<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-7155
THE DUN & BRADSTREET CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 13-2740040
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
ONE DIAMOND HILL ROAD, MURRAY HILL, NJ 07974
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(908) 665-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
<TABLE>
<S> <C>
TITLE OF CLASS Shares Outstanding
Common Stock, at April 30, 1998
par value $1 per share 171,665,841
</TABLE>
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<PAGE> 2
The undersigned registrant hereby amends Part I of its Quarterly Report on
Form 10-Q, for the quarterly period ended March 31, 1998 in its entirety, as
follows:
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Operations (Unaudited) for the
Three Months Ended March 31, 1998 and 1997................ 2
Consolidated Balance Sheets (Unaudited) at March 31, 1998
and December 31, 1997..................................... 3
Consolidated Statements of Cash Flows (Unaudited) for the
Three Months Ended March 31, 1998 and 1997................ 4
Notes to Consolidated Financial Statements (Unaudited)...... 5-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 9-11
</TABLE>
1
<PAGE> 3
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
-------- ----------
(AMOUNTS IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Operating Revenues.......................................... $471.1 $ 436.4
------ --------
Operating Costs............................................. 145.3 133.2
Selling and Administrative Expenses......................... 197.6 190.1
Depreciation and Amortization............................... 35.4 35.2
------ --------
Operating Income............................................ 92.8 77.9
------ --------
Interest Income............................................. 0.9 0.1
Interest Expense............................................ (7.3) (21.2)
Other Expense -- Net........................................ (6.5) (1.4)
------ --------
Non-Operating Expense -- Net................................ (12.9) (22.5)
------ --------
Income from Continuing Operations before Provision for
Income Taxes.............................................. 79.9 55.4
Provision for Income Taxes.................................. 28.4 18.9
------ --------
Income from Continuing Operations........................... 51.5 36.5
Income (Loss) from Discontinued Operations, Net of Income
Taxes of $8.1 for 1998 and Income Tax Benefit of $0.7 for
1997...................................................... 12.0 (1.6)
------ --------
Income before Cumulative Effect of Accounting Changes....... 63.5 34.9
Cumulative Effect of Accounting Changes, Net of Income Tax
Benefit of $87.7.......................................... -- (127.0)
------ --------
Net Income (Loss)........................................... $ 63.5 $ (92.1)
====== ========
Basic Earnings (Loss) Per Share of Common Stock:
Continuing Operations..................................... $ 0.30 $ 0.21
Discontinued Operations................................... 0.07 (0.01)
------ --------
Before Cumulative Effect of Accounting Changes............ 0.37 0.20
Cumulative Effect of Accounting Changes, Net of Income Tax
Benefit................................................ -- (0.74)
------ --------
Basic Earnings (Loss) Per Share of Common Stock............. $ 0.37 $ (0.54)
====== ========
Diluted Earnings (Loss) Per Share of Common Stock:
Continuing Operations..................................... $ 0.30 $ 0.21
Discontinued Operations................................... 0.07 (0.01)
------ --------
Before Cumulative Effect of Accounting Changes............ 0.37 0.20
Cumulative Effect of Accounting Changes, Net of Income Tax
Benefit................................................ -- (0.73)
------ --------
Diluted Earnings (Loss) Per Share of Common Stock........... $ 0.37 $ (0.53)
====== ========
Dividends Paid Per Share of Common Stock.................... $ 0.22 $ 0.22
------ --------
Weighted Average Number of Shares Outstanding -- Basic...... 171.2 171.2
------ --------
Weighted Average Number of Shares Outstanding -- Diluted.... 174.1 172.7
------ --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE> 4
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- --------------
(DOLLAR AMOUNTS IN MILLIONS,
ASSETS
EXCEPT PER SHARE DATA)
<S> <C> <C>
Current Assets
Cash and Cash Equivalents................................... $ 116.6 $ 81.8
Accounts Receivable -- Net of Allowance of $45.2 in 1998 and
$39.4 in 1997............................................. 474.5 454.5
Other Current Assets........................................ 244.8 269.2
--------- --------
Total Current Assets.............................. 835.9 805.5
--------- --------
Non-Current Assets
Investments and Notes Receivable............................ 12.8 12.3
Property, Plant and Equipment............................... 306.9 317.2
Prepaid Pension Costs....................................... 194.6 190.7
Computer Software........................................... 128.7 128.0
Goodwill.................................................... 186.9 194.6
