modify or amend the Indenture, (f) reduce the percentage of aggregate
principal amount of Outstanding Notes necessary for waiver of compliance with
certain provisions of the Indenture or for waiver of certain defaults, (g)
modify any provisions of the Indenture relating to the modification and
amendment of the Indenture or the waiver of past defaults or covenants, except
as otherwise specified, or (h) following the mailing of any Offer to Purchase,
modify any Offer to Purchase for the Notes required under the "-- Limitation on
Asset Dispositions" and the "-- Change of Control" covenants contained in the
Indenture in a manner materially adverse to the Holders thereof. (sec. 902)
The Holders of a majority in aggregate principal amount of the Outstanding
Notes, on behalf of all Holders of Notes, may waive compliance by Donnelley with
certain restrictive provisions of the Indenture. (sec. 1021) Subject to certain
rights of the Trustee, as provided in the Indenture, the Holders of a majority
in aggregate principal amount of the Outstanding Notes, on behalf of all Holders
of Notes, may waive any past default under the Indenture, except a default in
the payment of principal, premium or interest or a default arising from failure
to purchase any Note tendered pursuant to an Offer to Purchase. (sec. 513)
GOVERNING LAW
The Indenture and the Notes will be governed by the laws of the State of
New York.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise as a prudent person would exercise
under the circumstances in the conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, should it
become a creditor of Donnelley, to obtain payment of claims in certain cases or
to realize on certain property received by it in respect of any such claim as
security or otherwise. The Trustee is permitted to engage in other transactions
with Donnelley or any Affiliate, provided, however, that if it acquires any
conflicting interest (as defined in the Indenture or in the Trust Indenture
Act), it must eliminate such conflict or resign.
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DESCRIPTION OF THE DONNELLEY CORP. GUARANTEE
Pursuant to the Donnelley Corp. Guarantee, Donnelley Corp. has irrevocably
and unconditionally agreed, irrespective of the validity, regularity or
enforceability of any Note or the Indenture, to pay in full, to the holders of
Notes authenticated and delivered by the Trustee and to the Trustee, (without
duplication of amounts theretofore paid by the Company), the due and punctual
payment of the principal of (and premium, if any) and interest and all other
amounts due hereunder on such Note when and as the same shall become due and
payable, whether at the Stated Maturity or by acceleration, call for redemption,
purchase or otherwise, in accordance with the terms of such Note and of the
Indenture. In case of the failure of the Company punctually to make any such
payment, Donnelley Corp. has agreed to cause such payment to be made punctually
when and as the same shall become due and payable, whether at the Stated
Maturity or by acceleration, call for redemption, purchase or otherwise, and as
if such payment were made by the Company. The Donnelley Corp. Guarantee may be
amended in accordance with the general provisions of the Indenture governing
amendments. See "Description of the Notes -- Modification and Waiver".
The Donnelley Corp. Guarantee is subordinated in right of payment to all
Donnelley Corp. Senior Debt and senior in right of payment to all subordinated
indebtedness of Donnelley Corp. As of the date of this Prospectus, Donnelley
Corp. has guaranteed approximately $350 million principal amount of Senior Debt
represented by borrowings by Donnelley under the New Credit Facility. Donnelley
has $50 million of unused capacity available under the Revolving Facility
portion of the New Credit Facility, which amounts, if drawn, will also be
guaranteed by Donnelley Corp. As of the date of this Prospectus, Donnelley's
capital stock is the only significant asset of Donnelley Corp. and dividends on
such capital stock will be the sole source of funds available to Donnelley Corp.
to meet its obligations, including its obligations under the Donnelley Corp.
Guarantee. Such capital stock has been pledged to secure Donnelley's obligations
under the New Credit Facility. In addition, the payment of dividends on the
Company's capital stock is restricted by certain covenants contained in the
Indenture and the New Credit Facility and may be restricted by other agreements
entered into by the Company in the future and by applicable law.
In the event of a default in payment of principal (or premium, if any) or
interest on any Note, whether at its Stated Maturity or by acceleration, call
for redemption, purchase or otherwise, legal proceedings may be instituted by
the Trustee on behalf of, or by, the Holder of such Note, subject to the terms
and conditions set forth in the Indenture, directly against Donnelley Corp. to
enforce the Donnelley Corp. Guarantee without first proceeding against the
Company. If, after the occurrence and during the continuance of an Event of
Default, the Trustee or any of the Holders are prevented by applicable law from
exercising their respective rights to accelerate the maturity of the Notes, to
collect interest on the Notes or to enforce or exercise any other right or
remedy with respect to the Notes, or the Trustee or the Holders are prevented
from taking any action to realize on any collateral, Donnelley Corp. agrees to
pay to the Trustee for the account of the Holders, upon demand therefor, the
amount that would otherwise have been due and payable had such rights and
remedies been permitted to be exercised by the Trustee or any of the Holders.
The Donnelley Corp. Guarantee will terminate and be of no further force and
effect when the Indenture shall have terminated and the principal of and
interest on the Notes and all other Donnelley Corp. Guarantee obligations shall
have been paid in full. In addition, concurrently with the defeasance or
covenant defeasance of the Notes under the Indenture, Donnelley Corp. shall be
released from all of its obligations under the Donnelley Corp. Guarantee.
CERTAIN UNITED STATES TAX CONSEQUENCES
The Exchange of Old Notes for Exchange Notes pursuant to the Exchange Offer
will not result in any federal income tax consequences to the Holders. When a
Holder exchanges an Old Note for a New Note pursuant to the Exchange Offer, the
Holder will have the same adjusted basis and holding period in the New Note as
in the Old Note immediately before the exchange.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of 90 days after the Expiration Date, it will make this
Prospectus, as amended or supplemented, available to any such broker-dealer for
use in connection with any such resale. The Company will not receive any
proceeds from any sale of Exchange Notes by broker-dealers. Exchange Notes
received by broker-dealers for their own account pursuant to the Exchange Offer
may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Exchange Notes or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker-dealer that participates
in a distribution of such Exchange Notes may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such resale of
Exchange Notes and any commissions or concessions received by any such persons
may be deemed to be underwriting compensation under the Securities Act. The
Letter of Transmittal states that by acknowledging that it will deliver and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal.
The Company has agreed in the Registration Rights Agreement to indemnify
each broker-dealer reselling Exchange Notes pursuant to this Prospectus, and
their officers, directors and controlling persons, against certain liabilities
in connection with the offer and sale of the Exchange Notes, including
liabilities under the Securities Act, or to contribute to payments that such
broker-dealers may be required to make in respect thereof.
VALIDITY OF THE NOTES
Certain legal matters in connection with the Notes offered hereby will be
passed upon for Donnelley by Davis Polk & Wardwell, 450 Lexington Avenue, New
York, New York 10017.
EXPERTS
The consolidated financial statements of R.H. Donnelley Corporation and the
combined financial statements of DonTech I and DonTech II as of December 31,
1996 and 1997 and for each of the three years in the period ended December 31,
1997, included in this Prospectus, have been included herein in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company and Donnelley Corp. have filed with the Commission a
Registration Statement on Form S-4 (together with all amendments and exhibits
thereto, the "Registration Statement") under the Securities Act, with respect to
the Notes offered hereby. This Prospectus does not contain all of
99
<PAGE> 104
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company,
Donnelley Corp. and the Notes, reference is hereby made to such Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or document filed as exhibit to the Registration Statement, each
such statement being qualified in all respects by such reference.
Each purchaser of the Exchange Notes will be furnished with a copy of the
Prospectus and any related amendments or supplements to this Prospectus (as so
amended or supplemented, unless the context otherwise requires, the
"Prospectus"). Each person receiving this Prospectus acknowledges that (i) such
person has been afforded an opportunity to request from the Company and
Donnelley Corp., and to review and has received, all additional information
considered by it to be necessary to verify the accuracy and completeness of the
information herein, (ii) such person has not relied on the Exchange Agent or any
person affiliated with the Exchange Agent in connection with this investigation
of the accuracy of such information or its investment decision and (iii) except
as provided pursuant to (i) above, no person has been authorized to give any
information or to make any representation concerning the New Notes offered
hereby other than those contained herein and, if given or made, such other
information or representation should not be relied upon as having been
authorized by the Company and Donnelley Corp. or the Exchange Agent. Written
requests for such information should be directed to: R.H. Donnelley Inc., One
Manhattanville Road, Purchase, New York 10577, Attention: Jane B. Clark.
Donnelley Corp. is, and the Company will be, subject to the informational
requirements of the Exchange Act, and, in accordance therewith Donnelley Corp.
is, and the Company will be, required to file reports and other information with
the Commission. The Registration Statement, as well as such reports and other
information filed by Donnelley Corp. with the Commission, may be inspected
without charge at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the
Commission's regional offices located at Seven World Trade Center, 13th Floor,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can be obtained by mail
from the Commission's Public Reference Section at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, including Donnelley Corp., that file
electronically with the Commission. In addition, such reports and other
information concerning Donnelley Corp. may also be inspected at the offices of
the New York Stock Exchange at 111 Wall Street, New York, NY 10005.
100
<PAGE> 105
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
R.H. DONNELLEY CORPORATION
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Statements of Operations (Unaudited) for the
Six Months Ended June 30, 1998 and 1997................... F-2
Consolidated Balance Sheets (Unaudited) at June 30, 1998 and
December 31, 1997......................................... F-3
Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended June 30, 1998 and 1997................... F-4
Notes to Consolidated Financial Statements.................. F-5
YEAR-END CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants........................... F-8
Consolidated Statements of Operations for the Three Years
Ended December 31, 1997................................... F-9
Consolidated Balance Sheets at December 31, 1997 and 1996... F-10
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1997................................... F-11
Consolidated Statements of Changes in Shareholders' Equity
for the Three Years Ended December 31, 1997............... F-12
Notes to Consolidated Financial Statements.................. F-13
DONTECH
Report of Independent Accountants........................... F-25
Combined Statements of Operations for the Three Years Ended
December 31, 1997......................................... F-26
Combined Balance Sheets as of December 31, 1997 and 1996.... F-27
Combined Statements of Cash Flows for the Three Years Ended
December 31, 1997......................................... F-28
Combined Statements of Partners' Capital for the Three Years
Ended December 31, 1997................................... F-29
Notes to Combined Financial Statements...................... F-30
</TABLE>
F-1
<PAGE> 106
R.H. DONNELLEY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
---- ----
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues.................................................... $62,338 $80,664
Expenses:
Operating Expenses........................................ 19,356 32,167
General and Administrative................................ 35,970 45,707
Depreciation and Amortization............................. 9,856 11,030
------- -------
Total Expenses.................................... 65,182 88,904
Income from Partnerships and Related Fees................... 62,225 15,739
------- -------
Operating Income.................................. 59,381 7,499
Interest Expense............................................ 3,015 --
------- -------
Income before Provision for Income Taxes.......... 56,366 7,499
Provision for Income Taxes.................................. 22,546 3,000
------- -------
Net Income........................................ $33,820 $ 4,499
======= =======
Earnings Per Share
Basic..................................................... $ 0.99 $ 0.13
======= =======
Diluted................................................... $ 0.98 $ 0.13
======= =======
Shares Used in Computing Earnings Per Share
Basic..................................................... 34,263 34,218
Diluted................................................... 34,574 34,264
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE> 107
R.H. DONNELLEY CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------- ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents................................. $ 208 $ 32
Accounts Receivable:
Billed................................................. 5,205 5,208
Unbilled............................................... 130,217 129,620
Allowance for Doubtful Accounts........................ (5,304) (4,014)
--------- --------
Total Accounts receivable -- net.................. 130,118 130,814
Deferred Contract Costs................................... 20,357 6,944
Other Current Assets...................................... 14,343 4,950
--------- --------
Total Current Assets.............................. 165,026 142,740
Property and Equipment -- net............................. 23,653 25,460
Computer Software -- net.................................. 36,102 37,546
Partnership Investments................................... 147,712 167,010
Other Non-Current Assets.................................. 18,997 9,530
--------- --------
Total Assets...................................... $ 391,490 $382,286
========= ========
Current Liabilities:
Accounts Payable.......................................... $ 2,517 $ 1,395
Accrued and Other Current Liabilities..................... 48,515 58,070
Current Portion of Long Term Debt......................... 2,250 --
--------- --------
Total Current Liabilities......................... 53,282 59,465
Long Term Debt -- net of Current Portion.................. 497,750 --
Deferred Income Taxes..................................... 39,394 34,456
Postretirement and Postemployment Benefits................ 12,920 12,920
Other Liabilities......................................... 14,423 16,770
--------- --------
Total Liabilities................................. 617,769 123,611
Commitments and Contingencies
Shareholders' Equity:
Preferred Stock, Par Value $1.00 per share, Authorized --
10,000,000 shares; Outstanding -- none................. -- --
Common Stock, Par Value $1.00 per share, Authorized --
400,000,000 shares; Issued -- 51,387,942 and 51,967,121
shares for 1998 and 1997, respectively................. 51,388 51,967
Retained Earnings (Deficit)............................... (260,537) 224,562
Treasury Stock, at par, 17,129,679 and 17,853,652 shares
for 1998 and 1997, respectively........................ (17,130) (17,854)
--------- --------
Total Shareholders' Equity........................ (226,279) 258,675
--------- --------
Total Liabilities and Shareholders' Equity........ $ 391,490 $382,286
========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 108
R.H. DONNELLEY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income................................................ $ 33,820 $ 4,499
Reconciliation of Net Income to Net Cash Provided by
Operating Activities
Depreciation and Amortization.......................... 9,856 11,030
Provision for Doubtful Accounts........................ 3,765 5,613
Cash Received in Excess of Income from Partnerships.... 19,298 52,622
(Increase) Decrease in Accounts Receivable............. (3,068) 50,691
Increase in Deferred Contract Costs.................... (13,413) (28,261)
Decrease in Accounts Payable, Accrued and Other Current
Liabilities........................................... (7,684) (8,743)
Increase in Other Long Term Liabilities................ 2,591 2,450
(Increase) Decrease in Other Assets.................... (9,394) 3,891
Other, net............................................. (10) (165)
--------- --------
Net Cash Provided by Operating Activities......... 35,761 93,627
--------- --------
Cash Flows from Investing Activities:
Additions to Property and Equipment....................... (3,115) (7,773)
Additions to Computer Software............................ (4,229) (3,670)
--------- --------
Net Cash Used in Investing Activities............. (7,344) (11,443)
--------- --------
Cash Flows from Financing Activities
Net Distributions to D&B.................................. (518,774) (82,187)
Net Proceeds from Long Term Borrowings.................... 490,553 0
--------- --------
Net Cash Used in Financing Activities............. (28,241) (82,187)
--------- --------
Increase (Decrease) in Cash and Cash Equivalents.......... 176 (3)
Cash and Cash Equivalents, at Beginning of Year............. 32 60
--------- --------
Cash and Cash Equivalents, at End of Period................. $ 208 $ 57
========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 109
R.H. DONNELLEY CORPORATION
NOTES TO CONSOLIDATED 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 -- R.H. Donnelley Corporation ("R.H. Donnelley") and
The New Dun & Bradstreet Corporation ("New D&B"). The distribution
("Distribution") was the method by which D&B distributed to its stockholders
shares of New D&B common stock, which represent a continuing interest in the D&B
businesses now conducted by New D&B. On July 1, 1998, as part of the
Distribution, D&B distributed to its stockholders shares of New D&B stock.
Shares of D&B common stock held by D&B stockholders represent a continuing
ownership interest in the Company. In connection with the Distribution, D&B
changed its name to R.H. Donnelley Corporation and D&B common stock has become
R.H. Donnelley's common stock (the "Common Stock"). After the Distribution, R.H.
Donnelley's only operating subsidiary is R.H. Donnelley Inc. ("Donnelley").
Donnelley is a wholly-owned subsidiary of R.H. Donnelley and R.H. Donnelley has
no other operations other than through the Donnelley subsidiary. Therefore, on a
consolidated basis, the financial statements of R.H. Donnelley and Donnelley are
substantially identical. The financial statements of R.H. Donnelley have been
restated to reflect the recapitalization.
The financial statements reflect the financial position, results of
operations, and cash flows of R.H. Donnelley as if it were a separate entity.
The financial statements include allocations of certain D&B corporate
headquarters assets, liabilities and expenses relating to R.H. Donnelley's
businesses that were transferred from D&B on June 30, 1998. Management believes
these allocations are reasonable. However, the costs of these services and
benefits charges 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 Registration 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 EARNINGS PER SHARE
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Weighted average number of shares -- basic.................. 34,263 34,218
Effect of potentially dilutive stock options................ 311 46
------ ------
Weighted average number of shares -- diluted................ 34,574 34,264
====== ======
</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. 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
F-5
<PAGE> 110
R.H. DONNELLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
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 six month periods
ended June 30, 1998 and 1997 were equal to net income for those periods.
4. COMMITMENT
On June 5, 1998, Donnelley entered into a credit agreement with the Chase
Manhattan Bank, as Administrative Agent, and the Lenders party thereto (the
"Credit Agreement"). Under the terms of the Credit Agreement, Donnelley obtained
a Senior Revolving Credit Facility of $100 million and Senior Secured Term
Facilities in the aggregate amount of $300 million, of which Donnelley has
borrowed $350 million payable over a maximum period of 8.5 years. Interest is
payable on these borrowings based on prevailing short-term LIBOR borrowing rate
plus a credit spread. At June 30, 1998, these bank borrowings had a weighted
average interest rate of 7.422% per annum, which was comprised of a LIBOR rate
of 5.688% plus a weighted average credit spread of 1.734%. Also on June 5, 1998,
Donnelley issued $150 million of Senior Subordinated Notes. These Notes pay
interest semi-annually at the annual rate of 9.125% and are due in 2008. The net
proceeds of the $500 million was dividended to D&B (and distributed to New D&B
in connection with the Distribution), but repayment of such indebtedness remains
an obligation of Donnelley, and is guaranteed by R.H. Donnelley. R.H.
Donnelley's ratio of total indebtedness to total capitalization as of June 30,
1998 was 1.83.
On June 16, 1998 Donnelley entered into interest rate swap agreements to
reduce the impact of changes in interest rates on its floating rate long-term
debt under the Credit Agreement. At June 30, 1998, Donnelley had outstanding
three interest rate swap agreements, having a total notional principal amount of
$175 million. These agreements effectively change the interest rate on $175
million of floating rate borrowing to fixed rates. The interest rate swap
agreements have terms of three to five years. Including the effect of the
interest rate swaps which mitigate R.H. Donnelley's exposure to increasing
short-term interest rates, the weighted average interest rate on R.H.
Donnelley's bank borrowings increased by 0.095% to 7.517% per annum. Donnelley
is exposed to credit risk in the event of nonperformance by the other party to
the interest rate swap agreements. However, Donnelley does not anticipate
nonperformance by the counterparty.
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, having
as defendant 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 seeks damages in excess of $350 million, which IRI is seeking
to have trebled under the antitrust laws. IRI also seeks punitive damages of an
unspecified amount. Under the Distribution Agreement, New D&B will assume and
indemnify R.H. Donnelley against any payments to be made by R.H. Donnelley in
respect of the IRI Action, 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 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.
F-6
<PAGE> 111
R.H. DONNELLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
6. DONTECH PARTNERSHIPS
In 1991, Donnelley formed a general partnership with Ameritech Corporation
("Ameritech"), the DonTech Partnership ("DonTech I"). Prior to August 1997,
DonTech I solicited advertising, published and delivered various directories, in
Illinois and Northwest Indiana. During August 1997, Donnelley signed a series of
agreements with Ameritech changing the structure of the existing partnership. A
new partnership was formed ("DonTech") which was appointed the exclusive sales
agent in perpetuity, for yellow page directories published by Ameritech in
Illinois and Northwest Indiana. R.H. Donnelley also receives direct fees from
Ameritech (Revenue Participation) which are tied to advertising sales of DonTech
and are not included in the financial information below.
The following are summarized combined financial information of the DonTech
Partnerships:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS
ENDED MARCH 31, ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------ -------------------
1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues................ $91,542 $120,563 $86,673 $104,636 $178,215 $225,199
Operating Income.............. 58,556 55,271 54,029 41,150 112,585 96,421
Net Income Before Taxes....... 58,556 55,271 54,029 41,150 112,585 96,421
</TABLE>
7. ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"), which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. Restatement of prior period financials is not required.
R.H. Donnelley is in the process of evaluating the effect this statement will
have on its financial statements and footnote disclosures.
8. SUBSEQUENT EVENTS
On July 14, 1998 R.H. Donnelley announced that a special shareholders'
meeting would be held to vote on a proposal to execute a reverse one-for-five
stock split of its outstanding common stock. The shareholders' meeting was
subsequently held on August 24, 1998 and the reverse split was approved. The
share and per share information provided herein has been adjusted to reflect
such reverse stock split.
Only July 14, 1998 R.H. Donnelley also announced plans to repurchase up to
three million shares of its Common Stock under a systematic stock repurchase
plan. The primary purpose of the repurchase is to offset shares issued under
R.H. Donnelley's employee and director compensation plans. The shares are
expected to be purchased periodically over a three-year period in the open
market, in accordance with guidelines established by the Securities and Exchange
Commission. Stock purchased under this authorization would be held as treasury
stock and would be available for issuance upon exercise of employee stock
options and for compensation plans.
On July 14, 1998, the Board of Directors declared a dividend of $0.175 per
share payable on September 10, 1998 to holders of record on August 20, 1998.
F-7
<PAGE> 112
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of R.H. Donnelley Corporation:
We have audited the accompanying consolidated balance sheets of R.H.
Donnelley Corporation (formerly a wholly owned subsidiary of The Dun &
Bradstreet Corporation) at December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' 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 R.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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
R.H. Donnelley Corporation at December 31, 1997 and 1996, and the results of
their 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.
PricewaterhouseCoopers LLP
New York, New York
March 31, 1998, except as to Note 14A,
for which the date is July 1, 1998 and
Note 14B, for which the date is
August 24, 1998
F-8
<PAGE> 113
R.H. DONNELLEY CORPORATION
CONSOLIDATED 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
======== ======== ========
Earnings Per Share:
Basic................................................. $ 2.49 $ 2.30 $ 3.20
======== ======== ========
Diluted............................................... $ 2.48 $ 2.29 $ 3.19
======== ======== ========
Shares Used in Computing Earnings Per Share:
Basic................................................. 34,153 34,003 33,904
Diluted............................................... 34,213 34,058 33,977
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE> 114
R.H. DONNELLEY CORPORATION
CONSOLIDATED 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
Computer Software -- net.................................. 37,546 40,050
Partnership Investments................................... 167,010 233,706
Other Non-Current Assets.................................. 9,530 13,536
-------- --------
Total Assets...................................... $382,286 $502,193
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable.......................................... $ 1,395 $ 785
Accrued and Other Current Liabilities..................... 58,070 57,764
-------- --------
Total Current Liabilities......................... 59,465 58,549
Deferred Income Taxes..................................... 34,456 53,990
Postretirement and Postemployment Benefits................ 12,920 10,020
Other Liabilities......................................... 16,770 450
-------- --------
Total Liabilities................................. 123,611 123,009
Commitments and Contingencies
SHAREHOLDERS' EQUITY:
Preferred Stock, Par Value $1.00 per share,
Authorized -- 10,000,000 shares, Outstanding -- none
Common Stock, Par Value $1.00 per share,
Authorized -- 400,000,000 shares; Issued -- 51,967,121
and 51,774,420 shares for 1997 and 1996,
respectively........................................... 51,967 51,774
Retained Earnings......................................... 224,562 345,023
Treasury Stock, at par, 17,853,652 and 17,612,776 shares
for 1997 and 1996, respectively........................ (17,854) (17,613)
-------- --------
Total Shareholders' Equity........................ 258,675 379,184
-------- --------
Total Liabilities and Shareholders' Equity........ $382,286 $502,193
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-10
<PAGE> 115
R.H. DONNELLEY CORPORATION
CONSOLIDATED 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
Increase in Accounts Receivable................... (37,519) (5,616) (11,000)
Decrease (Increase) in Other Current Assets....... 8,460 6,709 (1,715)
(Increase) Decrease in Deferred Contracts Costs... (6,746) (8,403) 262
(Decrease) Increase in Accounts Payable, Accrued
and Other Current Liabilities................... (38,993) (26,781) 7,396
Increase (Decrease) in Postretirement and
Postemployment Liabilities...................... 2,900 (5,100) 4,120
Increase in Other Liabilities..................... 16,320 -- 450
(Decrease) Increase in Deferred Income Taxes...... (19,534) 23,586 11,969
Other, net........................................ 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-11
<PAGE> 116
R.H. DONNELLEY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED COMMON TREASURY TOTAL
STOCK STOCK STOCK RETAINED SHAREHOLDERS'
($1 PAR VALUE) ($1 PAR VALUE) ($1 PAR VALUE) EARNINGS EQUITY
--------------- --------------- --------------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995....... -- $ 52,605 $(18,651) $ 336,360 $ 370,314
Net Income..................... 108,397 108,397
Net Distribution to D&B........ (92,146) (92,146)
Net Change due to Treasury
Stock activity............... 305 (381) 76 0
-------- -------- --------- ---------
Balance, December 31, 1995..... -- 52,910 (19,032) 352,687 386,565
-------- -------- --------- ---------
Net Income..................... 78,085 78,085
Net Distribution to D&B........ (85,466) (85,466)
Net Change due to Treasury
Stock activity............... (1,136) 1,419 (283) 0
-------- -------- --------- ---------
Balance, December 31, 1996..... -- 51,774 (17,613) 345,023 379,184
-------- -------- --------- ---------
Net Income..................... 84,905 84,905
Net Distribution to D&B........ (205,414) (205,414)
Net Change due to Treasury
Stock activity............... 193 (241) 48 0
-------- -------- --------- ---------
Balance, December 31, 1997..... -- $ 51,967 $(17,854) $ 224,562 $ 258,675
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE> 117
R.H. DONNELLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND 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 -- R.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
operating subsidiary will be R.H. Donnelley Inc. ("Donnelley"). Donnelley is a
wholly-owned subsidiary of R.H. Donnelley and R.H. Donnelley has no other
operations other than through the Donnelley subsidiary. 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." Therefore, on a
consolidated basis, the financial statements of R.H. Donnelley Corporation and
R.H. Donnelley, Inc. are substantially identical. As discussed in footnote 14,
the financial statements have been restated to reflect the recapitalization of
R.H. Donnelley as of July 1, 1998. 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.
F-13
<PAGE> 118
R.H. DONNELLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 Agreements. Summaries of these
agreements are set forth elsewhere in this Information Statement.
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,
F-14
<PAGE> 119
R.H. DONNELLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 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.
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.
F-15
<PAGE> 120
R.H. DONNELLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
3. RECONCILIATION OF SHARES USED IN COMPUTING EARNINGS PER SHARE
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average number of shares -- basic......... 34,153,000 34,003,400 33,904,400
Effect of potentially dilutive stock options as of
year end......................................... 59,958 54,359 72,274
---------- ---------- ----------
Weighted average number of shares -- diluted....... 34,212,958 34,057,759 33,976,674
========== ========== ==========
</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 dilutive 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 Partner-
F-16
<PAGE> 121
R.H. DONNELLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ships") 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 direct fees (Revenue Participation) which are tied to
advertising sales 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 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.
F-17
<PAGE> 122
R.H. DONNELLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 $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. Nielsen Company, and IMS International Inc. ("the IRI
Action"). The complaint alleges, among other things, various violations of the
antitrust laws and seeks damages in excess of $350 million, which IRI is seeking
to have trebled under the antitrust laws. IRI also seeks punitive damages of an
unspecified amount. Under the Distribution Agreement, New D&B will assume and
indemnify R.H. Donnelley against any payments to be made by R.H. Donnelley in
respect of the IRI Action, 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
F-18
<PAGE> 123
R.H. DONNELLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 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 adjusted to 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 applicable prior to the Distribution.
