Changes in stock options for the three years ended December 31, 2004 are summarized as follows:
For 2004, the annual stock options awarded to employees were granted in February of the following year after the approval of the 2005 compensation program and Business Plan. 470,400 options were granted at an exercise price of $60.54 in February 2005.
For 2002 and 2003, the annual stock options awarded to employees were granted in February of the following year after the approval of the 2003 and 2004 compensation program and Business Plan, respectively. 1,580,300 and 628,440 options were granted at an exercise price of $34.17 and $53.30 in February 2003 and 2004, respectively.
The following table summarizes information about stock options outstanding at December 31, 2004:
The 2000 SIP and 2000 DSIP plans also provide for the granting of stand-alone stock appreciation rights (“SARs”) and limited stock appreciation rights (“LSARs”) in tandem with stock options to certain key employees. At December 31, 2004, 2003 and 2002, 3,685,680, 3,326,200 and 3,188,983 shares of LSARs attached to stock options have been granted, respectively, which are exercisable only if, and to the extent that,
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
the related option is exercisable, and only upon the occurrence of specified contingent events. During 2004, 2003 and 2002, no shares, 4,600 shares, and no shares of SARs were granted, respectively. At December 31, 2004, 2003, and 2002, 17,736, 57,235 and 64,257 shares of SARs were outstanding, respectively, and we have recognized the associated expense of $0.5 million, $0.6 million, and $0.2 million within “Operating Costs” for the years 2004, 2003 and 2002, respectively. Compensation expense for stock appreciation rights is measured as the amount by which the quoted market value of the shares of our common stock exceeds the base unit price at the date of the grant. Changes, either increases or decreases, in the quoted market value of these shares between the date of grant and at the end of each subsequent quarter result in a change in the measure of compensation for the rights. The compensation expense is recognized proportionally over the vesting period.
During 2004 and 2002, no shares of restricted stock were granted, and during 2003, 147,870 shares of restricted stock were granted. During 2004 and 2003, 14,420 and 11,300 shares of restricted stock were forfeited, respectively from previous plans. There were no forfeitures during 2002. The restrictions on the majority of such shares lapse over a period of three years from the date of the grant, and the cost is charged to compensation expense ratably. We record compensation expense for the amortization of restricted stock units issued to employees, utilizing the intrinsic-value method, which would result in the same amount of compensation expense that would be recognized as if we had applied the fair value recognition provisions of SFAS 123. We recognized compensation expense recorded under APB 25 associated with the restricted stock of $1.4 million, $2.1 million, and $1.1 million in 2004, 2003 and 2002, respectively.
Beginning in 2004, certain employees were provided an opportunity to receive an award of restricted stock in the future. That award is contingent on performance against the same goals that drive payout of the annual bonus plan. The restricted stock award will be granted, if at all, after the one year performance goal has been met and will then vest over a three-year period. In 2004, we recognized expense associated with the restricted stock opportunity of $8.3 million.
During 2004, 2003 and 2002, 9,238 shares, 27,550 shares, and 10,890 shares of restricted stock units were granted, respectively. During 2004 and 2003, 2,660 shares and 2,290 shares of restricted stock units were forfeited, respectively. There were no forfeitures during 2002. The restrictions on the majority of such shares lapse over a period of three years from the date of the grant. We recognized expense associated with the restricted stock units of $0.6 million, $0.7 million, and $0.4 million in 2004, 2003 and 2002, respectively.
| Note 12. | | Lease Commitments and Contractual Obligations |
Most of our operations are conducted from leased facilities, which are under operating leases that expire over the next 10 years, with the majority expiring within five years. We also lease certain computer and other equipment under operating leases that expire over the next three years. These leases are frequently renegotiated or otherwise changed as advancements in computer technology produce opportunities to lower costs and improve performance. Rental expenses under operating leases (cancelable & non-cancelable) were $32.8 million, $34.7 million and $29.4 million for the years ended December 31, 2004, 2003 and 2002, respectively.