Other Non-Current Assets.................................... 139.6 141.2
--------- --------
Total Non-Current Assets.......................... 969.5 984.0
Net Assets of Discontinued Operations....................... 282.5 296.5
--------- --------
Total Assets................................................ $ 2,087.9 $2,086.0
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes Payable............................................... $ 364.8 $ 451.5
Accrued and Other Current Liabilities....................... 449.2 472.0
Unearned Subscription Income................................ 640.4 573.5
--------- --------
Total Current Liabilities......................... 1,454.4 1,497.0
Postretirement and Postemployment Benefits.................. 387.1 389.0
Other Non-Current Liabilities............................... 390.7 388.3
Minority Interest........................................... 301.9 301.9
Shareholders' Equity
Preferred Stock, par value $1 per share,
authorized -- 10,000,000 shares; outstanding -- none
Common Stock, par value $1 per share,
authorized -- 400,000,000 shares; issued -- 188,420,996
shares for 1998 and 1997.................................. 188.4 188.4
Capital Surplus............................................. 80.2 80.2
Retained Earnings........................................... 396.2 405.2
Treasury Stock, at cost, 16,850,856 and 17,853,652 shares
for 1998 and 1997, respectively........................... (906.5) (964.0)
Cumulative Translation Adjustment........................... (167.1) (162.6)
Minimum Pension Liability Adjustment........................ (37.4) (37.4)
--------- --------
Total Shareholders' Equity.................................. (446.2) (490.2)
--------- --------
Total Liabilities and Shareholders' Equity.................. $ 2,087.9 $2,086.0
========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 5
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
------------------
1998 1997
------- -------
(DOLLAR AMOUNTS IN
MILLIONS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)........................................... $ 63.5 $ (92.1)
Less: Income (Loss) from Discontinued Operations............ 12.0 (1.6)
------- -------
Income (Loss) from Continuing Operations.................. 51.5 (90.5)
Reconciliation of Net Income (Loss) to Net Cash
Provided by Operating Activities:
Cumulative Effect of Accounting Change, Net of Income Tax
Benefits............................................... -- 127.0
Depreciation and Amortization............................. 35.4 35.2
Postemployment Benefit Payments........................... (5.1) (9.9)
Net Decrease in Accounts Receivable....................... (25.3) (78.3)
Accrued Income Taxes...................................... 38.5 (10.4)
Increase in Long Term Liabilities......................... 4.5 30.0
Net Decrease in Other Working Capital Items............... 44.9 118.0
Other..................................................... (1.3) 1.8
------- -------
Net Cash Provided by Operating Activities:
Continuing Operations..................................... 143.1 122.9
Discontinued Operations................................... 28.4 59.9
------- -------
Net Cash Provided by Operating Activities................... 171.5 182.8
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from Marketable Securities......................... 3.9 0.1
Payments for Marketable Securities.......................... (4.3) --
Capital Expenditures........................................ (10.0) (4.0)
Additions to Computer Software and Other Intangibles........ (16.1) (13.1)
Net Cash Used in Investing Activities of Discontinued
Operations................................................ (2.5) (8.7)
Other....................................................... (7.6) (8.9)
------- -------
Net Cash Used In Investing Activities....................... (36.6) (34.6)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of Dividends........................................ (37.7) (37.7)
Payments for Purchase of Treasury Shares.................... -- (1.7)
Net Proceeds from Exercise of Stock Options................. 22.6 13.1
Decrease in Short-term Borrowings........................... (85.9) (99.2)
Other....................................................... (0.2) (0.3)
------- -------
Net Cash Used in Financing Activities....................... (101.2) (125.8)
------- -------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents............................................... 1.1 2.2
------- -------
Increase in Cash and Cash Equivalents....................... 34.8 24.6
Cash and Cash Equivalents, Beginning of Quarter............. 81.8 127.8
------- -------
Cash and Cash Equivalents, End of Quarter................... $ 116.6 $ 152.4
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 6
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
NOTE 1 INTERIM CONSOLIDATED FINANCIAL STATEMENTS
These interim consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q and should be read in conjunction
with the consolidated financial statements and related notes of The Dun &
Bradstreet Corporation's (the "Company") 1997 Annual Report on Form 10-K/A-2.