F-19
<PAGE> 124
R.H. DONNELLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 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
Basic earnings per share of common stock
As reported........................... $ 2.49 $ 2.30 $ 3.20
Pro forma............................. $ 2.48 $ 2.29 $ 3.20
Diluted earnings per share of common
stock
As reported........................... $ 2.48 $ 2.29 $ 3.19
Pro forma............................. $ 2.47 $ 2.29 $ 3.19
</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 121,291 shares and 115,188 shares of
common stock, respectively, were exercisable and 290,039 shares, 848,154 shares
and 2,061,318 shares, respectively, were available for future grants under the
plans at December 31, 1997, 1996 and 1995, respectively.
F-20
<PAGE> 125
R.H. DONNELLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND 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: 68,146 $267.40
Granted................................................... 15,846 316.00
Exercised................................................. (5,524) 222.70
Surrendered or expired.................................... -- --
------- -------
Options outstanding, December 31, 1995: 78,468 280.35
Granted................................................... -- --
Exercised................................................. (10,427) 259.95
Surrendered or expired.................................... (1,607) 285.90
------- -------
Options outstanding, October 31, 1996....................... 66,434 283.40
------- -------
Options converted, November 1, 1996......................... 175,227 107.40
Granted................................................... 94,861 114.35
Exercised................................................. (1,811) 104.75
Surrendered or expired.................................... (3,163) 110.60
------- -------
Options outstanding, December 31, 1996:..................... 265,114 109.85
Granted................................................... 75,798 149.75
Exercised................................................. (35,013) 102.25
Surrendered or expired.................................... (23,882) 114.35
------- -------
Options outstanding, December 31, 1997...................... 282,017 121.15
======= =======
</TABLE>
The weighted average fair value of options granted during 1997, 1996 and
1995 was $27.70, $18.00 and $38.00, 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>
$ 78.65-$102.30 54,219 4 years $ 96.80 46,134 $ 95.85
$104.70-$123.75 153,525 6.7 years $115.65 75,157 $115.25
$138.60-$151.10 74,273 9.8 years $150.30 -- $ --
------- -------
282,017 121,291
======= =======
</TABLE>
The information above has been prepared based on the historical D&B stock
price after giving retroactive effect to the reverse one-for-five stock split
which became effective August 24, 1998. After the Distribution on July 1, 1998,
the shares and stock price included in the above table will be converted based
on R.H. Donnelley's shares and share price. If the conversion of D&B options to
R.H. Donnelley options had taken place as of December 31, 1997, at the ratio
used as of the Distribution date, there would have been 2,889,522 options
outstanding at a weighted average exercise price of $11.82.
F-21
<PAGE> 126
R.H. DONNELLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND 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-23
<PAGE> 127
R.H. DONNELLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND 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.
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.
F-23
<PAGE> 128
R.H. DONNELLEY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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
Earning per share data:
Basic.................... $ (0.04) $ 0.17 $ 0.82 $ 1.53 $ 2.49
Diluted.................. $ (0.04) $ 0.17 $ 0.82 $ 1.53 $ 2.48
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
Earning per share data:
Basic.................... $ 0.11 $ (0.54) $ 0.45 $ 2.27 $ 2.30
Diluted.................. $ 0.11 $ (0.54) $ 0.45 $ 2.27 $ 2.29
</TABLE>
14. SUBSEQUENT EVENTS
A. On July 1, 1998, as part of the Distribution, D&B distributed to its
stockholders shares of New D&B stock, which represents a continuing interest in
D&B's business to be conducted by New D&B. After the Distribution, D&B's only
business is the R.H. Donnelley business, and shares of D&B Common Stock held by
D&B stockholders represents a continuing interest only in that business. In
connection with the Distribution, D&B changed its name to R.H. Donnelley
Corporation and D&B Common Stock has become R.H. Donnelley Common Stock. The
financial statements of R.H. Donnelley have been restated to reflect the
recapitalization.
On June 5, 1998 R.H. Donnelley Inc. entered into a Credit Agreement with
the Chase Manhattan Bank, Chase Securities Inc., Goldman Sachs and the Lenders
party thereto. Under the terms of the agreement, R.H. Donnelley Inc. obtained a
Senior Revolving Credit Facility of $100 million and Senior Secured Term
Facilities in aggregate of $300 million, of which R.H. Donnelley has borrowed in
aggregate $350 million payable over a maximum period of nine years. Interest is
payable on these borrowings based on prevailing short-term LIBOR borrowing rates
plus a credit spread. At June 30, 1998, these bank borrowings had a weighted
average cost of 7.422% per annum, which was comprised of a LIBOR rate of 5.688%
plus a weighted average credit spread of 1.734%.
On June 16, 1998, R.H. Donnelley entered into three interest rate swap
transactions which effectively converted part of its floating rates interest
obligations to fixed rates. The swap transactions total in aggregate $175
million of the $350 million of loans under the Credit Agreement. The swaps have
terms of three to five years. Including the effect of the interest rate swaps
which mitigate R.H. Donnelley's exposure to increasing short-term interest
rates, the weighted average interest rate on R.H. Donnelley's bank borrowings
increased by 0.095% to 7.517% per annum.
In addition on June 5, 1998 R.H. Donnelley Inc. issued $150 million of
Senior Subordinated Notes. These Notes bear an interest rate of 9.125%, pay
interest semi-annually and are due in 2008. The aggregate $500 million was
dividended to D&B, but repayment of such indebtedness remains an obligation of
R.H. Donnelley Inc., as guaranteed by R.H. Donnelley Corporation. The weighted
average interest rate on R.H. Donnelley's total debt portfolio, comprised of the
$350 million Credit per annum facility, $150 million of bonds and $175 million
of interest rate swaps, at June 30, 1998 was 7.99% per annum.
B. On July 14, 1998, Donnelley Corp.'s Board of Directors approved a
reverse one-for-five stock split of its outstanding Common Stock subject to
approval by its shareholders. A Special Meeting of shareholders was held on
August 24, 1998 and the reverse one-for-five split was approved.
F-24
<PAGE> 129
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.
PricewaterhouseCoopers LLP
Chicago, Illinois
January 8, 1998
F-25
<PAGE> 130
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-26
<PAGE> 131
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-27
<PAGE> 132
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-28
<PAGE> 133
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-29
<PAGE> 134
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 R.H.
Donnelley Inc. ("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.
F-30
<PAGE> 135
DONTECH
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
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 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-31
<PAGE> 136
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.
F-32
<PAGE> 137
DONTECH
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
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 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
F-33
<PAGE> 138
DONTECH
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
financial statements and the reported amounts of revenues and expense during the
reporting period. Actual results could differ from those estimates.
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>
F-34
<PAGE> 139
DONTECH
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(IN THOUSANDS)
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>
<TABLE>
<CAPTION>
PRINCIPAL ASSUMPTIONS 1997 1996 1995
--------------------- -------- -------- -------
<S> <C> <C> <C>
Weighted average discount rate............................ 7.00% 7.75% 7.50%
Weighted average rate of compensation increase............ 3.16% 3.16% 4.16%
Long-term rate of return on assets........................ 9.75% 9.75% 9.75%
</TABLE>
Additionally, each respective partnership participates in a Profit
Participation Plan (the "Profit Plan") that covers substantially all its
employees. Employees may voluntarily contribute up to 16% of their salaries to
the Profit Plan and are guaranteed a matching contribution of fifty cents per
dollar contributed up to 6%. Each partnership also makes contributions to the
Profit Plan based on a formula and contingent upon the attainment of financial
goals set in advance as defined in the Plan. The contributions made to the plan
were $926, $809 and $1,025 in 1997, 1996 and 1995, respectively.
11. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED
BEGINNING TO BALANCE AT
OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS(A) PERIOD
----------- ---------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Allowance For Doubtful Accounts
For year ended December 31, 1997............ $13,908 $40,230 $18,557 $35,581
For year ended December 31, 1996............ $23,106 $50,202 $59,400 $13,908
For year ended December 31, 1995............ $18,777 $51,076 $46,747 $23,106
</TABLE>
- ---------------
(a) Includes accounts written off.
F-35
<PAGE> 140
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY,
OR ANY OTHER PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 11
Use of Proceeds....................... 19
Capitalization........................ 20
Selected Financial Data............... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 29
The Exchange Offer.................... 38
Business.............................. 45
Relationship Between Donnelley Corp.
and the New Dun and Bradstreet
Corporation After the
Distribution........................ 56
Management............................ 61
Security Ownership of Certain
Beneficial Owners and Management.... 68
Description of New Credit Facility.... 70
Description of Notes.................. 71
Certain United States Tax
Consequences........................ 98
Plan of Distribution.................. 99
Validity of Notes..................... 99
Experts............................... 99
Available Information................. 99
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$150,000,000
[LOGO]
R.H. DONNELLEY INC.
9 1/8% SENIOR SUBORDINATED NOTES
DUE 2008
-----------------------
PROSPECTUS
-----------------------
SEPTEMBER 28, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 141
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Section 102(b)(7) of the Delaware General Corporation
Law (the "DGCL"), which enables a corporation in its original certificate of
incorporation or as an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty, except
(i) for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to Section
174 of the DGCL (providing for liability of directors for the unlawful payment
of dividends or unlawful stock purchases or redemptions) or (iv) for any
transaction from which a director derived an improper personal benefit.
Section 145 of the DGCL empowers the Company and Donnelley Corp. to
indemnify, subject to the standards set forth therein, any person in connection
with any action, suit or proceeding brought before or threatened by reason of
the fact that the person was a director, officer, employee or agent of such
company, or is or was serving as such with respect to another entity at the
request of such company. The DGCL also provides that the Company and Donnelley
Corp. may purchase insurance on behalf of any such director, officer, employee
or agent.
Each of the Company's and Donnelley Corp.'s Certificate of Incorporation
provides in effect for the indemnification by the such corporation of each
director and officer of such corporation to the fullest extent permitted by
applicable law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ----------- --------
<C> <S>
*3.1 Certificate of Incorporation of the Company
*3.2 By-laws of the Company
*3.3 Certificate of Incorporation of Donnelley Corp.
*3.4 By-laws of Donnelley Corp.
*4.1 Indenture dated as of June 5, 1998 between Donnelley, as
Issuer, Donnelley Corp., as Guarantor and The Bank of New
York, as Trustee, with respect to the 9 1/8% Senior
Subordinated Notes due 2008
*4.2 Form of the 9 1/8% Senior Subordinated Notes due 2008
(included in Exhibit 4.1)
*4.3 Donnelley Corp. Guarantee (included in Exhibit 4.1)
*4.4 Exchange and Registration Rights Agreement dated as of June
5, 1998, among the Company, The Dun & Bradstreet
Corporation, and Goldman, Sachs & Co. and Chase Securities
Inc., as initial purchasers
*4.5 Rights Agreement, dated as of October 19, 1988, between The
Dun & Bradstreet Corporation and Morgan Shareholder Services
Trust Company
*5.1 Legal Opinion
*10.1 Form of Distribution Agreement between The Dun & Bradstreet
Corporation and The New Dun & Bradstreet Corporation
(incorporated by reference to Exhibit 99.2 to the Form 8-K
of The Dun & Bradstreet Corporation, filed on June 30, 1998)
*10.2 Form of Tax Allocation Agreement between The Dun &
Bradstreet Corporation and The New Dun & Bradstreet
Corporation (incorporated by reference to Exhibit 99.3 to
the Form 8-K of The Dun & Bradstreet Corporation, filed on
June 30, 1998)
</TABLE>
II-1
<PAGE> 142
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ----------- --------
<C> <S>
*10.3 Form of Employee Benefits Agreement between The Dun &
Bradstreet Corporation and The New Dun & Bradstreet
Corporation (incorporated by reference to Exhibit 99.4 to
the Form 8-K of The Dun & Bradstreet Corporation, filed on
June 30, 1998)
*10.4 Form of Intellectual Property Agreement between The Dun &
Bradstreet Corporation and The New Dun & Bradstreet
Corporation (incorporated by reference to Exhibit 99.5 to
the Form 8-K of The Dun & Bradstreet Corporation, filed on
June 30, 1998)
*10.5 Form of Shared Transaction Services Agreement between The
Dun & Bradstreet Corporation and The New Dun & Bradstreet
Corporation (incorporated by reference to Exhibit 99.6 to
the Form 8-K of The Dun & Bradstreet Corporation, filed on
June 30, 1998)
*10.6 Form of Data Services Agreement between The Dun & Bradstreet
Corporation and The New Dun & Bradstreet Corporation
(incorporated by reference to Exhibit 99.7 to the Form 8-K
of The Dun & Bradstreet Corporation, filed on June 30, 1998)
*10.7 Form of Transition Services Agreement between The Dun &
Bradstreet Corporation and The New Dun & Bradstreet
Corporation (incorporated by reference to Exhibit 99.8 to
the Form 8-K of The Dun & Bradstreet Corporation, filed on
June 30, 1998)
*10.8 Form of Amended and Restated Transition Services Agreement
between The Dun & Bradstreet Corporation, The New Dun &
Bradstreet Corporation, Cognizant Corporation, IMS Health
Incorporated, AC Nielsen Corporation and Gartner Group, Inc.
(incorporated by reference to Exhibit 99.9 to the Form 8-K
of The Dun & Bradstreet Corporation, filed on June 30, 1998)
*10.9 Credit Agreement, dated as of June 5, 1998, among the
Company, Donnelley Corp., The Chase Manhattan Bank, as
Administrative Agent and the Lenders party thereto
*10.10 DonTech II Partnership Agreement, effective August 19, 1997,
by and between The Reuben H. Donnelley Corporation and
Ameritech Publishing of Illinois, Inc.
*10.11 Revenue Participation Agreement, dated as of August 17,
1997, by and between APIL Partners Partnership and the
Reuben H. Donnelley Corporation
*10.12 Master Agreement, executed August 19, 1997, by and among The
Reuben H. Donnelley Corporation, The Dun & Bradstreet
Corporation, The Am-Don Partnership a/k/a DonTech, DonTech
II, Ameritech Publishing, Inc., Ameritech Publishing of
Illinois, Inc., Ameritech Corporation, DonTech I Publishing
Company LLC and the APIL Partnerships Partnership
*10.13 Exclusive Sales Agency Agreement, effective August 19, 1997,
between APIL Partners Partnership and DonTech II
*10.14 Second Amended and Restated Partnership Agreement, effective
as of August 19, 1997, by and between The Reuben H.
Donnelley Corporation and Ameritech Publishing of Illinois
10.15 The Parent Company's Key Employees' Performance Unit Plan,
as amended and restated
10.16 The Parent Company's 1991 Key Employees' Stock Option Plan,
as amended and restated
10.17 The Parent Company's 1998 Directors' Stock Plan
10.18 The Parent Company's Annual Incentive Plan, as amended and
restated
10.19 The Parent Company's Supplemental Executive Benefit Plan
</TABLE>
II-2
<PAGE> 143
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ----------- --------
<C> <S>
12.1 Statement regarding Computation of Earnings Ratio to Fixed
Charges
*21.1 List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP with respect to R.H.
Donnelley Corporation and DonTech
*24.1 Power of Attorney (included on the signature page of this
Registration Statement)
*25.1 Statement of Eligibility of Trustee
*27.1 Financial Data Schedule of the Company/12-Months Ended
December 31, 1995
*27.2 Financial Data Schedule of the Company/For 1996
*27.3 Financial Data Schedule of the Company/For 1997
*27.4 Financial Data Schedule of the Company/For 6-Months Ended
June 30, 1998
*27.5 Financial Data Schedule of Donnelley Corp./12-Months Ended
December 31, 1995
*27.6 Financial Data Schedule of Donnelley Corp./For 1996
*27.7 Financial Data Schedule of Donnelley Corp./For 1997
*27.8 Financial Data Schedule of Donnelley Corp./For 6-Months
Ended June 30, 1998
99.1 Form of Letter of Transmittal to 9 1/8% Senior Subordinated
Notes due 2008 of the Company
99.2 Form of Notice of Guaranteed Delivery
99.3 Form of Letter to Record Holders
99.4 Form of Letter to Beneficial Holders
99.5 Form of Instruction from Owner of 9 1/8% Senior Subordinated
Notes due 2008 of the Company
</TABLE>
- ---------------
* Previously filed.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrants pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of their counsel the
matters has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
<PAGE> 144
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offering
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE> 145
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Purchase,
New York, on this 28th day of September, 1998.
R.H. DONNELLEY INC.
By: /s/ FRANK R. NOONAN
------------------------------------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ FRANK R. NOONAN Director, President and September 28, 1998
- --------------------------------------------------- Chief Executive Officer
Frank R. Noonan
/s/ PHILIP C. DANFORD Director, Senior Vice September 28, 1998
- --------------------------------------------------- President and Chief
Philip C. Danford Financial Officer
/s/ STEPHEN B. WIZNITZER Director September 28, 1998
- ---------------------------------------------------
Stephen B. Wiznitzer
/s/ ANNA PATRUNO Vice President and September 28, 1998
- --------------------------------------------------- Controller
Anna Patruno
</TABLE>
II-5
<PAGE> 146
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Purchase,
New York, on this 28th day of September, 1998.
R.H. DONNELLEY CORPORATION
By: /s/ FRANK R. NOONAN
------------------------------------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ FRANK R. NOONAN Chairman of the Board of September 28, 1998
- --------------------------------------------------- Directors, President and
Frank R. Noonan Chief Executive Officer
/s/ PHILIP C. DANFORD Senior Vice President and September 28, 1998
- --------------------------------------------------- Chief Financial Officer
Philip C. Danford
/s/ DIANE P. BAKER Director September 28, 1998
- ---------------------------------------------------
Diane P. Baker
/s/ WILLIAM G. JACOBI Director September 28, 1998
- ---------------------------------------------------
William G. Jacobi
/s/ ROBERT J. KAMERSCHEN Director September 28, 1998
- ---------------------------------------------------
Robert J. Kamerschen
/s/ CAROL J. PARRY Director September 28, 1998
- ---------------------------------------------------
Carol J. Parry
/s/ BARRY L. WILLIAMS Director September 28, 1998
- ---------------------------------------------------
Barry L. Williams
/s/ ANNA PATRUNO Vice President and September 28, 1998
- --------------------------------------------------- Controller
Anna Patruno
</TABLE>
II-6
<PAGE> 147
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DOCUMENT PAGES
- ----------- -------- ------------
<C> <S> <C>
*3.1 Certificate of Incorporation of the Company.................
*3.2 By-laws of the Company......................................
*3.3 Certificate of Incorporation of Donnelley Corp..............
*3.4 By-laws of Donnelley Corp. .................................
*4.1 Indenture dated as of June 5, 1998 between Donnelley, as
Issuer, Donnelley Corp., as Guarantor and The Bank of New
York, as Trustee, with respect to the 9 1/8% Senior
Subordinated Notes due 2008.................................
*4.2 Form of the 9 1/8% Senior Subordinated Notes due 2008
(included in Exhibit 4.1)...................................
*4.3 Donnelley Corp. Guarantee (included in Exhibit 4.1).........
*4.4 Exchange and Registration Rights Agreement dated as of June
5, 1998, among the Company, The Dun & Bradstreet
Corporation, and Goldman, Sachs & Co. and Chase Securities
Inc., as initial purchasers.................................
*4.5 Rights Agreement, dated as of October 19, 1998, between The
Dun & Bradstreet Corporation and Morgan Shareholder Services
Trust Company...............................................
*5.1 Legal Opinion...............................................
*10.1 Form of Distribution Agreement between The Dun & Bradstreet
Corporation and The New Dun & Bradstreet Corporation
(incorporated by reference to Exhibit 99.2 to the Form 8-K
of The Dun & Bradstreet Corporation, filed on June 30,
1998).......................................................
*10.2 Form of Tax Allocation Agreement between The Dun &
Bradstreet Corporation and The New Dun & Bradstreet
Corporation (incorporated by reference to Exhibit 99.3 to
the Form 8-K of The Dun & Bradstreet Corporation, filed on
June 30, 1998)..............................................
*10.3 Form of Employee Benefits Agreement between The Dun &
Bradstreet Corporation and The New Dun & Bradstreet
Corporation (incorporated by reference to Exhibit 99.4 to
the Form 8-K of The Dun & Bradstreet Corporation, filed on
June 30, 1998)..............................................
*10.4 Form of Intellectual Property Agreement between The Dun &
Bradstreet Corporation and The New Dun & Bradstreet
Corporation (incorporated by reference to Exhibit 99.5 to
the Form 8-K of The Dun & Bradstreet Corporation, filed on
June 30, 1998)..............................................
*10.5 Form of Shared Transaction Services Agreement between The
Dun & Bradstreet Corporation and The New Dun & Bradstreet
Corporation (incorporated by reference to Exhibit 99.6 to
the Form 8-K of The Dun & Bradstreet Corporation, filed on
June 30, 1998)..............................................
*10.6 Form of Data Services Agreement between The Dun & Bradstreet
Corporation and The New Dun & Bradstreet Corporation
(incorporated by reference to Exhibit 99.7 to the Form 8-K
of The Dun & Bradstreet Corporation, filed on June 30,
1998).......................................................
*10.7 Form of Transition Services Agreement between The Dun &
Bradstreet Corporation and The New Dun & Bradstreet
Corporation (incorporated by reference to Exhibit 99.8 to
the Form 8-K of The Dun & Bradstreet Corporation, filed on
June 30, 1998)..............................................
</TABLE>
<PAGE> 148
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DOCUMENT PAGES
- ----------- -------- ------------
<C> <S> <C>
*10.8 Form of Amended and Restated Transition Services Agreement
between The Dun & Bradstreet Corporation, The New Dun &
Bradstreet Corporation, Cognizant Corporation, IMS Health
Incorporated, AC Nielsen Corporation and Gartner Group, Inc.
(incorporated by reference to Exhibit 99.9 to the Form 8-K
of The Dun & Bradstreet Corporation, filed on June 30,
1998).......................................................
*10.9 Credit Agreement, dated as of June 5, 1998, among the
Company, Donnelley Corp., The Chase Manhattan Bank, as
Administrative Agent and the Lenders party thereto..........
*10.10 DonTech II Partnership Agreement, effective August 19, 1997,
by and between The Reuben H. Donnelley Corporation and
Ameritech Publishing of Illinois, Inc.......................
*10.11 Revenue Participation Agreement, dated as of August 17,
1997, by and between APIL Partners Partnership and the
Reuben H. Donnelley Corporation.............................
*10.12 Master Agreement, executed August 19, 1997, by and among The
Reuben H. Donnelley Corporation, The Dun & Bradstreet
Corporation, The Am-Don Partnership a/k/a DonTech, DonTech
II, Ameritech Publishing, Inc., Ameritech Publishing of
Illinois, Inc., Ameritech Corporation, DonTech I Publishing
Company LLC and the APIL Partnerships Partnership...........
*10.13 Exclusive Sales Agency Agreement, effective August 19, 1997,
between APIL Partners Partnership and DonTech II............
*10.14 Second Amended and Restated Partnership Agreement, effective
as of August 19, 1997, by and between The Reuben H.
Donnelley Corporation and Ameritech Publishing of
Illinois....................................................
10.15 The Parent Company's Key Employees' Performance Unit Plan,
as amended and restated.....................................
10.16 The Parent Company's 1991 Key Employees' Stock Option Plan,
as amended and restated.....................................
10.17 The Parent Company's 1998 Directors' Stock Plan.............
10.18 The Parent Company's Annual Incentive Plan, as amended and
restated....................................................
10.19 The Parent Company's Supplemental Executive Benefit Plan....
12.1 Statement regarding Computation of Earnings Ratio to Fixed
Charges.....................................................
*21.1 List of Subsidiaries........................................
23.1 Consent of PricewaterhouseCoopers LLP with respect to R.H.
Donnelley Corporation and DonTech...........................
*24.1 Power of Attorney (included on the signature page of this
Registration Statement).....................................
*25.1 Statement of Eligibility of Trustee.........................
*27.1 Financial Data Schedule of the Company/12-Months Ended
December 31, 1995...........................................
*27.2 Financial Data Schedule of the Company/For 1996.............
*27.3 Financial Data Schedule of the Company/For 1997.............
</TABLE>
<PAGE> 149
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DOCUMENT PAGES
- ----------- -------- ------------
<C> <S> <C>
*27.4 Financial Data Schedule of the Company/For 6-Months Ended
June 30, 1998...............................................
*27.5 Financial Data Schedule of Donnelley Corp./12-Months Ended
December 31, 1995...........................................
*27.6 Financial Data Schedule of Donnelley Corp./For 1996.........
*27.7 Financial Data Schedule of Donnelley Corp./For 1997.........
*27.8 Financial Data Schedule of Donnelley Corp./For 6-Months
Ended June 30, 1998.........................................
99.1 Form of Letter of Transmittal to 9 1/8% Senior Subordinated
Notes due 2008 of the Company...............................
99.2 Form of Notice of Guaranteed Delivery.......................
99.3 Form of Letter to Record Holders............................
99.4 Form of Letter to Beneficial Holders........................
99.5 Form of Instruction from Owner of 9 1/8% Senior Subordinated
Notes due 2008 of the Company...............................
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
Exhibit 10.15
R. H. DONNELLEY CORPORATION
- --------------------------------------------------------------------------------
KEY EMPLOYEES' PERFORMANCE UNIT PLAN,
AS AMENDED AND RESTATED
- --------------------------------------------------------------------------------
<PAGE> 2
R. H. DONNELLEY CORPORATION
- --------------------------------------------------------------------------------
KEY EMPLOYEES' PERFORMANCE UNIT PLAN,
AS AMENDED AND RESTATED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
1. Purpose of the Plan............................................... 1
2. Administration.................................................... 1
3. Eligibility....................................................... 1
4. Performance Units................................................. 1
5. Transfers and Leaves of Absence................................... 4
6. Change in Control................................................. 5
7. Amendments........................................................ 6
8. Effectiveness..................................................... 6
</TABLE>
<PAGE> 3
R. H. DONNELLEY CORPORATION
- --------------------------------------------------------------------------------
KEY EMPLOYEES' PERFORMANCE UNIT PLAN,
AS AMENDED AND RESTATED
- --------------------------------------------------------------------------------
1. PURPOSE OF THE PLAN
The purpose of the Plan is to aid R.H. Donnelley Corporation (the
"Company") and its subsidiaries in securing and retaining key employees of
outstanding ability and to motivate such employees to exert their best efforts
on behalf of the Company and its subsidiaries by providing incentive through the
award of performance units. The Company expects that it will benefit from the
added interest which such key employees will have in the welfare of the Company
as a result of their interest in the long-term performance of the Company.
2. ADMINISTRATION
The Board of Directors of the Company shall appoint a Compensation and
Benefits Committee (herein called the "Committee") consisting of at least three
members of the Board of Directors which shall administer the Plan and serve at
the pleasure of the Board. Each member of the Committee shall not be eligible to
participate in the Plan and, from and after April 16, 1996, shall be an "outside
director" as defined in the regulations under Section 162(m) of the Internal
Revenue Code (the "Code"). The Committee shall have the authority, consistent
with the Plan, to determine the provisions of the performance units to be
granted, to interpret the Plan and the performance units granted under the Plan,
to adopt, amend and rescind subplans implementing awards under the Plan, award
agreements, and rules and regulations for the administration of the Plan, and
generally to conduct and administer the Plan and to make all determinations in
connection therewith which may be necessary or advisable, and all such actions
of the Committee shall be binding upon all participants.
