<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 3, 1998
REGISTRATION NO. 333-59287
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
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
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO THE REGISTRATION STATEMENT OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY
SUCH STATE.
PROSPECTUS
SEPTEMBER 3, 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 [ ], 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 the new publishing center in
Raleigh, North Carolina, the
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<PAGE> 6
restructuring of the DonTech relationship with Ameritech and the rescheduling of
related directories, and the sale of the majority of Donnelley's proprietary
yellow pages operations.
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. 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.
2
<PAGE> 7
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
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 approxi-
3
<PAGE> 8
mately 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". The Company's ratio of total consolidated indebtedness to total
capitalization as of June 30, 1998 was 1.83.
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 [ ],
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 54,574
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. The Company's ratio of total consolidated
indebtedness to total capitalization as of June 30, 1998 was 1.83. 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).................... --........ -- -- -- -- 3.2x
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).................... -- -- 3.2x
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. The Company's
ratio of total consolidated indebtedness to total capitalization as of June
30, 1998 was 1.83. 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. The Company's ratio of total consolidated indebtedness to total
capitalization as of June 30, 1998 was 1.83. 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 and was appointed the exclusive sales agent, in perpetuity, for yellow
page directories published by Ameritech in Illinois and Northwest Indiana (the
"DonTech Restructuring"). Prior to the DonTech Restructuring, the Company
recognized revenues and costs for the DonTech partnership when related
directories were published. Under the new structure, the Company now recognizes
revenues and costs for the DonTech partnership when a customer signs a sales
contract. However, the effect of the DonTech Restructuring should not, on an
annual basis, result in materially different financial results than during 1997.
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.
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,
30
<PAGE> 35
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. The effect of
the DonTech Restructuring on quarterly results for 1998 and forward is that
partnership income and related fees will 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 operating income increase in the first half of 1998 is primarily due to the
DonTech Restructuring, increased revenues in Bell Atlantic and increased
revenues from publishing operations.
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 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
31
<PAGE> 36
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 $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.
32
<PAGE> 37
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 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.
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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.
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,
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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. The decrease is primarily due to a change in the timing of cash
receipts from DonTech related to the DonTech Restructuring. The Company has
available credit capacity under the Revolving Facility which may be used as
necessary to offset any fluctuations in liquidity caused by the timing of cash
receipts from DonTech and other operations 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 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
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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.
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 restate-
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ment 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.
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 $0.3 million for 1999. These
costs will be funded through cash flows from operations.
In addition, it is possible that certain computer systems or software
products with which 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-
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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 [ ], 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 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-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
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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 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.
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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 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-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
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<PAGE> 45
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 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
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<PAGE> 46
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 Prospectus or of the
Letter of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent, addressed as follows:
Deliver To:
The Bank of New York, Exchange Agent
By Mail or By Hand:
Attention:
By Facsimile:
Confirm by Telephone:
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES 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 reasona-
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ble 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 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> 48
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.
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
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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. 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
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<PAGE> 50
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 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.
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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 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
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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.
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.
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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 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
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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 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.
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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.
(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
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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, 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.
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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 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.
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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.
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
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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 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
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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 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.
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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 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
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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).
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.
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<PAGE> 63
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.
59
<PAGE> 64
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
60
<PAGE> 65
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 and its Managing Director
from 1992 to 1996. 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.
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 administer 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
61
<PAGE> 66
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 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.
62
<PAGE> 67
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.
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
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<PAGE> 68
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.
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
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<PAGE> 69
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
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.
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<PAGE> 70
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 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.
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<PAGE> 71
(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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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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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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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 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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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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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,
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plus (iii) the consolidated depreciation and amortization expense included in
the income statement 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
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payments or fees with respect to letters of credit, bankers' acceptances or
similar facilities; (iii) fees 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
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being contested in good faith), (v) every Capital Lease Obligation of such
Person, (vi) all 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,
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easement (other than any easement not materially impairing usefulness or
marketability), encumbrance, 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
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and (iv) any other information required by applicable law to be included
therein. The Offer shall 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
97
<PAGE> 102
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.
98
<PAGE> 103
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> 104
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> 105
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> 106
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> 107
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> 108
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> 109
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> 110
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> 111
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> 112
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
Prepaid Pension Costs..................................... 9,530 10,329
Computer Software -- net.................................. 37,546 40,050
Partnership Investments................................... 167,010 233,706
Other Non-Current Assets.................................. -- 3,207
-------- --------
Total Assets...................................... $382,286 $502,193
======== ========
LIABILITIES AND 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
Postretirement and Postemployment Benefits................ 12,920 10,020
Deferred Income Taxes..................................... 34,456 53,990
Other Liabilities......................................... 16,770 450
-------- --------
Total Liabilities................................. 123,611 123,009
Commitments and Contingencies
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> 113
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> 114
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> 115
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> 116
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> 117
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> 118
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> 119
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> 120
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> 121
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> 122
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> 123
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 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.
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>
F-21
<PAGE> 124
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> 125
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> 126
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> 127
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> 128
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> 129
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> 130
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> 131
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> 132
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> 133
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> 134
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> 135
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> 136
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> 137
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> 138
- ------------------------------------------------------
- ------------------------------------------------------
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.............................. 44
Relationship Between Donnelley Corp.
and the New Dun and Bradstreet
Corporation After the
Distribution........................ 55
Management............................ 59
Security Ownership of Certain
Beneficial Owners and Management.... 66
Description of New Credit Facility.... 68
Description of Notes.................. 69
Certain United States Tax
Consequences........................ 96
Plan of Distribution.................. 97
Validity of Notes..................... 97
Experts............................... 97
Available Information................. 97
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 3, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 139
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> 140
<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
*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
</TABLE>
II-2
<PAGE> 141
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- ----------- --------
<C> <S>
*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.
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-3
<PAGE> 142
(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> 143
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 3rd 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 3, 1998
- --------------------------------------------------- Chief Executive Officer
Frank R. Noonan
/s/ PHILIP C. DANFORD Director, Senior Vice September 3, 1998
- --------------------------------------------------- President and Chief
Philip C. Danford Financial Officer
/s/ STEPHEN B. WIZNITZER Director September 3, 1998
- ---------------------------------------------------
Stephen B. Wiznitzer
/s/ ANNA PATRUNO Vice President and September 3, 1998
- --------------------------------------------------- Controller
Anna Patruno
</TABLE>
II-5
<PAGE> 144
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 3rd 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 3, 1998
- --------------------------------------------------- Directors, President and
Frank R. Noonan Chief Executive Officer
/s/ PHILIP C. DANFORD Senior Vice President and September 3, 1998
- --------------------------------------------------- Chief Financial Officer
Philip C. Danford
/s/ DIANE P. BAKER Director September 3, 1998
- ---------------------------------------------------
Diane P. Baker
/s/ WILLIAM G. JACOBI Director September 3, 1998
- ---------------------------------------------------
William G. Jacobi
/s/ ROBERT J. KAMERSCHEN Director September 3, 1998
- ---------------------------------------------------
Robert J. Kamerschen
/s/ CAROL J. PARRY Director September 3, 1998
- ---------------------------------------------------
Carol J. Parry
/s/ BARRY L. WILLIAMS Director September 3, 1998
- ---------------------------------------------------
Barry L. Williams
/s/ ANNA PATRUNO Vice President and Controller September 3, 1998
- ---------------------------------------------------
Anna Patruno
</TABLE>
II-6
<PAGE> 145
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> 146
<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
*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.........................................
</TABLE>
<PAGE> 147
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. DOCUMENT PAGES
- ----------- -------- ------------
<C> <S> <C>
*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 10.14
SECOND AMENDED AND RESTATED AM-DON PARTNERSHIP AGREEMENT
This Second Amended and Restated Partnership Agreement ("Agreement") is
effective as of this 19th day of August, 1997, by and between THE REUBEN H.
DONNELLEY CORPORATION, a Delaware corporation ("Donnelley"), and AMERITECH
PUBLISHING OF ILLINOIS, INC., a Delaware corporation ("API/IL"). Donnelley and
API/IL are hereafter sometimes referred to individually or collectively as a
"Partner" or the "Partners."
W I T N E S S E T H:
WHEREAS, the Partners have entered into the DonTech II Partnership
Agreement;
WHEREAS, DonTech II intends to enter into the Exclusive Sales Agency
Agreement;
WHEREAS, the Partnership will continue to publish classified directories
and street address directories and otherwise continue with its business through
December 31, 1997;
WHEREAS, the Partnership will cease publishing directories and street
address directories as of January 1, 1998 and will thereafter windup the
Partnership in accordance with this Agreement; and
WHEREAS, the Partners wish to adopt this Agreement as the Partnership's
Second Amended and Restated Articles of Partnership as of the Effective Date.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and benefits herein set forth and contemplated, the Partners agree as
follows:
ARTICLE I
DEFINITIONS
Section 1.1. "Accountants" means the firm of recognized independent
certified public accountants for the Partnership that is appointed pursuant to
this Agreement.
Section 1.2. "Advisory Director" has the meaning set forth in Section
8.1(b).
Section 1.3. "Affiliate" of any Person means any other Person directly or
indirectly Controlling, directly or indirectly Controlled by, or under common
direct or indirect Control
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with, such Person. "Control" in this Section has the same meaning as "control"
in Rule 12b-2 under the Securities Exchange Act of 1934 as in effect on the
Effective Date.
Section 1.4. "Ameritech" means Ameritech Corporation, a Delaware
corporation.
Section 1.5. "Board of Directors" has the meaning set forth in Section
8.1(a).
Section 1.6. "Book Value" has the meaning set forth in Section 4.6(f)(ii).