The consolidated results for interim periods are not necessarily indicative of
results for the full year or any subsequent period. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation of financial position, results of operations
and cash flows at the dates and for the periods presented have been included.
Certain prior-year amounts have been reclassified to conform to the 1998
presentation.
NOTE 2 ACCOUNTING CHANGES
Effective January 1, 1997, the Company changed its revenue recognition
method for its Credit Information Services business to recognize revenue as
products and services are used by its customers. Previously, the Company
recognized revenue ratably over the contract period. This change is consistent
with the Company's change in focus from a sales contract basis to a product
usage basis in order to drive revenue growth and increase customer satisfaction.
Additionally, the Company changed its revenue recognition method for its
Moody's Investors Service ("Moody's") business to recognize revenue over the
service period from previously recognizing revenues and costs at the time of
billing. In the opinion of management, these accounting changes bring revenue
recognition methods more in line with the economics of the business and provide
a better measure of operating results.
In accordance with Accounting Principles Board Opinion ("APB") No. 20,
"Accounting Changes," the cumulative effect of changing the accounting for
certain of the Company's revenue recognition policies resulted in a pre-tax,
non-cash charge of $214.7 million ($127.0 million after tax or $.74 per share
basic, $.73 per share diluted) in the quarter ended March 31, 1997.
The Company also changed certain of its revenue recognition methods for its
Marketing Information Services and Receivable Management Services businesses to
recognize revenue over the service period from previously recognizing revenues
and costs at the time of shipment or billing. Previously, the Company included
the effect of these changes as a part of the cumulative effect of accounting
changes in the Consolidated Statements of Operations effective January 1, 1997.
Subsequent to the initial issuance of these financial statements and after
discussions with the staff of the Securities and Exchange Commission, it was
determined that the accounting for these changes in revenue recognition methods
be amended and therefore applied retroactively. The effects of such changes
decreased the pre-tax non-cash charge by $40.0 million to $214.7 million ($127.0
million after tax or $0.74 share basic, $0.73 per share diluted). The effects of
these changes increased net income by $23.6 in the quarter ended March 31, 1997
and increased basic and fully diluted earnings per share for the first quarter
of 1997 by $0.14.
NOTE 3 REORGANIZATION AND DISCONTINUED OPERATIONS
On December 17, 1997, the Board of Directors of the Company announced a
plan, subject to receiving a favorable ruling from the Internal Revenue Service,
to separate into two publicly traded companies -- The New Dun & Bradstreet
Corporation ("New D&B") and R.H. Donnelley Corporation ("R.H. Donnelley"). The
separation (the "Distribution") of the two companies will be accomplished
through a tax-free dividend of a new entity comprised of the Company's Risk
Management Services segment (Moody's Investors Service ("Moody's") and Dun &
Bradstreet, the operating company ("D&B Inc.")). The new entity, New D&B, will
be known as "The Dun & Bradstreet Corporation" and the continuing entity will
change its name to
5
<PAGE> 7
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
"R.H. Donnelley Corporation" and will consist of the Company's Directory
Information Services segment (R.H. Donnelley Inc., the operating company, and
the DonTech partnership). In April 1998, the Company received a favorable ruling
from the Internal Revenue Service with respect to the tax-free treatment of the
Distribution. The transaction is expected to be completed in the summer of 1998.
Due to the relative significance of the Risk Management Services segment, the
transaction will be accounted for as a reverse spin-off, and as such the Risk
Management Services and Directory Information Services segments have been
classified as continuing and discontinued operations, respectively.