3. ELIGIBILITY
Key employees (but not members of the Committee and any person who serves
only as a Director) of the Company, who are from time to time responsible for
the management, growth and protection of the business of the Company, are
eligible to be granted performance units under the Plan. The participants under
the Plan shall be selected from time to time by the Committee, in its
discretion, from among those eligible, and the Committee shall determine, in its
discretion, consistent with the terms of the Plan, the terms and conditions of
the performance units granted to each participant. The granting of a performance
unit under the Plan shall impose no obligation on the Company or any subsidiary
to continue the employment of a participant and shall not lessen or affect the
right to terminate the employment of a participant.
4. PERFORMANCE UNITS
<PAGE> 4
Performance units ("Units") granted under this Plan shall be subject to
the following terms and conditions:
(a) Award Period. The Award Period for a Unit shall be established by the
Committee at the time of grant and shall be not more than four (4) calendar
years in length. The Committee may provide that the Award Period for such Units
shall begin with the calendar year during which such Units are granted or at
such other date within the calendar year as the Committee may specify. Award
Periods may overlap with one another. The Committee shall establish an Award
Period for awards in 1998, which Award Period will commence July 1, 1998 and
terminate December 31, 1999.
(b) Valuation of Units.
(i) Payment values for each Unit, which may be in cash, in
restricted stock issued pursuant to the Key Employees Restricted Stock
Plan or other restricted stock plan of the Company as in effect from time
to time, in performance shares of Common Stock in the Company or in any
combination of the foregoing, shall be established by the Committee,
together with targets to be achieved during the Award Period for one or
more performance measures, no later than 90 days after the commencement of
the Award Period (or earlier, as required under Treasury Regulation
1.162-27(e)(2) in the case of an Award Period less than one year); such
performance measures, targets and Unit payment schedules shall govern the
valuation of Units for award payment determination purposes.
(ii) The Committee shall select performance measures for each Award
Period from the following: (1) earnings per share, net income, operating
income, revenue, working capital, return on equity, return on assets,
total return to shareholders, and average sales growth, each of which may
be on a corporate-wide basis or with respect to one or more operating
units, divisions, acquired businesses, minority investments, partnerships
or joint ventures; and (2) with respect to participants other than
executive officers of the Company (as such are determined by the
Committee), other quantitative or qualitative measures. Executive officers
shall include persons expected to be "covered employees" as defined in the
regulations under Section 162(m) of the Code.
(iii) The Committee may increase or decrease targets and/or Unit
payment schedules if in its sole judgment there have been extraordinary
occurrences, not anticipated when Unit grants were approved, which
significantly have affected or may affect the Company's earnings or other
performance measures, except that no increase may be made with respect to
awards earned by executive officers, and no change in the targets
applicable to executive officers may be made during the Award Period,
except that no adjustments may be made that disqualify the Units as
"performance-based compensation" under Code Section 162(m).
Notwithstanding the above, any expenses incurred either before or after a
Change in Control (as defined below) occurs, as a result of a Change in
Control, as determined by the Company's outside accountants as of the date
the Change in Control occurs, shall not be taken into account in
determining
- 2 -
<PAGE> 5
whether performance criteria and targets have been achieved, and in no
event shall a Change in Control constitute an extraordinary occurrence
which could justify a change, adverse to the participant, in performance
criteria, targets and/or Unit payment schedules.
(iv) In calculating whether the performance targets for executive
officers have been met, the Committee (A) will make appropriate conforming
adjustments in the performance measures or the targets to exclude the
effects of any corporate transactions such as acquisitions, divestitures
and reorganizations, and (B) will not take into account extraordinary
accounting changes or items (as defined under generally accepted
accounting principles), restructuring charges, nonrecurring events, or any
unusual events affecting earnings by more than 10%, which in any such case
affect the results that otherwise would have been attained under the
applicable performance measures; provided, however, that this provision
will apply to Units granted to executive officers only if and to the
extent that such Units will not be disqualified as "performance-based
compensation" under Code Section 162(m).
(c) Payment of Units. As promptly as practicable after the completion of
an Award Period, the Committee shall determine what, if any, award payments have
been earned with respect to related Units. Committee determinations with respect
to executive officers shall be in writing and shall comply with the requirements
of Treasury Regulation 1.162-27(e)(5). Payment shall be made to participants in
cash, in shares of restricted stock, in performance shares of Company Common
Stock or in any combination of the foregoing, as established by the Committee,
promptly after the date the Committee makes such determination. For purposes of
payment of cash-denominated Units, shares of restricted stock and performance
shares shall be valued at their Fair Market Value (as defined in Section 4(f)).
Restricted stock shall be subject to a risk of forfeiture and restrictions on
transferability for such restriction period, extending beyond the Award Period,
as may be specified by the Committee, subject to any requirements of the plan
under which such restricted stock is issued. Performance shares may be settled
in cash (including in cases in which the Units were share-denominated) or by
delivery of shares of Common Stock without restriction at the end of the Award
Period (including in cases in which the Units were cash-denominated) or share
units representing a right to delivery of shares of Common Stock at the end of a
mandatory deferral period, extending beyond the Award Period, as may be
specified by the Committee, and subject to such risk of forfeiture and
restrictions on transferability for such restriction period (which may be
shorter but not longer than the mandatory deferral period) as may be specified
by the Committee. The Committee may permit elective deferral of settlement of
cash payouts or payouts of performance shares by the participant, subject to
such restrictions as may be specified by the Committee.
(d) Termination of Employment. In the event a participant's employment
with the Company or any of its subsidiaries is terminated prior to settlement of
Units, if such termination is for "Cause" such Units shall be canceled and
forfeited, and if such termination is for any other reason such Units shall be
subject to cancellation and forfeiture to the extent specified by the Committee.
Restricted stock and performance shares awarded in settlement of Units shall be
forfeitable upon termination of employment if and to the extent specified by the
Committee
- 3 -
<PAGE> 6
(subject to the requirements of the plan under which any restricted stock is
issued). For purposes of this Plan, the term "Cause" shall have the meaning
defined in any employment agreement between the participant and the Company or a
subsidiary then in effect or, if no such employment agreement is then in effect,
"Cause" shall mean:
(i) The participant's willful and continued failure substantially to
perform the duties of his or her position after notice and opportunity to
cure;
(ii) Any willful act or omission by the participant constituting
dishonesty, fraud or other malfeasance, which is demonstrably injurious to
the financial condition or business reputation of the Company or any of
its affiliates; or
(iii) A felony conviction in a court of law under the laws of the
United States or any state thereof or any other jurisdiction in which the
Company or a subsidiary conducts business which materially impairs the
value of the participant's services to the Company or any of its
subsidiaries;
provided, however, that, for purposes of this definition, no act or failure to
act shall be deemed "willful" unless effected by the participant not in good
faith and without a reasonable belief that such action or failure to act was in
or not opposed to the Company's best interests, and no act or failure to act
shall be deemed "willful" if it results from any incapacity of the participant
due to physical or mental illness. For purposes of this Section 4, a termination
of employment of a participant by the Company without Cause after the
commencement of negotiations with a potential acquirer or business combination
partner will be deemed to be a termination of employment immediately after a
Change in Control if such negotiations result in a transaction constituting a
Change in Control.
(e) Non-Assignability. Each Unit granted under this Plan shall by its
terms be nontransferable by the participant except by will or the laws of
descent and distribution. Unless otherwise determined by the Committee, each
performance share shall be nontransferable by the participant except by will or
the laws of descent and distribution.
(f) Limitation on Value of Units. The total of all payments to any
participant under this Plan, including cash, restricted stock and/or performance
shares, in any calendar year shall not exceed $6,000,000. For purposes of this
Section 4(f), shares of restricted stock and performance shares shall be valued
at their Fair Market Value. Unless otherwise determined by the Committee, "Fair
Market Value" of Common Stock means, as of a given date, the average of the high
and low sales prices per share of Company Common Stock reported on a
consolidated basis for securities listed on the principal stock exchange or
market on which Stock is traded on the date immediately preceding the date as of
which such value is being determined or, if there is no sale on that date, then
on the last previous day on which a sale was reported.
(g) Tax Withholding. The Company shall require payment by a participant of
any amount the Company may determine to be necessary to withhold for federal,
state or local taxes in connection with the settlement of an award under the
Plan, except that the Committee may
- 4 -
<PAGE> 7
permit a participant to elect to have a portion of any shares deliverable in
settlement of an award, including shares deliverable in settlement of
performance shares or shares of restricted stock with respect to which the risk
of forfeiture or restriction on transferability has lapsed, withheld to provide
for payment of any such taxes.
(h) Other Terms and Conditions. The Committee may impose such other terms,
provisions and conditions, not inconsistent with the Plan, as it shall determine
in its sole judgment.
5. TRANSFERS AND LEAVES OF ABSENCE
For purposes of the Plan: (a) a transfer of an employee from the Company
to a subsidiary or vice versa, or from one subsidiary to another, (b) a leave of
absence, duly authorized in writing by the Company, for military service or
sickness or for any other purpose approved by the Company if the period of such
leave does not exceed 90 days, and (c) a leave of absence in excess of 90 days,
duly authorized in writing by the Company, provided the employee's right to
re-employment is guaranteed either by statute or by contract, shall not be
deemed a termination of employment.
- 5 -
<PAGE> 8
6. CHANGE IN CONTROL
(a)(i) With respect to Units granted on or prior to October 15, 1997, upon
the occurrence or potential occurrence of certain events defined by the
Committee, including without limitation, a merger, consolidation, combination,
reorganization or other transaction in which the Company is not the surviving
corporation or in which the determination of whether performance criteria and
targets of outstanding Units will be satisfied at the end of the Award Period
otherwise is impaired (any such event, a "Triggering Event"), or a "Change in
Control" of the Company, Units held by a participant, including Units held less
than one year after the date of grant of such Units, shall immediately become
payable in full, with the final value of such Units determined as though
performance criteria and targets for the full Award Period had been achieved.
(ii) With respect to Units granted after October 15, 1997, (1) upon the
occurrence or potential occurrence of any Triggering Event that does not
constitute a "Change in Control" of the Company, unless otherwise determined by
the Committee, Units held by a participant, including Units held less than one
year after the date of grant of such Units, shall immediately become payable in
an amount equal to the product of (A) the final value of such Units determined
as though performance criteria and targets for the full Award Period had been
achieved at 100% of target levels, multiplied by (B) a fraction, the numerator
of which is the number of days in the Award Period prior to the occurrence of
the Triggering Event and the denominator of which is the number of days in the
Award Period; and (2) upon the occurrence of a "Change in Control," Units held
by a participant, including Units held less than one year after the date of
grant of such Units, shall immediately become payable in full, with the final
value of such Units determined as though performance criteria and targets for
the full Award Period had been achieved at the maximum levels.
(b) For purposes of this Plan, "Change in Control" means the occurrence of
any of the following events after the effective date of the amendment and
restatement of the Plan:
(i) Any "person," as such term is used in Section 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")
(other than the Company, any trustee or other fiduciary holding securities
under an employee benefit plan of the Company, or any company owned,
directly or indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the
Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company representing 20% or more of the combined voting power of the
Company's then outstanding securities;
(ii) During any period of two consecutive years commencing on July
14, 1998, individuals who at the beginning of such period constitute the
Board, and any new director (other than a director designated by a person
(as defined above) who has entered into an agreement with the Company to
effect a transaction described in subsections (i), (iii) or (iv) of this
definition) whose election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds
- 6 -
<PAGE> 9
(2/3) of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for election
was previously so approved cease for any reason to constitute at least a
majority thereof;
(iii) The shareholders of the Company have approved a merger or
consolidation of the Company with any other company and all other required
governmental approvals of such merger or consolidation have been obtained,
other than (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing
to represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) more than 60% of the combined
voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation or (B) a
merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no person (as defined above)
becomes the beneficial owner (as defined above) of more than 20% of the
combined voting power of the Company's then outstanding securities; or
(iv) The shareholders of the Company have approved a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets, and all other required governmental approvals of such transaction
have been obtained.
(c) Upon a Change in Control, Units which become payable in full under
Section 6(a) shall be paid as promptly as practicable but not more than 15 days
after the later of the Change in Control or the date the Company became aware of
the Change in Control. If any such Units were to be payable in the form of
performance shares or shares of restricted stock, such Units shall either be
paid in the form of shares which are subject to no risk of forfeiture,
restriction on transferability, or other restriction, or in cash subject to no
restriction, as determined by the Committee. In addition, in the case of any
performance shares or shares of restricted stock issued prior to a Change in
Control which remain outstanding at the date of the Change in Control, all risks
of forfeiture, restrictions on transferability, and other restrictions on such
performance shares and restricted stock shall lapse upon the occurrence of such
Change in Control.
7. AMENDMENTS
The Committee may amend or discontinue the Plan in its sole discretion,
but no amendment or discontinuation shall be made which would impair the rights
of the participant under any Unit granted on or prior to October 15, 1997
without the participant's consent, or which, without the approval of the
shareholders of the Company, would change (a) the performance measures in
Section 4(b) with respect to "covered employees," (b) the individuals or class
of individuals eligible to participate in the Plan, or (c) the maximum amount
payable to an individual participant under the Plan; provided, however, that
upon the occurrence of a Change in Control of the Company, no amendment or
discontinuation shall be made which
- 7 -
<PAGE> 10
would impair the rights of the participant under any Unit theretofore granted
without the participant's consent.
8. EFFECTIVENESS
The amendments proposed in 1996 became effective upon approval by the
shareholders at the 1997 Annual Meeting. Sections 6(a) and 7 as amended became
effective upon approval by the Board of Directors at its October 15, 1997
meeting. Section 4(a) as amended became effective upon approval by the Board of
Directors at its December 17, 1997 meeting. The amendment and restatement of the
Plan in connection with the reorganization of the Company and the change of the
name of the Company to R.H. Donnelley Corporation became effective as of June
17, 1998.
- 8 -
<PAGE> 1
Exhibit 10.16
R. H. DONNELLEY CORPORATION
- --------------------------------------------------------------------------------
1991 KEY EMPLOYEES' STOCK OPTION PLAN,
AS AMENDED AND RESTATED
- --------------------------------------------------------------------------------
<PAGE> 2
R. H. DONNELLEY CORPORATION
- --------------------------------------------------------------------------------
1991 KEY EMPLOYEES' STOCK OPTION PLAN,
AS AMENDED AND RESTATED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Purpose of the Plan............................................... 1
2. Stock Subject to the Plan......................................... 1
3. Administration.................................................... 1
4. Eligibility....................................................... 1
5. Termination Date for Grants....................................... 2
6. Terms and Conditions of Stock Options............................. 2
7. Terms and Conditions of Stock Appreciation Rights................. 5
8. Transfers and Leaves of Absence................................... 6
9 Adjustments Upon Changes in Capitalization or Other Events........ 6
10. Use of Proceeds................................................... 8
11. Amendments........................................................ 8
12. Effectiveness of the Plan and Amendments.......................... 9
</TABLE>
<PAGE> 3
R. H. DONNELLEY CORPORATION
- --------------------------------------------------------------------------------
1991 KEY EMPLOYEES' STOCK OPTION PLAN,
AS AMENDED AND RESTATED
- --------------------------------------------------------------------------------
1. PURPOSE OF THE PLAN
The purpose of the Plan is to aid R.H. Donnelley Corporation (herein
called the "Company") and its subsidiaries in securing and retaining key
employees of outstanding ability and to motivate such employees to exert their
best efforts on behalf of the Company and its subsidiaries by providing
incentive through the award of stock options and stock appreciation rights. The
Company expects that it will benefit from the added interest which such key
employees will have in the welfare of the Company as a result of their
proprietary interest in the Company's success.
2. STOCK SUBJECT TO THE PLAN
The total number of shares of Common Stock of the Company which may be
issued under the Plan from and after July 1, 1998 shall be 29,800,000, subject
to adjustment as provided in Section 9. The maximum number of shares for which
stock options may be granted from the 1995 Annual Meeting during the remaining
term of the Plan to any individual optionee shall be 7,000,000, subject to
adjustment as provided in Section 9. The shares may consist, in whole or in
part, of unissued shares or treasury shares. Issuance of shares of Common Stock
upon exercise of a stock option or reduction of the number of shares of Common
Stock subject to a stock option upon exercise of a stock appreciation right
shall reduce the total number of shares of Common Stock available under the
Plan. Shares which are subject to unexercised stock options which terminate or
lapse may be optioned again under the Plan.
3. ADMINISTRATION
The Board of Directors of the Company shall appoint a Compensation and
Benefits Committee (herein called the "Committee") consisting of at least three
members of the Board of Directors who shall administer the Plan and serve at the
pleasure of the Board. Each member of the Committee shall not be eligible to
participate in the Plan. The Committee shall have the authority, consistent with
the Plan, to determine the provisions of the stock options and stock
appreciation rights to be granted, to interpret the Plan and the stock options
and the stock appreciation rights granted under the Plan, to adopt, amend and
rescind rules and regulations for the administration of the Plan, the stock
options and the stock appreciation rights and generally to conduct and
administer the Plan and to make all determinations in connection therewith which
may be necessary or advisable, and all such actions of the Committee shall be
binding upon all participants. The Committee shall require payment of any amount
the
<PAGE> 4
Company may determine to be necessary to withhold for federal, state or local
taxes as a result of the exercise of a stock option or a stock appreciation
right.
4. ELIGIBILITY
Key employees (but not members of the Committee and any person who serves
only as a Director) of the Company and its subsidiaries (within the meaning of
Section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code")),
who are from time to time responsible for the management, growth and protection
of the business of the Company and its subsidiaries, are eligible to be granted
stock options or stock appreciation rights under the Plan. The participants
under the Plan shall be selected from time to time by the Committee, in its sole
discretion, from among those eligible, and the Committee shall determine, in its
sole discretion, the number of shares to be covered by the stock options or
stock appreciation rights or both granted to each participant. An employee may
not be granted a stock option, however, if at the time such option is to be
granted, such employee owns stock of the Company or any of its subsidiaries
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or of any such subsidiary. For purposes of the preceding
sentence, the attribution rules of stock ownership set forth in Section 424(d)
of the Code shall apply. The granting of a stock option or stock appreciation
right under the Plan shall impose no obligation on the Company or any subsidiary
to continue the employment of an optionee and shall not lessen or affect the
right to terminate the employment of an optionee.
5. TERMINATION DATE FOR GRANTS
No stock option or stock appreciation right may be granted under the Plan
after February 19, 2001, but stock options or stock appreciation rights
theretofore granted may extend beyond that date.
6. TERMS AND CONDITIONS OF STOCK OPTIONS
Stock options granted under the Plan shall be, as determined by the
Committee, non-qualified, incentive or other stock options for federal income
tax purposes, as evidenced by stock option grants, and shall be subject to the
foregoing and the following terms and conditions and to such other terms and
conditions, not inconsistent therewith, as the Committee shall determine:
(a) Option Price. The option price per share shall be determined by the
Committee, but shall not be less than 100% of the Fair Market Value of the
Common Stock on the date a stock option is granted. For purposes of the Plan,
unless otherwise determined by the Committee, "Fair Market Value" of Common
Stock means, as of a given date, the average of the high and low sales prices
per share of Common Stock reported on a consolidated basis for securities listed
on the principal stock exchange or market on which Stock is traded on the date
immediately preceding the date as of which such value is being determined or, if
there is no sale on that date, then on the last previous day on which a sale was
reported.
- 2 -
<PAGE> 5
(b) Exercisability. Stock options granted under the Plan shall be
exercisable at such time and upon such terms and conditions as may be determined
by the Committee, but in no event shall a stock option be exercisable more than
ten years after the date it is granted. The Committee may accelerate the date
any previously granted Option will become exercisable.
(c) First Year Non-Exercisability. Except as provided in elsewhere in this
Paragraph 6 and in Paragraph 9 of the Plan, no stock option shall be exercisable
during the year ending on the first anniversary date of the granting of the
stock option.
(d) Exercise of Stock Options. Except as otherwise provided in the Plan or
the stock option, a stock option may be exercised for all, or from time to time
any part, of the shares for which it is then exercisable. The option price for
the shares as to which a stock option is exercised shall be paid to the Company
in full, or adequate provision for such payment made, at the time of exercise at
the election of the optionee (i) in cash, (ii) in shares of Common Stock of the
Company having a Fair Market Value equal to the option price for the shares
being purchased and satisfying such other requirements as may be imposed by the
Committee or (iii) partly in cash and partly in such shares of Common Stock of
the Company. The Committee may permit the optionee to elect, subject to such
terms and conditions as the Committee shall determine, to have the number of
shares deliverable to the optionee as a result of the exercise reduced by a
number sufficient to pay the amount the Company determines to be necessary to
withhold for federal, state or local taxes as a result of the exercise of the
stock option. No optionee shall have any rights to dividends or other rights of
a shareholder with respect to shares subject to a stock option until the
optionee has given written notice of exercise of the stock option, paid in full
for such shares or made adequate provision therefor and, if requested, given the
representation described in Paragraph 6(h) of the Plan.
(e) Exercisability Upon Termination of Employment by Death. If an
optionee's employment by the Company or a subsidiary terminates by reason of
death, the stock option thereafter may be exercised for three years after the
date of death or the remaining stated period of the stock option, whichever
period is shorter, to the full extent of the stock option regardless of the
extent to which it was exercisable at the time of death (including death less
than one year after the date of grant).
(f) Exercisability Upon Termination of Employment by Disability or
Retirement. If an optionee's employment by the Company or a subsidiary
terminates by reason of disability or retirement, the stock option thereafter
may be exercised as follows:
(i) Pre-July 14, 1998 Options: In the case of a stock option granted
before July 14, 1998, during the five years after the date of such
termination of employment or the remaining stated period of the stock
option, whichever period is shorter, to the full extent of the stock
option regardless of the extent to which it was exercisable at the time of
termination of employment (including termination less than one year after
the date of grant); provided, however, that if the optionee dies within a
period of five years after such termination of employment, any unexercised
stock option may be exercised thereafter, during either (1) the period
ending on the later of (i) five years after such termination of
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<PAGE> 6
employment and (ii) one year after the date of death or (2) the period
remaining in the stated term of the stock option, whichever period is
shorter.
(ii) Post-July 13, 1998 Options: In the case of a stock option
granted on or after July 14, 1998, during the remaining stated period of
the stock option, to the full extent of the stock option regardless of the
extent to which it was exercisable at the time of termination of
employment (including termination less than one year after the date of
grant).
For purposes of this Paragraph 6, "retirement" shall mean voluntary termination
of employment with the Company or a subsidiary after the optionee has attained
age 55 with the approval of the Committee; or after the optionee has attained
age 65. An optionee shall not be considered disabled for purposes of this
Paragraph 6, unless he or she furnishes such medical or other evidence of the
existence of the disability as the Committee, in its sole discretion, may
require.
(g) Effect of Other Termination of Employment. If a participant's
employment terminates for any reason, other than disability, death or
retirement, each stock option and stock appreciation right held by such
participant shall be subject to the following:
(i) Pre-July 14, 1998 Options: In the case of a stock option granted
before July 14, 1998, the stock option shall terminate upon such
termination of employment.
(ii) Post-July 13, 1998 Options: In the case of a stock option
granted on or after July 14, 1998, unless otherwise determined by the
Committee, if such termination is for reasons other than for Cause the
stock option shall be exercisable during (1) the period of 90 days after
such termination or (2) the period remaining in the stated term of the
stock option, whichever period is shorter, but only to the extent to which
the stock option was exercisable at the time of termination of employment;
and if such termination is for Cause the stock option shall terminate upon
such termination of employment.
For purposes of this Plan, the term "Cause" shall have the meaning defined in
any employment agreement between the participant and the Company or a subsidiary
then in effect or, if no such employment agreement is then in effect, "Cause"
shall mean:
(i) The participant's willful and continued failure substantially to
perform the duties of his or her position after notice and opportunity to
cure;
(ii) Any willful act or omission by the participant constituting
dishonesty, fraud or other malfeasance, which in any such case is
demonstrably injurious to the financial condition or business reputation
of the Company or any of its affiliates; or
(iii) A felony conviction in a court of law under the laws of the
United States or any state thereof or any other jurisdiction in which the
Company or a subsidiary conducts business which materially impairs the
value of the participant's services to the Company or any of its
subsidiaries;
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<PAGE> 7
provided, however, that, for purposes of this definition, no act or failure to
act shall be deemed "willful" unless effected by the participant not in good
faith and without a reasonable belief that such action or failure to act was in
or not opposed to the Company's best interests, and no act or failure to act
shall be deemed "willful" if it results from any incapacity of the participant
due to physical or mental illness.
(h) Termination of Employment After Change in Control Negotiations Have
Commenced. For purposes of this Section 6, a termination of employment of a
participant by the Company without Cause after the commencement of negotiations
with a potential acquirer or business combination partner will be deemed to be a
termination of employment immediately after a Change in Control if such
negotiations result in a transaction constituting a Change in Control.
(i) Additional Agreements of Optionee and Restrictions on Transfer. The
Committee may require each person purchasing shares pursuant to exercise of a
stock option to represent to and agree with the Company in writing that the
shares are being acquired without a view to distribution thereof. The
certificates for shares so purchased may include any legend which the Committee
deems appropriate to reflect any restrictions on transfers. The Committee also
may impose, in its discretion, as a condition of any option, any restrictions on
the transferability of shares acquired through the exercise of such option as it
may deem fit. Without limiting the generality of the foregoing, the Committee
may impose conditions restricting absolutely the transferability of shares
acquired through the exercise of options for such periods as the Committee may
determine and, further, in the event the optionee's employment by the Company or
a subsidiary terminates during the period in which such shares are
nontransferable, the optionee may be required, if required by the related option
agreement, to sell such shares back to the Company at such price and on such
other terms as the Committee may have specified in the stock option agreement.
(j) Nontransferability of Stock Options. Except as otherwise provided in
this Paragraph 6(i), a stock option shall not be transferable by the optionee
otherwise than by will or by the laws of descent and distribution and during the
lifetime of an optionee a stock option shall be exercisable only by the
optionee. A stock option exercisable after the death of an optionee or a
transferee pursuant to the following sentence may be exercised by the legatees,
personal representatives or distributees of the optionee or such transferee. The
Committee may, in its discretion, authorize all or a portion of the stock
options previously granted or to be granted to an optionee to be on terms which
permit irrevocable transfer for no consideration by such optionee to (i) any or
all of the spouse, children or grandchildren of the optionee ("Immediate Family
Members"), (ii) a trust or trusts for the exclusive benefit of the optionee
and/or any or all of such Immediate Family Members, or (iii) a partnership in
which the optionee and/or any or all of such Immediate Family Members are the
only partners, provided that subsequent transfers of transferred options shall
be prohibited except those in accordance with the first sentence of this
Paragraph 6(i). Following transfer, any such options shall continue to be
subject to the same terms and conditions as were applicable immediately prior to
transfer. The events of termination of employment of Paragraphs 6(e), 6(f), and
6(g) hereof shall continue to be applied with respect to the original optionee,
following which the stock options shall be exercisable by the transferee
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<PAGE> 8
only to the extent, and for the periods specified, in Paragraphs 6(e), 6(f) and
6(g). The Committee may delegate to an administrative committee the authority to
authorize transfers, establish terms and conditions upon which transfers may be
made and establish classes of optionees eligible to transfer options, as well as
to make other determinations with respect to option transfers.
7. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS
(a) Grants. The Committee also may grant stock appreciation rights in
connection with stock options granted under the Plan, either at the time of
grant of options or subsequently. Stock appreciation rights shall cover the same
shares covered by a stock option (or such lesser number of shares of Common
Stock as the Committee may determine) and shall be subject to the same terms and
conditions as the stock option (including limitations on transferability) except
for such additional limitations as are contemplated by this Paragraph 7 (or as
may be included in a stock appreciation right granted hereunder).
(b) Terms. Each stock appreciation right shall entitle an optionee to
surrender to the Company an unexercised option, or any portion thereof, and to
receive from the Company in exchange therefor an amount equal to the excess of
the Fair Market Value on the exercise date of one share of Common Stock over the
option price per share times the number of shares covered by the stock option,
or portion thereof, which is surrendered. The date a notice of exercise is
received by the Company shall be the exercise date. Payment shall be made in
shares of Common Stock or in cash, or partly in shares and partly in cash,
valued at such Fair Market Value, all as shall be determined by the Committee.
Stock appreciation rights may be exercised from time to time upon actual receipt
by the Company of written notice of exercise stating the number of shares of
Common Stock subject to an exercisable option with respect to which the stock
appreciation right is being exercised. No fractional shares of Common Stock will
be issued in payment for stock appreciation rights, but instead cash will be
paid for a fraction or, if the Committee should so determine, the number of
shares will be rounded downward to the next whole share.
(c) Limitations on Exercisability. The Committee shall impose such
conditions upon the exercisability of stock appreciation rights as will result,
except upon the occurrence of an event contemplated by limited stock
appreciation rights granted pursuant to Paragraph 7(d) or contemplated by the
provisions of Paragraph 9, in the amount to be charged against the Company's
consolidated income by reason of stock appreciation rights not to exceed, in any
one calendar year, two percent of the Company's prior calendar year's
consolidated income before income taxes. The Committee also may impose, in its
discretion, such other conditions upon the exercisability of stock appreciation
rights as it may deem fit.
(d) Limited Stock Appreciation Rights. The Committee may grant limited
stock appreciation rights which are exercisable upon the occurrence of specified
contingent events. Such stock appreciation rights may provide for a different
method of determining appreciation, may specify that payment will be made only
in cash and may provide that related stock options or stock appreciation rights
or both are not exercisable while such limited stock appreciation
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<PAGE> 9
rights are exercisable. Unless the context otherwise requires, whenever the term
"stock appreciation right" is used in the Plan, such term shall include limited
stock appreciation rights.
8. TRANSFERS AND LEAVES OF ABSENCE
For purposes of the Plan: (a) a transfer of an employee from the Company
to a 50% or more owned subsidiary, partnership, venture or other affiliate
(whether or not incorporated) or vice versa, or from one such subsidiary,
partnership, venture or other affiliate to another, (b) a leave of absence, duly
authorized in writing by the Company, for military service or sickness or for
any other purpose approved by the Company if the period of such leave does not
exceed 90 days, or (c) a leave of absence in excess of 90 days, duly authorized
in writing by the Company, provided the employee's right to re-employment is
guaranteed either by statute or by contract, shall not be deemed a termination
of employment under the Plan.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR OTHER EVENTS
Upon changes in the Common Stock of the Company by reason of a stock
dividend, stock split, reverse split, recapitalization, merger, consolidation,
combination or exchange of shares, separation, reorganization or liquidation,
the number and class of shares available under the Plan as to which stock
options or stock appreciation rights may be granted (both in the aggregate and
to any one optionee), the number and class of shares under each option and the
option price per share, and the terms of stock appreciation rights, shall be
correspondingly adjusted by the Committee, such adjustments to be made in the
case of outstanding options without change in the total price applicable to such
options. In the event of a merger, consolidation, combination, reorganization or
other transaction in which the Company will not be the surviving corporation, an
optionee shall be entitled to options on that number of shares of stock in the
new corporation which the optionee would have received had the optionee
exercised all of the unexercised options available to the optionee under the
Plan, whether or not then exercisable, at the instant immediately prior to the
effective date of such transaction, and if such unexercised options had related
stock appreciation rights the optionee also will receive new stock appreciation
rights related to the new options. Thereafter, adjustments as provided above
shall relate to the stock options or stock appreciation rights of the new
corporation.
Except as otherwise specifically provided in the stock option or stock
appreciation right, in the event of a Change in Control, merger, consolidation,
combination, reorganization or other transaction in which the shareholders of
the Company will receive cash or securities (other than common stock) or in the
event that an offer is made to the holders of Common Stock of the Company to
sell or exchange such Common Stock for cash, securities or stock of another
corporation and such offer, if accepted, would result in the offeror becoming
the owner of (a) at least 50% of the outstanding Common Stock of the Company or
(b) such lesser percentage of the outstanding Common Stock which the Committee
in its sole discretion determines will materially adversely affect the market
value of the Common Stock after the tender or exchange offer, the Committee
shall, prior to the shareholders' vote on such transaction or prior to the
expiration date (without extensions) of the tender or exchange offer, (i)
accelerate the time of exercise so that all stock options and stock appreciation
rights which are outstanding shall
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<PAGE> 10
become immediately exercisable in full without regard to any limitations of time
or amount otherwise contained in the Plan or the stock options or stock
appreciation rights and/or (ii) determine that the stock options and stock
appreciation rights shall be adjusted and make such adjustments by substituting
for Common Stock of the Company subject to options and stock appreciation
rights, common stock of the surviving corporation or offeror if such stock of
such corporation is publicly traded or, if such stock is not publicly traded, by
substituting common stock of a parent of the surviving corporation or offeror if
the stock of such parent is publicly traded, in which event the aggregate option
price shall remain the same and the number of shares subject to option shall be
the number of shares which could have been purchased on the closing day of such
transaction or the expiration date of the offer with the proceeds which would
have been received by the optionee if the stock option had been exercised in
full prior to such transaction or expiration date and the optionee had exchanged
all of such shares in the transaction or sold or exchanged all of such shares
pursuant to the tender or exchange offer, and if any such option has related
stock appreciation rights, the stock appreciation rights shall likewise be
adjusted; provided, however, that, in the event of a Change in Control, the
acceleration of the exercisability of options and stock appreciation rights
under clause (i) of this paragraph shall occur automatically and without the
requirement of action by the Committee.
For purposes of this Plan, "Change in Control" means the occurrence of any
of the following events after the effective date of the amendment and
restatement of the Plan:
(i) Any "person," as such term is used in Section 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")
(other than the Company, any trustee or other fiduciary holding securities
under an employee benefit plan of the Company, or any company owned,
directly or indirectly, by the shareholders of the Company in
substantially the same proportions as their ownership of stock of the
Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company representing 20% or more of the combined voting power of the
Company's then outstanding securities;
(ii) During any period of two consecutive years commencing on July
14, 1998, individuals who at the beginning of such period constitute the
Board, and any new director (other than a director designated by a person
(as defined above) who has entered into an agreement with the Company to
effect a transaction described in subsections (i), (iii) or (iv) of this
definition) whose election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved cease for any reason to constitute at least a
majority thereof;
(iii) The shareholders of the Company have approved a merger or
consolidation of the Company with any other company and all other required
governmental approvals of such merger or consolidation have been obtained,
other than (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing
to represent (either by remaining
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<PAGE> 11
outstanding or by being converted into voting securities of the surviving
entity) more than 60% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately
after such merger or consolidation or (B) a merger or consolidation
effected to implement a recapitalization of the Company (or similar
transaction) in which no person (as defined above) becomes the beneficial
owner (as defined above) of more than 20% of the combined voting power of
the Company's then outstanding securities; or
(iv) The shareholders of the Company have approved a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets, and all other required governmental approvals of such transaction
have been obtained.
10. USE OF PROCEEDS
Proceeds from the sale of shares of Common Stock pursuant to exercise of
options granted under the Plan shall constitute general funds of the Company.
11. AMENDMENTS
The Board of Directors may amend, alter or discontinue the Plan, but no
amendment, alteration or discontinuation shall be made which would materially
impair the rights of any optionee under any option theretofore granted, without
the optionee's consent, or which, without the approval of the shareholders of
the Company, would:
(a) Except as is provided in Paragraph 9 of the Plan, increase the total
number of shares reserved for the purposes of the Plan or change the maximum
number of shares for which options may be granted to any optionee.
(b) Decrease the option price to less than 100% of Fair Market Value on
the date of grant of a stock option.
(c) Change the employees (or class of employees) eligible to receive
options under the Plan.
(d) Materially increase the benefits accruing to employees participating
under the Plan.
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<PAGE> 12
12. EFFECTIVENESS OF THE PLAN AND AMENDMENTS
The Plan became effective upon approval by the shareholders at the 1991
Annual Meeting. The Amendments proposed in 1995 became effective upon approval
by the shareholders at the 1995 Annual Meeting. Paragraph 6(f) as amended became
applicable to all options outstanding at the date of the 1995 Annual Meeting and
thereafter. Paragraph 6(i) as amended became effective upon approval by the
Board of Directors at its July 16, 1997 meeting. The amendment and restatement
of the Plan in connection with the reorganization of the Company and the change
of the name of the Company to R.H. Donnelley Corporation became effective as of
July 14, 1998.
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<PAGE> 1
Exhibit 10.17
R. H. DONNELLEY CORPORATION
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1998 DIRECTORS' STOCK PLAN
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<PAGE> 2
R. H. DONNELLEY CORPORATION
- --------------------------------------------------------------------------------
1998 DIRECTORS' STOCK PLAN
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<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Purpose........................................................... 1
2. Definitions....................................................... 1
3. Administration.................................................... 4
4. Shares Available Under the Plan................................... 4
5. Eligibility....................................................... 4
6. Initial and Annual Grants of Options.............................. 5
7. Grants of Deferred Shares and Restricted Stock.................... 6
8. Options Granted in Payment of Fees and Deferral of Fees
In Deferred Shares and Deferred Cash.............................. 7
9 Other Deferrals and Terms of Deferral Accounts.................... 10
10. Settlement of Deferral Accounts................................... 11
11. Amendment and Termination......................................... 12
12. General Provisions................................................ 12
</TABLE>
<PAGE> 3
R. H. DONNELLEY CORPORATION
- --------------------------------------------------------------------------------
1998 DIRECTORS' STOCK PLAN
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1. PURPOSE. The purpose of this 1998 Directors' Stock Plan (the "Plan") is
to aid R.H. Donnelley Corporation (the "Company") in attracting, retaining and
compensating non-employee directors and to enable such persons to increase their
proprietary interest in the Company. In furtherance of this purpose, the Plan
provides to each such director (i) an automatic annual grant of Deferred Shares
(as defined below), (ii) an automatic initial grant of an Option (as defined
below) to each newly elected or appointed non-employee director, (iii) an
automatic annual grant of an Option, (iv) an opportunity to elect deferred and
alternative forms of compensation in lieu of cash fees for service as a
director, including Options, Deferred Shares, and deferred cash, and (v) an
opportunity to defer delivery of shares otherwise deliverable upon exercise of
Options or settlement of Deferred Shares.
2. DEFINITIONS. In addition to the terms defined in Section 1 above, the
following capitalized terms used in the Plan have the respective meanings set
forth in this Section:
(a) "Act" means the Securities Exchange Act of 1934, as amended.
References to any provision of the Exchange Act or rule thereunder shall include
any successor provisions or rules.
(b) "Administrator" means the administrative committee specified in
Section 3(b) to whom the Board has delegated the authority to take action under
the Plan.
(c) "Beneficial Owner" has the meaning defined in Rule 13d-3 under
the Act.
(d) "Beneficiary" means any person (which may include trusts and is
not limited to one person) who has been designated by the Participant in his or
her most recent written beneficiary designation filed with the Company to
receive the benefits specified under the Plan in the event of the Participant's
death. If no Beneficiary has been designated who survives the Participant's
death, then Beneficiary means any person(s) entitled by will or, in the absence
thereof, the laws of descent and distribution to receive such benefits.
(e) "Board" means the Board of Directors of the Company.
(f) "Change in Control" means the occurrence of any of the following
events after the effective date of the Plan:
(i) Any "person," as such term is used in Section 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")
(other than the Company, any trustee or other fiduciary holding securities
under an employee benefit plan of the Company, or any company owned,
directly or indirectly, by the shareholders of the
<PAGE> 4
Company in substantially the same proportions as their ownership of stock
of the Company), is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of
the Company representing 20% or more of the combined voting power of the
Company's then outstanding securities;
(ii) During any period of two consecutive years commencing on July
14, 1998, individuals who at the beginning of such period constitute the
Board, and any new director (other than a director designated by a person
(as defined above) who has entered into an agreement with the Company to
effect a transaction described in subsections (i), (iii) or (iv) of this
definition) whose election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved cease for any reason to constitute at least a
majority thereof;
(iii) The shareholders of the Company have approved a merger or
consolidation of the Company with any other company and all other required
governmental approvals of such merger or consolidation have been obtained,
other than (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing
to represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) more than 60% of the combined
voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation or (B) a
merger or consolidation effected to implement a recapitalization of the
Company (or similar transaction) in which no person (as defined above)
becomes the beneficial owner (as defined above) of more than 20% of the
combined voting power of the Company's then outstanding securities; or
(iv) The shareholders of the Company have approved a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets, and all other required governmental approvals of such transaction
have been obtained.
(g) "Code" means the Internal Revenue Code of 1986, as amended.
References to any provision of the Code or regulation (including a proposed
regulation) thereunder shall include any successor provisions or regulations.
(h) "Deferral Account" means the account established and maintained
by the Company for Deferred Shares credited under Sections 7 and 8 and deferred
cash credited under Section 8. A Deferral Account shall include one or more
subaccounts, including a Deferred Share Account for forfeitable Deferred Shares
under Section 7, a Deferred Share Account for Deferred Shares that have become
nonforfeitable under Section 7 or that are at all times nonforfeitable under
Section 8(c), a Deferred Share Account for Deferred Shares resulting from Option
exercises under Section 9(a), and a Deferred Cash Account described in Section
8(d). The Deferral Account and subaccounts, and Deferred Shares and deferred
cash credited thereto, will
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<PAGE> 5
be maintained solely as bookkeeping entries by the Company to evidence unfunded
obligations of the Company.
(i) "Deferred Share" means a credit to a Participant's Deferred
Share Account under Sections 7 or 8 which represents the right to receive one
share of Stock upon settlement of such Account.
(j) "Disability" means a Participant's termination of service as a
director of the Company due to a physical or mental incapacity of long duration
which renders the Participant unable to perform the duties of a director of the
Company.
(k) "Effective Date" means July 14, 1998, the date the Plan becomes
effective.
(l) "Fair Market Value" means, with respect to Stock as of a given
date, the average of the high and low sales prices per share of Stock reported
on a consolidated basis for securities listed on the principal stock exchange or
market on which Stock is traded on the date immediately preceding the date as of
which such value is being determined or, if there is no sale on that date, then
on the last previous day on which a sale was reported, unless otherwise
determined by the Committee.
(m) "Option" means the right, granted to a Participant under Section
6 or 8, to purchase a specified number of shares of Stock at the specified
exercise price for a specified period of time under the Plan. All Options will
be non-qualified stock options.
(n) "Option Valuation Methodology" means the method for determining
the number of shares to be subject to Options, and the exercise price thereof,
granted in payment of Retainer Fees under Section 8(b).
(o) "Other Director Compensation" means fees payable to a director
in his or her capacity as such, other than Retainer Fees, for attending meetings
and other service on the Board and Board committees or otherwise.
(p) "Participant" means any person who, while a director, has been
granted an Option which remains outstanding, has Deferred Shares or cash
credited to his or her Deferral Account, or has elected to be granted Options in
payment of Retainer Fees or to defer payment of Retainer Fees and Other Director
Compensation in the form of Deferred Shares or cash under the Plan.
(q) "Plan Year" means, with respect to a Participant, the period
commencing at the time of election of the director at an annual meeting of
shareholders (or the election of a class of directors if the Company then has a
classified Board of Directors), or the director's initial appointment to the
Board if not at an annual meeting of shareholders, and continuing until the
close of business of the day preceding the next annual meeting of shareholders;
provided, however, that the initial Plan Year for directors serving on the
Effective Date shall begin at the opening of business on August 14, 1998.
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<PAGE> 6
(r) "Restricted Stock" means shares of Stock granted under Section
7, subject to a risk of forfeiture and restrictions on transfer for a specified
period.
(s) "Retainer Fees" means annual Board and chair retainer fees
payable to a director in his or her capacity as such for service on the Board
and Board committees.
(t) "Retirement" means a Participant's termination of service as a
director of the Company at or after age 65.
(u) "Stock" means Common Stock, par value $1.00 per share, or any
other equity securities of the Company substituted or resubstituted for Stock
under Section 12(b).
(v) "Valuation Date" shall mean the close of business on the last
business day of each calendar quarter and, in the case of any final distribution
from a Participant's Deferred Cash Account, the day preceding such distribution.
3. ADMINISTRATION.
(a) Authority. Both the Board and the Administrator (subject to the
ability of the Board to restrict the Administrator) shall administer the Plan in
accordance with its terms, and shall have all powers necessary to accomplish
such purpose, including the power and authority to construe and interpret the
Plan, to define the terms used herein, to prescribe, amend and rescind rules and
regulations, agreements, forms, and notices relating to the administration of
the Plan, and to make all other determinations necessary or advisable for the
administration of the Plan. The Administrator may perform any function of the
Board under the Plan, except for grants of Awards under Sections 6 and 7,
adoption of material amendments to the Plan under Section 11, or other functions
from time to time specifically reserved by the Board to itself. Any actions of
the Board or the Administrator with respect to the Plan shall be conclusive and
binding upon all persons interested in the Plan, except that any action of the
Administrator will not be binding on the Board. The Board and Administrator may
each appoint agents and delegate thereto powers and duties under the Plan,
except as otherwise limited by the Plan.
(b) Administrator. The Administrator shall be the Compensation and
Benefits Committee of the Board of Directors or such other committee as may
designated by the Board. No member of the Administrator shall be entitled to act
on or decide any matter relating solely to himself or herself or any of his or
her rights or benefits under the Plan. No bond or other security need be
required of the Administrator or any member thereof in any jurisdiction.
(c) Limitation of Liability. Each member of the Board and the
Administrator shall be entitled to, in good faith, rely or act upon any report
or other information furnished to him or her by any officer or other employee of
the Company or any subsidiary, the Company's independent certified public
accountants, or any legal counsel, executive compensation consultant, or other
professional retained by the Company to assist in the administration of the
Plan. To the maximum extent permitted by law, no member of the Board or the
Administrator, nor
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<PAGE> 7
any person to whom ministerial duties under the Plan have been delegated, shall
be liable to any person for any action taken or omitted in connection with the
interpretation and administration of the Plan.
4. SHARES AVAILABLE UNDER THE PLAN. The total number of shares of Stock
reserved and available for delivery under the Plan is 750,000, subject to
adjustment as provided in Section 12(b). Shares that may be delivered under the
Plan shall be treasury shares or shares acquired in the market for the account
of the Participant. For purposes of the Plan, shares that may be purchased upon
exercise of an Option or distributed in settlement of Deferred Shares will not
be considered to be available after such Option has been granted or Deferred
Share credited, except for purposes of delivery in connection with such Option
or Deferred Share; provided, however, that, if an Option expires for any reason
without having been exercised in full or Deferred Shares or shares of Restricted
Stock are forfeited or cancelled, the shares subject to the unexercised portion
of such Option or to the forfeited or cancelled Deferred Shares or Restricted
Stock will again be available for delivery under the Plan. The Company will use
its best efforts to ensure that, at any time shares are deliverable by the
Company under the Plan, the Company has a sufficient number of treasury shares
available for such delivery.
5. ELIGIBILITY. Each non-employee director of the Company who is paid fees
for service on the Board or a Board committee may participate in the Plan,
subject to the terms hereof. No person other than those specified in this
Section 5 will be eligible to participate in the Plan. The Administrator will
notify each person of his or her eligibility to participate in the Plan on an
elective basis not later than 15 days (or such other period as may be determined
by the Administrator) prior to any deadline for filing an election form.
6. INITIAL AND ANNUAL GRANTS OF OPTIONS. Options shall be granted to
non-employee directors in accordance with policies established from time to time
by the Board specifying the classes of directors to be granted Options, the
number of shares to be subject to each Option, and the time or times at which
such Options shall be granted.
(a) Initial Policy -- Option Grants. The initial policy with respect
to Options granted under this Section 6, effective as of the Effective Date and
continuing until modified or revoked by the Board, shall be as follows:
(i) Initial Grants. At the date of a person's initial election or
appointment as a member of the Board after the Effective Date, such
person, if he or she is a non-employee director eligible to participate
upon such election or appointment, shall be granted an Option to purchase
during the Option term 7,500 shares of Stock, subject to adjustment as
provided in Section 12(b). At the Effective Date, each person who is a
non-employee member of the Board eligible to participate at that date
shall be granted an Option to purchase during the Option term 7,500 shares
of Stock.
(ii) Annual Grants. At the date of each annual meeting of
shareholders at which a director is elected or reelected as a member of
the Board (or at which members of another class of directors are elected
or reelected, if the Company then has a classified
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<PAGE> 8
Board), such director, if he or she is a non-employee director eligible to
participate at that date and if he or she has not been granted an Option
under this Section 6(a) previously during the same calendar year, shall be
granted an Option to purchase during the Option term 7,500 shares of
Stock, subject to adjustment as provided in Section 12(b).
(b) Terms of Options Granted Under Section 6. Each Option granted
under this Section 6 shall be subject to the following terms and conditions:
(i) Exercise Price. The exercise price per share of Stock
purchasable under an Option will be equal to 100% of the Fair Market Value
of Stock on the date of grant of the Option.
(ii) Option Term. Each Option shall expire ten years after the date
of grant, or such earlier date as the Option may no longer be exercised
and cannot, by its terms, thereafter become exercisable.
(iii) Vesting and Exercisability. The Board may establish terms
regarding the times at which Options shall become vested and exercisable.
Unless otherwise determined by the Board, an Option granted under this
Section 6 and not previously forfeited shall vest and become exercisable
by a Participant as to one-third of the number of shares subject to the
Option at the close of business on the day preceding each of the three
annual meetings of shareholders following the date of grant of the Option,
rounded to the nearest number of whole shares. The foregoing
notwithstanding, an Option not previously forfeited shall vest and become
exercisable on an accelerated basis upon a Change in Control or upon the
termination of the Participant's service as a director due to death,
Disability or Retirement. Unless otherwise determined by the Board, an
Option will cease to vest and become exercisable upon the termination of
the Participant's service prior to a Change in Control for any reason
other than death, Disability or Retirement, and the portion of that has
not vested and become exercisable at the time of such termination shall be
forfeited.
(iv) Payment. The exercise price of an Option shall be paid to the
Company either in cash or by the surrender of Stock, or any combination
thereof, or in such other form or manner as may be established by the
Administrator, unless otherwise determined by the Board.
7. GRANTS OF DEFERRED SHARES AND RESTRICTED STOCK. Deferred Shares and/or
Restricted Stock shall be granted to non-employee directors in accordance with
policies established from time to time by the Board specifying the classes of
directors to be granted such Awards, the number of Deferred Shares or shares of
Restricted Stock to be granted, and the time or times at which such Awards shall
be granted.
(a) Initial Policy -- Grant of Deferred Shares. The initial policy
with respect to Awards under this Section 7, effective as of the Effective Date
and continuing until modified or revoked by the Board, shall be as follows:
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<PAGE> 9
(i) Initial Grant. At the Effective Date, each person who is a
non-employee member of the Board eligible to participate at that date
shall be granted 7,500 Deferred Shares.
(ii) Annual Grants. At the date of each annual meeting of
shareholders at which a director is elected or reelected as a member of
the Board (or at which members of another class of directors are elected
or reelected, if the Company then has a classified Board), such director,
if he or she is a non-employee director eligible to participate at that
date and if he or she has not been granted Deferred Shares or Restricted
Stock under this Section 7(a) previously during the same calendar year,
shall be granted 7,500 Deferred Shares, unless the director has elected,
prior to such annual meeting of shareholders, to receive such grant in the
form of an equal number of shares of Restricted Stock. The number of
shares subject to such annual grants shall be subject to adjustment as
provided in Section 12(b).
(b) Terms of Deferred Shares and Restricted Stock Granted Under
Section 7. Deferred Shares granted under this Section 7 shall be subject to the
terms and conditions of Deferred Shares specified in Sections 9(b), (c), and
(d), unless otherwise determined by the Board. Deferred Shares and Restricted
Stock granted under this Section 7 shall also be subject to the following
additional terms and conditions:
(i) Vesting and Forfeiture. The Board may establish terms regarding
the times at which Deferred Shares and Restricted Stock shall become
vested and non-forfeitable. Unless otherwise determined by the Board, an
Award granted under this Section 7 and not previously forfeited shall
become vested and non-forfeitable as to one-third of the number of
Deferred Shares or shares of Restricted Stock at the close of business on
the day preceding each of the three annual meetings of shareholders
following the date of grant of such Award, rounded to the nearest number
of whole shares. The foregoing notwithstanding, an Award of Deferred
Shares or Restricted Stock not previously vested or forfeited shall vest
and become non-forfeitable on an accelerated basis upon a Change in
Control or upon the termination of the Participant's service as a director
due to death, Disability or Retirement. Unless otherwise determined by the
Board, an Award of Deferred Shares or Restricted Stock not previously
vested or forfeited will cease to vest and will be forfeited upon the
termination of the Participant's service prior to a Change in Control for
any reason other than death, Disability or Retirement.
(ii) Deferred Shares Credited As a Result of Dividend Equivalents.
Unless otherwise determined by the Board, Deferred Shares credited as a
result of dividend equivalents under Section 9(b) shall be subject to the
same terms, including risk of forfeiture, as the Deferred Shares with
respect to which the dividend equivalents were credited.
(iii) Dividends on Restricted Stock. Unless otherwise determined by
the Board, dividends on Restricted Stock declared and paid prior to the
lapse of the risk of forfeiture on such Restricted Stock shall be
automatically reinvested in additional shares of
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<PAGE> 10
Restricted Stock, which shall be subject to the same terms, including risk
of forfeiture, as the Restricted Stock on which the dividend was paid.
(iv) Awards Nontransferable. Deferred Shares and Restricted Stock
shall be nontransferable by the Participant at any time that the Award
remains subject to a risk of forfeiture.
8. OPTIONS GRANTED IN PAYMENT OF FEES AND DEFERRAL OF FEES IN DEFERRED
SHARES AND DEFERRED CASH. Each director of the Company who is eligible under
Section 5 may elect, in accordance with Section 8(a), to be paid Retainer Fees
in the form of Options under Section 8(b) or to defer receipt of Retainer Fees
and Other Director Compensation in the form of Deferred Shares under Section
8(c) or deferred cash under Section 8(d).
(a) Elections. A director shall elect to participate and the terms
of such participation by filing an election with the Company prior to the
beginning of a Plan Year (the initial Plan Year will begin August 14, 1998 and
Plan Years thereafter generally will begin at each annual meeting of
shareholders or, in the case of a new director, upon initial appointment) or at
such other date as may be specified by the Administrator, provided that any date
so specified shall ensure effective deferral of taxation and otherwise comply
with applicable laws.
(i) Effect and Irrevocability of Elections. Elections shall be
deemed continuing, and therefore applicable to Plan Years after the
initial Plan Year covered by the election, until the election is modified
or superseded by the Participant. Elections other than those subject to
Section 9(d) shall become irrevocable at the commencement of the Plan Year
to which an election relates, unless the Administrator specifies a
different time. Elections relating to the time of settlement of a Deferral
Account shall become irrevocable at the time specified in Section 9(d).