Section 1.7. "Breaching Partner" has the meaning set forth in Section
9.2(b).
Section 1.8. "Business Day" means Monday, Tuesday, Wednesday, Thursday, or
Friday, unless the day is a federal or Illinois legal holiday.
Section 1.9. "Business Plan" means a business plan (including an operating
budget and a capital budget) for the Partnership for the three succeeding Fiscal
Years, as amended in accordance with this Agreement.
Section 1.10. "Capital Account" has the meaning set forth in Section 4.5.
Section 1.11. "Code" means the Internal Revenue Code of 1986, as amended.
Section 1.12. "Confidential Information" has the meaning set forth in
Section 12.2(a).
Section 1.13. "D&B" means The Dun & Bradstreet Corporation, a Delaware
corporation.
Section 1.14. "Debt" of any Person means (a) obligations of such Person
for borrowed money, (b) obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (c) obligations of such Person
to pay the deferred purchase price of property or services, (d) obligations of
such Person as lessee under capital leases, (e) Debt of others secured by a Lien
on any asset of such Person, whether or not such Debt is assumed by such Person,
and (f) Debt of others guaranteed directly or indirectly by such Person or as to
which such Person has an obligation substantially the economic equivalent of a
guarantee.
Section 1.15. "DonTech II Partnership Agreement" means the agreement by
that title between API/IL and Donnelley dated August 19, 1997.
Section 1.15. "Effective Date" means August 19, 1997.
Section 1.16. "Exclusive Sales Agency Agreement" means the agreement by
that title between APIL Partners Partnership and the Partnership dated August
19, 1997.
Section 1.17. "Fiscal Year" has the meaning set forth in Section 3.2.
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Section 1.18. "GAAP" means generally accepted accounting principles,
consistently applied.
Section 1.19. "Governmental Authority" means any federal, state, local or
foreign governmental Person, authority or agency, Court, regulatory commission,
stock exchange or other body, whether governmental or private, and any
arbitrator acting within the scope of his authority.
Section 1.20. "Governmental Rule" means any statute, law, treaty, rule,
code, ordinance, regulation, permit, certificate or order of any Governmental
Authority or any judgment, decree, injunction, writ, order or like action of any
court, arbitrator or other judicial or quasijudicial tribunal.
Section 1.21. "Impasse" has the meaning set forth in Section 8.6(a).
Section 1.22. "Interest" has the meaning set forth in Section 4.1.
Section 1.23. "IRS" means the Internal Revenue Service.
Section 1.24. "Lien" means any lien, mortgage, encumbrance, pledge,
charge, lease restriction, easement, servitude, right of others or security
interest of any kind, including any thereof arising under conditional sales or
other title retention agreements.
Section 1.25. "Losses" has the meaning set forth in Section 4.6(a).
Section 1.26. "Net Loss" has the meaning set forth in Section 4.6(a).
Section 1.27. "Net Profit" has the meaning set forth in Section 4.6(a).
Section 1.28. "Parent" means Ameritech in the case of API/IL and D&B in
the case of Donnelley.
Section 1.29. "Partner" means API/IL or Donnelley. "Partners" means API/IL
and Donnelley.
Section 1.30. "Partnership" means the general partnership formed pursuant
to this Agreement.
Section 1.31. "Person" means any individual; corporation; partnership,
joint venture; association; joint-stock company; trust; limited liability
company; unincorporated organization; federal, state, local or foreign
governmental agency, authority, court, or regulatory commission; or other
regulatory body, whether governmental or private.
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Section 1.32. "Profits" has the meaning set forth in Section 4.6(a).
Section 1.33. "Proprietary Rights" means patents, patent applications,
patent disclosures and inventions, and any reissue, continuation,
continuation-in-part, division, extension, or reexamination thereof, trademarks,
service marks, trade dress, logos, trade names, business names, and corporate
names, and all goodwill associated therewith; copyrights; mask works; and any
registrations or applications with respect to the foregoing, trade secrets and
confidential business information (including ideas, formulas, compositions,
inventions (whether patentable or unpatentable and whether or not reduced to
practice), know-how, manufacturing and production processes and techniques,
research and development information, drawings, specifications, designs, plans,
proposals, technical data, copyrightable works, financial, business and
marketing plans and customer and supplier lists and information); computer
software, data and documentation; other proprietary rights, licenses or other
agreements to or from third parties regarding the foregoing, and all copies and
tangible embodiments of the foregoing (in whatever form or medium).
Section 1.34. "Seconded Employee" means an employee of a Partner or any of
its Affiliates made available to the Partnership while remaining an employee of
such Partner or Affiliate.
Section 1.35. "Subsidiary" of any Person means a corporation, limited
liability company, company or other entity (i) more than 50% of whose
outstanding shares or securities (representing the right to vote for the
election of directors or other managing authority) are, or (ii) which does not
have outstanding shares or securities (as may be the case in a partnership,
joint venture or unincorporated association), but more than 50% of whose
ownership interest representing the right to make decisions for such other
entity is, now or hereafter owned or controlled, directly or indirectly, by such
Person, but such corporation, company or other entity is a Subsidiary only so
long as such ownership or control exists.
Section 1.36. "Tax Matters Partner" has the meaning set forth in Section
3.5(b)(i).
Section 1.37. "Transfer" means to transfer, sell, assign, convey, license,
sublicense or deliver.
Section 1.38. "Treas. Reg." has the meaning set forth in Section
4.6(f)(i).
Section 1.39. "Voting Director" has the meaning set forth in Section
8.1(b).
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ARTICLE II
ORGANIZATION OF THE PARTNERSHIP
Section 2.1. Formation. The Partnership has been formed as a general
partnership under the Illinois Uniform Partnership Act for the purposes and
scope set forth herein, and the Partners hereby adopt this Agreement as the
Partnership's Second Amended and Restated Articles of Partnership.
Section 2.2. Illinois Uniform Partnership Act. Except to the extent
otherwise provided herein, the rights and liabilities of the Partners and the
conduct and termination of the Partnership shall be governed by the Illinois
Uniform Partnership Act.
Section 2.3. Execution of Documents. The Partners will promptly execute
all certificates and other documents, and make all such filings and recordings
and perform such other acts as may now or hereafter be necessary or desirable,
to comply with the requirements of Illinois law for the organization and
formation of the Partnership and the carrying on of its business.
Section 2.4. General Partner Status. Subject to the limitations on each
Partner's authority contained in Section 7.2, each Partner shall be a general
partner.
Section 2.5. Name, Qualification of Partners. The Partnership's name is
"Am-Don." The Partnership may also do business under other names agreed to by
both Partners. If required by an applicable Governmental Rule, (a) the
Partnership shall cause appropriate partnership certificates or fictitious
business name certificates to be filed with the appropriate Governmental
Authorities and (b) each Partner shall as expeditiously as possible qualify to
do business as a foreign corporation in all appropriate jurisdictions.
Section 2.6. Principal Office. The principal office and place of business
of the Partnership shall be 205 North Michigan Avenue, Chicago, Illinois, or
such other location within Illinois as the Partnership may designate.
Section 2.7. Purpose and Scope.
(a) The purposes of the Partnership shall be to complete the activities
associated with publishing directories and street address directories through
December 31, 1997, to engage in any other businesses which the Partners agree to
undertake, and disbursing profits relating to such businesses, and winding up
the business of the Partnership.
(b) The Partnership shall have the right, authority, and power to do any
act to accomplish, and to enter into any contract incidental to attain, the
purposes of the Partnership specified in this Agreement and to manage the
business of the Partnership.
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(c) The Partners agree that they will conduct the business of the
Partnership to maximize the profitability of the Partnership and will cooperate
in sharing information and resources with each other to further that objective.
Unless the Partners otherwise agree, each member of the Board of Directors and
each Seconded Employee must prefer the interests of the Partnership over the
interests of a Partner or any of its Affiliates.
ARTICLE III
TAX ACCOUNTING METHOD, TAX ELECTIONS, AND TAX YEAR
Section 3.1. Reporting Income. The Partnership shall report its income for
income tax purposes on the accrual method on a calendar-year basis. The
Partnership shall elect to treat any research and development expenses incurred
by the Partnership as current expenses.
Section 3.2. Fiscal. The fiscal year of the Partnership shall be the
calendar year.
Section 3.3. Books and Records. The Partnership shall cause to be prepared
and maintained in Illinois complete books and records, on an accrual basis,
regarding all phases of its business including, without limitation,
construction, lease acquisition and maintenance, marketing, procurement and
purchasing, contract administration, financial planning, accounting, reporting,
legal expenditures, capital expenditures, taxes, royalties and other operating
expenses, capital and operating budgets, and other reporting procedures. Each
Partner shall have the right (at its own expense) to inspect, audit, and copy
any and all such books and records at all reasonable times, which right may be
exercised through any agent or employee of such Partner designated by such
Partner or by an independent certified public accountant designated by such
Partner.
Section 3.4. Financial Statements. As soon as practicable following the
end of each Fiscal Year (and in any event not later than 90 days after the end
of such Fiscal Year), the Partnership shall prepare and deliver to each Partner
and the Board of Directors, a balance sheet of the Partnership as of the end of
such Fiscal Year and the related statements of operations, changes in Partners'
equity and cash flow of the Partnership for such Fiscal Year, together with
appropriate notes to such financial statements, all of which shall be prepared
in accordance with GAAP and certified by the Accountants. At the same time, the
Partnership shall deliver (at its sole expense) to each Partner a report
indicating such Partner's share of all items of income, gain, loss, deduction,
and credit of the Partnership for such Fiscal Year and any other financial
information related to the Partnership which is requested by either Partner for
federal, state, local or foreign income or franchise tax purposes.