For purposes of governing certain of the ongoing relationships among the
Company and R.H. Donnelley as a result of the Distribution, the companies will
enter into various agreements, including a Distribution Agreement, Tax
Allocation Agreement, Employee Benefits Agreement, Intellectual Property
Agreement, Shared Transaction Services Agreement, Data Services Agreement and
Transition Services Agreements.
Pursuant to Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of the Company have been
reclassified to reflect the Company's Directory Information Services segment as
discontinued operations.
For financial reporting purposes the assets and liabilities of the
Directory Information Services segment have been separately classified on the
balance sheet as "Net Assets of Discontinued Operations." A summary of these
assets and liabilities at March 31, 1998 and December 31, 1997 was as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
Current assets................................ $ 89.8 $ 92.7
Total assets.................................. 341.5 362.3
Current liabilities........................... 57.8 64.6
Total liabilities............................. 59.0 65.8
Net assets of discontinued operations......... 282.5 296.5
</TABLE>
The net operating results of the Directory Information Services segment
have been reported in the caption "Income (Loss) from Discontinued Operations,"
in the consolidated statements of operations. Summarized operating results for
the Directory Information Services segment for the quarters ended March 31, were
as follows:
<TABLE>
<CAPTION>
1998 1997*
----- -----
<S> <C> <C>
Operating revenues.......................................... $41.5 $19.0
Income before provision for income taxes.................... 20.1 (2.3)
Net income.................................................. 12.0 (1.6)
</TABLE>
- ---------------
* 1997 included the results of the East Coast proprietary operations of R.H.
Donnelley.
NOTE 4 RECONCILIATION OF WEIGHTED AVERAGE SHARES
<TABLE>
<CAPTION>
(SHARE DATA IN THOUSANDS) 1998 1997
------------------------- ------- -------
<S> <C> <C>
Weighted average number of shares -- basic.................. 171,153 171,189
Dilutive effect of shares issuable under stock options,
restricted stock and performance unit plans............... 2,731 1,257
Adjustment of shares applicable to stock options exercised
during the period and performance unit plans.............. 220 204
------- -------
Weighted average number of shares -- diluted................ 174,104 172,650
======= =======
</TABLE>
6
<PAGE> 8
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
As required by Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share," the Company has provided a reconciliation of basic
weighted average shares to diluted weighted average shares within the table
outlined above. The conversion of diluted shares has no impact on the Company's
operating results. All options outstanding at March 31, 1998 and 1997 were
included in the computation of diluted earnings per share because the options'
exercise prices were less than the average market price of the Company's common
stock. The Company's options generally expire 10 years after the initial grant
date.
NOTE 5 COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement requires that all items recognized under
accounting standards as components of comprehensive earnings be reported in a
financial statement for the period in which they are recognized and displayed
with the same prominence as other financial statements. This statement also
requires that financial statements for prior periods are reclassified. The
Company's total comprehensive income for the three month period ended March 31,
was as follows:
<TABLE>
<CAPTION>
1998 1997
----- ------
<S> <C> <C>
Net income (loss)........................................... $63.5 $(92.1)
Other comprehensive loss -- foreign currency translation
adjustment................................................ (4.5) (7.5)
----- ------
Total comprehensive income.................................. $59.0 $(99.6)
===== ======
</TABLE>
NOTE 6 NOTES PAYABLE
In connection with the Distribution, R.H. Donnelley will borrow
approximately $350 million under the R.H. Donnelley Credit Facility and issue
$150 million of senior subordinated notes under the R.H. Donnelley Indenture,
all of which will be guaranteed by D&B. A portion of the proceeds of this
indebtedness will be used to repay existing indebtedness of the Company. This
$500 million of debt will become an obligation of R.H. Donnelley after the
Distribution.
NOTE 7 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company enters into interest rate swap agreements to manage exposure to
changes in interest rates. Interest rate swaps allow the Company to raise funds
at floating rates and effectively swap them into fixed rates that are lower than
those available to it if fixed-rate borrowings were made directly. If the
Company terminates a swap agreement, the gain or loss is amortized over the
shorter of the remaining original life of the swap or the debt. At March 31,
1998, the unrealized fair value of the interest rate swaps was a loss of $11.7
million, of which $3.8 million ($.6 million in the first quarter of 1998 and
$3.2 million in 1997) has been recognized in income relating to swaps which do
not qualify for settlement accounting. In connection with the Distribution and
repayment of outstanding notes payable, the Company will cancel all of its
interest rate swap agreements and will record into income the previously
unrecognized fair value loss at the time of termination.