Elections may be modified or revoked by filing a new election prior to the
time the election to be modified or revoked has become irrevocable. The
latest election filed with the Administrator shall be deemed to revoke all
prior inconsistent elections that remain revocable at the time of filing
of the latest election.
(ii) Matters To Be Elected. The Administrator will provide a form of
election which will permit a director to make appropriate elections with
respect to all relevant matters under this Section 8.
(iii) Time of Filing Elections. An election must be received by the
Administrator prior to the date specified by the Administrator. Under no
circumstances may a Participant defer compensation to which the
Participant has attained, at the time of deferral, a legally enforceable
right to current receipt of such compensation.
(b) Options Granted in Payment of Retainer Fees. A Participant who
has elected to be paid a specified amount of Retainer Fees in the form of
Options shall be granted, at the close of business on the day the Participant's
Plan Year commences an Option to purchase the number of whole shares of Stock
determined in accordance with the Option Valuation
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<PAGE> 11
Methodology specified by the Board. Each Option granted under this Section 8(b)
shall be subject to the following terms and conditions:
(i) Option Valuation Methodology. The Board shall determine the
Option Valuation Methodology which will be used to determine the number of
Options granted and the Option exercise price. The Option Valuation
Methodology may be based upon a valuation of the Option, a discounting of
the aggregate exercise price of the Options by the amount of Retainer Fees
to be paid in the form of Options, or such other methodology as may be
deemed reasonable for purposes of this Section 8(b).
(ii) Option Term. Each Option will expire ten years after the date
of grant; provided, however, that, unless otherwise determined by the
Board, any portion of an Option that is not yet exercisable at the date a
Participant ceases to serve as a director for any reason will expire at
the date such service ceases; and, provided further, that, unless
otherwise determined by the Board, any portion of an Option that is not
yet exercisable at the date a Participant ceases to serve as chair or a
member of a Board committee will, to the extent specified in Section
8(b)(v), expire at the date such service ceases.
(iii) Vesting and Exercisability. Each Option will vest and become
exercisable as to 25% of the underlying shares on the June 30, September
30, December 31, and March 31 following the date of grant; provided,
however, that, in the case of a Plan Year which begins on or after June 30
and before September 30, the vesting percentage shall be 33%, and in the
case of a Plan Year which begins on or after September 30 and before
December 31, the vesting percentage shall be 50%; and provided further,
that an Option will become fully vested and exercisable at the close of
business on the last day of the Plan Year in which it was granted. The
number of shares as to which the Option becomes vested and exercisable
will be rounded to the nearest whole number. The foregoing
notwithstanding, upon a Change in Control a Participant's Option not
previously forfeited shall vest and become exercisable in full, and (ii),
upon termination of the Participant's service as a director due to death,
Disability, or Retirement, that portion of the Option which would become
vested and exercisable on the last day of the calendar quarter in which
such death, Disability, or Retirement occurred will become immediately
vested and exercisable. Unless otherwise determined by the Board, an
Option will cease to further vest and become exercisable upon the
termination of the Participant's service as a director prior to a Change
in Control for any reason, and the portion that has not vested and become
exercisable at the time of such termination shall be forfeited.
(iv) Exercise Price. The exercise price per share of Stock
purchasable under an Option will be determined in accordance with the
Option Valuation Methodology. The exercise price of an Option shall be
paid to the Company either in cash or by the surrender of Stock, or any
combination thereof, or in such other form or manner as may be established
by the Administrator; provided, however, that, unless otherwise determined
by the Administrator, shares shall not be surrendered in payment of the
exercise price if such surrender would result in additional accounting
expense to the Company.
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<PAGE> 12
(v) Changes in Fees; Changes in Service as a Committee Chair. If the
amount of Retainer Fees is increased during a Plan Year, or if a Director
is appointed chair of a Board committee such that an additional Retainer
Fee is payable during a Plan Year, such increased or additional fees will
not be paid in the form of Options. If a Director has been granted an
Option in respect of a Plan Year in payment of Retainer Fees which
included committee-related fees for service as chair or a member of any
Board committee, and during such Plan Year he or she ceases such service
but remains on the Board, the Option will expire in part at the time such
service ceases, to the extent of that portion of the Option which is not
yet exercisable multiplied by a fraction the numerator of which is the
amount of committee-related fees included in such Retainer Fees and the
denominator of which is the total amount of such Retainer Fees.
(vi) Service During Part of a Quarter. If a Participant ceases to
serve as a director or on committee at a date other than a vesting date
for the Option and if the Board does not exercise its discretion to permit
vesting of the Participant's Option in consideration for the Participant's
service in that final quarterly period, the Participant shall be entitled
to payment in cash for his or her service in that final quarterly period
if and to the extent then provided in the Company's regular non-employee
director compensation policies.
(c) Deferral of Retainer Fees and Other Director Compensation in the
Form of Deferred Shares. If a Participant has elected to defer receipt of a
specified amount of Retainer Fees or Other Director Compensation in the form of
Deferred Shares, a number of Deferred Shares shall be credited to the
Participant's Deferred Share Account, as of the date such Retainer Fees or Other
Director Compensation otherwise would have been payable to the Participant but
for such election to defer, equal to (i) such amount otherwise payable divided
by (ii) the Fair Market Value of a share of Stock at that date. Deferred Shares
credited under this Section 8(c) shall be subject to the terms and conditions of
Deferred Shares specified in Sections 9(b), (c), and (d). The right and interest
of each Participant in Deferred Shares credited to the Participant's Deferred
Share Account under this Section 8(c) at all times will be nonforfeitable.
(d) Deferral of Retainer Fees and Other Director Compensation in the
Form of Deferred Cash. If a Participant has elected to defer receipt of a
specified amount of Retainer Fees or Other Director Compensation in the form of
deferred cash, an amount equal to such specified amount shall be credited to the
Participant's Deferred Cash Account as of the date such Retainer Fees or Other
Director Compensation otherwise would have been payable to the Participant but
for such election to defer. As of the close of business on each Valuation Date,
interest shall be credited to such Deferred Cash Account in an amount equal to
the average daily balance in such Deferred Cash Account since the last Valuation
Date multiplied by the interest rate as specified by the Board and applicable to
the period since the last Valuation Date. The right and interest of each
Participant relating to his or her Deferred Cash Account at all times will be
nonforfeitable.
(e) Cessation of Service as a Director. If any Retainer Fee or Other
Director Compensation otherwise subject to an election would be paid to a
Participant after he or she has
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<PAGE> 13
ceased to serve as a director, such payment shall not be subject to deferral
under this Section 8, but shall instead be paid in accordance with the Company's
regular non-employee director compensation policies.
9. OTHER DEFERRALS AND TERMS OF DEFERRAL ACCOUNTS.
(a) Deferral of Certain Option Shares. Upon any exercise of an
Option or an option granted under any other plan or program of the Company by a
non-employee director, if the exercise price of such option is paid by surrender
of shares of Stock to the Company, the director may elect to defer receipt of
all or a portion of the shares deliverable upon exercise of the option in excess
of the number surrendered in payment of the exercise price. In such case, the
number of shares deferred shall be credited to the Participant's Deferred Share
Account.
(b) Dividend Equivalents on Deferred Shares. Dividend equivalents
will be credited on Deferred Shares credited to a Participant's Deferred Share
Account(s) as follows:
(i) Cash and Non-Share Dividends. If the Company declares and pays a
dividend on Stock in the form of cash or property other than shares of
Stock, then a number of additional Deferred Shares shall be credited to a
Participant's Deferred Share Account(s) as of the payment date for such
dividend equal to (i) the number of Deferred Shares credited to the
respective Account as of the record date for such dividend, multiplied by
(ii) the amount of cash plus the Fair Market Value of any property other
than shares actually paid as a dividend on each share at such payment
date, divided by (iii) the Fair Market Value of a share of Stock at such
payment date.
(ii) Share Dividends and Splits. If the Company declares and pays a
dividend on Stock in the form of additional shares of Stock, or there
occurs a forward split of Stock, then a number of additional Deferred
Shares shall be credited to the Participant's Deferred Share Account(s) as
of the payment date for such dividend or forward Stock split equal to (i)
the number of Deferred Shares credited the respective Account as of the
record date for such dividend or split multiplied by (ii) the number of
additional Shares actually paid as a dividend or issued in such split in
respect of each Share.
(c) Reallocation of Accounts. A Participant shall have no right to
have amounts credited as cash to the Participant's Deferred Cash Account
reallocated or switched to his or her Deferred Share Account or amounts credited
to the Participant's Deferred Share Account reallocated or switched to his or
her Deferred Cash Account, except as may be permitted by the Administrator.
(d) Elections as to Settlement. Each Participant, while still a
director of the Company, shall file an election with the Administrator
specifying the time or times at which the Participant's Deferral Account will be
settled, following the Participant's termination of service as a director of the
Company, and whether distribution will be in a single lump sum or in a number of
annual installments not exceeding ten; provided, however, that, if no valid
election has been filed as to the time of settlement of a Participant's Deferral
Account or any portion thereof, such De-
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<PAGE> 14
ferral Account or portion thereof shall be distributed in a single lump sum on
the first business day of the year following the year in which the Participant
ceases to serve as a director. If installments are elected, such installments
must be annual installments commencing not later than the first year following
the year in which the Participant ceases to serve as a director (on such annual
installment date as may be specified by the Administrator) and extending over a
period not to exceed ten years.
(i) Matters Covered by Election. Subject to the terms of the Plan,
the Administrator shall determine whether all deferrals under the Plan
must be subject to a single election as to the time or times of
settlement, or whether settlement elections may relate to a specified
sub-account (i.e., the Deferred Share Account or the Deferred Cash
Account) and/or a specified Plan Year. If the Administrator permits
elections to relate to a specified Plan Year, such election shall apply to
the amounts originally credited to the specified subaccount in respect of
such Plan Year and to any additional amounts credited as dividend
equivalents or interest in respect of such originally credited amounts and
previously credited additional amounts.
(ii) Modifying Elections. A Participant may modify a prior election
as to the time at which a Participant's Deferral Account (including a
specified subaccount) will be settled at any time prior to the time the
Participant ceases to serve as a director of the Company, subject to such
requirements as may be specified by the Administrator. Such modification
shall be made by filing a new election with the Administrator. The
foregoing notwithstanding, the Administrator may disapprove or limit
elections under this Section 9(d) in order to ensure that the Participant
will not be deemed to have constructively received compensation in respect
of the Participant's Deferral Account prior to settlement.
(e) Election Forms. Elections under the Plan shall be made in
writing on such form or forms as may be specified from time to time by the
Administrator.
(f) Statements. The Administrator will furnish statements to each
Participant reflecting the amount credited to a Participant's Deferral Account,
transactions therein, and other related information no less frequently than once
each calendar year.
(g) Fractional Shares. The amount of Deferred Shares credited to a
Deferred Share Account shall include fractional shares calculated to at least
three decimal places.
10. SETTLEMENT OF DEFERRAL ACCOUNTS. The Company will settle a
Participant's Deferral Account by making one or more distributions to the
Participant (or his or her Beneficiary, following Participant's death) at the
time or times, in a lump sum or installments, as specified in the Participant's
election filed in accordance with Section 9(d); provided, however, that a
Deferral Account will be settled at times earlier than those specified in such
election in accordance with Sections 10(b), (c), and (d).
(a) Form of Distribution. Distributions in respect of a
Participant's Deferred Share Account shall be made only in shares of Stock,
together with cash in lieu of any fractional
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<PAGE> 15
share remaining at a time that less than one whole Deferred Share is credited to
such Deferred Share Account. Shares may be delivered in certificate form to a
Participant (or his or her Beneficiary) or to a nominee for the account of the
Participant (or his or her Beneficiary), or in such other manner as the
Administrator may determine. Distributions in respect of a Participant's
Deferred Cash Account shall be made only in cash.
(b) Death. If a Participant ceases to serve as a director due to
death or dies prior to distribution of all amounts from his or her Deferral
Account, the Company shall make a single lump-sum distribution to the
Participant's Beneficiary. Any such distribution shall be made as soon as
practicable following notification to the Company of the Participant's death.
(c) Financial Emergency and Other Payments. Other provisions of the
Plan notwithstanding, if, upon the written application of a Participant, the
Board determines that the Participant has a financial emergency of such a
substantial nature and beyond the Participant's control that payment of amounts
previously deferred under the Plan is warranted, the Board may direct the
payment to the Participant of all or a portion of the balance of a Deferral
Account and the time and manner of such payment.
(d) Change in Control. In the event of a Change in Control, payments
in settlement of any Deferral Account (including a Deferral Account with respect
to which one or more installment payments have previously been made) shall be
made within fifteen (15) business days following such Change in Control.
11. AMENDMENT AND TERMINATION. The Board may, with prospective or
retroactive effect, amend, alter, suspend, discontinue, or terminate the Plan at
any time without the consent of Participants, shareholders, or any other person;
provided, however, that, without the consent of a Participant, no such action
shall materially and adversely affect the rights of such Participant with
respect to any rights to payment of amounts credited to such Participant's
Deferral Account. The foregoing notwithstanding, the Board may, in its sole
discretion, terminate the Plan (in whole or in part) and, and may distribute to
any Participant (in whole or in part, and whether or not in connection with a
termination of the Plan) the amounts credited to the Participant's Deferral
Account.
12. GENERAL PROVISIONS.
(a) Limits on Transferability. Options, Deferred Shares, Restricted
Stock and all other rights under the Plan will not be transferable by a
Participant except by will or the laws of descent and distribution, or to a
Beneficiary in the event of a Participant's death, and will not otherwise be
subject to alienation, anticipation, encumbrance, garnishment, attachment, levy,
execution or other legal or equitable process, nor subject to the debts,
contracts, liabilities or engagements, or torts of any Participant or his or her
Beneficiary. Any attempt to alienate, sell, transfer, assign, pledge, garnish,
attach or take any other action subject to legal or equitable process or
encumber or dispose of any interest in the Plan shall be void. The foregoing
notwithstanding, the Administrator may permit a Participant to transfer Options,
Deferred Shares, and related rights to one or more trusts, partnerships, or
family members during the lifetime of the
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<PAGE> 16
Participant solely for estate planning purposes, but only if and to the extent
then consistent with the registration of any offer and sale of shares related
thereto on Form S-8, Form S-3, or such other registration form of the Securities
and Exchange Commission as may then be filed and effective with respect to the
Plan. The Company may rely upon the beneficiary designation last filed in
accordance with this Section 12(a).
(b) Adjustments. In the event that any large, special and
non-recurring dividend or other distribution (whether in the form of cash,
Stock, or other property), recapitalization, forward or reverse split,
reorganization, merger, consolidation, spin-off, combination, repurchase, share
exchange, liquidation, dissolution or other similar corporate transaction or
event affects the Stock such that an adjustment is determined by the Board to be
appropriate in order to prevent dilution or enlargement of a Participant's
rights under the Plan, then the Board shall, in such manner as it may deem
equitable, adjust any or all of (i) the number and kind of shares of Stock
reserved and available for delivery under the Plan and to be subject to Options,
Deferred Shares, and Restricted Stock thereafter granted or credited, (ii) the
number of shares subject to Options automatically granted under Section 6(a) and
the number of Deferred Shares and/or shares of Restricted Stock automatically
granted under Section 7(a), (iii) the number and kind of shares of Stock
deliverable upon exercise of outstanding Options, and the exercise price per
share thereof (provided that no fractional shares will be delivered upon
exercise of any Option), (iv) the number and kind of shares of Stock to be
delivered upon settlement of outstanding Deferred Shares (taking into account
any Deferred Shares credited as dividend equivalents under Section 9(b)), and
(v) the number and kind of shares outstanding as Restricted Stock.
(c) Receipt and Release. Payments (in any form) to any Participant
or Beneficiary in accordance with the provisions of the Plan shall, to the
extent thereof, be in full satisfaction of all claims for the compensation
deferred and relating to the Deferral Account to which the payments relate
against the Company, the Board, or the Administrator, and the Administrator may
require such Participant or Beneficiary, as a condition to such payments, to
execute a receipt and release to such effect. In the case of any payment under
the Plan of less than all amounts then credited to a Deferral Account in the
form of Deferred Shares, the amounts paid shall be deemed to relate to the
Deferred Shares credited to the Account at the earliest time.
(d) Unfunded Status of Plan; Creation of Trusts. The Plan is
intended to constitute an "unfunded" plan for deferred compensation and
Participants shall rely solely on the unsecured promise of the Company for
payment hereunder. With respect to any payment not yet made to a Participant
under the Plan, nothing contained in the Plan shall give a Participant any
rights that are greater than those of a general unsecured creditor of the
Company; provided, however, that the Board may authorize the creation of trusts
or make other arrangements to meet the Company's obligations under the Plan,
which trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan unless the Board otherwise determines with the consent of
each affected Participant.
(e) Compliance. The Company shall have no obligation to settle any
Deferral Account of a Participant (in any form) until all legal and contractual
obligations of the Company
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<PAGE> 17
relating to establishment of the Plan and such settlement shall have been
complied with in full. In addition, the Company shall impose such restrictions
on Stock delivered to a Participant hereunder and any other interest
constituting a security as it may deem advisable in order to comply with the
Securities Act of 1933, as amended, the requirements of the New York Stock
Exchange or any other stock exchange or automated quotation system upon which
the Stock is then listed or quoted, any state securities laws applicable to such
a transfer, any provision of the Company's Certificate of Incorporation or
Bylaws, or any other law, regulation, or binding contract to which the Company
is a party.
(f) Other Participant Rights. No Participant shall have any of the
rights or privileges of a shareholder of the Company under the Plan, including
as a result of the grant of an Option or crediting of Deferred Shares or other
amounts to a Deferral Account, or the creation of any Trust and deposit of Stock
therein, except at such time as such Option may have been duly exercised or
Stock may be actually delivered in settlement of a Deferral Account, except that
a Participant granted Restricted Stock shall have rights of a shareholder except
to the extent that those rights are limited by the terms of the Plan and the
agreement relating to the Restricted Stock. No provision of the Plan, document
relating to the Plan, or transaction hereunder shall confer upon any Participant
any right to continue to serve as a director of the Company or in any other
capacity with the Company or a subsidiary or to be nominated for reelection as a
director, or interfere in any way with the right of the Company to increase or
decrease the amount of any compensation payable to such Participant. Subject to
the limitations set forth in Section 12(a) hereof, the Plan shall inure to the
benefit of, and be binding upon, the parties hereto and their successors and
assigns.
(g) Continued Service as an Employee. If a Participant ceases to
serve as a director and, immediately thereafter, is employed by the Company or
any subsidiary, then such Participant will not be deemed to have ceased to serve
as a director or as chair or as a member of a Board committee at that time, and
his or her continued employment by the Company or any subsidiary will be deemed
to be continued service as a director or chair or a member of a Board committee;
provided, however, that, for purposes of Section 5, such former director will
not be deemed to be a non-employee director eligible for further grants of
Awards.
(h) Governing Law. The validity, construction, and effect of the
Plan and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the State of Delaware, without giving effect to
principles of conflicts of laws, and applicable provisions of federal law.
(i) Limitation. A Participant and his or her Beneficiary shall
assume all risk in connection with any decrease in value of Options or a
Deferral Account and neither the Company, the Board nor the Administrator shall
be liable or responsible therefor.
(j) Construction. The captions and numbers preceding the sections of
the Plan are included solely as a matter of convenience of reference and are not
to be taken as limiting or extending the meaning of any of the terms and
provisions of the Plan. Whenever
- 15 -
<PAGE> 18
appropriate, words used in the singular shall include the plural or the plural
may be read as the singular.
(k) Severability. In the event that any provision of the Plan shall
be declared illegal or invalid for any reason, said illegality or invalidity
shall not affect the remaining provisions of the Plan but shall be fully
severable, and the Plan shall be construed and enforced as if said illegal or
invalid provision had never been inserted herein.
(l) Status. The establishment and maintenance of, or allocations and
credits to, the Deferral Account of any Participant shall not vest in any
Participant any right, title or interest in and to any Plan assets or benefits
except at the time or times and upon the terms and conditions and to the extent
expressly set forth in the Plan and in accordance with the terms of any Trust.
(m) Nonexclusivity of the Plan. The adoption of the Plan by the
Board shall not be construed as creating any limitation on the power of the
Board to adopt such other compensatory arrangements for directors as it may deem
desirable.
- 16 -
<PAGE> 1
Exhibit 10.18
R.H. DONNELLEY CORPORATION
ANNUAL INCENTIVE PLAN
AS AMENDED AND RESTATED
<PAGE> 2
R.H. DONNELLEY CORPORATION
ANNUAL INCENTIVE PLAN
AS AMENDED AND RESTATED
The purpose of this Plan is to promote the interests of the
shareholders and all others who benefit by the continuing success of R.H.
Donnelley Corporation ("R.H. DONNELLEY") and its subsidiaries (collectively, the
"COMPANY") by providing incentive to those executives whose decisions and
actions most significantly affect the growth and profitability of the Company.
1. PARTICIPANTS
The participants in this Plan will be those officers and managers of
the Company, its profit centers, resource units and profit center groups whose
decisions and actions most significantly affect corporate growth and
profitability, none of whom shall be a participant in any other annual
corporate-wide management cash incentive compensation plan. Except as set forth
below, each year in November the senior officers of the Company shall recommend
to the Chief Executive Officer employees for participation in the Plan for the
following year and the amount of target bonus opportunity for each of them under
the Plan.
As a result of the transaction (the "SPINOFF") separating R.H.
Donnelley from its former parent company and establishing R.H. Donnelley as an
independent public company, a special performance period for incentive awards
under the Plan shall be established (the "INITIAL DONNELLEY PERIOD"), which
shall extend from July 1, 1998 through December 31, 1998. Participants shall be
selected for awards with respect to the Initial Donnelley Period prior to August
15, 1998.
To be recommended, an employee will normally (a) be earning in excess
of $100,000 gross compensation, and (b) be an officer of R.H. Donnelley or have
a reporting relationship to an officer, or (c) be a general manager of a Company
subsidiary, profit center, resource unit or profit center group or have a
reporting relationship to a general manager.
Such recommended employees as are approved by the Chief Executive
Officer shall then be recommended to the Compensation and Benefits Committee
(the "COMMITTEE") of the Board of Directors by the Chief Executive Officer as
participants in this Plan as of January 1 of the following year or, with respect
to the Initial Donnelley Period, prior to August 15, 1998.
The Committee shall be composed solely of two or more "outside
directors" as defined in the regulations under Section 162(m) of the Internal
Revenue Code (the "CODE").
<PAGE> 3
2. INCENTIVE AWARDS
Each participant's target bonus opportunity shall be stated as a dollar
amount. Participants may earn amounts ("AWARDS") equal to, greater than or less
than the target bonus opportunity as follows:
(a) Participants shall earn their award on the basis of one or
more of (i) the following performance measures (the "CORPORATE
PERFORMANCE MEASURES") established by the Committee for each year or
performance period: earnings per share, net income, operating income,
revenue, working capital, return on equity, return on assets, total
return to shareholders, average sales growth and cash flow, each of
which may be on a corporate-wide basis or with respect to one or more
operating units, divisions, acquired businesses, minority investments,
partnerships or joint ventures; and (ii) other quantitative or
qualitative measures, but only with respect to participants other than
those expected to be "covered employees," as defined in the regulations
under Section 162(m) of the Code, whom the Committee determines at the
time of grant are likely to receive compensation a substantial portion
of which would be nondeductible by the Company ("SPECIAL
PARTICIPANTS").
(b) Participants who are or who report to operating unit
executive or senior vice presidents (or their functional equivalent)
may earn their award on the basis of a combination of corporate and
operating unit or individual performance measures established by the
Committee.
(c) Participants other than Special participants may earn
their award on the basis of a combination of corporate and operating
unit or individual performance measures as recommended by the operating
unit executive or senior vice presidents of R.H. Donnelley and as
approved by the Chief Executive Officer.
(d) Each year the Chief Executive Officer shall recommend to
the Committee for its approval, such approval to be given no later than
March 31 of each year (or, with respect to the Initial Donnelley
Period, prior to August 15, 1998), (i) a minimum amount ("FLOOR"), a
target amount ("TARGET") and, if desired, a maximum amount ("CEILING")
for that year's or period's corporate performance measures, and (ii)
minimum, target and, if desired, ceiling, performance measures for each
Company division, profit center and/or resource unit having employees
who are participants in the Plan, provided that the Committee may
delegate to the Chief Executive Officer the establishment of the
performance measures referred to in this clause (ii). Performance
measures for individual divisions, profit centers and/or resource units
may be consolidated, as appropriate, for the purpose of establishing
corporate, operating unit or sub-unit measures. The floor, target and
ceiling figures may, but need not, be based upon budgeted operation
results, and will be established solely for the purpose of
administering the Plan.
(e) Awards shall be earned as follows in relation to the
pre-established performance measures approved by the Committee: no
award will be earned
2
<PAGE> 4
unless the performance floor for that portion of the award is exceeded;
the target bonus opportunity is earned if the target amount is
achieved; an amount greater or less than the target bonus opportunity
can be earned for a level of performance above the performance floor as
determined by established performance measures.
(f) The Chief Executive Officer may adjust individual awards
earned under the performance measures upward or downward, by an amount
of up to 20% of the participant's target bonus opportunity, to account
for demonstrated quality of performance or the occurrence of unusual or
unforeseen circumstances, except that no such adjustment may be made
with respect to awards earned by Special Participants. The Committee
may adjust awards earned by Special Participants under the performance
measures downward only. The total of Plan awards for any year may not
exceed 110% of the total earned amount. Notwithstanding the above, in
no event shall a Change in Control (as defined below) constitute the
occurrence of unusual or unforeseen circumstances which would justify
an upward or downward adjustment in an award.
(g) In calculating whether the performance targets for Special
Participants have been met, the Committee (i) will make appropriate
conforming adjustments in the performance measures or the targets to
exclude the effects of any corporate transactions such as acquisitions,
divestitures and reorganizations, and (ii) will not take into account
extraordinary accounting changes or items (as defined under generally
accepted accounting principles), restructuring charges, nonrecurring
events or any unusual events affecting earnings by more than 10%, which
in any such case affect the results that otherwise would have been
attained under the applicable performance measure; provided, however,
that this provision will apply to awards granted to Special
Participants only if and to the extent that such awards will not be
disqualified as "performance-based compensation" under Code Section
162(m).
3. LIMITATION ON THE AMOUNT OF INCENTIVE AWARDS
The total of all payments to an individual participant under this plan in
any calendar year shall not exceed $3,000,000.
4. MISCELLANEOUS
(a) Each participant will be notified in writing at the time
of his or her approval as a participant, of the amount and terms of his
or her salary and guideline bonus opportunity.
(b) Payment of awards earned by participants will be made as
soon as practicable after the end of the year or period in which they
have been earned and approved by the Committee.
(c) If a participant dies, retires, is assigned to a different
position, is granted a leave of absence or if the participant's
employment is otherwise terminated (except for "Cause" (as defined
below) by the Company), a pro rata share of the participant's award
based on the period of actual participation may, at the Committee's
discretion, be paid to the participant after the end of the year if
3
<PAGE> 5
it would have become earned and payable had the participant's
employment status not changed. Notwithstanding the above, if as a
result of a Change in Control a participant retires, is assigned to a
different position, is placed on a leave of absence or if the
participant's employment is terminated before the end of the calendar
year (except for Cause), he or she shall receive a full award for that
year. Termination of employment by the Company without Cause after the
commencement of negotiations with a potential acquiror or business
combination partner will be deemed to be a termination of employment as
a result of a Change in Control, if such negotiations result in a
transaction with such acquiror or business combination partner
constituting a Change in Control.