Section 3.5. Taxation.
(a) Characterization. The Partners intend that the Partnership shall be
treated as a partnership for federal, state, local, and foreign income and
franchise tax purposes and shall take
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all reasonable action, including the amendment of this Agreement and the
execution of other documents, as may be required to qualify for and receive
treatment as a partnership for federal income tax purposes.
(b) Tax Matters Partner.
(i) The Board of Directors shall designate from time to time one of the
Partners to serve as the Tax Matters Partner of the Partnership under Section
6231(a)(7) of the Code and in any similar capacity under state, local, or
foreign law (the "Tax Matters Partner"). The Tax Matters Partner shall take no
action (other than ministerial action) without the prior approval of the Board
of Directors. The Tax Matters Partner shall not be required to take any action
or incur any expenses for the prosecution of any administrative or judicial
remedies in its capacity as the Tax Matters Partner unless both Partners agree
on a method of sharing expenses incurred in connection with the prosecution of
such remedies and on appropriate tax counsel or other tax advisors to represent
the Partnership in connection with such matters. As long as the Tax Matters
Partner is not grossly negligent and acts in good faith pursuant to instructions
it receives from the Board of Directors, (A) the Tax Matters Partner shall be
fully protected in acting as such and (B) the Partnership shall indemnify and
hold harmless the Tax Matters Partner from and against any and all expenses
incurred by the Tax Matters Partner in connection with any activities or
undertakings taken by it in its capacity as the Tax Matters Partner. If the
other Partner enters into a settlement or closing agreement with the IRS or any
comparable Governmental Authorities with respect to any Partnership tax item,
then the other Partner shall notify the Tax Matters Partner of such agreement
and its terms within 30 days of the execution of such agreement.
(ii) The Tax Matters Partner shall take such action as may be reasonably
necessary to constitute the other Partner a "notice partner" within the meaning
of Section 6231(a)(8) of the Code. The Tax Matters Partner shall notify the
other Partner of all material matters that come to its attention in its capacity
as Tax Matters Partner, and the other Partner and the Partnership shall notify
the Tax Matters Partner of all material matters that come to their attention
relevant to the Tax Matters Partner's acting as such. This Section 3.5(b) is not
intended to authorize the Tax Matters Partner to exercise or limit any right
that is exercisable by the other Partner under Sections 6222 through 6233 of the
Code.
(c) Tax Returns. The Tax Matters Partner shall cause the Accountants to
prepare and file on a timely basis the federal tax returns of the Partnership
for each fiscal year for which such Tax Matters Partner is responsible. On or
before the earliest of (i) July 1, (ii) 45 days before the due date (determined
with regard to any extension) of each such return, and (iii) such date as is
requested by either Partner, the Tax Matters Partner shall transmit copies
thereof to the other Partner for review. The Tax Matters Partner shall not cause
any such tax return to be filed by or on behalf of the Partnership unless the
other Partner has consented to its filing; provided, however, that if the other
Partner does not consent to the filing of any such tax return at least 15 days
before the due date, the Tax Matters Partner (a) shall promptly submit any
disputed issues to the Accountants for resolution, such resolution to be binding
upon the Partners and (b) may, in
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the event that the Accountants are unable to resolve such dispute at least five
days before the due date, (1) file such return after making a good faith effort
to incorporate in such return any comments previously received from such Partner
and (2) incorporate the Accountants' resolution into an amended return within a
reasonable time after the Accountants resolve such dispute.
The Tax Matters Partner shall cause state, local, and any other required
tax returns of the Partnership to be prepared and filed on a timely basis. To
the extent appropriate in connection with such preparation and filing, (i) the
Accountants or other accounting firms shall assist and (ii) the Partners shall
be consulted.
Section 3.6. Deposit of Funds. All funds of the Partnership not otherwise
employed shall be (a) deposited from time to time to its credit in such banks or
trust companies or other depositories or (b) invested in such other short-term
investments as the Board of Directors shall select, or as may be selected by any
authorized officer or agent of the Partnership. The funds of the Partnership
shall not be commingled with the funds of either Partner or any Affiliate of
either Partner.
Section 3.7. Independent Accountants. The Board of Directors shall select
the Accountants for the Partnership from a recognized firm of public accountants
to provide general outside accounting services to the Partnership and to perform
the annual audit of the Partnership. In the event such firm resigns or is
otherwise unable to continue to serve as the Partnership's outside Accountants,
then the Board of Directors shall select successor Accountants. Nothing in this
section shall be construed to preclude the Board of Directors from selecting a
nationally recognized accounting firm performing services for either Partner.
ARTICLE IV
INITIAL CAPITAL, CONTRIBUTIONS, DISTRIBUTIONS, AND ALLOCATIONS
Section 4.1. Partnership Interest. Each Partner's interest ("Interest")
shall be as follows: Donnelley's Interest shall be fifty three percent (53%);
API/IL's Interest shall be forty-seven percent (47%).
Section 4.2. Initial Capital Contribution. The Partners have heretofore
made capital contributions to the Partnership. All non-cash contributions to the
Partnership shall be valued at their net book value as determined by the Board
of Directors.
Section 4.3. Additional Capital Contributions. From time to time during
the term of the Partnership, the Board of Directors may call for additional
capital contributions if, in the opinion of the Board of Directors, additional
capital is required for the operation of the Partnership. Notice of any capital
call shall be delivered to each Partner not less than five Business Days prior
to the date payment is required to be made pursuant to the capital call.
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Section 4.4. Distributions. Periodically, as determined by the Board of
Directors, the Partnership, whether from Partnership operations or otherwise,
shall distribute to the Partners in proportion to their respective Interests (a)
the Partnership's net profits for the period completed reduced by any funds
which the Board of Directors determines to be necessary to satisfy existing or
future obligations of the Partnership and (b) other assets.
Section 4.5. Partner Capital Accounts. The term "Capital Account" means
the account maintained for each Partner in accordance with the following
provisions:
(a) To each Partner's Capital Account there shall be credited such
Partner's capital contributions pursuant to Article IV (with any property
contributed in kind valued at the net book value thereof as determined by the
Board of Directors net of any Partner liabilities assumed or taken subject to by
the Partnership), such Partner's allocation of Net Profits, and the amount of
any Partnership liabilities assumed by such Partner (excluding guarantees and
loans made by such Partner);
(b) From each Partner's Capital Account there shall be debited the amount
of cash and the fair market value of any property of the Partnership distributed
to such Partner (as determined by the Board of Directors) pursuant to any
provision of this Agreement net of Partnership liabilities retained or assumed
by the Partner, such Partner's allocation of Net Losses, and the amount of any
liabilities of such Partner assumed by the Partnership;
(c) If any interest in the Partnership is Transferred in accordance with
the terms of this Agreement, the Transferee shall succeed to the Capital Account
of the Transferor to the extent it relates to the Transferred interest in the
Partnership; and
(d) The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with the
requirements of Treas. Reg. Section 1.704-1(b) and shall be interpreted and
applied in a manner consistent therewith.
Section 4.6. Allocations of Partnership Profit and Loss.
(a) "Profits" means items of Partnership income and gain determined
according to Section 4.6(b), "Losses" means items of Partnership loss and
deduction determined according to Section 4.6(b). The "Net Profit" of the
Partnership for a fiscal period shall mean the excess of Partnership Profits
over Partnership Losses. The "Net Loss" of the Partnership for a fiscal period
shall mean the excess of Partnership Losses over Partnership Profits.
(b) For purposes of computing the amount of any item of Partnership
income, gain, loss or deduction the determination, recognition and
classification of any such item shall be the same as its determination,
recognition and classification for federal income tax purposes except that:
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(i) items of income and gain exempt from federal income tax shall
be included;
(ii) Partnership expenditures not deductible for federal income tax
purposes and not chargeable to Capital Accounts (including any losses on
Partnership property sold to a related person that are disallowed for federal
income tax purposes) shall be included as items of loss or deduction;
(iii) items of income, gain, loss or deduction attributable to the
disposition of Partnership property having a Book Value that differs from its
adjusted basis for federal income tax purposes shall be computed by reference to
the Book Value of such property;
(iv) items of depreciation, amortization and other cost recovery
deductions with respect to Partnership property having a Book Value that differs
from its adjusted tax basis for federal income tax purposes shall be computed by
applying the same method and rate or depreciable life used to recover adjusted
tax basis for federal income tax purposes to the property's Book Value; and
(v) if Partnership property is distributed to a Partner, such
property shall be treated as if it were sold for an amount equal to its net book
value.
(c) Except as otherwise provided in Section 4.6(e), the Net Profit of
the Partnership for any fiscal period shall be allocated to all Partners in
proportion to their Interests.
(d) Except as otherwise provided in Section 4.6(e), the Net Loss of the
Partnership for any fiscal period shall be allocated to all Partners in
proportion to their Interests.
(e) The following special allocations shall be made:
(i) If there is a net decrease in the partnership minimum gain (as
defined by Treas. Reg. Section 1.704-2(d)) or partner nonrecourse debt minimum
gain (as defined by Treas. Reg. Section 1.704-2(i)(2)) during any taxable year,
each Partner shall be allocated Profits for such taxable year (and, if
necessary, for subsequent taxable years) in the amounts and of such character as
determined according to Treas. Reg. Sections 1.704-2(f) or 1.704-2(i)(4). This
Section 4.6(e)(i) is intended to be a minimum gain chargeback and partner
nonrecourse debt minimum gain chargeback that complies with the requirements of
Treas. Reg. Section 1.704-2, and shall be interpreted in a manner consistent
therewith.