In July 2002, we outsourced certain technology functions to Computer Sciences Corporation (“CSC”) under a 10-year agreement, which we may terminate for a fee at any time effective after July 2003 and under certain other conditions. Under the terms of the agreement, CSC will be responsible for the data center operations, technology help desk and network management functions in the United States and in the United Kingdom and for certain application development and maintenance through July 31, 2012. The obligation under the contract is based on our historical and expected future level of usage and volume. If our future volume changes, payments under the contract could vary up or down based on specified formulas. Charges are subject to increases to partially offset inflation. We incurred $63.0 million, $58.9 million, and $18.6 million in 2004, 2003 and 2002, respectively under this contract.
In December 2003, we signed a three-year agreement with ICT Group, Inc. effective January 2004 to outsource certain marketing calling activities. We may terminate this agreement for a fee at any time. Under
95
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
the terms of the agreement, ICT will be responsible for performing certain marketing and credit calling activities previously performed by our own call centers in North America. The obligation under the contract is based upon transmitted call volumes, but shall not be less than $3 million per contract year. In 2004, we incurred $5.6 million under this contract.
On October 15, 2004, we entered into a seven-year outsourcing agreement with IBM. Under the terms of the agreement, we will transition certain portions of our data acquisition and delivery, customer service, and financial processes to IBM. In addition, we can terminate at our discretion, subject to payment of termination fees that decline over the term, or for cause. In 2004, we incurred $2.2 million under this contract.
The following table quantifies our future contractual obligations as discussed above as of December 31, 2004:
| | | | 2005
| | 2006
| | 2007
| | 2008
| | 2009
| | Thereafter
| | Total
|
|---|
| Operating Leases | | | | $ | 24.3 | | | $ | 22.0 | | | $ | 16.0 | | | $ | 11.7 | | | | $9.4 | | | $ | 20.5 | | | $ | 103.9 | |
| Obligations to Outsourcers | | | | $ | 75.3 | | | $ | 76.5 | | | $ | 76.1 | | | $ | 77.6 | | | $ | 77.4 | | | $ | 197.7 | | | $ | 580.6 | |
Excludes pension obligations in which funding requirements are uncertain and long-term contingent liabilities. Our obligations with respect to pension and post-retirement medical benefit plans are described in Note 10 to these consolidated financial statements. Our long-term contingent liabilities with respect to tax matters are described in Note 13 to these consolidated financial statements.
We are involved in tax and legal proceedings, claims and litigation arising in the ordinary course of business. We periodically assess our liabilities and contingencies in connection with these matters based upon the latest information available. For those matters where it is probable that we have incurred a loss and the loss or range of loss can be reasonably estimated, we have recorded reserves in our consolidated financial statements. In other instances, we are unable to make a reasonable estimate of any liability because of the uncertainties related to the probability of the outcome and/or amount or range of loss. As additional information becomes available, we adjust our assessment and estimates of such liabilities accordingly. It is possible that the ultimate resolution of our liabilities and contingencies could be at amounts that are different from our currently recorded reserves and that such differences could be material.
Based on our review of the latest information available, we believe our ultimate liability in connection with pending tax and legal proceedings, claims and litigation will not have a material effect on our results of operations, cash flows or financial position, with the possible exception of the matters described below.
In order to understand our exposure to the potential liabilities described below, it is important to understand the relationship between us and Moody’s Corporation, our predecessors and other parties that, through various corporate reorganizations and contractual commitments, have assumed varying degrees of responsibility with respect to such matters.
In November 1996, the company then known as The Dun & Bradstreet Corporation (“D&B1”) separated through a spin-off into three separate public companies: D&B1, ACNielsen Corporation (“ACNielsen”) and Cognizant Corporation (“Cognizant”) (the “1996 Distribution”). This was accomplished through a spin-off by D&B1 of its stock in ACNielsen and Cognizant. In June 1998, D&B1 separated through a spin-off into two separate public companies: D&B1, which changed its name to R.H. Donnelley Corporation (“Donnelley/D&B1”), spun off its stock in a new company named The Dun & Bradstreet Corporation (“D&B2”) (the “1998 Distribution”). During 1998, Cognizant separated into two separate public companies: IMS Health Incorporated (“IMS”) and Nielsen Media Research, Inc. (“NMR”) (the “1998 Cognizant Distribution”). In September 2000, D&B2 separated through a spin-off into two separate public companies: D&B2, which changed its name to Moody’s Corporation (“Moody’s” and also referred to elsewhere in this Form 10-K as “Moody’s/D&B2”), spun off its stock in a new company named The Dun & Bradstreet Corporation (“we” or “D&B3” and also referred to elsewhere in this Form 10-K as “D&B”) (the “2000 Distribution”).