(d) The Chief Executive Officer may approve participation for
promoted, transferred or newly-hired employees for less than a year
ending December 31 except where the annualized compensation level of
such participant may require Committee approval.
(e) At the end of any year or performance period, the
Committee, on the recommendation of the Chief Executive Officer, may
increase or decrease the amount of award payments to any or all
participants if in its sole judgment there have been extraordinary
occurrences, not anticipated when awards were approved at the start of
the year or performance period, which have significantly affected
earnings or other performance measures, except that no increase may be
made with respect to awards earned by Special Participants.
Notwithstanding the above, in no event shall a Change in Control
constitute an extraordinary occurrence which would justify an increase
or decrease in the amount of award payments.
(f) The Committee may terminate this Plan at any time, to
become effective as of January 1 of the following year:
(g) For purposes of this Plan, the term "Cause" shall have the
meaning defined in any employment agreement between the participant and
the Company or a subsidiary then in effect or, if no such employment
agreement is then in effect, "Cause" shall mean:
(i) The participant's willful and continued failure
substantially to perform the duties of his or her position after
notice and opportunity to cure;
(ii) Any willful act or omission by the participant
constituting dishonesty, fraud or other malfeasance, which in any
such case is demonstrably injurious to the financial condition or
business reputation of the Company or any of its affiliates; or
(iii) A felony conviction in a court of law under the laws
of the United States or any state thereof or any other
jurisdiction in which the Company or a subsidiary conducts
business which materially impairs the value of the participant's
services to the Company or any of its subsidiaries;
4
<PAGE> 6
provided, however, that, for purposes of this definition, no act or
failure to act shall be deemed "willful" unless effected by the participant not
in good faith and without a reasonable belief that such action or failure to act
was in or not opposed to the Company's best interests, and no act or failure to
act shall be deemed "willful" if it results from any incapacity of the
participant due to physical or mental illness.
(h) For purposes of this Plan, "Change in Control" means the
occurrence of any of the following events after July 14, 1998:
(i) Any "person", as such term is used in Section 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT") (other than R.H. Donnelley, any trustee or other
fiduciary holding securities under an employee benefit plan of
R.H. Donnelley, or any corporation owned, directly or indirectly,
by the shareholders of R.H. Donnelley in substantially the same
proportions as their ownership of stock of R.H. Donnelley), is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of R.H.
Donnelley representing 20% or more of the combined voting power
of R.H. Donnelley's then outstanding securities;
(ii) during any period of two consecutive years commencing
July 14, 1998, individuals who at the beginning of such period
constitute the Board, and any new director (other than a director
designated by a person who has entered into an agreement with
R.H. Donnelley to effect a transaction described in clause (i),
(iii) or (iv) of this definition) whose election by the Board or
nomination for election by R.H. Donnelley's shareholders was
approved by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors at the beginning
of the period or whose election or nomination for election was
previously so approved, cease for any reason to constitute at
least a majority thereof;
(iii) the shareholders of R.H. Donnelley have approved a
merger or consolidation of R.H. Donnelley with any other company
and all other required governmental approvals of such merger and
consolidation have been obtained, other than (A) a merger or
consolidation which would result in the voting securities of R.H.
Donnelley outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 60% of
the combined voting power of the voting securities of R.H.
Donnelley or such surviving entity outstanding immediately after
such merger or consolidation or (B) a merger or consolidation
effected to implement a recapitalization of R.H. Donnelley (or
similar transaction) in which no "person" (as hereinabove
defined) acquires more than 20% of the combined voting power of
R.H. Donnelley's then outstanding securities; or
(iv) the shareholders of R.H. Donnelley have approved a
plan of complete liquidation of R.H. Donnelley or an agreement
for the sale or disposition by R.H. Donnelley of all or
substantially all of R.H. Donnelley's assets, and all other
required governmental approvals of
5
<PAGE> 7
such transactions have been obtained.
(i) This Annual Incentive Plan became effective January 1, 1977
with respect to the predecessor of the Company. The amendments proposed
in 1996 and 1997 became effective upon approval by the shareholders of
the Company's predecessor at their 1997 Annual Meeting. This Amended and
Restated Plan is effective as of July 1, 1998.
(j) No provision of this Plan shall preclude the Company from
adopting or continuing in effect other compensation arrangements, and
such arrangements may be either generally applicable or applicable only
in specific cases.
5. AMENDMENTS
The Committee may amend or discontinue this Plan, but no amendment or
discontinuation shall be made which would impair the rights of a participant
without the participant's consent, or which, without approval of the
shareholders of R.H. Donnelley, would change (a) the performance measures in
Section 2(a) with respect to Special Participants, (b) the individuals or class
of individuals eligible to participate in the Plan, or (c) the maximum amount
payable to an individual participant under the Plan.
6
<PAGE> 1
Exhibit 10.19
SUPPLEMENTAL EXECUTIVE BENEFIT PLAN
OF
R.H. DONNELLEY CORPORATION
PREAMBLE
The principal purpose of this Supplemental Executive Benefit Plan
is to ensure the payment of a competitive level of retirement income and
disability benefits in order to attract, retain and motivate selected executives
of the Corporation and its affiliated companies.
1
Definitions
1.1 "Affiliate" means any corporation, partnership, division or
other organization controlling, controlled by or under common control with the
Corporation or any joint venture entered into by the Corporation.
1.2 "Average Final Compensation" means the greater of (i) a
Participant's or Vested Former Participant's average final compensation as
defined in the R.H. Donnelley Corporation [Retirement Account plan] as if no
provision were set forth therein incorporating limitations imposed by Sections
401, 415 or any other applicable Section of the Internal Revenue Code, or, (ii)
if the Participant is disabled at the time of his Retirement, the Participant's
Basic Earnings. For purposes of (i), Average Final Compensation will not include
an employee's compensation while the employee is a Vested Former Participant or
a Former Participant and will include compensation from the date of the
Participant's employment with the Corporation or an Affiliate.
1.3 "Basic Disability Plan" means as to any Participant either
(i) the long-term disability plan of the Corporation or an Affiliate pursuant to
which long-term disability benefits are payable to such Participant or, (ii) if
the Affiliate which employs such Participant has not adopted a long-term
disability plan, the long-term disability plan of the Corporation.
<PAGE> 2
1.4 "Basic Disability Plan Benefit" means the amount of benefits
actually payable to a Participant from the Basic Disability Plan or which would
be payable if the Participant were a member of such Plan. For purposes of
determining a Participant's Basic Disability Plan Benefit, a disability benefit
shall not be treated as actually payable to a Participant unless the Participant
is actually covered by a long-term disability plan of the Corporation or an
Affiliate.
1.5 "Basic Earnings" means a Participant's total earnings
received as an employee as salary or wages in the twelve months immediately
preceding the onset of the Participant's disability, including any amounts
deferred under a plan qualified under Section 401(k) of the Internal Revenue
Code, amounts contributed on a Participant's behalf on a salary reduction basis
to a cafeteria plan described in Section 125 of the Internal Revenue Code, cash
bonuses and commissions, but excluding any pension, retainers, severance pay,
income derived from stock options, stock appreciation rights and restricted
stock awards and dispositions of stock acquired thereunder, payments dependent
upon any contingency after the period of Credited Service and other special
remuneration (including performance units).
1.6 "Basic Plan" means as to any Participant or Vested Former
Participant, the defined benefit pension plan of the Corporation or an
Affiliate, which is intended to meet the requirements of Code Section 401(a) and
pursuant to which retirement benefits are payable to such Participant or Vested
Former Participant or to the Surviving Spouse or designated beneficiary of a
deceased Participant or Vested Former Participant.
1.7 "Basic Plan Benefit" means the amount of benefits payable
from the Basic Plan to a Participant or Vested Former Participant.
1.8 "Board" means the Board of Directors of R.H. Donnelley
Corporation.
1.9 "Change in Control" means:
(a) Any "person," as such term is used in Section
13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") (other than the Corporation,
any trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation, or any
Corporation owned, directly or indirectly, by the
shareholders of the
<PAGE> 3
Corporation in substantially the same proportions as their
ownership of stock of the Corporation), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of
the Corporation representing 20% or more of the combined
voting power of the Corporation's then outstanding
securities;
(b) during any period of twenty-four months (not
including any period prior to the effective date of this
provision), individuals who at the beginning of such
period constitute the Board, and any new director (other
than (1) a director designated by a person who has entered
into an agreement with the Corporation to effect a
transaction described in clause (a), (c) or (d) of this
Section) (2) a director designated by any Person
(including the Corporation) who publicly announces an
intention to take or to consider taking actions
(including, but not limited to, an actual or threatened
proxy contest) which if consummated would constitute a
Change in Control or (3) a director designated by any
Person who is the Beneficial Owner, directly or
indirectly, of securities of the Corporation representing
10% or more of the combined voting power of the
Corporation's securities) whose election by the Board or
nomination for election by the Corporation's shareholders
was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors
at the beginning of the period or whose election or
nomination for election was previously so approved cease
for any reason to constitute at least a majority thereof;
(c) the shareholders of the Corporation approve a
merger or consolidation of the Corporation with any other
company, other than a merger or consolidation (1) which
would result in the voting securities of the Corporation
outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity)
more than 50% of the combined
<PAGE> 4
voting power of the voting securities of the Corporation
or such surviving entity outstanding immediately after
such merger or consolidation and (2) after which no Person
would hold 20% or more of the combined voting power of the
then outstanding securities of the Corporation or such
surviving entity; or
(d) the shareholders of the Corporation approve a
plan of complete liquidation of the Corporation or an
agreement for the sale or disposition by the Corporation
of all or substantially all of the Corporation's assets.
1.1 "Committee" means the [Compensation and Benefits] Committee
of the Board.
1.2 "Corporation" means R.H. Donnelley Corporation, a Delaware
corporation, and any successor or assigns thereto.
1.3 "Credited Service" means a Participant's, Former
Participant's or Vested Former Participant's Credited Service as defined in the
R.H. Donnelley Corporation [Retirement Account plan], except that Credited
Service will include service while the Participant is receiving Disability
Benefits and service from the date the Participant, Former Participant or Vested
Former Participant was employed by the Corporation or an Affiliate, but will not
include service while an employee is a Former Participant or Vested Former
Participant. However, in the case of an acquired company, the Participant's,
Former Participant's or Vested Former Participant's service with that company
prior to the date of acquisition will not be counted unless such service is
recognized for benefit accrual purposes under the relevant Basic Plan.
1.4 "Disability Benefit" means the benefits provided to
Participants and Vested Former Participants pursuant to Section 5 of the Plan.
1.5 "Effective Date" means [July 1, 1998].
1.6 "Election" means an election as to the form of benefit
payment made pursuant to Section 4.5 of the Plan.
1.7 "Election Date" means the date that a properly completed
election form with respect to an Election is received by the Corporation's
Treasurer.
<PAGE> 5
1.8 "Former Participant" means an employee who has not completed
five or more years of Credited Service at the time his employment with the
Corporation or an Affiliate terminates or at the time he was removed, upon
written notice by the Chief Executive Officer of the Corporation and with the
approval of the Committee, from further participation in the Plan.
1.9 "Other Disability Income" means (A) the disability insurance
benefit that the Participant is entitled to receive under the Federal Social
Security Act while he is receiving the Basic Disability Plan Benefit and (B) the
disability income payable to a Participant from the following sources:
(a) any supplemental executive disability plan of any Affiliate;
and
(b) any other contract, agreement or other arrangement with the
Corporation or an Affiliate (excluding any Basic Disability Plan) to the extent
it provides disability benefits.
1.10 "Other Retirement Income" means (A)(i) the Social Security
retirement benefit that the Participant or Vested Former Participant is entitled
to receive under the Federal Social Security Act as of the date of his
Retirement or, (ii) if the Participant or Vested Former Participant is not
eligible to receive a Social Security retirement benefit commencing on such
date, the Social Security retirement benefit he is entitled to receive at the
earliest age he is eligible to receive such a benefit, discounted to the date
his Benefit under the Plan actually commences, using the actuarial assumptions
then in use under the relevant Basic Plan, assuming for purposes of (i) and (ii)
above that for years prior to the Participant's employment with the Corporation
and for years following the Participant's termination of employment with the
Corporation up until the Participant attains age 62, the Participant earned
compensation so as to accrue the maximum Social Security benefits, and (B) the
retirement income payable to a Participant or Vested Former Participant from the
following sources:
(a) any retirement benefits equalization plan of
the Corporation or an Affiliate or any former Affiliate,
the purpose of which is to provide the Participant or
Vested Former Participant with the benefits he is
precluded from receiving under any relevant Basic Plan as
a result of limitations under the Internal Revenue Code;
and
<PAGE> 6
(b) any supplemental executive retirement plan of
any Affiliate; and
(c) any other contract, agreement or other
arrangement with the Corporation or an Affiliate
(excluding any Basic Plan and any defined contribution
plan intended to meet the requirements of Section 401(a)
of the Code) to the extent it provides retirement or
pension benefits.
1.11 "Participant" means an employee of the Corporation or an
Affiliate who becomes a participant in the Plan pursuant to Section 2 and has
not been removed pursuant to Section 2.2.
1.12 "Plan" means this Supplemental Executive Benefit Plan of
R.H. Donnelley Corporation, as amended from time to time.
1.13 "Potential Change in Control" means:
(a) the Corporation enters into an agreement, the
consummation of which would result in the occurrence of a
Change in Control of the Corporation;
(b) any person (including the Corporation) publicly
announces an intention to take or to consider taking
actions which if consummated would constitute a Change in
Control of the Corporation;
(c) any person, other than a trustee or their
fiduciary holding securities under an employee benefit
plan of the Corporation (or a Corporation owned, directly
or indirectly, by the stockholders of the Corporation in
substantially the same proportions as their ownership of
stock of the Corporation), who is or becomes the
beneficial owner, directly or indirectly, of securities of
the Corporation representing 9.5% or more of the combined
voting power of the Corporation's then outstanding
securities, increases his beneficial ownership of such
securities by 5% or more over the percentage so owned by
such person; or
<PAGE> 7
(d) the Board adopts a resolution to the effect
that, for purposes of this Plan, a Potential Change in
Control of the Corporation has occurred.
1.14 "Retirement" means the termination, other than at death, of
a Participant's or Vested Former Participant's employment with the Corporation
or an Affiliate (i) after reaching age 55 and completing ten years of Vesting
Service, or (ii) immediately following the cessation of the payment of
Disability Benefits under the Plan to such Participant or Vested Former
Participant while he is still disabled, as such term is defined under the Basic
Disability Plan.
1.15 "Retirement Benefit" means the benefits provided to
Participants and Vested Former Participants pursuant to Section 4 of the Plan.
1.16 "Surviving Spouse" means the spouse of a deceased
Participant or Vested Former Participant to whom such Participant or Vested
Former Participant is legally married immediately preceding such Participant or
Vested Former Participant's death.
1.17 "Surviving Spouse's Benefits" mean the benefits provided to
a Participant's or Vested Former Participant's Surviving Spouse pursuant to
Section 6 of the Plan.
1.18 "Vested Former Participant" means an employee who completed
five or more years of Credited Service at the time his employment with the
Corporation or an Affiliate terminated or at the time he was removed, upon
written notice by the Chief Executive Officer of the Corporation and with the
approval of the Committee, from further participation in the Plan.
1.19 The masculine gender, where appearing in the Plan, will be
deemed to include the feminine gender, and the singular may include the plural,
unless the context clearly indicates to the contrary.
<PAGE> 8
SECTION 2
Eligibility and Participation
SECTION 2.1 All key management employees of the Corporation and
its Affiliates who are responsible for the management, growth or protection of
the business of the Corporation and its Affiliates, who are designated by the
Chief Executive Officer of the Corporation in writing, are eligible, upon
approval by the Committee, for participation in the Plan as of the effective
date of such designation.
SECTION 2.2 A Participant's participation in the Plan shall
terminate upon termination of his or her employment. Prior to termination of
employment, a participant may be removed, upon written notice by the Chief
Executive Officer of the Corporation and with the approval of the Committee,
from further participation in the Plan. As of the date of termination or
removal, no further benefits shall accrue to such individual.
SECTION 3
Eligibility For Benefits
SECTION 3.1 Each Participant or Vested Former Participant is
eligible for an annual Retirement Benefit under this Plan upon Retirement, or
upon termination of employment with the Corporation before Retirement after
completing five or more years of Credited Service.
SECTION 3.2 Each Participant is eligible to commence receiving a
Disability Benefit under this Plan upon the actual or deemed commencement of
benefits under the relevant Basic Disability Plan. Notwithstanding the above, a
Participant may not receive a Disability Benefit if he has not previously
enrolled for the maximum disability insurance coverage available under the
relevant Basic Disability Plan.
SECTION 3.3 Notwithstanding any other provision of the Plan to
the contrary, no benefits or no further benefits, as the case may be, shall be
paid to a Participant, Vested Former Participant or Surviving Spouse if the
Committee reasonably determines that such Participant or Vested Former
Participant has:
(a) To the detriment of the Corporation or any Affiliate,
directly or indirectly acquired, without the prior written consent of the
Committee, an interest in any other company,
<PAGE> 9
firm, association, or organization (other than an investment interest of less
than 1% in a publicly-owned company or organization), the business of which is
in direct competition with any business of the Corporation or an Affiliate;
(b) To the detriment of the Corporation or any Affiliate,
directly or indirectly competed with the Corporation or any Affiliate as an
owner, employee, partner, director or contractor of a business, in a field of
business activity in which the Participant or Vested Former Participant has been
primarily engaged on behalf of the Corporation or any Affiliate or in which he
has considerable knowledge as a result of his employment by the Corporation or
any Affiliate, either for his own benefit or with any person other than the
Corporation or any Affiliate, without the prior written consent of the
Committee; or
(c) Been discharged from employment with the Corporation or any
Affiliate for "Cause". "Cause" shall include the occurrence of any of the
following events or such other dishonest or disloyal act or omission as the
Committee reasonably determines to be "cause":
(i) The Participant or Vested Former Participant has
misappropriated any funds or property of the Corporation or any
Affiliate or committed any other act of willful malfeasance or willful
misconduct in connection with his or her employment;
(ii) The Participant or Vested Former Participant has,
without the prior knowledge or written consent of the Committee,
obtained personal profit as a result of any transaction by a third party
with the Corporation or any Affiliate; or
(iii) The Participant or Vested Former Participant has
sold or otherwise imparted to any person, firm, or corporation the names
of the customers of the Corporation or any Affiliate or any confidential
records, data, formulae, specifications and other trade secrets or other
information of value to the Corporation or any Affiliate derived by his
or her association with the Corporation or any Affiliate.
(iv) The Participant or Vested Former Participant fails,
on a continuing basis, to perform such duties as are requested by any
employee to whom the Participant or Vested Former Participant reports or
the Board; or
<PAGE> 10
(v) The Participant or Vested Former Participant commits
any felony or any misdemeanor involving moral turpitude.
In any case described in this Section 3.3, the Participant, Vested
Former Participant or Surviving Spouse shall be given prior written notice that
no benefits or no further benefits, as the case may be, will be paid to such
Participant, Vested Former Participant or Surviving Spouse. Such written notice
shall specify the particular act(s), or failures to act, on the basis of which
the decision to terminate benefits has been made.
SECTION 3.4 (a) Notwithstanding any other provision of the Plan
to the contrary, a Participant or Vested Former Participant who receives in a
lump sum any portion of his Retirement Benefit pursuant to an Election shall
receive such lump sum portion of his Retirement Benefit subject to the condition
that if such Participant or Vested Former Participant engages in any of the acts
described in clause (a) or (b) of Section 3.3, then such Participant or Vested
Former Participant shall within 60 days after written notice by the Corporation
repay to the Corporation the amount described in Section 3.4(b).
(a) The amount described under this Section 3.4(b) shall equal
the amount, as determined by the Committee, of the Participant's or Vested
Former Participant's lump sum benefit paid under this Plan to which such
Participant or Vested Former Participant would not have been entitled, if such
lump sum benefit had instead been payable in the form of an annuity under this
Plan and such annuity payments were subject to the provisions of Section 3.3.
SECTION 4
Amount and Form of Retirement Benefits
SECTION 4.1 The Retirement Benefit provided by the Plan is
designed to provide each Participant and Vested Former Participant with an
annual pension from the Plan and certain other sources equal to his Retirement
Benefit as hereinafter specified. Thus, the Retirement Benefits described
hereunder as payable to Participants and Vested Former Participants will be
offset by retirement benefits payable from sources outside the Plan as specified
herein.
SECTION 4.2 (a) The Retirement Benefit of a Participant or Vested
Former Participant upon Retirement shall be an annual benefit equal to [(i) for
a Participant or Vested
<PAGE> 11
Former Participant who had attained age fifty and had been credited with at
least ten years of Vesting Service as of January 15, 1997 or a Participant or
Vested Former Participant whose age plus years of Vesting Service is equal to or
greater than 70 as of January 15, 1997, or other individuals designated by the
Chief Executive Officer; 50% of his Average Final Compensation with respect to
his first ten years of Credited Service, plus 2% of such Average Final
Compensation for each year of Credited Service in excess of ten years of
Credited Service, but not to exceed fifteen years of Credited Service, offset by
his Other Retirement Income and his Basic Plan Benefit. A full month is credited
for each completed and partial month of age and Credited Service; (ii) for all
other Participants or Vested Former Participants;] [40% of his Average Final
Compensation with respect to his first ten years of credited service, plus 2% of
Average Final Compensation for each year of Credited Service in excess of ten
years of Credited Service, but not to exceed twenty years of Credited Service],
offset by his Other Retirement Income and his Basic Plan Benefit. A full month
is credited for each completed and partial month of Credited Service. [If such a
Participant or Vested Former Participant retires before age 60 without the
Corporation's consent, his Retirement Benefit shall be reduced by 3% for each
year or fraction thereof that Retirement commenced prior to reaching age 60.]
(a) Any portion of the Retirement Benefit provided under this
Section 4.2 payable in the form of an annuity pursuant to Section 4.4 shall be
payable in monthly installments and will commence on the first day of the
calendar month coinciding with or next following the day the Participant or
Vested Former Participant retires, and any portion of such Retirement Benefit
payable in a lump sum pursuant to Section 4.4 shall be paid on the date that is
sixty days after the date when annuity payments under this Section 4.2 commence,
or would commence if any portion of the Retirement Benefit were payable in the
form of an annuity, or as soon as practicable thereafter, provided the Committee
has approved any such lump sum payments.
[SECTION 4.3 (a) Subject to Section 4.3(c), the Retirement
Benefit of a Participant or Vested Former Participant who terminates employment
with the Corporation with five or more years of Credited Service before he is
eligible to retire under the relevant Basic Plan shall be an annual benefit
equal to (i) for a Participant or Vested Former Participant who had
<PAGE> 12
attained age fifty and had been credited with at least ten years of Vesting
Service as of January 15, 1997 or a Participant or Vested Former Participant
whose age plus years of Vesting Service is equal to or greater than 70 as of
January 15, 1997, or other individuals designated by the Chief Executive
Officer; 25% of his Average Final Compensation for his first five years of
Credited Service, plus 5% of Average Final Compensation for each additional year
of Credited Service between six and ten years of Credited Service, plus 2% of
Average Final Compensation for each additional year of Credited Service from 11
to 15 years, offset by his Other Retirement Income and his Basic Plan Benefit. A
full month is credited for each completed and partial month of Credited Service,
and (ii) for all other Participants or Vested Former Participants; 20% of his
Average Final Compensation with respect to his first five years of Credited
Service, plus 4% of Average Final Compensation for each additional year of
Credited Service between six and ten years of Credited Service, plus 2% of
Average Final Compensation for each additional year of Credited Service from 11
to 20 years, offset by his Other Retirement Income and his Basic Plan Benefit. A
full month is credited for each completed and partial month of Credited Service.
(a) Any portion of the Retirement Benefit provided under this
Section 4.3 payable in the form of an annuity pursuant to Section 4.4 shall be
payable in monthly installments and will commence on the first day of the
calendar month coinciding with or next following the day the Participant or
Vested Former Participant reaches age 55 or the date of his termination, if
later, and any portion of such Retirement Benefit payable in a lump sum pursuant
to Section 4.4 shall be paid on the date that is 60 days after the date when
annuity payments under this Section 4.3 commence, or would commence if any
portion of the Retirement Benefit were payable in the form of an annuity, or as
soon as practicable thereafter, provided the Committee has approved any such
lump sum payments.
(b) If a Participant or Vested Former Participant terminates
employment with the Corporation without the Corporation's consent, and the
payment of his Retirement Benefit commences, or would commence if it were
payable in the form of an annuity, before he reaches age 60, his Retirement
Benefit shall be reduced by 10% for each year or fraction thereof that the
payment of his Retirement Benefit commences, or would commence if it were
payable in the form of an annuity, prior to his reaching age 60.]
<PAGE> 13
SECTION 4.4 (a) Except as provided under Section 4.4(b) or
Section 4.4(c), a Retirement Benefit under this Plan shall be payable to a
Participant or Vested Former Participant in the form of a straight life annuity
and without regard to any optional form of benefits elected under the Basic
Plan.
(a) If a Participant or a Vested Former Participant makes an
Election while he is a Participant pursuant to Section 4.5 and such Election
becomes effective (i) prior to the date such Participant or such Vested Former
Participant retires or terminates employment with the Corporation or an
Affiliate and (ii) while he was still a Participant, a Retirement Benefit under
this Plan shall be payable to such Participant or such Vested Former Participant
in the form or combination of forms of payment elected pursuant to such Election
under Section 4.5 and without regard to any optional form of benefit elected
under the Basic Plan. Any lump sum distribution of a Participant's or Vested
Former Participant's Retirement Benefit under the Plan shall fully satisfy all
present and future Plan liability with respect to such Participant or Vested
Former Participant for such portion or all of such Retirement Benefit so
distributed.
(b) Notwithstanding any Election made under Section 4.5, if the
lump sum value, determined in the same manner as provided under Section 4.5(a),
of a Participant's or Vested Former Participant's Retirement Benefit is $10,000
or less at the time such Retirement Benefit is payable under this Plan, such
benefit shall be payable as a lump sum.
(c) If the Retirement Benefit under this Plan is payable to a
Participant or Vested Former Participant in a different form and/or at a
different time than his Other Retirement Income or his Basic Plan Benefits, the
offset provided in this Plan for such Participant's or Vested Former
Participant's Other Retirement Income and Basic Plan Benefit shall be converted,
using actuarial assumptions that are reasonable and appropriate and in
accordance with applicable law at the time the benefit under this Plan is
determined, to the extent required as follows, but solely for purposes of
calculating the amount of such offset:
(i) a percentage of the benefits to be offset equal to the
percentage of such Participant's or Vested Former Participant's benefits
payable in the form of an annuity under this Plan shall be actuarially
converted to the extent required into the form of a straight life
annuity, commencing at the time such benefits payable under this Plan
<PAGE> 14
commence or on the date such Participant or Vested Former Participant
would first become eligible for the payment of such benefits under this
Plan, if earlier; and
(ii) the balance, if any, of the benefits to be offset
shall be actuarially converted to a lump sum payment payable on the date
which is 60 days after the date described in Section 4.4(d)(i).