(ii) Subject to Section 4.6(b), organizational expenses (as defined
in Treas. Reg. Section 1.709-2(a)) shall be allocated to the Partners to whom
such expenses are attributable, in such proportion as the Partners reasonably
determine.
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(iii) If, and to the extent that, any Partner is deemed to recognize
any item of income, gain, loss, deduction or credit as a result of any
transaction between such Partner and the Partnership pursuant to Code Sections
1272-1274, 7872, 483, 482, 83 or any similar provision, any corresponding item
of Profit or Loss shall be allocated to the Partner who recognized such item.
(iv) Any gain or loss described in Section 9.4(e) shall be
allocated to each Partner in accordance with Section 4.6(c) and 4.6(d).
(f) The following definitions shall apply for purposes of this
Agreement:
(i) "Treas. Reg." means the federal income tax regulations
promulgated under the Code before the Effective Date. To the extent that such
regulations are subsequently amended, the Partners shall discuss at such time
whether any amendments to this Agreement are necessary or desirable.
(ii) "Book Value" means with respect to any Partnership property,
the Partnership's adjusted tax basis for federal income tax purposes, except
that the Book Value of any property contributed to the Partnership in kind by a
Partner shall be the property's fair market value as determined by the Board of
Directors as of the date of contribution adjusted by the Partnership's
subsequent depreciation, amortization or other cost recovery with respect to
such property computed under Section 4.6(b)(iv).
(g) Except as provided by Section 4.6(e), an allocation of Net Profit or
Net Loss to a Partner shall be deemed to consist proportionately of each item of
Partnership income, gain, loss or deduction determined according to Section
4.5(b) making up such Net Profit or Not Loss.
(h) For purposes of determining the Partners' share of excess
nonrecourse liabilities under Treasury Reg. Section 1.752-3(a)(3), each Partner
shall be treated as having a 50 percent interest in profits.
Section 4.7. Tax Allocation.
(a) Except as otherwise provided in Section 4.7(b), items of Partnership
taxable income, gain, loss and deduction shall be determined according to Code
Section 703 and allocated to the Partners according to their respective shares
of Net Profit and Net Loss to which such items relate.
(b) Items of Partnership taxable income, gain, loss and deduction with
respect to any property contributed to the capital of the Partnership by a
Partner shall be allocated between the Partners according to Code Section 704(c)
so as to take account of any variation between its Book Value and the adjusted
tax basis of such property to the Partnership for federal income tax purposes
using such method as determined by the Board of Directors.
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(c) Allocations pursuant to this Section 4.7 are solely for purposes of
federal, state and local income taxes and shall not affect or be taken into
account in computing any Partner's Capital Account or share of Profits, Losses,
distributions or other Partnership items.
Section 4.8. Curative Allocations. If the Partners determine, after
consultation with competent tax counsel, that the allocation of any item of
Partnership income, gain, loss, deduction or credit is not specified in this
Article IV (an "unallocated item"), or that the allocation of any item of
Partnership income, gain, loss, deduction or credit hereunder is clearly
inconsistent with the Partners' economic interests in the Partnership
(determined by reference to the general principles of Treas. Reg. Sections
1.704-1(b) and 1.704-2(b) and the factors set forth in Treas. Reg. Section
1.704-1(b)(3)(ii)) (a "misallocated item"), then the Partners shall allocate
such unallocated items, or reallocate such misallocated items, to reflect such
economic interests. In the event of disagreement between the Partners as to a
curative allocation, the matter shall be referred for resolution to competent
tax counsel designated by the Board of Directors.
Section 4.9. Indemnification and Reimbursement for Payments on Behalf of a
Partner. If the Partnership is required by law to make any payment on behalf of
any Partner in its capacity as such or as a result of such Partner's status
(including federal withholding taxes, state personal property taxes, and state
unincorporated business taxes), then such Partner shall indemnify the
Partnership in full for the entire amount paid (including interest, penalties
and related expenses). The Partnership may offset distributions to which a
Partner is otherwise entitled hereunder against such Partner's obligation to
indemnify the Partnership under this Section 4.9.
Section 4.10. No Interest. No interest shall be payable to the Partners on
their capital contributions or otherwise in respect of the capital of the
Partnership.
Section 4.11. Payroll Taxes. The Partners and the Partnership agree that
responsibilities for payroll taxes shall be assigned under the Alternative
Procedure described in Section 5 of Rev. Proc. 83-66, to the extent applicable.
ARTICLE V
PARTNERSHIP EXPENSES
The Partnership shall take whatever steps are necessary to pay the
expenses related to conducting its business, borrowing funds, and making capital
calls on the Partners.
ARTICLE VI
BUSINESS OPERATIONS
Section 6.1. Business Dealings with the Partnership. A Partner or any
Affiliate thereof may enter into contracts or agreements, including loans, with
the Partnership and otherwise enter
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into transactions or dealings with the Partnership on an arm's-length or other
reasonable basis and derive and retain profits therefrom, provided that any such
contract or agreement or other transaction or dealing is approved by the Board
of Directors in accordance with this Agreement. The Board of Directors may cause
the Partnership to enter into contracts or agreements with a Partner with or
without competitive bidding. The validity of any such contract, agreement,
transaction, or dealing or any payment or profit related thereto or derived
therefrom shall not be affected by any relationship between the Partnership and
such Partner or any of its Affiliates. All loans from one Partner to the
Partnership shall be made with full recourse to each Partner.
Section 6.2. Conflicts of Interest. The Partners agree that if a conflict
of interests arises, each conflicted Partner, member of the Board of Directors
("Board Member"), or Seconded Employee may act inconsistently with the
Partnership's interests only after (i) the Partner that has the conflict of
interest or the Partner that appointed the conflicted Board Member or conflicted
Seconded Employee fully discloses the conflict to the other Partner and (ii) the
other Partner explicitly waives the conflict in writing.
ARTICLE VII
ACTIONS BY PARTNERS OR BY THE BOARD OF DIRECTORS
Section 7.1. Matters Requiring the Consent of the Board of Directors. The
Partnership may not act in connection with any of the following matters without
the Board of Directors' consent expressed in a formal resolution:
(a) any change in the amount of capital contributions provided in Sections
4.2 or 4.3 or in the allocation of profits, losses, deductions, or credits
between the Partners;
(b) the sale, lease, exchange, or other disposition (including by license)
of substantially all of the assets or properties of the Partnership;
(c) the release of either Partner from any of its obligations under this
Agreement;
(d) the sale or license of any of the Partnership's Proprietary Rights;
(e) (i) the filing of a petition in bankruptcy or for reorganization or
rehabilitation under the federal bankruptcy law or any state law for the relief
of debtors, having an order for relief entered against it under the federal
bankruptcy law or otherwise having the Partnership adjudicated bankrupt or
insolvent, the making of an assignment for the benefit of creditors, or the
suffering of the appointment of a receiver, trustee, or custodian for a
substantial portion of its business or properties by virtue of an allegation of
insolvency or (ii) any similar action under any foreign law;
(f) the dissolution or liquidation of the Partnership;
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(g) any change in or departure from the purposes of the Partnership;
(h) an incurrence of (i) obligations for borrowed money (whether secured
or unsecured), (ii) obligations exceeding $250,000 at any time that represent
the deferred purchase price of property or services other than accounts payable
arising in the ordinary course of business, (iii) obligations that would be
shown as a liability on a balance sheet of the Partnership under GAAP in respect
of leases of property that would be capitalized on such balance sheet, (iv)
obligations evidenced by any bond, note, debenture, or other evidence of Debt,
and (v) guarantees (direct or indirect and however named) in respect of any
obligations of third parties referred to in clauses (i) through (iv); provided,
however, that the authorization called for by this Section 7.1 shall not be
required in respect of the Partnership actions referred to in clauses (i),
(iii), (iv), and (v) if (A) the aggregate amount outstanding at any time under
all such clauses does not exceed $250,000 and (B) such obligations are incurred
under banking arrangements previously authorized;
(i) the making of any loan or advance to any Person, except for loans and
advances to employees and consultants in the ordinary course of business at any
time not exceeding $250,000 outstanding in the aggregate to all employees and
consultants, excluding salespersons' commission overdrafts;
(j) other than in the ordinary course of business, (i) the sale, lease,
exchange, or other disposition (including by license) of less than substantially
all of the assets or properties of the Partnership or (ii) the acquisition of
any assets or properties (including by license), in each case if it has a value
to or effect on the Partnership of $100,000 or more;
(k) the entering into or the amendment or termination (other than
automatic termination pursuant to the terms thereof) of any (i) agreement,
contract, or commitment between the Partnership and either Partner or any
Affiliate of either Partner or (ii) any agreement, contract, or commitment
between the Partnership and any third party that benefits either Partner (other
than in its capacity as a Partner) or any Affiliate of either Partner (other
than by benefiting such Affiliate by benefiting such Partner in its capacity as
a Partner), in each case if it has a value to or effect on the Partnership in
excess of $50,000;
(l) any capital expenditure (including research and development
expenditures), or any related group of capital expenditures, in excess of
$125,000 or the making of any capital expenditures in any one year aggregating
in excess of the approved capital budget;
(m) the appointment or removal of the Accountants;
(n) the commencement (including the filing of a counterclaim) or
settlement of any claim or litigation, regulatory proceeding, or arbitration to
which the Partnership is, or is to be, a
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party, if the claim or litigation, regulatory proceeding, or arbitration has a
value to or effect on the Partnership of more than $100,000;
(o) the creation of any Liens upon any assets or properties of the
Partnership, other than (i) any imperfections of title or other Liens that,
individually or in the aggregate, are not substantial in character or amount and
do not materially impair the value of or materially interfere with the use of