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Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
Tax Matters
Moody’s/D&B2 and its predecessors entered into global tax-planning initiatives in the normal course of business, principally through tax-free restructurings of both their foreign and domestic operations. As further described below, we have contractual obligations to be financially responsible for a portion of certain liabilities arising from three of these historical tax-planning initiatives (“Legacy Tax Matters”). The status of these Legacy Tax Matters is summarized below, including our settlement of the matter referred to as “Utilization of Capital Losses — 1989–1990” (“Capital Losses Matter”) during the fourth quarter of 2004.
Pursuant to a series of tax sharing agreements (the “Tax Sharing Agreements”), IMS and NMR are jointly and severally liable for and must pay one-half, and we and Moody’s/D&B2 are jointly and severally liable for and must pay the other half, of any payments over $137 million for taxes, accrued interest and other amounts resulting from the Legacy Tax Matters (other than the matter summarized under “Amortization and Royalty Expense Deductions/Royalty Income 1997–2004,” for which we and Moody’s/D&B2 are solely responsible). Moody’s/D&B2 was contractually obligated to pay, and did pay, that $137 million in connection with the Capital Losses Matter.
As further described below, we currently believe that we have adequate reserves for these matters and, as a result, the ultimate resolution of these Legacy Tax Matters is not expected to have a material impact on our earnings.
Utilization of Capital Losses — 1989–1990
The IRS completed its review of the utilization of certain capital losses generated during 1989 and 1990 and, on June 26, 2000, issued a formal notice of adjustment. On May 12, 2000, an amended tax return was filed for the 1989 and 1990 tax periods, which reflected $561.6 million of tax and interest due. Moody’s/D&B2 paid the IRS approximately $349.3 million of this amount on May 12, 2000, and IMS paid the IRS approximately $212.3 million on May 17, 2000. The payments were made to the IRS to stop further interest from accruing. Donnelley/D&B1, the taxpayer of record, filed a complaint for a refund in the U.S. District Court on September 21, 2000.
During the fourth quarter of 2004, the taxpayer entered into a settlement agreement with the IRS resolving this matter. We expect the net impact of the settlement to our cash flow in 2005 will be approximately $17.0 million (tax, interest, and penalties, net of tax benefits and inclusive of amounts in dispute with IMS and NMR as described below), in line with our expectations. This amount will be payable to the IRS following our receipt of the related bills for the settlement. The IRS has issued to the taxpayer of record a bill with respect to tax year 1990 for $11.6 million which was paid in full by February 24, 2005 by the companies noted above. Of this amount, we paid $2.9 million. We expect the IRS to issue the bill or bills for the balance of the settlement during the first half of 2005, based on representations from the IRS.
As stated above, the Tax Sharing Agreements provide that IMS and NMR are jointly and severally liable and must pay one half, and we and Moody’s/D&B2 are jointly and severally liable and must pay the other half, of tax liabilities relating to this matter. IMS and NMR have indicated to us their belief that they are not responsible for certain portions of the remaining settlement payment. Given our indemnification obligations to Donnelley/D&B1 (the taxpayer of record) we and Moody’s/D&B2 are required to pay to the IRS on behalf of Donnelley/D&B1 any portion of the settlement amount not paid by IMS and NMR. Based on our discussions with IMS and NMR, we believe that this dispute with IMS and NMR will require that we pay the IRS approximately $4.5 million (tax and interest, net of tax benefits) in excess of our allocable share of the settlement under the terms of the Tax Sharing Agreements. We believe that the position of IMS and NMR on this issue is contrary to their obligations under the Tax Sharing Agreements. If we are unable to resolve this dispute with IMS and NMR through the negotiation process contemplated by the Tax Sharing Agreements we will commence arbitration proceedings to enforce our rights to collect these amounts from IMS and NMR. While we believe we will prevail in any such arbitration, we cannot predict with certainty that we will ultimately achieve this result.