NOTE 8 LITIGATION
The Company and its subsidiaries are involved in legal proceedings, claims
and litigation arising in the ordinary course of business. In the opinion of
management, the outcome of such current legal proceedings, claims and litigation
could have a material effect on quarterly or annual operating results or cash
flows when resolved in a future period. However, in the opinion of management,
these matters will not materially affect the Company's consolidated financial
position.
7
<PAGE> 9
THE DUN & BRADSTREET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(UNAUDITED)
(TABULAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)
In addition to the litigation referred to above, on July 29, 1996,
Information Resources, Inc. ("IRI") filed a complaint in the United States
District Court for the Southern District of New York, naming as defendants the
Company, A.C. Nielsen Company (a subsidiary of ACNielsen) and IMS International,
Inc.
The complaint alleges various violations of United States antitrust laws,
including alleged violations of Section 1 and 2 of the Sherman Act. The
complaint also alleges a claim of tortious interference with a contract and a
claim of tortious interference with a prospective business relationship. These
claims relate to the acquisition by defendants of Survey Research Group Limited
("SRG"). IRI alleges SRG violated an alleged agreement with IRI when it agreed
to be acquired by the defendants and that the defendants induced SRG to breach
that agreement.
On October 15, 1996, defendants moved for an order dismissing all claims in
the complaint. On May 6, 1997, the United States District Court for the Southern
District of New York issued a decision dismissing IRI's claim of attempted
monopolization in the United States, with leave to replead within sixty days.
The Court denied defendants' motion with respect to the remaining claims in the
complaint. On June 3, 1997, defendants filed an answer denying the material
allegations in IRI's complaint, and A.C. Nielsen Company filed a counterclaim
alleging that IRI has made false and misleading statements about its services
and commercial activities. On July 7, 1997, IRI filed an Amended and Restated
Complaint repleading its alleged claim of monopolization in the United States
and realleging its other claims. By notice of motion dated August 18, 1997,
defendants moved for an order dismissing the amended claim. On December 1, 1997,
the Court denied the motion and, on December 16, 1997, defendants filed a
supplemental answer denying the remaining material allegations of the amended
complaint.
IRI's complaint alleges damages in excess of $350 million, which amount IRI
asked to be trebled under antitrust laws. IRI also seeks punitive damages in an
unspecified amount.
In connection with the IRI action, Cognizant, ACNielsen and the Company
entered into an Indemnity and Joint Defense Agreement (the "Indemnity and Joint
Defense Agreement") pursuant to which they have agreed (i) to certain
arrangements allocating potential liabilities ("IRI Liabilities") that may arise
out of or in connection with the IRI Action and (ii) to conduct a joint defense
of such action. In particular, the Indemnity and Joint Defense Agreement
provides that ACNielsen will assume exclusive liability for IRI Liabilities up
to a maximum amount to be calculated at such time such liabilities, if any,
become payable (the "ACN Maximum Amount"), and that the Company and Cognizant
will share liability equally for any amounts in excess of the ACN Maximum
Amount. The ACN Maximum Amount will be determined by an investment banking firm
as the maximum amount which ACNielsen is able to pay after giving effect to (i)
any plan submitted by such investment bank which is designed to maximize the
claims paying ability of ACNielsen without impairing the investment banking
firm's ability to deliver a viability opinion (but which will not require any
action requiring stockholder approval), and (ii) payment of related fees and
expenses. For these purposes, financial viability means the ability of
ACNielsen, after giving effect to such plan, the payment of related fees and
expenses, and the payment of the ACN Maximum Amount, to pay its debts as they
become due and to finance the current and anticipated operating and capital
requirements of its business, as reconstituted by such plan, for two years from
the date any such plan is expected to be implemented.
In connection with the Distribution, the Company and R.H. Donnelley will
enter into an agreement whereby the Company will retain all potential
liabilities arising from the IRI Action.