any of the assets or properties subject thereto, (ii) Liens relating to
obligations approved under this Section 7.1, and (iii) software escrows in the
ordinary course of business and for ordinary purposes if the Partnership's
general form therefor has been previously approved by the Board of Directors and
the particular software escrow does not materially differ from such form;
(p) the entering into of any partnership or formal joint venture, or the
acquisition of any capital stock of or other ownership interest in any Person,
other than investments in marketable securities that are held as cash
equivalents;
(q) any merger or consolidation of the Partnership;
(r) any declaration or payment of any distribution to either Partner;
(s) the delegation of authority to any Person to approve the taking of any
action set forth in this Section 7.1;
(t) (i) the hiring or firing of any officer or (ii) the hiring of any
individual who was an employee of any Partner or Affiliate thereof within two
years of his leaving any Partner's or Partner Affiliate's employ;
(u) other than matters in the ordinary course of business, any delegation
of authority to the President or any other officer of the Partnership;
(v) the setting or changing of the annual compensation of any officer;
(w) the adoption or amendment of any long-range plans of the Partnership,
including the Business Plan;
(x) the creation of any Subsidiary or material business alliance;
(y) the creation of any committee of the Board of Directors;
(z) the adoption, amendment, or termination of any (i) collective
bargaining agreement, (ii) plan, policy, arrangement, or understanding providing
any of the following benefits to any current or former employee of the
Partnership or any Subsidiary of the Partnership; bonuses, pension, profit
sharing, deferred compensation, incentive compensation, stock ownership, equity
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or quasi-equity purchase, equity or quasi-equity option, equity or quasi-equity
appreciation rights, phantom equity or quasi-equity, retirement, vacation,
severance, disability, death benefit, hospitalization, or insurance, or (iii)
other material personnel practices or policies of the Partnership; provided,
however, that the approval otherwise required by clause (ii) of this Section
7.1(z) does not apply to an ad hoc grant of cash bonuses, vacation leave, and
the like to individual employees that otherwise does not violate this Agreement;
(aa) the entering into or amendment or termination (other than automatic
termination pursuant to the terms thereof) of any agreement, contract, or
commitment (i) pursuant to the approved Business Plan (A) having a duration of
one year or more and representing a value to or commitment of the Partnership of
$1,000,000 or more, other than as otherwise contemplated by this Section 7.1, or
(B) representing a value to or commitment of the Partnership of $3,000,000 or
more and (ii) if not pursuant to the approved Business Plan, having a value to
or commitment of the Partnership of $700,000 or more;
(bb) any public announcement (including in interviews) (i) of any new
Partnership product (as opposed to any minor modification of or improvement to
any existing product) or (ii) describing either Partner's or any of its
Affiliates' relationship with the Partnership in other than previously approved
general terms;
(cc) the setting or changing of the royalties to be charged under any
license agreement of or for Proprietary Rights;
(dd) any filings with or public comments to be made to any Governmental
Authority;
(ee) any change in the Partnership's fiscal year;
(ff) the entering into of any agreement or commitment to take any action
set forth in Sections 7.1(a) through 7.1(ee), unless such agreement or
commitment and each counterparty thereto acknowledges in writing that it is
subject to approval and failure to receive such approval does not result in a
penalty or adverse effect (other than loss of the promise of the counterparty's
performance) to the Partnership; or
(gg) the (i) taking of any action set forth in Sections 7.1(a) through
7.1(ee) by the Partnership as owner of any Subsidiary, or otherwise with respect
to any Subsidiary, assuming for this purpose that references to the Partnership
in such clauses include a reference to any Subsidiary of the Partnership, (ii)
amendment of the charter, by-laws, or other governing document of any
Subsidiary, or (iii) causing or permitting of the Partnership's direct or
indirect ownership of any of its Subsidiaries to change.
Section 7.2. Restrictions on Partners. Neither Partner may, without the
consent of the other Partner:
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(a) confess a judgment against the Partnership;
(b) make any agreement on behalf of or otherwise purport to bind the other
Partner or (except as required by Governmental Rule) the Partnership;
(c) do any act in contravention of this Agreement;
(d) do any act that would make it impossible to carry on the business of
the Partnership;
(e) dispose of the goodwill or the business of the Partnership;
(f) assign the property of the Partnership in trust for creditors or on
the assignee's promise to pay the Debts of the Partnership; or
(g) release a Partner or any of its Affiliates from any obligation under
this Agreement or any obligation that a Partner or any of its Affiliates owes
with respect to the Partnership.
Each partner agrees that it will indemnify the Partnership and the other
Partner against any and all claim, loss, or damage to which the Partnership or
such other Partner may be or become subject arising or resulting from the breach
by such Partner of this Section 7.2.
ARTICLE VIII
MANAGEMENT AND OPERATION OF THE PARTNERSHIP
Section 8.1. The Board of Directors.
(a) General. The Partnership shall have a board of directors consisting of
six individuals appointed by the Partners (the "Board of Directors"). The Board
of Directors shall direct the Partnership in accordance with this Agreement.
(b) Members, Voting, etc.
(i) Each Partner shall appoint two members of the Board of Directors,
one of whom shall be entitled to cast one vote on all matters (the "Voting
Director") and the other of whom may advise the Board of Directors but shall
have no vote (the "Advisory Director"). In addition, the Chief Executive Officer
and a financial officer shall serve on the Board of Directors as non-voting
members. Each Partner shall be entitled to name an alternate member to serve in
the place of any member appointed by such Partner should any such member not be
able to attend a meeting or meetings. Each Voting Director and Advisory Director
shall serve at the pleasure of the designating Partner.
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(ii) If a member should die, resign, or be removed, the Partner
that appointed him or her shall have the right to designate his or her successor
in a writing delivered to the other Partner. Each Partner shall bear the cost
incurred by any individual designated by it to serve on the Board of Directors,
and no such individual shall be entitled to compensation from the Partnership
for serving in such capacity.
(iii) Each Partner shall notify the Partnership and the other
Partner of the name, business address, and business telephone and telecopier
numbers of each member and each alternate member that such Partner has appointed
to the Board of Directors. Each Partner shall promptly notify the Partnership
and the other Partner of any change in such Partner's appointments or of any
change in any such address or number.
(iv) The Board of Directors may take action only by the affirmative
vote of both Voting Directors. The quorum necessary for any meeting of the Board
of Directors shall be the number of members needed to approve any action.
(v) Any action taken by a member of the Board of Directors shall,
so far as the other Partner is concerned, be deemed to have been duty authorized
by the Partner appointing him or her. Each appointment by a Partner to the Board
of Directors shall remain in effect until the Partner making such appointment
notifies the Partnership and the other Partner of a change in such appointment.
The resignation or removal of a member of the Board of Directors shall not
invalidate any act of such member taken before the giving of written notice of
his or her removal or resignation.
(c) Meetings, etc.
(i) Meetings of the Board of Directors shall be held at the
principal offices of the Partnership or at such other place as may be determined
by the Board of Directors. Regular meetings of the Board of Directors shall be
held quarterly on such dates and at such times as shall be determined by the
Board of Directors.
(ii) Special meetings of the Board of Directors may be called by
either Partner on at least five days' notice to each member thereof, which
notice shall state the purpose or purposes for which such meeting is being
called.
(iii) The actions taken by the Board of Directors at any meeting,
however called and noticed, shall be as valid as if taken at a meeting duly held
after regular call and notice if (but not until) at any time the member as to
whom it was improperly held signs a written waiver of notice or a consent to the
holding of such meeting or an approval of the minutes thereof. A vote of the
Board of Directors may be taken either in a meeting of the members thereof or by
written consent.
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(iv) A meeting of the Board of Directors may be held by conference
telephone or similar communications equipment by means of which all individuals
participating in the meeting can be heard.
(v) The Board of Directors may establish reasonable rules and
regulations to (i) require officers to call meetings and perform other
administrative duties, (ii) limit the number and participation of observers and
to require them to observe confidentiality obligations, and (iii) otherwise
provide for the keeping of minutes and other internal Board of Directors
governance.
(d) Partners May Act. Nothing in this Section 8.1 derogates from the
power of the Partners to agree in writing to cause the Partnership to act.
Section 8.2. Officers.
(a) General. The officers of the Partnership shall be a Chief Executive
Officer, Chief Financial Officer, and such other officers as may be designated
by the Board of Directors from time to time to be necessary or advisable in the
conduct of the business and affairs of the Partnership. Subject to the
provisions of Section 7.1, the officers of the Partnership shall be appointed
and shall be subject to removal without cause by the Board of Directors. Any
individual may hold more than one office. Any officer of the Partnership may
also serve as an officer, employee, or agent of a Partner or any of its
Affiliates. All officers of the Partnership shall (i) report to the Chief
Executive Officer (except that he or she shall report to the Board of
Directors), (ii) have the powers and duties set forth in this Section 8.2 or as
otherwise prescribed by the Board of Directors, (iii) serve for the term
designated by the Board of Directors, subject to removal as provided above, and
(iv) attend meetings of the Board of Directors as requested.
(b) Chief Executive Officer. The Chief Executive Officer shall (i) be
the chief executive officer of the Partnership who shall have the usual powers,
duties, and responsibilities incident thereto, subject to additions,
modifications, and deletions thereof from time to time by the Board of Directors
and those powers and responsibilities specifically reserved hereunder to the
Partners and the Board of Directors, (ii) manage the conduct of the business and
affairs of the Partnership, and (iii) see that all orders and resolutions of the
Board of Directors are carried into effect.