SECTION 4.5 (a) A Participant may elect, on a form supplied by
the Committee, to receive all, none, or a specified portion, as provided in
Section 4.5(c), of his Retirement Benefit under the Plan in a lump sum and to
receive any balance of such Retirement Benefit in the form of an annuity;
provided that any such Election shall be effective for purposes of this Plan
only if the conditions of Section 4.5(b) are satisfied. A Participant may elect
a payment form different than the payment form previously elected by him under
this Section 4.5(a) by filing a revised election form; provided that any such
new Election shall be effective only if the conditions of Section 4.5(b) are
satisfied with respect to such new Election. Any prior Election made by a
Participant that has satisfied the conditions of Section 4.5(b) remains
effective for purposes of the Plan until such Participant has made a new
Election satisfying the conditions of Section 4.5(b). The amount of any portion
of a Participant's or a Vested Former Participant's Retirement Benefit payable
as a lump sum under this Section 4.5 will equal the present value of such
portion of the Retirement Benefit, and such present value shall be determined
(i) based on a discount rate equal to 85% of the average of the 15-year
non-callable U.S. Treasury bond yields as of the close of business on the last
business day of each of the three months immediately preceding the date the
annuity value is determined and (ii) using the 1983 Group Annuity Mortality
Table.
(a) A Participant's Election under Section 4.5(a) becomes
effective only if the following conditions are satisfied: (i) such Participant
remains in the employment of the Corporation or an Affiliate, as the case may
be, for the full twelve calendar months immediately following the Election Date
of such Election, except in case of death or disability of such Participant as
provided in Section 4.5(d) and (ii) such Participant complies with the
administrative procedures set forth by the Committee with respect to the making
of the Election.
<PAGE> 15
(b) A Participant making an election under Section 4.5(a) may
specify the portion of his Retirement Benefit under the Plan to be received in a
lump sum as follows: 0 percent, 25 percent, 50 percent, 75 percent or 100
percent.
(c) In the event a Participant who has made an Election pursuant
to Section 4.5(a) dies or becomes totally and permanently disabled for purposes
of the relevant Basic Disability Plan while employed by the Corporation or an
Affiliate and such death or total and permanent disability occurs during the
twelve-calendar-month period, as described under Section 4.5(b)(i), immediately
following the Election Date of such Election, the condition under Section
4.5(b)(i) shall be deemed satisfied with respect to such Participant.
SECTION 4.6 Subject to Section 3.1, Section 3.3, Section 3.4 and
the foregoing limitations of this Section 4, the Retirement Benefit of each
Participant and Vested Former Participant under the Plan shall at all times be
100% vested and nonforfeitable.
SECTION 4.7 (a) Subject to Section 4.7(c), the Corporation shall
indemnify each Participant, Vested Former Participant and Surviving Spouse who
receives any portion of a Retirement Benefit or Surviving Spouse's Benefit under
this Plan in the form of an annuity for any interest and penalties that may be
assessed by the U.S. Internal Revenue Service (the "Service") with respect to
U.S. Federal income tax on such benefits (payable under the Plan in the form of
an annuity) upon final settlement or judgment with respect to any such
assessment in favor of the Service, provided the basis for the assessment is
that the amendment of the Plan to provide for the Election causes the
Participant, Vested Former Participant or Surviving Spouse, as the case may be,
to be treated as being in constructive receipt of such benefits prior to the
time when such benefits are actually payable under the Plan.
(b) In case any assessment shall be made against a Participant,
Vested Former Participant or Surviving Spouse as described in Section 4.7(a),
such Participant, Vested Former Participant or Surviving Spouse, as the case may
be (the "indemnified party"), shall promptly notify the Corporation's Treasurer
in writing and the Corporation, upon request of such indemnified party, shall
select and retain an accountant or legal counsel reasonably satisfactory to the
indemnified party to represent the indemnified party in connection with such
assessment and shall pay the fees and expenses of such an accountant or legal
counsel related to such
<PAGE> 16
representation, and the Corporation shall have the right to determine how and
when such assessment by the Service should be settled, litigated or appealed. In
connection with any such assessment, any indemnified party shall have the right
to retain his own accountant or legal counsel, but the fees and expenses of such
accountant or legal counsel shall be at the expense of such indemnified party
unless the Corporation and the indemnified party shall have mutually agreed to
the retention of such accountant or legal counsel.
(c) The Corporation shall not be liable for any payments under
this Section 4.7 with respect to any assessment described in Section 4.7(a) if a
Participant, Vested Former Participant or Surviving Spouse against whom such
assessment is made has not promptly notified or allowed the Corporation to
participate with respect to such assessment in the manner described in Section
4.7(b) or, following demand by the Corporation, has not made the deposit to
avoid additional interest or penalties as described in Section 4.7(d) or has
agreed to, or otherwise settled with the Service with respect to, such
assessment without the Corporation's written consent, provided, however, (i) if
such assessment is settled with such consent or if there is a final judgment for
the Service, (ii) the Corporation has been notified and allowed to participate
in the manner as provided in Section 4.7(b) and (iii) such Participant, Vested
Former Participant or Surviving Spouse has made any required deposit to avoid
additional interest or penalty as described in Section 4.7(d), the Corporation
agrees to indemnify the indemnified party to the extent set forth in this
Section 4.7.
(d) In the event a final settlement or judgment with respect to
an assessment as described under Section 4.7 has been made against a
Participant, Vested Former Participant or Surviving Spouse, such Participant,
Vested Former Participant or Surviving Spouse may elect to receive a portion or
all of his Retirement Benefit or Surviving Spouse's Benefit that is otherwise
payable as an annuity under the Plan in the form of a lump sum in accordance
with procedures as the Committee may set forth, and such lump sum distribution
will be made as soon as practicable after any such election. At the time such
assessment is made against such Participant, Vested Former Participant or
Surviving Spouse (the "assessed party") and prior to any final settlement or
judgment with respect to such assessment, if so directed by the Corporation,
such assessed party shall, as a condition to receiving any indemnity under this
Section 4.7, as soon as practicable
<PAGE> 17
after notification of such assessment make a deposit with the Service to avoid
any additional interest or penalties with respect to such assessment and, upon
the request of such assessed party, the Corporation shall lend, or arrange for
the lending to, such assessed party a portion of his remaining Retirement
Benefit or Surviving Spouse's Benefit under the Plan, not to exceed the lump sum
value of such benefit under the Plan, determined using the actuarial assumptions
set forth in Section 4.5(a), solely for purposes of providing the assessed party
with funds to make a deposit with the Service to avoid any additional interest
or penalties with respect to such assessment.
SECTION 5
Disability Benefits
SECTION 5.1 The Disability Benefit provided by the Plan is
designed to provide each Participant with a disability benefit from the Plan and
certain other sources equal to his Disability Benefit as hereinafter specified.
Thus, Disability Benefits described hereunder as payable to Participants will be
offset by disability benefits payable from sources outside the Plan (other than
benefits payable under the relevant Basic Disability Plan) as specified herein.
SECTION 5.2 In the event that a Participant has become totally
and permanently disabled for the purposes of the relevant Basic Disability Plan,
an annual Disability Benefit shall be payable in monthly installments under this
Plan during the same period as disability benefits are actually or deemed paid
by the relevant Basic Disability Plan, in an amount equal to 60% of the
Participant's Basic Earnings. Such Disability Benefit shall be offset by the
Participant's Other Disability Income, if any. A Participant's Disability
Benefits shall also be offset by the Participant's Basic Plan Benefit, if the
Participant's Basic Disability Plan Benefit does not already include such an
offset.
SECTION 6
Surviving Spouse's Benefits
SECTION 6.1 Upon the death of a Participant or Vested Former
Participant, while employed by the Corporation or an Affiliate, who has
completed at least ten years of Credited Service with the Corporation or an
Affiliate and has attained age 55, his Surviving Spouse will be entitled to a
Surviving Spouse's Benefit under this Plan equal to 50% of the
<PAGE> 18
Retirement Benefit that would have been provided from the Plan had the
Participant or Vested Former Participant retired from the Corporation or an
Affiliate with the Corporation's consent, on the date of his death.
SECTION 6.2 Upon the death of a Participant or Vested Former
Participant, while employed by the Corporation or an Affiliate, who has
completed at least five years of Credited Service with the Corporation or an
Affiliate and has not attained age 55, his Surviving Spouse will be entitled to
a Surviving Spouse's Benefit under this Plan equal to 50% of the Retirement
Benefit that would have been provided from the Plan had the Participant or
Vested Former Participant terminated employment with the Corporation or an
Affiliate on the date of his death with the Corporation's consent, and elected
to have the payment of his Basic Plan Benefit commence at age 55 in the form of
a straight life annuity.
SECTION 6.3 Upon the death of a Vested Former Participant while
no longer employed by the Corporation or an Affiliate, who has not attained age
55, his Surviving Spouse will be entitled to a Surviving Spouse's Benefit under
this Plan equal to 50% of the Retirement Benefit that would have been provided
from the Plan to the Vested Former Participant at age 55, taking into account
whether the Corporation consented to the termination.
SECTION 6.4 Upon the death of a Participant or Vested Former
Participant, while employed by the Corporation or an Affiliate, who has
completed at least five, but less than ten years of Credited Service with the
Corporation or an Affiliate and has attained age 55, his Surviving Spouse will
be entitled to a Surviving Spouse's Benefit under this Plan equal to 50% of the
Retirement Benefit that would have been provided from the Plan had the
Participant or Vested Former Participant terminated employment with the
Corporation or an Affiliate on the date of his death with the Corporation's
consent and his Basic Plan Benefit commenced immediately in the form of a
straight life annuity.
SECTION 6.5 Upon the death of a Vested Former Participant while
he is receiving Retirement Benefits, his Surviving Spouse shall receive a
Surviving Spouse's Benefit equal to 50% of the Retirement Benefit he was
receiving at the time of his death.
SECTION 6.6 Except as provided in Section 6.8, the Surviving
Spouse's Benefit provided under Section 6.1, 6.4 and 6.5 will be payable
monthly, will commence as of the first
<PAGE> 19
day of the month coincident with or next following the month in which the
Participant or Vested Former Participant dies, and will continue until the first
day of the month in which the Surviving Spouse dies.
SECTION 6.7 Except as provided in Section 6.8, the Surviving
Spouse's Benefit provided under Section 6.2 and 6.3 will be payable monthly,
will commence as of the first day of the month coincident with or next following
the month in which the Participant or Vested Former Participant would have
attained age 55, and will continue until the first day of the month in which the
Surviving Spouse dies.
SECTION 6.8 (a) If a Participant or a Vested Former Participant
while he was a Participant has made an Election under Section 4.5 and such
Election is effective on the date of such Participant's or Vested Former
Participant's death, the Surviving Spouse's Benefit payable to a Surviving
Spouse of such Participant or Vested Former Participant will be payable in the
form or combination of forms of payment so elected by such Participant or Vested
Former Participant pursuant to such Election. The amount of any lump sum
payment under this Section 6.8 shall be the present value of the applicable
portion of the Surviving Spouse's Benefit payable under the Plan, and such
present value shall be determined using the actuarial assumptions set forth in
Section 4.5(a). Any lump sum distribution of a Surviving Spouse's Surviving
Spouse's Benefit under the Plan shall fully satisfy all present and future Plan
liability with respect to such Surviving Spouse for such portion or all of such
Surviving Spouse's Benefit so distributed.
(a) Notwithstanding any Election made under Section 4.5, if the
lump sum value, determined in the same manner as provided under Section 4.5(a),
of a Surviving Spouse's Benefit is $10,000 or less at the time such Surviving
Spouse's Benefit is payable under this Plan, such benefit shall be payable as a
lump sum.
(b) Any portion of a Surviving Spouse's Benefit provided under
Section 6.1, 6.4 and 6.5 which is payable as an annuity shall be paid in the
manner and at such time as set forth in Section 6.6, and any such benefit which
is payable as a lump sum shall be paid 60 days after the date when annuity
payments commence, or would commence if any portion of such Surviving Spouse's
Benefit were payable as an annuity as set forth in Section 6.6.
<PAGE> 20
(c) Any portion of a Surviving Spouse's Benefit provided under
Section 6.2 and 6.3 which is payable as an annuity shall be paid in the manner
and at such time as set forth in Section 6.7, and any such benefit which is
payable as a lump sum shall be paid 60 days after the date when annuity payments
commence, or would commence if any portion of such Surviving Spouse's Benefit
were payable as an annuity, as set forth in Section 6.7.
SECTION 6.9 Notwithstanding the foregoing provisions of Section
6, the amount of a Surviving Spouse's Benefit shall be reduced by one percentage
point for each year (including a half year or more as a full year) in excess of
ten that the age of the Participant or Vested Former Participant exceeds the age
of the Surviving Spouse.
SECTION 7
Committee
SECTION 7.1 The Committee shall be responsible for the
administration of the Plan and may delegate to any management committee,
employee, director or agent its responsibility to perform any act hereunder,
including without limitation those matters involving the exercise of discretion,
provided that such delegation shall be subject to revocation at any time at its
discretion. The Committee shall have the authority to interpret the provisions
of the Plan and construe all of its terms, to adopt, amend, and rescind rules
and regulations for the administration of the Plan, and generally to conduct and
administer the Plan and to make all determinations in connection with the Plan
as may be necessary or advisable. All such actions of the Committee shall be
conclusive and binding upon all Participants, Former Participants, Vested Former
Participants and Surviving Spouses.
SECTION 8
Miscellaneous
SECTION 8.1 The Board may, in its sole discretion, terminate,
suspend or amend this Plan at any time or from time to time, in whole or in
part. However, no termination, suspension or amendment of the Plan may adversely
affect a Participant's or Vested Former Participant's vested benefit under the
Plan, or a retired Participant's or Vested Former Participant's right or the
right of a Surviving Spouse to receive or to continue to receive a benefit
<PAGE> 21
in accordance with the Plan as in effect on the date immediately preceding the
date of such termination, suspension or amendment.
SECTION 8.2 Nothing contained herein will confer upon any
Participant, Former Participant or Vested Former Participant the right to be
retained in the service of the Corporation or any Affiliate, nor will it
interfere with the right of the Corporation or any Affiliate to discharge or
otherwise deal with Participants, Former Participants or Vested Former
Participants with respect to matters of employment without regard to the
existence of the Plan.
SECTION 8.3 Notwithstanding anything herein to the contrary, at
any time following the termination of service of a Participant or Vested Former
Participant, the Committee may authorize, under uniform rules applicable to all
Participants, Vested Former Participants and Surviving Spouses under the Plan, a
lump sum distribution of a Participant's, Vested Former Participant's and/or
Surviving Spouse's Retirement Benefit or Surviving Spouse's Benefit under the
Plan in an amount equal to the present value of such Retirement Benefit or
Surviving Spouse's Benefit, using the actuarial assumptions then in use for
funding purposes under R.H. Donnelley Corporation Retirement Account, in full
satisfaction of all present and future Plan liability with respect to such
Participant, Vested Former Participant and/or Surviving Spouse, if the amount of
such present value is less than $250,000. Such lump sum distribution may be made
without the consent of the Participant, Vested Former Participant or Surviving
Spouse.
SECTION 8.4 (a) Notwithstanding anything in this Plan to the
contrary, if a Participant has less than five years of Credited Service at the
time of a Change in Control, and as a result of the Change in Control, and
before he completes five years of Credited Service, (i) the Plan is terminated,
(ii) the Participant is removed from further participation in the Plan, or (iii)
the Participant is terminated as a result of action initiated directly or
indirectly by the Corporation or any Affiliate, such Participant shall be
entitled to a Benefit of 20% of his Average Final Compensation and the
Corporation will remain obligated to pay all benefits under the Plan.
(a) Notwithstanding anything in this Plan to the contrary, upon
the occurrence of a Change in Control, (i) no reduction shall be made in a
Participant's or Vested Former Participant's Retirement Benefit, notwithstanding
his termination of employment or
<PAGE> 22
Retirement prior to age 60 without the Corporation's consent, (ii) the
provisions of Section 3.3(i) and (ii) shall not apply to any Participant, Vested
Former Participant or Surviving Spouse, (iii) each Participant and Vested Former
Participant already receiving a Retirement Benefit under the Plan shall receive
a lump sum distribution of his unpaid Retirement Benefit and, if he is married,
his Surviving Spouse's Benefit under the Plan within 30 days of the Change of
Control in an amount equal to the present value of such Retirement Benefit and
Surviving Spouse's Benefit in full satisfaction of all present and future Plan
liability with respect to such Participant, Vested Former Participant and
Surviving Spouse, if any, and each Surviving Spouse already receiving a
Surviving Spouse's Benefit under the Plan shall receive a lump sum distribution
of his unpaid Surviving Spouse's Benefit at the same time in an amount equal to
the present value of such Surviving Spouse's Benefit in full satisfaction of
Plan liability to such Surviving Spouse, (iv) each Vested Former Participant who
is not already receiving a Retirement Benefit under the Plan shall receive a
lump sum distribution of his unpaid Retirement Benefit and, if he is married,
his Surviving Spouse's Benefit within 30 days of the Change in Control in an
amount equal to the present value of such Retirement Benefit and Surviving
Spouse's Benefit, and each Surviving Spouse of either a Vested Former
Participant or a Participant with five or more years of Credited Service who is
not already receiving a Surviving Spouse's Benefit under the Plan shall receive
a lump sum distribution of his unpaid Surviving Spouse's Benefit at the same
time in amount equal to the present value of such Surviving Spouse's Benefit,
(v) each Participant with less than five years of Credited Service who is
entitled to a benefit under Section 8.4(a) shall receive a lump sum distribution
of the present value of such Retirement Benefit within 30 days from the earlier
of the date the Plan is terminated, the date he is removed from further
participation in the Plan, or the date his employment with the Corporation is
terminated, and of his Surviving Spouse's Benefit based upon the amount of such
Retirement Benefit if he is married on the applicable date, and (vi) each
Participant who is not included in (v) above and who is not already receiving a
Retirement Benefit under the Plan shall receive (a) within 30 days of the later
to occur of the date of such Change in Control or the date he completes five
years of Credited Service a lump sum distribution of the present value of his
accrued Retirement Benefit under the Plan as of the applicable date and, if he
is married on such date, the present value of his Surviving Spouse's
<PAGE> 23
Benefit, and (b) within 30 days from the earliest of the date of his Retirement
or termination of employment with the Corporation, the date the Plan is
terminated or the date he is removed from further participation in the Plan, a
lump sum distribution of the present value of his additional Retirement Benefit
accrued after the applicable event in (a) computed as of the applicable date
herein set forth in (b) and, if he is married on such applicable date, the
present value of his surviving Spouse's Benefit. In determining the amount of
the lump sum distributions to be paid under this Section 8.4, the following
actuarial assumptions shall be used: (i) the interest rate used shall be the
interest rate used by the Pension Benefit Guaranty Corporation for determining
the value of immediate annuities as of January 1st of either the year of the
occurrence of the Change in Control or the Participant's retirement or
termination of employment, whichever is applicable, (ii) the 1983 Group Annuity
Mortality Table shall be used; and (iii) it shall be assumed that all
Participants retired or terminated employment with the Corporation on the date
of the occurrence of the Change in Control and with the Corporation's consent
for purposes of determining the amount of the lump sum distribution to be paid
upon the occurrence of the Change in Control.
SECTION 8.5 (a) The Plan is unfunded, and the Corporation will
make Plan benefit payments solely on a current disbursement basis, provided,
however, that the Corporation reserves the right to purchase insurance
contracts, which may or may not be in the name of a Participant or Vested Former
Participant, or establish one or more trusts to provide alternative sources of
benefit payments under this Plan, provided, further, however, that upon the
occurrence of a "Potential Change in Control" the appropriate officers of the
Corporation are authorized to make such contributions to such trust or trusts as
are necessary to fund the lump sum distributions to Plan Participants required
pursuant to Section 8.4 of this Plan in the event of a Change in Control. In
determining the amount of the necessary contribution to the trust or trusts in
the event of a Potential Change in Control, the following actuarial assumptions
shall be used: (i) the interest rate used shall be the interest rate used by the
Pension Benefit Guaranty Corporation for determining the value of immediate
annuities as of January 1st of the year of the occurrence of the Potential
Change in Control, (ii) the 1983 Group Annuity Mortality Table shall be used;
and (iii) it shall be assumed that all Participants will retire or terminate
employment
<PAGE> 24
with the Corporation as soon as practicable after the occurrence of the
Potential Change in Control and with the Corporation's consent. The existence of
any such insurance contracts, trust or trusts shall not relieve the Corporation
of any liability to make benefit payments under this Plan, but to the extent any
benefit payments are made from any such insurance contract in the name of the
Corporation or any Affiliate or from any such trust, such payment shall be in
satisfaction of and shall reduce the Corporation's liabilities under this Plan.
Further, in the event of the Corporation's bankruptcy or insolvency, all
benefits accrued under this Plan shall immediately become due and payable in a
lump sum and all Participants, Vested Former Participants and Surviving Spouses
shall be entitled to share in the Corporation's assets in the same manner and to
the same extent as general unsecured creditors of the Corporation.
(a) Members and Vested Former Members shall have the status of
general unsecured creditors of the Corporation and this Plan constitutes a mere
promise by the Corporation to make benefit payments at the time or times
required hereunder. It is the intention of the Corporation that this Plan be
unfunded for tax purposes and for purposes of Title I of the Employee Retirement
Income Security Act of 1974, as amended and any trust created by the Corporation
in meeting its obligations under the Plan shall meet the requirements necessary
to retain such unfunded status.
SECTION 8.6 If any dispute arises under the Plan between the
Corporation and a Participant, Former Participant, Vested Former Participant or
Surviving Spouse (collectively or individually referred to as "Participant" in
this Section 8.6) as to the amount or timing of any benefit payable under the
Plan or as to the persons entitled thereto, such dispute shall be resolved by
binding arbitration proceedings initiated by either party to the dispute in
accordance with the rules of the American Arbitration Association and the
results of such proceedings shall be conclusive on both parties and shall not be
subject to judicial review. If the disputed benefits involve the benefits of a
Participant who is no longer employed by the Corporation or any Affiliate, the
Corporation shall pay or continue to pay the benefits claimed by the Participant
until the results of the arbitration proceedings are determined unless such
claim is patently without merit; provided, however, that if the results of the
arbitration proceedings are adverse to the Participant, then in such event the
recipient of the benefits shall be obligated to repay the
<PAGE> 25
excess benefits to the Corporation. The Corporation expressly acknowledges that
the amounts payable under the Plan are necessary to the livelihood of
Participants and their family members and that any refusal or neglect to pay
benefits under the preceding sentence prior to the resolution of any dispute
shall be prima facie evidence of bad faith on its part and will be conclusive
grounds for an arbitration award resulting in an immediate lump sum payment to
the Participant, of the Participant's benefits under the Plan then due and
payable to him, unless the arbitrator determines that the claim for the disputed
benefits was without merit. The amount of such lump sum payment shall be equal
to the then actuarial value of such benefits calculated by utilizing the
actuarial assumptions then in use for funding purposes under the R.H. Donnelley
Corporation [Retirement Account plan]. In addition, in the event of any dispute
covered by this Section 8.6 the Corporation agrees to pay the entire costs of
any arbitration proceeding or legal proceeding brought hereunder, including the
fees and expenses of counsel and pension experts engaged by a Participant and
that such expenses shall be reimbursed promptly upon evidence that such expenses
have been incurred without awaiting the outcome of the arbitration proceedings;
provided, however, that such costs and expenses shall be repaid to the
Corporation by the recipient of same if it is finally determined by the
arbitrators that the position taken by such person was without merit.
SECTION 8.7 To the maximum extent permitted by law, no benefit
under the Plan shall be assignable or subject in any manner to alienation, sale,
transfer, claims of creditors, pledge, attachment or encumbrances of any kind.
SECTION 8.8 The Corporation may withhold from any benefit under
the Plan an amount sufficient to satisfy its tax withholding obligations.
SECTION 8.9 The Plan is established under and will be construed
according to the laws of the State of New York.
<PAGE> 1
EXHIBIT 12.1
R.H. DONNELLEY CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGE
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, 1998 DEC. 31, 1997
-------------- -------------
<S> <C> <C>
Income before Taxes $38,733 $102,855
Add:
Portion of rents representative
of the interest factor 1,542 3,700
Interest and related debt expenses 20,648 41,296
--------------------------
Income before Taxes as adjusted 60,923 147,851
==========================
Fixed Charges
Interest and related debt expenses 20,648 41,296
Portion of rents representative
of the interest factor 1,542 3,700
--------------------------
Fixed Charges $22,190 $44,996
==========================
Ratio of earnings to fixed charges 2.7 3.3
</TABLE>
<PAGE> 1
Exhibit 23.1
PriceWaterhouseCoopers
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of (i)
our report dated March 31, 1998, except as to Note 14A, for which the date is
July 1, 1998, and Note 14B, for which the date is August 24, 1998, on our
audits of the consolidated financial statements of R.H. Donnelley Corporation
and (ii) our report dated January 8, 1998, on our audits of the combined
financial statements of DonTech I and DonTech II. We also consent to the
references to our firm under the caption "Experts".
/s/ PriceWaterhouseCoopers LLP
------------------------------
PriceWaterhouseCoopers LLP
New York, New York
September 25, 1998
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
OFFER TO EXCHANGE
9 1/8% SENIOR SUBORDINATED NOTES DUE 2008 (CUSIP #74956EAB4)
(REGISTERED UNDER THE SECURITIES ACT OF 1933)
FOR ANY AND ALL OF ITS OUTSTANDING
9 1/8% SUBORDINATED DISCOUNT NOTES DUE 2008, SERIES A (CUSIP #74956EAA6)
OF
R.H. DONNELLEY INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
[ ], 1998 (THE "EXPIRATION DATE"), UNLESS EXTENDED BY R.H. DONNELLEY
INC.
Exchange Agent:
THE BANK OF NEW YORK
If you desire to accept the Exchange Offer, this Letter of Transmittal
should be completed, signed, and submitted to the Exchange Agent:
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
By Registered or Certified Mail: By Facsimile Transmission: By Hand or Overnight Delivery:
The Bank of New York (For Eligible Institutions Only) The Bank of New York
101 Barclay Street, (212) 815-6339 101 Barclay Street, Ground Level
Floor 7 East Corporate Trust Services Window
New York, New York 10286 To Confirm By Telephone or For New York, New York 10286
Attention: Christopher Davis, Information Call: Attention: Christopher Davis,
Reorganization Section (212) 815-4997 Reorganization Unit
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE
TRANSMISSION TO A NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
The undersigned acknowledges receipt of the Prospectus dated [ ],
1998 (the "Prospectus") of R.H. Donnelley Inc. (the "Company") and R.H.
Donnelley Corporation (the "Parent Company") which, together with this Letter of
Transmittal (the "Letter of Transmittal"), describes the Company's offer (the
"Exchange Offer") to exchange $1,000 in principal amount of a new series of
9 1/8% Senior Subordinated Notes due 2008 (CUSIP #74956EAB4) (the "Exchange
Notes") for each $1,000 in principal amount of outstanding 9 1/8% Senior
Subordinated Notes due 2008 (CUSIP #74956EAA6) (the "Old Notes"). The terms of
the Exchange Notes are identical in all material respects (including principal
amount, interest rate and maturity) to the terms of the Old Notes for which they
may be exchanged pursuant to the Exchange Offer, except that the offering of the
Exchange Notes will have been registered under the Securities Act of 1933, as
amended and, therefore, the Exchange Notes will not bear legends restricting the
transfer thereof.
The undersigned has checked the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW.
<PAGE> 2
THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE
PROSPECTUS AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
List below the Old Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, the Certificate Numbers and Principal
Amounts should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES TENDERED HEREWITH
- --------------------------------------------------------------------------------------------------------------------------
AGGREGATE PRINCIPAL
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) CERTIFICATE AMOUNT REPRESENTED PRINCIPAL AMOUNT
(PLEASE FILL IN) NUMBER(S)* BY OLD NOTES* TENDERED**
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
TOTAL
- --------------------------------------------------------------------------------------------------------------------------
* Need not be completed by book-entry holders.