Management is unable to predict at this time the final outcome of the IRI
Action or whether the resolution of this matter could materially affect the
Company's results of operations, cash flows or financial position.
8
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
On December 17, 1997, the Board of Directors of the Dun & Bradstreet
Corporation ("D&B") announced a plan to separate into two publicly traded
companies -- The Dun & Bradstreet Corporation ("New D&B") and R.H. Donnelley
Corporation ("R.H. Donnelley"). The separation (the "Distribution") of the two
companies will be accomplished through a tax-free dividend of a new entity
comprised of Moody's Investors Service ("Moody's") and Dun & Bradstreet, the
operating company ("D&B Inc."). The new entity, New D&B, will be known as "The
Dun & Bradstreet Corporation" and the continuing entity will change its name to
"R.H. Donnelley Corporation" and will consist of R.H. Donnelley Inc., the
operating company and the DonTech partnership. Due to the relative significance
of Moody's and D&B Inc., the transaction will be accounted for as a reverse
spin-off, and as such Moody's and D&B Inc. have been classified as continuing
operations and R.H. Donnelley Inc. and DonTech have been classified as
discontinued operations. In April 1998, the Company received a favorable ruling
from the Internal Revenue Service with respect to the tax-free treatment of the
Distribution. The transaction is expected to be completed in the summer of 1998.
Pursuant to Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations -- Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," the consolidated financial statements of the Company have been
reclassified to reflect the reorganization. Accordingly, revenues, costs and
expenses, assets and liabilities, and cash flows of R.H. Donnelley Inc. and
DonTech have been excluded from the respective captions in the Consolidated
Statements of Operations, Consolidated Balance Sheets and Consolidated
Statements of Cash Flows. The net operating results have been reported, net of
applicable income taxes, as "Income from Discontinued Operations", the net
assets have been reported as "Net Assets of Discontinued Operations" and the net
cash flows have been reported as "Net Cash Provided by Discontinued Operations."
RESULTS OF OPERATIONS
D&B's first quarter 1998 income from continuing operations of $51.5 million
was up $15.0 million or 41% from the prior year's first quarter results from
continuing operations. Earnings per share from continuing operations (basic and
diluted) of $.30 was up 43% from the prior year's earnings per share from
continuing operations of $.21. D&B's first quarter net income was $63.5 million
or $.37 per share, both basic and diluted. This compares with a first quarter
1997 net loss of $92.1 million, or a $.54 per share loss basic, $.53 per share
loss diluted. The 1997 results include a one-time, non-cash charge for the
cumulative effect of accounting changes of $127.0 million after-tax ($.74 per
share basic, $.73 per share diluted), with respect to certain of D&B's revenue
recognition methods. Effective January 1, 1997, D&B changed its revenue
recognition method for its Credit Information Services and Moody's businesses.
In accordance with APB No. 20, "Accounting Changes," the cumulative effect of
these accounting changes resulted in a pre-tax non-cash charge of $214.7 million
($127.0 million after-tax).
The company also changed certain of its revenue recognition methods for its
Marketing Information Services and Receivable Management Services businesses.
Previously, the Company included the effect of these changes as part of the
cumulative effect of accounting changes in the Consolidated Statements of
Operations effective January 1, 1997. Subsequent to the initial issuance of the
financial statements and after discussions with the staff of the Securities and
Exchange Commission, it was determined that the accounting for these changes in
revenue recognition methods be amended and therefore applied retroactively for
all periods presented. As such the pre-tax non-cash charge was reduced by $40.0
million ($23.6 after-tax).
Operating revenues for the first quarter were up 8% to $471.1 million in
1998 from $436.4 million in 1997. Revenues for D&B Inc. of $338.6 million were
up 2% from the prior year. Excluding the impact of foreign currency
fluctuations, revenue growth for D&B Inc. was 6%. D&B U.S. posted an 8% increase
in first quarter revenue, driven by solid growth in traditional credit products,
as well as strong performance in sales of Value Added Products and Database
Marketing. D&B Europe's revenues decreased 8%, driven by unfavorable foreign
exchange fluctuations. Excluding foreign exchange, Europe's results improved
modestly, up 1% over the prior year. Growth in the UK, Eastern Europe, Italy,
Holland and Portugal were offset by declines in Switzerland, Norway and Germany.