(c) Chief Financial Officer. The Chief Financial Officer shall, subject
to the authority of the Chief Executive Officer, keep and maintain, or cause to
be kept and maintained, adequate and correct accounts of the properties and
business transactions of the Partnership, and shall send or cause to be sent to
the Partners such financial statements and reports as required by law or this
Agreement to be sent to the Partners or as may be reasonably requested by a
Partner. Subject to the authority of the Chief Executive Officer and the Board
of Directors, the Chief Financial Officer shall have general and active
management of the Partnership's finances. The Chief Financial Officer shall have
such other powers and perform such other duties as may be prescribed by the
Board of Directors.
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Section 8.3. Nomination Procedures.
All candidates for Chief Executive Officer and Chief Financial Officer
shall be nominated and confirmed by the Board of Directors.
Section 8.4. Management.
The Chief Executive Officer and his designees shall manage the
Partnership's affairs subject to the control of the Board of Directors. The
Board of Directors shall annually approve the Business Plan. The Chief Executive
Officer shall manage the Partnership's business in accordance with the Business
Plan, which he shall annually update and propose to the Board of Directors.
Section 8.5. Dispute Resolution.
(a) Accounting Matters. In the event of a dispute between the Partners
with respect to Partnership accounting and/or federal or state income tax
matters or the time, manner, or allocation of a distribution under this
Agreement, the Partners shall select an independent accounting firm to resolve
the dispute. In the event the Partners cannot agree upon an accounting firm,
each of the Partners shall select an independent accounting firm. The firms thus
selected shall then select a single independent accounting firm not then engaged
by either of the Partners, or any of their Affiliates, to resolve the dispute.
The decision of the accounting firm selected in accordance with the foregoing
procedure is to be made within 60 days of the firm's selection and shall be
final and binding upon the Partners and not subject to appeal.
(b) Other Matters. Whenever a member of the Board of Directors proposes
in good faith that the Board of Directors consent to an action described in
Section 7.1 and the Board of Directors does not so consent, the following shall
apply:
(i) When the matter arises at the level of the Board of Directors
or in other dealings between Partners, such dispute shall be submitted, for
discussion and possible resolution, to the President of API/IL (or such senior
officer of API/IL designated by the chief executive officer of API/IL) and the
President of Donnelley (or such senior officer of Donnelley designated by the
chief executive officer of Donnelley).
(ii) In the event that such senior officers fail to resolve the
dispute within 45 days, the dispute shall be submitted, for discussion and
resolution, to the chief executive officer of the Parent of each Partner or the
designee of the chief executive officer. Each Partner shall negotiate in good
faith to resolve the dispute.
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Section 8.6. Unresolved Disputes.
(a) In the event that the chief executive officers of the Partner's
Parents fail to resolve a dispute pursuant to Section 8.5(b)(ii) within 30 days,
either Partner may declare an impasse (an "Impasse") by written notice to the
other Partner. Following declaration of an Impasse the Partners shall, for a
period of 90 days, negotiate in good faith to resolve the Impasse. During such
negotiations and until a resolution through arbitration or otherwise, the
Partnership shall conduct its business in the ordinary course.
(b) If the Impasse is not resolved by negotiation pursuant to (a) above,
the Partners shall submit all disputes, except those disputes that include a
demand for emergency equitable relief, arising out of this Agreement to
arbitration in accordance with the Commercial Rules of the American Arbitration
Association ("AAA") then in effect. Unless otherwise agreed by the Partners, the
dispute shall be resolved by the AAA within sixty (60) days of submission, and
the AAA shall be informed of the sixty (60) day resolution requirement when the
submission is made to the AAA. Judgment on the award may be entered in any court
having jurisdiction. The location of the arbitration proceeding shall be in the
greater metropolitan area of Chicago, Illinois.
(c) Notwithstanding the procedures set forth in Sections 8.5(b) and 8.6(a)
and (b), any dispute that includes a demand for emergency equitable relief shall
be brought in a court of competent jurisdiction in the State of Illinois, and
each Partner hereby submits to the jurisdiction of such courts for the purpose
of any such suit, action, or proceeding.
Section 8.7. Insurance. The Partnership shall at its expense maintain
insurance against such liabilities and other risks associated with the conduct
by the Partnership of its operations and in such amounts as is generally
maintained by companies engaged in a business similar to that of the
Partnership. In addition, the Partnership may, to the fullest extent permitted
by law, purchase and maintain insurance against any liability that may be
asserted against any Person entitled to indemnity pursuant to Section 10.1.
Section 8.8. Employee and Officer Confidentiality Agreements. The
Partnership shall enter into confidentiality agreements with each of its
officers and each Seconded Employee sufficient to enable the Partnership to
fully comply with its obligations of confidentiality set forth in Article XII.
ARTICLE IX
TERM, DISSOLUTION, AND TERMINATION
Section 9.1. Effective Date and Term. The Partnership shall exist as of
the Effective Date and shall continue in perpetuity until dissolved by the
occurrence of an event described and in accordance with the provisions of this
Article. No Partner shall have the right to, and each
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Partner agrees not to, dissolve, terminate or liquidate, or to petition a court
for the dissolution, termination, or liquidation of, the Partnership, except as
provided in this Agreement. Each Partner agrees that dissolution, termination,
or liquidation of the Partnership or the filing of a petition to put the
Partnership in bankruptcy are not matters subject to the impasse and arbitration
provisions of Article VIII of this Agreement. Neither Partner shall permit to
exist any event of dissolution hereunder or under any applicable law within its
control (other than a technical dissolution caused by a transfer to an Affiliate
pursuant to Section 11.2 or after an Impasse pursuant to Section 8.6).
Section 9.2. Events of Dissolution.
(a) The Partnership shall be dissolved upon the earliest of any of the
following events to occur:
(i) The unanimous written agreement of the Partners to dissolve
the Partnership; or
(ii) If (A) a Partner or its Parent shall (1) apply for or consent
to the appointment of a receiver, trustee, or liquidator, of its Partner or its
Parent, or of all or a substantial part of the Partner's or its Parent's assets,
(2) have been adjudicated a bankrupt or insolvent, or file a voluntary petition
in bankruptcy, or admit its inability to pay its debts as they come due, (3)
make a general assignment for the benefit of creditors, (4) file a petition or
answer seeking reorganization or arrangement with creditors or otherwise take
advantage of any insolvency law, or (5) file an answer admitting the material
allegations, or consent to, or default in answering the petition filed against
the Partner or its Parent in any bankruptcy, reorganization, or insolvency
proceedings; or (B) an order, judgment, or decree shall be entered by any court
of competent jurisdiction approving a petition seeking reorganization of a
Partner or its Parent or an arrangement with creditors (or any call of
creditors) of a Partner or its Parent or appointing a receiver, trustee, or
liquidator of a Partner or its Parent or of all or a substantial part of the
assets of a Partner or its Parent, and such order, judgment, or decree shall
continue unstayed and in effect for any period of 60 consecutive days; or
(iii) The acquisition by one Partner of the entire Interest of the
other Partner in the Partnership;
(iv) A Transfer of a Partner's Interest in contravention of Article
XI of this Agreement;
(v) A decision by the Board of Directors, in the exercise of their
business judgment, to dissolve the Partnership because they have determined in
good faith that (A) changes in any applicable law or regulation would have a
material adverse effect on the continuation of the Partnership or (ii) such
action is necessary in order for the Partnership not to be in material violation
of any material law or regulation;
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(vi) By either Partner, upon thirty (30) days prior written notice
to the other Partner, if such other Partner is in material breach of any of its
obligations under this Agreement which breach is not cured to the reasonable
satisfaction of the non-breaching Partner within such thirty day period or, if
such breach is not capable of being cured within thirty (30) days, then the
failure to commence immediately and to proceed with diligence to cure such
breach, or if such breach is incapable of being cured, then any subsequent
repetition of such breach; or
(vii) Occurrence of any act (whether or not in contravention of this
Agreement) that would, under provisions of the Illinois Uniform Partnership Act,
cause a dissolution of the Partnership.
Without limitation on, but subject to, the other provisions hereof, the Transfer
or assignment of all or any part of a Partner's Interest permitted hereunder
will not result in the dissolution of the Partnership. Except as specifically
provided in this Agreement, each Partner agrees that, without the consent of the
other Partner, no Partner may withdraw from or cause a voluntary dissolution of
the Partnership. In the event any Partner withdraws from or causes a voluntary
dissolution of this Agreement, such withdrawal or the causing of a voluntary
dissolution shall not affect such Partner's liability for obligations to the
Partnership.
(b) (i) If the Partnership is dissolved pursuant to Section 9.2(a)(ii),
(iv) or (vi), then the Partner whose breach gave rise to such dissolution (the
"Breaching Partner") shall immediately cease to be a Partner, and the other
Partner (the "Non-Breaching Partner") may elect either (A) to purchase the
Interest of the Breaching Partner for an amount equal to the positive Capital
Account of the Breaching Partner (or in the case of a Parent causing dissolution
under Section 9.2(a)(ii), for an amount equal to the Interest's fair market
value) at the time of the dissolution and continue the business of the
Partnership as provided in Section 9.2(c) hereof, or (B) to liquidate the
Partnership in the manner described in Section 9.4, in which case the Breaching
Partner shall continue to receive allocations of Net Profit and Net Loss and
shall continue to be obligated to restore any deficit Capital Account under
Section 9.4(d) and pay its share of any shortfall under Section 9.4(c).
(ii) If the Partnership is dissolved under Sections 9.2(a)(i), (v),
or (vii) of this Agreement, the provisions contained in Section 9.4 hereof shall
apply.