** Unless otherwise indicated, the holder will be deemed to have tendered the full aggregate principal amount represented
by the Old Notes. See Instruction 2.
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
This Letter of Transmittal is to be used either if certificates for the Old
Notes are to be forwarded herewith or if delivery of Old Notes is to be made by
book-entry transfer to an account maintained by the Exchange Agent at The
Depository Trust Company ("DTC"), pursuant to the procedures set forth in "The
Exchange Offer -- Book-Entry Transfer" in the Prospectus. Delivery of documents
to a book-entry transfer facility does not constitute delivery to the Exchange
Agent.
Unless the context requires otherwise, the term "Holder" for purposes of
this Letter of Transmittal means any person in whose name Old Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder or any person whose Old
Notes are held of record by DTC who desires to deliver such Old Notes by
book-entry transfer at DTC.
Holders whose Old Notes are not immediately available or who cannot deliver
their Old Notes and all other documents required hereby to the Exchange Agent on
or prior to the Expiration Date (as defined in the Prospectus) may tender their
Old Notes according to the guaranteed delivery procedure set forth in the
Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery
Procedures."
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DEPOSITORY TRUST
COMPANY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
----------------------------------------------------------------------------
The Depository Trust Company
Account Number
----------------------------------------------------------------------------
Transaction Code Number
----------------------------------------------------------------------------
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s)
----------------------------------------------------------------------------
Name of Eligible Institution that Guaranteed Delivery
---------------------------------------------------------------
DTC Account Number
----------------------------------------------------------------------------
2
<PAGE> 3
IF DELIVERED BY BOOK-ENTRY TRANSFER:
Account Number
---------------------------------------------------------------------------
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name
----------------------------------------------------------------------------
Address
----------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3
<PAGE> 4
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the above-described principal amount
of Old Notes. Subject to, and effective upon, the acceptance for exchange of the
Old Notes tendered herewith, the undersigned hereby exchanges, assigns and
transfers to, or upon the order of, the Company all right, title and interest in
and to such Old Notes. The undersigned hereby irrevocably constitutes and
appoints the Exchange Agent as the true and lawful agent and attorney-in-fact of
the undersigned (with full knowledge that said Exchange Agent acts as the agent
of the undersigned in connection with the Exchange Offer) to cause the Old Notes
to be assigned, transferred and exchanged. The undersigned represents and
warrants that it has full power and authority to tender, exchange, assign and
transfer the Old Notes and to acquire Exchange Notes issuable upon the exchange
of such tendered Old Notes, and that, when the same are accepted for exchange,
the Company will acquire good and unencumbered title to the tendered Old Notes,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim. The undersigned also warrants that it will, upon
request, execute and deliver any additional documents deemed by the Exchange
Agent or the Company to be necessary or desirable to complete the exchange,
assignment and transfer of tendered Old Notes or transfer ownership of such Old
Notes on the account books maintained by The Depository Trust Company.
The Exchange Offer is subject to certain conditions as set forth in the
Prospectus under the caption "The Exchange Offer." The undersigned recognizes
that as a result of these conditions (which may be waived, in whole or in part,
by the Company), as more particularly set forth in the Prospectus, the Company
may not be required to exchange any of the Old Notes tendered hereby and, in
such event, the Old Notes not exchanged will be returned to the undersigned at
the address shown below the signature of the undersigned.
BY TENDERING, EACH HOLDER OF OLD NOTES REPRESENTS TO THE COMPANY THAT (i)
THE EXCHANGE NOTES ACQUIRED PURSUANT TO THE EXCHANGE OFFER ARE BEING OBTAINED IN
THE ORDINARY COURSE OF BUSINESS OF THE PERSON RECEIVING SUCH EXCHANGE NOTES,
WHETHER OR NOT SUCH PERSON IS SUCH HOLDER, (ii) NEITHER THE HOLDER OF OLD NOTES
NOR ANY SUCH OTHER PERSON HAS AN ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO
PARTICIPATE IN THE DISTRIBUTION OF SUCH EXCHANGE NOTES, (iii) IF THE HOLDER IS
NOT A BROKER-DEALER OR IS A BROKER-DEALER BUT WILL NOT RECEIVE EXCHANGE NOTES
FOR ITS OWN ACCOUNT IN EXCHANGE FOR OLD NOTES, NEITHER THE HOLDER NOR ANY SUCH
OTHER PERSON IS ENGAGED IN OR INTENDS TO PARTICIPATE IN A DISTRIBUTION OF THE
EXCHANGE NOTES AND (iv) NEITHER THE HOLDER NOR ANY SUCH OTHER PERSON IS AN
"AFFILIATE" OF THE COMPANY WITHIN THE MEANING OF RULE 405 UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"). IF THE EXCHANGE OFFEREE IS A BROKER-DEALER
(WHETHER OR NOT IT IS ALSO AN "AFFILIATE") HOLDING OLD NOTES FOR ITS OWN ACCOUNT
ACQUIRED FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER
TRADING ACTIVITIES, IT WILL DELIVER A PROSPECTUS MEETING THE REQUIREMENTS OF THE
ACT IN CONNECTION WITH ANY RESALE OF EXCHANGE NOTES RECEIVED IN RESPECT OF SUCH
OLD NOTES PURSUANT TO THE EXCHANGE OFFER. BY ACKNOWLEDGING THAT IT WILL DELIVER
AND BY DELIVERING A PROSPECTUS MEETING THE REQUIREMENTS OF THE ACT IN CONNECTION
WITH ANY RESALE OF SUCH EXCHANGE NOTES, THE UNDERSIGNED IS NOT DEEMED TO ADMIT
THAT IT IS AN "UNDERWRITER" WITHIN THE MEANING OF THE ACT.
All authority herein conferred or agreed to be conferred shall survive the
death, bankruptcy or incapacity of the undersigned and every obligation of the
undersigned hereunder shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned. Tendered Old Notes may be withdrawn
at any time prior to the Expiration Date.
Certificates for all Exchange Notes delivered in exchange for tendered Old
Notes and any Old Notes delivered herewith but not exchanged, in each case
registered in the name of the undersigned, shall be delivered to the undersigned
at the address shown below the signature of the undersigned.
4
<PAGE> 5
TENDERING HOLDER(S) SIGN HERE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(SIGNATURE(S) OF HOLDER(S))
DATE
- ---------------------------------- 199
(Must be signed by registered holder(s) exactly as name(s) appear(s) on
certificate(s) for Old Notes or by any person(s) authorized to become registered
holder(s) by endorsements and documents transmitted herewith or, if the Old
Notes are held of record by DTC, the person in whose name such Old Notes are
registered on the books of DTC. If signature by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary or representative capacity, please set forth the
full title of such person.) See Instruction 3.
Name(s)
- --------------------------------------------------------------------------------
(PLEASE PRINT)
Capacity
- --------------------------------------------------------------------------------
(INCLUDE FULL TITLE)
Address
- --------------------------------------------------------------------------------
(INCLUDE ZIP CODE)
Area Code and Telephone Number
- ------------------------------------------------------------------------------
(Tax Identification No.)
- --------------------------------------------------------------------------------
GUARANTEE OF SIGNATURE(S)
(IF REQUIRED -- SEE INSTRUCTIONS 3)
Authorized Signature
- --------------------------------------------------------------------------------
Name
- --------------------------------------------------------------------------------
Title
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
Name of Firm
- --------------------------------------------------------------------------------
Area Code and Telephone Number
- ------------------------------------------------------------------------------
Date
- ---------------------------------- 199
5
<PAGE> 6
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND CERTIFICATES. Certificates
for all physically delivered Old Notes or confirmation of any book-entry
transfer to the Exchange Agent's account at The Depository Trust Company of Old
Notes tendered by book-entry transfer, as well as a properly completed and duly
executed copy of this Letter of Transmittal or facsimile thereof, and any other
documents required by this Letter of Transmittal, must be received by the
Exchange Agent at any of its addresses set forth herein on or prior to the
Expiration Date.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE OLD NOTES AND ANY
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER AND, EXCEPT
AS OTHERWISE PROVIDED BELOW, THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED BY THE EXCHANGE AGENT. IF SUCH DELIVERY IS BY MAIL, IT IS SUGGESTED
THAT REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, BE USED.
Holders whose Old Notes are not immediately available or who cannot deliver
their Old Notes and all other required documents to the Exchange Agent on or
prior to the Expiration Date or comply with book-entry transfer procedures on a
timely basis may tender their Old Notes pursuant to the guaranteed delivery
procedure set forth in the Prospectus under "The Exchange Offer -- Guaranteed
Delivery Procedures." Pursuant to such procedure: (i) such tender must be made
by or through an Eligible Institution (as defined therein); (ii) on or prior to
the Expiration Date the Exchange Agent must have received from such Eligible
Institution, a letter, telegram or facsimile transmission setting forth the name
and address of the tendering holder, the names in which such Old Notes are
registered, and, if possible, the certificate numbers of the Old Notes to be
tendered; and (iii) all tendered Old Notes (or a confirmation of any book-entry
transfer of such Old Notes into the Exchange Agent's account at The Depository
Trust Company) as well as this Letter of Transmittal and all other documents
required by this Letter of Transmittal must be received by the Exchange Agent
within five New York Stock Exchange trading days after the date of execution of
such letter, telegram or facsimile transmission, all as provided in the
Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery
Procedures."
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the Old Notes for exchange.
2. PARTIAL TENDERS; WITHDRAWALS. Tenders of Old Notes will be accepted in
all denominations of $1,000 and integral multiples in excess thereof. If less
than the entire principal amount of Old Notes evidenced by a submitted
certificate is tendered, the tendering holder must fill in the principal amount
tendered in the box entitled "Principal Amount Tendered." A newly issued
certificate for the principal amount of Old Notes submitted but not tendered
will be sent to such holder as soon as practicable after the Expiration Date.
All Old Notes delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
Tenders of Old Notes pursuant to the Exchange Offer are irrevocable, except
that Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date. To be effective, a written, telegraphic or
facsimile transmission notice of withdrawal must be timely received by the
Exchange Agent. Any such notice of withdrawal must specify the person named in
the Letter of Transmittal as having tendered Old Notes to be withdrawn, the
certificate numbers of the Old Notes to be withdrawn, the principal amount of
Old Notes delivered for exchange, a statement that such a holder is withdrawing
its election to have such Old Notes exchanged, and the name of the registered
holder of such Old Notes, and must be signed by the holder in the same manner as
the original signature on the Letter of Transmittal (including any required
signature guarantees) or be accompanied by evidence satisfactory to the Company
that the person withdrawing the tender has succeeded to the beneficial ownership
of the Old Notes being withdrawn. The Exchange Agent will return the properly
withdrawn Old Notes promptly following receipt of notice of withdrawal. If Old
Notes have been tendered pursuant to the procedure for book-entry transfer, any
notice of withdrawal must specify the name and number of the account at The
Depository Trust Company to be credited with the withdrawn Old Notes or
otherwise comply with The Depository Trust Company's procedures.
6
<PAGE> 7
3. SIGNATURE ON THIS LETTER OF TRANSMITTAL; WRITTEN INSTRUMENTS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed
by the registered holder(s) of the Old Notes tendered hereby, the signature must
correspond with the name(s) as written on the face of certificates without
alteration, enlargement or any change whatsoever.
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If a number of Old Notes registered in different names are tendered, it
will be necessary to complete, sign and submit as many separate copies of this
Letter of Transmittal as there are different registrations of Old Notes.
When this Letter of Transmittal is signed by the registered holder or
holders of Old Notes listed and tendered hereby, no endorsements of certificates
or separate written instruments of transfer or exchange are required.
If this Letter of Transmittal is signed by a person other than the
registered holder or holders of the Old Notes listed, such Old Notes must be
endorsed or accompanied by separate written instruments of transfer or exchange
in form satisfactory to the Company and duly executed by the registered holder,
in either case signed exactly as the name or names of the registered holder or
holders appear(s) on the Old Notes.
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
Endorsements on certificates or signatures on separate written instruments
of transfer or exchange required by this Instruction 3 must be guaranteed by an
Eligible Institution.
Signatures on this Letter of Transmittal need not be guaranteed by an
Eligible Institution, provided the Old Notes are tendered: (i) by a registered
holder of such Old Notes and the certificates for Exchange Notes to be issued in
exchange therefor are to be issued (or any untendered amount of Old Notes are to
be reissued) to the registered holder; or (ii) for the account of any Eligible
Institution.
4. TRANSFER TAXES. The Company shall pay all transfer taxes, if any,
applicable to the transfer and exchange of Old Notes to it or its order pursuant
to the Exchange Offer. If, however, Exchange Notes are to be delivered to, or
are to be registered or issued in the name of, any person other than the
registered holder of the Old Notes tendered hereby, or if a transfer tax is
imposed for any reason other than the transfer of Old Notes to the Company or
its order pursuant to the Exchange Offer, the amount of any such transfer taxes
(whether imposed on the registered holder or any other person) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exception therefrom is not submitted herewith the amount of such transfer taxes
will be billed directly to such tendering holder.
Except as provided in this Instruction 4, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
5. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive,
in whole or in part, any of the conditions to the Exchange Offer set forth in
the Prospectus.
6. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES. Any holder whose Old
Notes have been mutilated, lost, stolen or destroyed should contact the Exchange
Agent at the address indicated below for further instructions.
7. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
procedure for tendering, as well as requests for additional copies of the
Prospectus and this Letter of Transmittal, may be directed to the Exchange Agent
at the address and telephone number set forth below. In addition, all questions
relating to the Exchange Offer, as well as requests for assistance or additional
copies of the Prospectus and
7
<PAGE> 8
this Letter of Transmittal, may be directed to the Company at One Manhattenville
Road, Purchase, New York 10577. Attention: Mary Coughlin (914) 933-6400.
8. IRREGULARITIES. All questions as to the validity, form, eligibility
(including time of receipt), and acceptance of Letters of Transmittal or Old
Notes will be resolved by the Company, whose determination will be final and
binding. The Company reserves the absolute right to reject any or all Letters of
Transmittal or tenders that are not in proper form or the acceptance of which
would, in the opinion of the Company's counsel, be unlawful. The Company also
reserves the right to waive any irregularities or conditions of tender as to the
particular Old Notes covered by any Letter of Transmittal or tendered pursuant
to such letter. None of the Company, the Parent Company, the Exchange Agent or
any other person will be under any duty to give notification of any defects or
irregularities in tenders or incur any liability for failure to give any such
notification. The Company's interpretation of the terms and conditions of the
Exchange Offer shall be final and binding.
9. DEFINITIONS. Capitalized terms used in this Letter of Transmittal and
not otherwise defined have the meanings given in the Prospectus.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE THEREOF (TOGETHER WITH
CERTIFICATES FOR OLD NOTES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER
REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE
EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
8
<PAGE> 1
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
OFFER TO EXCHANGE
9 1/8% SENIOR SUBORDINATED NOTES DUE 2008 (CUSIP #74956EAB4)
(REGISTERED UNDER THE SECURITIES ACT OF 1933)
FOR ANY AND ALL OF ITS OUTSTANDING
9 1/8% SENIOR NOTES DUE 2008 (CUSIP #74956EAA6)
OF
R.H. DONNELLEY INC.
This Notice of Guaranteed Delivery or one substantially equivalent hereto
may be used to accept the Exchange Offer (as defined below) if (i) certificates
for the 9 1/8% Senior Subordinated Notes due 2008 (CUSIP #74956EAA6) (the "Old
Notes") of R.H. Donnelley Inc., a Delaware corporation (the "Company"), are not
immediately available, (ii) time will not permit the holder's Old Notes or other
required documents to reach The Bank of New York (the "Exchange Agent") before
the Expiration Date (as defined in the Prospectus referred to below) or (iii)
the procedures for book-entry transfer cannot be completed on a timely basis.
This Notice of Guaranteed Delivery may be delivered by hand or sent by facsimile
transmission, overnight courier, telex, telegram or mail to the Exchange Agent.
See "The Exchange Offer -- Guaranteed Delivery Procedures" in the Prospectus
dated September [ ], 1998 (which, together with the related Letter of
Transmittal, constitutes the "Exchange Offer") of the Company.
The Exchange Agent for the Exchange Offer is:
THE BANK OF NEW YORK
<TABLE>
<S> <C> <C>
By Registered or Certified Mail: By Facsimile Transmission: By Hand or Overnight Delivery:
The Bank of New York (For Eligible Institutions Only) The Bank of New York
101 Barclay Street, (212) 815-6339 101 Barclay Street, Ground Level
Floor 7 East Corporate Trust Services Window
New York, New York 10286 To Confirm By Telephone or For New York, New York 10286
Attention: Christopher Davis, Information Call: Attention: Christopher Davis,
Reorganization Section (212) 815-4997 Reorganization Unit
</TABLE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA A
FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED ON THE LETTER
OF TRANSMITTAL.
<PAGE> 2
THE FOLLOWING GUARANTEE MUST BE COMPLETED
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------------
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United
States, hereby guarantees to deliver to the Exchange Agent, at one of its addresses set forth above, either the certificates
for all physically tendered Old Notes, in proper form for transfer, or confirmation of the book-entry transfer of such Old
Notes to the Exchange Agent's account at The Depository Trust Company ("DTC"), pursuant to the procedures for book-entry
transfer set forth in the Prospectus, in either case together with one or more properly completed and duly executed Letter(s)
of Transmittal (or facsimile thereof) and any other documents required by such Letter of Transmittal, within five New York
Stock Exchange trading days after the date of execution of this Notice of Guaranteed Delivery.
The undersigned acknowledges that it must deliver the Letter(s) of Transmittal and the Old Notes tendered hereby to the
Exchange Agent within the time period set forth above and that failure to do so could result in a financial loss to the
undersigned.
- -------------------------------------------------------------------------------------------------------------------------------
Name of Firm: -------------------------------------------
------------------------------------------------------------
Address:-------------------------------------------------- (AUTHORIZED SIGNATURE)
----------------------------------------------------------
(ZIP CODE) Title:-----------------------------------------------------
Area Code and Telephone Name:---------------------------------------------------
Number: ----------------------------------------------- (PLEASE TYPE OR PRINT)
Date: ----------------------------------------------------
Principal Amount of 9 1/8% Senior Subordinated Notes due 2008 (CUSIP #74956EAA6): $
-----------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: DO NOT SEND OLD NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY. ACTUAL
SURRENDER OF OLD NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, A
PROPERLY COMPLETED AND FULLY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER
REQUIRED DOCUMENTS.
2
<PAGE> 1
EXHIBIT 99.3
OFFER TO EXCHANGE
9 1/8% SENIOR SUBORDINATED NOTES DUE 2008 (CUSIP #74956EAB4)
(REGISTERED UNDER THE SECURITIES ACT OF 1933)
FOR ANY AND ALL OUTSTANDING
9 1/8% SENIOR SUBORDINATED NOTES DUE 2008 (CUSIP #74956EAA6)
OF
R.H. DONNELLEY INC.
To Registered Holders and The Depository Trust Company Participants:
We are enclosing herewith the material listed below relating to the offer
by R.H. Donnelley Inc., a Delaware corporation (the "Company"), to exchange its
9 1/8% Senior Subordinated Notes due 2008 (CUSIP #74956EAB4) (the "Exchange
Notes") pursuant to an offering registered under the Securities Act of 1933, as
amended (the "Securities Act"), for a like principal amount of its issued and
outstanding 9 1/8% Senior Subordinated Notes due 2008 (CUSIP #74956EAA6) (the
"Old Notes") upon the terms and subject to the conditions set forth in the
Company's Prospectus, dated September [ ], 1998, and the related Letter of
Transmittal (which together constitute the "Exchange Offer").
Enclosed herewith are copies of the following documents:
1. Prospectus dated September [ ], 1998;
2. Letter of Transmittal to the 9 1/8% Senior Subordinated Exchange
Notes due 2008;
3. Notice of Guaranteed Delivery;
4. Instruction to Registered Holder and/or Book-Entry Transfer
Participant from Owner; and
5. Letter which may be sent to your clients for whose account you hold
Old Notes in your name or in the name of your nominee, to accompany the
instruction form referred to above, for obtaining such client's instruction
with regard to the Exchange Offer.
WE URGE YOU TO CONTACT YOUR CLIENTS PROMPTLY. PLEASE NOTE THAT THE EXCHANGE
OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [ ], 1998,
UNLESS EXTENDED.
The Exchange Offer is not conditioned upon any minimum number of Old Notes
being tendered.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (i) the holder is not an "affiliate" of the
Company, (ii) any Exchange Notes acquired pursuant to the Exchange Offer are
being acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder and (iii) neither the
holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such Exchange Notes. If the
tendering holder is a broker-dealer that will receive Exchange Notes for its own
account in exchange for Old Notes, you will represent on behalf of such
broker-dealer that the Old Notes to be exchanged for the Exchange Notes were
acquired by it as a result of market-making activities or other trading
activities and acknowledge on behalf of such broker-dealer that it will deliver
a prospectus meeting the requirements of the Securities Act in connection with
any resale of such Exchange Notes. By acknowledging that it will deliver and by
delivering a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes, such broker-dealer is not
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
The enclosed Instruction to Registered Holder and/or Book-Entry Transfer
Participant from Owner contains an authorization by the beneficial owners of the
Old Notes for you to make the foregoing representations.
<PAGE> 2
The Company will not pay any fee or commission to any broker or dealer or
to any other persons (other than the Exchange Agent) in connection with the
solicitation of tenders of Old Notes pursuant to the Exchange Offer. The Company
will pay or cause to be paid any transfer taxes payable on the transfer of Old
Notes to it, except as otherwise provided in Instruction 4 of the enclosed
Letter of Transmittal.
Additional copies of the enclosed material may be obtained from the
undersigned.
Very truly yours,
THE BANK OF NEW YORK
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU THE
AGENT OF R.H. DONNELLEY INC. OR THE BANK OF NEW YORK OR AUTHORIZE YOU TO USE ANY
DOCUMENT OR MAKE ANY STATEMENT ON THEIR BEHALF IN CONNECTION WITH THE EXCHANGE
OFFER OTHER THAN THE DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED
THEREIN.
2
<PAGE> 1
EXHIBIT 99.4
OFFER TO EXCHANGE
9 1/8% SENIOR SUBORDINATED NOTES DUE 2008 (CUSIP #74956EAB4)
(REGISTERED UNDER THE SECURITIES ACT OF 1933)
FOR ANY AND ALL OF ITS OUTSTANDING
9 1/8% SENIOR SUBORDINATED NOTES DUE 2008 (CUSIP #74956EAA6)
OF
R.H. DONNELLEY INC.
To Our Clients:
We are enclosing herewith a Prospectus, dated September [ ], 1998, of R.H.
Donnelley Inc., a Delaware corporation (the "Company"), and a related Letter of
Transmittal (which together constitute the "Exchange Offer") relating to the
offer by the Company to exchange its 9 1/8% Senior Subordinated Notes due 2008
(CUSIP #74956EAB4) (the "Exchange Notes"), pursuant to an offering registered
under the Securities Act of 1933, as amended (the "Securities Act"), for a like
principal amount of its issued and outstanding 9 1/8% Senior Subordinated Notes
due 2008 (CUSIP #74956EAA6) (the "Old Notes") upon the terms and subject to the
conditions set forth in the Exchange Offer.
PLEASE NOTE THAT THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON [ ], 1998, UNLESS EXTENDED.
The Exchange Offer is not conditioned upon any minimum number of Old Notes
being tendered.
We are the holder of record and/or participant in the book-entry transfer
facility of Old Notes held by us for your account. A tender of such Old Notes
can be made only by us as the record holder and/or participant in the book-entry
transfer facility and pursuant to your instructions. The Letter of Transmittal
is furnished to you for your information only and cannot be used by you to
tender Old Notes held by us for your account.
We request instructions as to whether you wish to tender any or all of the
Old Notes held by us for your account pursuant to the terms and conditions of
the Exchange Offer. We also request that you confirm that we may on your behalf
make the representations contained in the Letter of Transmittal.
Pursuant to the Letter of Transmittal, each holder of Old Notes will
represent to the Company that (i) the holder is not an "affiliate" of the
Company, (ii) any Exchange Notes acquired pursuant to the Exchange Offer are
being acquired in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the holder and (iii) neither the
holder nor any such other person has an arrangement or understanding with any
person to participate in the distribution of such Exchange Notes. If the
tendering holder is a broker-dealer that will receive Exchange Notes for its own
account in exchange for Old Notes, we will represent on behalf of such
broker-dealer that the Old Notes to be exchanged for the Exchange Notes were
acquired by it as a result of market-making activities or other trading
activities and acknowledge on behalf of such broker-dealer that it will deliver
a prospectus meeting the requirements of the Securities Act in connection with
any resale of such Exchange Notes. By acknowledging that it will deliver and by
delivering a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes, such broker-dealer is not
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
Very truly yours,
<PAGE> 1
EXHIBIT 99.5
INSTRUCTION TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM OWNER
OF
R.H. DONNELLEY INC.
9 1/8% SENIOR SUBORDINATED NOTES DUE 2008
(CUSIP #74956EAA6)
To Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus dated
[ ], 1998 (the "Prospectus") of R.H. Donnelley, Inc., a Delaware
corporation (the "Company"), and R.H. Donnelley Corporation, a Delaware
Corporation (the "Parent Company"), and the accompanying Letter of Transmittal
(the "Letter of Transmittal"), that together constitute the Company's offer (the
"Exchange Offer"). Capitalized terms used but not defined herein have the
meaning as ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to the action to be taken by you relating to the
Exchange Offer with respect to the Old Notes held by you for the account of the
undersigned.
The aggregate face amount of the Old Notes held by you for the account of
the undersigned is (fill in amount):
$ of the 9 1/8% Senior Subordinated Notes due 2008 (CUSIP
#74956EAA6).
With respect to the Exchange Offer, the undersigned hereby instructs you
(check appropriate box):
[ ] To TENDER the following Old Notes held by you for the account of the
undersigned (insert principal amount of Old Notes to be tendered, if
any):
$ of the 9 1/8% Senior Subordinated Notes due 2008 (CUSIP
#74956EAA6).
[ ] NOT to TENDER any Old Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Old Notes held by you for
the account of the undersigned, it is understood that you are authorized to
make, on behalf of the undersigned (and the undersigned, by its signature below,
hereby makes to you), the representations and warranties contained in the Letter
of Transmittal that are to be made with respect to the undersigned as a
beneficial owner, including but not limited to the representations, that (i) the
holder is not an "affiliate" of the Company, (ii) any Exchange Notes acquired
pursuant to the Exchange Offer are being acquired in the ordinary course of
business of the person receiving such Exchange Notes, whether or not such person
is the holder and (iii) neither the holder nor any such other person has an
arrangement or understanding with any person to participate in the distribution
of such Exchange Notes. If the undersigned is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Old Notes, it represents that
such Old Notes were acquired as a result of market-making activities or other
trading activities, and it acknowledges that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale of
such Exchange Notes. By acknowledging that it will deliver and by delivering a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes, such broker-dealer is not deemed to admit that it
is an "underwriter" within the meaning of the Securities Act of 1933, as
amended.
<PAGE> 2
SIGN HERE
- --------------------------------------------------------------------------------
Name of beneficial owner(s)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Signature(s)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Name(s) (please print)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
Telephone Number
- --------------------------------------------------------------------------------
Taxpayer Identification or Social Security Number
- --------------------------------------------------------------------------------
Date
2