Revenues from D&B Inc.'s other regions were up 3%, driven by a 13%
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improvement in Receivable Management Services and growth in Latin America,
partially offset by declines in Canada and Asia Pacific resulting from
unfavorable foreign exchange. Moody's posted revenue growth of 25% to $132.5
million over the prior year reflecting the continuing favorable interest rate
environment, the continuing trend toward the globalization of capital markets
and Moody's success in product innovation.
Operating income for the first quarter of 1998 of $92.8 million was 19%
higher than 1997 first quarter operating income of $77.9 million. This growth
reflects the strong revenue results noted above and continued efforts to control
costs.
Non-operating expense-net was $12.9 million for the first quarter of 1998
compared with non-operating expense-net of $22.5 million for the first quarter
of 1997. This significant decrease was a result of sharply lower interest
expense, driven by lower debt and strong cash flow versus prior year.
The effective tax rate was 35.5% for the first quarter of 1998 compared to
34.1% in 1997.
Income from discontinued operations, net of income taxes, was $12.0 million
for the first quarter of 1998 compared to a loss of $1.6 million for the same
period in 1997. Revenue for the R.H. Donnelley Business totaled $41.5 million,
an increase of $22.5 million from $19.0 million reported in the first quarter of
1997 (which included $.8 million of revenues of the East Coast proprietary
operations of the R.H. Donnelley Business ("P-East") which was sold in the
fourth quarter of 1997). This strong increase is the result of a one-time shift
of approximately $19 million in revenues from the DonTech partnership as well as
growth in sales of advertising for both DonTech's Illinois directories and for
Sprint's Las Vegas directory. Certain revenue that in previous years was
reported in later quarters of the year is being reported in the first quarter
this year, a result of the August 1997 restructuring of the DonTech partnership
agreement with Ameritech advertising services. Operating income for the R.H.
Donnelley Business for the first quarter of 1998 was $20.1 million, up $22.4
million from 1997 (which included the $.9 million operating loss of P-East), due
mainly to the DonTech revenue shift.
ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132
revises employers' disclosures about pension and other postretirement benefit
plans. SFAS No. 132 is effective for fiscal years beginning after December 15,
1997. Restatement of disclosures for earlier periods provided for comparative
purposes are required unless the information is not readily available. D&B is in
the process of evaluating the disclosure requirements. The adoption of SFAS No.
132 will have no impact on D&B's results of operations, financial position or
cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"), which revises
disclosure requirements about operating segments and establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 requires that public business enterprises report
financial and descriptive information about their reportable operating segments.
The statement will be adopted by D&B effective year end December 31, 1998 and
will require restatement of prior years. SFAS No. 131 is expected to affect
D&B's segment disclosures, but will not affect D&B's results of operations,
financial position or cash flows. D&B is in the process of evaluating the
disclosure requirements.
LIQUIDITY AND FINANCIAL POSITION
D&B generates significant, predictable cash flows from its business
operations. Management believes that these cash flows are sufficient to fund its
operating needs, service debt and pay dividends and will continue to be so
subsequent to the Distribution. At March 31, 1998, cash and cash equivalents
totaled $116.6 million, an increase of $34.8 million from $81.8 million held at
December 31, 1997.
Operating activities of continuing operations generated net cash of $143.1
million during the first quarter of 1998 compared to $122.9 million in 1997.
This increase is consistent with the improvement in the income from continuing
operations. Discontinued operations generated $28.4 million in the first quarter
of 1998 compared to $59.9 million in 1997. All interest expense, taxes and
corporate overhead costs have been borne by the continuing operations of D&B.
Additionally, costs incurred to complete the Distribution are the responsibility
of D&B.
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Net cash used in investing activities was $36.6 million for the first
quarter of 1998 compared to $34.6 million in 1997 including net cash used in
investing activities of discontinued operations of $2.5 million in the first
quarter of 1998 and $8.7 million in 1997. In the first quarter of 1998 D&B
invested $26.1 million for capital expenditures and additions to computer
software and other intangibles compared to $17.1 million in the comparable
period in 1997.