(c) In the event of a dissolution pursuant to either Section 9.2(a)(ii),
(iv), or (vi) and the remaining Partner or the Non-Breaching Partner, as the
case may be, elects to reconstitute and continue the business of the
Partnership, it shall take all necessary actions to cancel this Agreement and
form a new partnership (the "Reconstituted Partnership") on the same terms and
conditions as are set forth in this Agreement by entering into a new Partnership
Agreement with a successor partner (the "Successor Partner") approved by the
remaining partner or the Non-Breaching Partner, as the case may be, to continue
the business and operations of the Partnership; provided, however, that upon
such approval of the Successor Partner (i) the remaining Partner or
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the Non-Breaching Partner, as the case may be, and the Successor Partner shall
have the same general liability in the Reconstituted Partnership pursuant to
Illinois Uniform Partnership Act as the Partners in the Partnership, and (ii)
neither the Partnership nor the Reconstituted Partnership will be treated as a
corporation, an association taxable as a corporation or on a similar basis for
federal income tax purposes. The Reconstituted Partnership shall have the right
to continue the business and affairs of the Partnership with the property of the
Partnership and under the same Partnership name and subject to the same terms
and conditions of this Agreement.
Section 9.3. Buyout of A Partner. When one Partner acquires the Interest
of the other Partner or when the Partnership acquires the Interest of one of the
Partners:
(a) the Partner whose Interest is purchased shall have no further right,
title and interest in, to or under this Agreement or the Partnership other than
the right to receive any purchase price for such Interest; and
(b) the continuing Partner shall have the following rights:
(i) the continuing Partner shall have the right at all times,
after complying with any requirement of law, to continue the business and
affairs of the Partnership with the property of the Partnership and under the
same Partnership name and subject to the terms and conditions, of this
Agreement;
(ii) the continuing Partner may send such notices of the
termination or dissolution of the Partnership as it may deem appropriate and
necessary under the circumstances; and
(iii) the goodwill of the Partnership (including the name, records
and files) shall belong to and remain solely vested in the continuing Partner.
Section 9.4. Liquidation of the Partnership.
(a) If the Partnership is dissolved by agreement pursuant to Section
9.2, the Board of Directors shall proceed with the winding up of the
Partnership, and the assets of the Partnership shall be applied and distributed
as provided in this Section 9.4. If the Partnership is dissolved at the election
of one of the Partners pursuant to Section 9.2, the electing Partner shall
control the winding up and distribution of the assets of the Partnership.
(b) (i) The assets of the Partnership shall first be applied to the
payment of the liabilities of the Partnership, including, without limitation,
any loan to the Partnership by a Partner. A reasonable time shall be allowed for
the orderly liquidation of the assets of the Partnership and the discharge of
liabilities to creditors so as to enable the Board of Directors to minimize the
normal losses attendant upon a liquidation. The Partnership may set aside assets
of the Partnership to establish reasonable reserves to provide for any
contingent liabilities of the
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Partnership; any assets remaining after the discharge of such contingent
liabilities shall be distributed pursuant to (ii) of this subsection.
(ii) The assets of the Partnership remaining after the payments
provided in (i) are made shall be distributed to the Partners in accordance with
the Partners' Capital Accounts. Any assets distributed in kind shall be valued
at fait market value.
(c) If the Partnership's assets are insufficient to make the payments
required under (b)(i), the Partners shall make up any shortfall in proportion to
their relative Interests. Such payments shall be considered capital
contributions to the Partnership. Any Partner that pays more than its
proportionate amount of Partnership liabilities shall have a right of
contribution against the other Partner.
(d) If any Partner's Capital Account has a deficit balance (after giving
effect to all contributions, distributions and allocations for all taxable
years, including the year during which the Partnership liquidated), such Partner
shall contribute to the capital of the Partnership the amount necessary to
restore such deficit balance to zero in the manner and within the time provided
in Treas. Reg. Section 1.704-1(b).
(e) Gain or loss on any Partnership assets transferred to creditors,
sold or distributed to the Partners in the liquidation shall be allocated in
accordance with Section 4.6.
(f) Each Partner (and any Breaching Partner) shall be furnished with a
statement certified by the Partnership's independent public accountant, which
shall set forth the assets and liabilities of the Partnership as of the date of
complete liquidation. Upon compliance with the foregoing distribution plan, the
Partnership shall terminate, and the Partners shall execute any and all
documents necessary with respect to termination and cancellation.
ARTICLE X
INDEMNIFICATION
Section 10.1. Indemnification. The Partnership shall, to the fullest
extent permitted by applicable law, indemnify any individual made, or threatened
to be made, a party to an action or proceeding whether civil or criminal, by
reason of the fact that such individual or such individual's testator or
intestate was a member of the Board of Directors or officer of the Partnership,
against judgments, fines, amounts paid in settlement, and reasonable expenses,
including attorneys' fees actually and necessarily incurred as a result of such
action or proceeding, or any appeal therein, in each case except to the extent
that such individual's actions or inactions constituted gross negligence or
willful misconduct. Such indemnification shall be a contract right and shall
include the right to be paid advances of any expenses incurred by such
individual in connection with such action, suit, or proceeding, consistent with
the provisions of applicable law in effect at any time. Indemnification shall be
deemed to be "permitted" within the
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meaning of the first sentence of this Section 10.1 if it is not expressly
prohibited by applicable law.
Section 10.2. Indemnification of Partners.
(a) Each Partner agrees to, and does hereby, indemnify and hold harmless
the other Partner, and, to the extent set forth below, each Affiliate of the
other Partner, from and against all claims, causes of action, liabilities,
payments, obligations, expenses (including without limitation reasonable fees
and disbursements of counsel) or losses (collectively "claims, liabilities, and
losses") arising out of a liability or obligation of the Partnership to the
extent necessary to accomplish the result that neither Partner (together with
its Affiliates) shall bear any portion of a liability or obligation of the
Partnership in excess of such Partner's Interest.
(b) Without limiting the generality of the foregoing, a claim, loss, or
liability shall be deemed to arise out of a Partnership liability or obligation
if it arises out of or is based upon the conduct of the business of the
Partnership or the ownership of the property of the Partnership.
(c) The foregoing indemnification shall be available to an Affiliate of
either Partner with respect to a claim, liability, or loss arising out of a
Partnership liability or obligation which is paid or incurred by such Affiliate
as a result of such Affiliate directly or indirectly owning or controlling a
Partner or as a result of the fact that an individual employed or engaged by the
Partnership is also a director, officer, or employee of such Affiliate.
(d) The foregoing indemnification shall not inure to the benefit of either
Partner (or any Affiliate of either Partner) in respect of any claim, liability,
or loss which (i) arises out of or is based upon the gross negligence or willful
misconduct of such Partner (or an Affiliate of such Partner) or (ii) is a tax,
levy, or similar governmental charge not imposed upon the Partnership or on its
property. For the purposes of this subsection, no claim, liability, or loss
shall be deemed to arise out of or be based upon the gross negligence or willful
misconduct of any Partner (or any of its Affiliates) solely because it arises
out of or is based upon the gross negligence or willful misconduct of a
director, officer, or employee of such Partner or such Affiliate if at the time
of such negligence or misconduct such director, officer, or employee was a
Seconded Employee or was a member of the Board of Directors.
ARTICLE XI
TRANSFER OF OR LIENS ON INTERESTS
Section 11.1. General Rule. Subject to Section 11.2, a Partner may not
Transfer, or subject to or suffer to exist any Lien on, all or any part of its
Interest except with the consent of the other Partner (which may be withheld at
that Partner's sole discretion) or as otherwise permitted by this Agreement, and
any attempt to do so shall be null and void. If any Partner purports to Transfer
its Interest in violation of the previous sentence, the other Partner shall, in
26
<PAGE> 27
addition to all other remedies available to it, have the right to equitable
relief and the right by written notice to the Transferring Partner to treat such
Partner as a Breaching Partner under Section 9.2(b)(i).
Section 11.2. Exception. Notwithstanding Section 11.1, (a) a Partner may
Transfer its Interest to the other Partner on such terms and conditions as each
Partner may mutually agree upon, and (b) a Partner may, with the approval of the
Board of Directors, Transfer all of its Interest to an Affiliate that assumes,
and agrees to pay, perform, and discharge, all the obligations of the
Transferring Partner under this Agreement.
ARTICLE XII
NON-COMPETITION AND CONFIDENTIALITY
Section 12.1. Non-Competition.
During the term of this Agreement, neither Partner may compete directly
against the business of the Partnership without the consent of the Board of
Directors.
Section 12.2. Confidentiality.
(a) Except to the extent compelled by court order or as may be otherwise
required by applicable law:
(i) Members of the Board of Directors, Partnership employees, and
Seconded Employees shall not be obligated to reveal confidential or
proprietary information belonging to either Partner (or either Partner's
Affiliates) without the consent of such Partner.
(ii) Each of the Partners in the performance of its duties
hereunder will communicate or otherwise make known to the other Partner
and the Partnership information, materials, data and other matter that is
not otherwise known to the recipient Partner or the Partnership and is not
generally known by third parties ("Confidential Information"). It is
generally acknowledged that such Confidential Information would be of
value to each Partner's and the Partnership's competitors and to others
were this Confidential Information known to them. Confidential Information
is considered to be trade secret information, and the Partners shall treat
it as such. Neither the Partner nor the Partnership may disclose
Confidential Information without the written authorization of the
non-disclosing Partner.
(iii) The Partners shall keep the terms, conditions and other
material provisions of this Agreement confidential.
27
<PAGE> 28
(b) Each Partner shall cause the Partnership to obtain from each of its
officers, members of the Board of Directors, and employees who will be given
access to all or any portion of the Confidential Information, prior to such
access, a non-disclosure agreement in form and substance mutually satisfactory
to each Partner. The non-disclosure agreement shall state, among other things,
that it is for the benefit of the Partnership and each Partner and may be
enforced by the Partnership, each Partner, and their Affiliates.
ARTICLE XIII
MISCELLANEOUS
Section 13.1. Change of Control.
(a) In the event of a Change of Control, as hereinafter defined, of a
Partner (the "Change Partner") without the prior written consent of the other
Partner, the Partner not suffering the Change of Control (the "Option Partner")
may exercise the Purchase Option as provided for in Section 13.2. For the
purposes of this Section a Change of Control shall be deemed to occur in the
following circumstances:
(i) The Transfer or Transfers to a non-Affiliate or non-Affiliates of
such Partner of an aggregate of 20% or more of the stock of a
Partner.
(ii) The Transfer or Transfers to a non-Affiliate or non-Affiliates of
such Partner of an aggregate of 20% or more of the stock of a direct
or indirect holding company of a Partner with respect to which the
revenues attributable to such Partner's Interest would constitute
more than 50% of the revenues of such holding company (the
"Requisite Percentage") determined on a consolidated basis in
accordance with generally accepted accounting principles as of the
end of the fiscal quarter of the Partner occurring immediately prior
to the date as of which the determination is to be made.
(iii) The Transfer to a non-Affiliate of such Partner by merger,
consolidation or sale of all or substantially all of the assets of a
direct or indirect holding company of which the revenues
attributable to the Partner's Interest constitute the Requisite
Percentage.
(b) Notwithstanding Section 13.1(a) above the term "Change of Control"
shall not be deemed to include the following:
(i) The Transfer by sale of shares, merger, consolidation or sale of all
or substantially all of the assets of (a) the ultimate parent
company of a Partner or (b) any intermediary holding company of
which the revenues attributable to the Partner's Interest constitute
less than the Requisite Percentage.
28
<PAGE> 29
(ii) A spinoff to holders of capital stock of the ultimate parent company
of all of the stock of a Partner then held or all of the stock then
held of any intermediary holding company of which the revenues
attributable to the Partner's Interest constitute the Requisite
Percentage.
Section 13.2. Change of Control Option. In the event of a Change of
Control as defined in Section 13.1(a), the Change Partner shall promptly deliver
written notice of such event (the "Change of Control Notice") to the Option
Partner. The Option Partner shall determine within 20 days of receipt of such
notice whether it may wish to exercise its rights to purchase the Change
Partner's Interest (the "Purchase Option") and, if so, may have the fair market
value (as determined pursuant to Section 13.3) of the Change Partner's Interest
determined by delivering a notice to cause such determination (the
"Determination Notice") to the Change Partner. If no Determination Notice is
received by the Change Partner within such time period, the Purchase Option will
be deemed to have lapsed with respect to the specified Change of Control and
thereafter a subsequent Change of Control shall be determined with respect to
the state of facts existing after giving effect to the Change of Control
specified in the change of Control Notice.
Delivery of the Determination Notice will obligate the Option Partner
either to (i) purchase the Change Partner's Interest for an amount equal to the
higher of (a) the value attributed to the Change Partner's Interest in the sale
or other event that triggered the Change of Control or (b) the fair market value
of the Change Partner's Interest as hereinafter determined or (ii) be
responsible for 100% of the fees of the investment banker referred to in Section
13.3 and all expenses incurred by the Change Partner as a result of the delivery
of the Determination Notice.
Section 13.3. Determination of Fair Market Value. Fair market value shall
be determined by a nationally recognized investment banker selected by mutual
agreement of the Partners within 10 days (the "Mutual Selection Period") of the
Determination Notice. In the event that an investment banker is not selected by
the Partners within the Mutual Selection Period, then each Partner shall select
an investment banker from the list of three investment bankers (or their
successors) attached hereto as Exhibit A. Each Partner shall simultaneously
deliver to the other Partner such Partner's selection of an investment banker on
the fifth day after the termination of the Mutual Selection Period. If both
Partners select the same investment banker, the investment banker so selected
shall serve as the investment banker for the purpose of determining fair market
value. If each Partner selects a different investment banker, then the
investment banker listed on Exhibit A, which neither of the Partners selected,
shall serve as the investment banker to determine fair market value.
The selected investment banker shall value the Interest of the Change
Partner at its fair private market value by valuing the Partnership in the
context of an auction process and then applying to such value the percentage
interest represented by the Interest of the Change Partner, taking into account
such other factors as the investment banker deems relevant to such analysis.
29
<PAGE> 30
The valuation shall be completed within 60 days of the selection of the
investment banker and promptly communicated in writing to each Partner. The fair
market value so determined shall be final and binding on the Partners and the
Option Partner must, within 10 days of the delivery of the investment banker's
valuation, indicate whether it will exercise the Purchase Option. If the Option
Partner elects to exercise the Purchase Option, the Option Partner must
consummate the purchase of the Change Partner's Interest on the terms set forth
in Section 13.2 within 10 days after any requisite regulatory approval has been
obtained. If the Purchase Option is exercised, the Partners agree that all fees
of such investment banker for making such evaluation shall be borne one-half by
each Partner.
Section 13.4. Notices. All notices, demands, or requests required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be deemed to have been given when delivered personally or when deposited in the
United States mail, postage prepaid, by registered or certified mail, with
return receipt requested, addressed as follows:
(a) If to API/IL, to:
Ameritech Publishing of Illinois, Inc.
100 E. Big Beaver
15th Floor
Troy, Michigan 48083
Attention: President
With a copy to:
Ameritech Publishing of Illinois, Inc.
100 E. Big Beaver
15th Floor
Troy, Michigan 48083
Attention: General Counsel
or at such other address as API/IL may have furnished Donnelley by notice.
(b) If to Donnelley:
The Reuben H. Donnelley Corporation
One Manhattanville Road
Purchase, New York 10577
Attention: President
With a copy to:
30
<PAGE> 31
The Reuben H. Donnelley Corporation
One Manhattanville Road
Purchase, New York 10577
Attention: General Counsel
or at such other address as Donnelley may have furnished API/IL by notice.
Section 13.5. Amendment. This Agreement may not be amended except by a
written instrument executed by both Partners.
Section 13.6. Applicable Law. This Agreement and the performance of the
Partners hereunder shall be interpreted, construed, and enforced in accordance
with the laws of the State of Illinois.
Section 13.7. Entire Agreement. This Agreement constitutes the entire
agreement between the Partners hereto relative to the formation of the
Partnership for the purposes herein contemplated and there are no other
understandings, representations, or warranties, oral or written, relating to the
subject matter of this Agreement, which shall be deemed to exist or bind either
of the Partners hereto, their respective successors or assigns.
Section 13.8. Further Assurances. Each of the Partners shall from time to
time and at all times do such other and further acts as may reasonably be
necessary in order fully to perform and carry out the terms and intent of this
Agreement.
Section 13.9. Admission of Additional Partners. No additional Partners may
be admitted to the Partnership except upon the unanimous consent of the Partners
and upon such terms and conditions to which they may agree.
Section 13.10. Severability. To the extent permitted by applicable law,
the Partners waive any provision of law that renders any provision hereof
prohibited or unenforceable in any respect. Any provision of this Agreement that
is nonetheless unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. Notwithstanding the foregoing, if any provision is so
unenforceable, the Partners shall, to the extent lawful and practicable, use
their best efforts to enter into arrangements to reinstate the rights and duties
arising from that provision.
Section 13.11. Headings. The headings of Sections in this Agreement are
for convenience only and are not a part of this Agreement.
Section 13.12. No Third Party Beneficiaries. The terms of this Agreement
shall be binding upon and inure to the benefit of the Partners and their
successors and assigns. Except for
31
<PAGE> 32
Section 10.1, nothing in this Agreement, whether express or implied, shall be
construed to give any Person (other than the Partners and their successors and
assigns and as expressly provided herein) any legal or equitable right, remedy,
or claim under or in respect of this Agreement or any covenants, conditions, or
provisions contained herein.
Section 13.13. Counterparts. This Agreement may be executed by the
Partners in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute but
one and the same document.
Section 13.14. Waiver of Rights of Partition and Dissolution. Each Partner
waives all rights it may have at any time to maintain any action for partition
or sale of any Partnership assets as now or hereafter permitted under applicable
law. Each Partner waives its rights to seek a court decree of dissolution or to
seek the appointment of a court receiver for the Partnership as now or hereafter
permitted under applicable law.
32
<PAGE> 33
IN WITNESS WHEREOF, the Partners have executed this Second Amended and
Restated Am-Don Partnership Agreement on the date and year first above written.
THE REUBEN H. DONNELLEY CORPORATION
By: /s/ Frank R. Noonan
-------------------------------------
Frank R. Noonan
Its: President and Chief Executive Officer
Witness:
/s/
- ---------------------------------
AMERITECH PUBLISHING OF ILLINOIS, INC.
By: /s/ Peter J. McDonald
-------------------------------------
Peter J. McDonald
Its: President
Witness
/s/
- ---------------------------------
33
<PAGE> 34
EXHIBIT A
LIST OF INVESTMENT BANKERS
Goldman, Sachs & Company
J. P. Morgan & Co. Incorporated
CS First Boston Corporation
34
<PAGE> 1
Exhibit 23.1
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 "Exports".
PricewaterhouseCoopers LLP
New York, New York
September 1, 1998
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<RECEIVABLES> 135,422 105,047
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