Net cash used in financing activities was $101.2 million during the first
quarter of 1998 compared to $125.8 million in the first quarter of 1997.
Payments of dividends accounted for $37.7 million in both 1998 and 1997. During
the first quarter of 1998, D&B reduced short-term borrowings by $85.9 million
compared to $99.2 million in the first quarter of 1997. Proceeds from the
exercise of stock options were $22.6 million for the first quarter of 1998
compared to $13.1 million in 1997.
D&B is in the process of arranging $600 million of committed revolving
credit facilities with a group of banks, which are expected to replace D&B's
existing $900 million facilities. D&B expects these facilities to be in place
prior to the Distribution. D&B also expects to replace its existing commercial
paper program with a new program subsequent to the Distribution. While it is
expected that the new revolving credit facilities will be used to support any
commercial paper borrowings, D&B may also borrow under these facilities at
prevailing short-term interest rates.
In connection with the Distribution, R.H. Donnelley will borrow
approximately $350 million under the R.H. Donnelley Credit Facility and issue
$150 million of senior subordinated notes under the R.H. Donnelley Indenture,
all of which will be guaranteed by D&B. A portion of the proceeds of this
indebtedness will be used to repay existing indebtedness of D&B. This $500
million of debt will be an obligation of R.H. Donnelley after the Distribution.
D&B has interest rate swap agreements, which effectively fix interest rates
on $300.0 million of variable-rate debt through January 2005, at a weighted
average fixed rate of 6.84% (see Note 5 to D&B's consolidated financial
statements). Currently, a portion of the swaps is marked-to-market through
earnings. In connection with the repayment of the outstanding notes payable at
the time of the Distribution, D&B will cancel its outstanding interest rate swap
agreements and recognize into income any previously unrecognized loss. At March
31, 1998, the unrealized fair value of these agreements was a loss of $11.7
million, of which $3.8 million had been recorded as interest expense in 1998 and
1997 ($.6 million in 1998 and $3.2 million in 1997).
Management estimates that one-time cash outlays of approximately $25
million to $30 million, including the costs to terminate the swaps, will be
required to complete the Distribution. These costs will be recorded as incurred.
Subsequent to the Distribution, D&B will report a deficit in both retained
earnings and shareholders' equity. The changes in these balance sheet accounts
in connection with the Distribution are primarily the result of recording the
dividend of the net assets of the R.H. Donnelley Business (for accounting
purposes only) and the elimination of treasury stock, which shares will be
treasury shares of R.H. Donnelley after the Distribution. The resultant decrease
in retained earnings and increase in shareholders' equity will not require the
use of cash and are not expected to have any impact on D&B's liquidity.
Additionally, since November 1996 D&B has reported a deficit in shareholders'
equity without adverse effect on its liquidity.
In January 1997, D&B announced a continuation of its systematic stock
repurchase plan, authorizing the purchase of up to 9.8 million shares of D&B
Common Stock. The stock was held in treasury and issued upon exercise of
employee stock options and for compensation plans. Under this plan, D&B
repurchased 2,271,851 shares of its D&B Common Stock for $60.1 million in 1997.
In connection with the Distribution, these shares will be treasury shares of
R.H. Donnelley. New D&B intends to start a new systematic stock repurchase plan
in 1998.
On April 15, 1998, the Board of Directors of D&B approved a second quarter
1998 dividend of $.22 per share, payable June 10, 1998 to shareholders of record
at the close of business May 20, 1998. Subject to the approval of its Board of
Directors, it is anticipated that New D&B will initially pay a quarterly
dividend of $0.185 per share.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE DUN & BRADSTREET CORPORATION
Date: June 30, 1998 By: /s/ FRANK S. SOWINSKI
------------------------------------
Frank S. Sowinski
Senior Vice President -- Chief
Financial Officer
Date: June 30, 1998 By: /s/ CHESTER J. GEVEDA, JR.
------------------------------------
Chester J. Geveda, Jr.
Vice President and Controller
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