97
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
Royalty Expense Deductions — 1993–1997
In the second quarter of 2003, we received on behalf of Donnelley/D&B1 a proposed notice of deficiency from the IRS proposing adjustments with respect to a partnership transaction entered into in 1993. Specifically, the IRS proposed to disallow certain royalty expense deductions claimed by Donnelley/D&Bl on its 1993–1996 tax returns. We estimate that the disallowance of the 1993 and 1994 royalty expense deductions would result in a loss to us of up to $5.0 million in pending tax refunds. We also estimate that the net impact to D&B’s cash flow with respect to the disallowance of the 1995 and 1996 royalty expense deductions could be up to $46.2 million (tax, interest and penalties, net of tax benefits).
In addition, and also in the second quarter of 2003, we received on behalf of the partnership associated with the above transaction a notice of proposed adjustment from the IRS challenging the tax treatment of certain royalty payments received by the partnership in which Donnelley/D&B1 was a partner. In that notice, the IRS is seeking to reallocate certain partnership income to Donnelley/D&B1. In January 2004, we received, on behalf of the partnership, a notice of proposed partnership adjustment, and on behalf of Donnelley/D&B1 a notice of proposed adjustment (similar to those received in the second quarter of 2003) associated with Donnelley/D&Bl’s remaining interest in the partnership transaction (as described above) for the three months in 1997 for which the entities were partners. In April 2004, we received, on behalf of Donnelley/D&B1, a proposed notice of deficiency proposing the adjustments described in the January 2004 notice. We estimate that the net impact to cash flow with respect to our share of this income for the Notices received in 2003 and 2004 could be up to $22.8 million (tax, interest, and penalties, net of tax benefits). We believe that the position of the IRS regarding the partnership is inconsistent with its position with respect to the same royalty expense deductions described above and, therefore, the IRS is unlikely to prevail on both positions. The $22.8 million referenced in this paragraph would be in addition to the $46.2 million noted above related to royalty expense deductions discussed in the previous paragraph.
We previously reported in our Form 10-Q for the quarter ended June 30, 2004, that we had negotiated with the IRS a tentative settlement of this matter for tax years 1995–1996 (the “Proposed Settlement”). Per the terms of the Proposed Settlement, the taxpayer would retain approximately 15% of the tax benefit associated with this transaction and pay a penalty of approximately 7%. During the third quarter of 2004, the IRS tendered to us a final settlement agreement for this matter, reflecting the financial terms set forth in the related Proposed Settlement. In accordance with the Tax Sharing Agreements we sought consent to execute the final settlement agreement for this matter from the relevant parties having financial responsibilities under the Tax Sharing Agreements (i.e., Donnelley/D&B1, Moody’s/D&B2, IMS, NMR and D&B). Only NMR and IMS did not consent to the final settlement agreement as tendered by the IRS. As a result, the settlement agreement was not executed and the IRS withdrew its settlement offer.
The Tax Sharing Agreements, which govern each of the parties’ rights and obligations under this situation, provide that, a party withholding consent to a proposed settlement shall “continue or initiate further proceedings” with the IRS “at its own expense, and the liability of [the party previously in control of such proceedings] shall be limited to the liability that would have resulted from the proposed settlement agreement (including interest, additions to tax and penalties which have accrued at that time.)” We believe, therefore, as a result of the failure of NMR and IMS to provide their consent that in accordance with the foregoing provisions (the “Royalty Expense Indemnity & Defense Provisions”) we have effectively capped our liability for this matter with respect to tax years 1995–1996 at the amounts provided in the Royalty Expense Proposed Settlement (and related final agreement).
Thus, we believe that the ultimate resolution of the 1995–1996 tax years will have a projected net impact to our cash flow of $37.7 million (tax, interest and penalties, net of tax benefits). We also believe that in accordance with the terms of the Tax Sharing Agreements NMR would be contractually responsible to pay any excess amounts above the Proposed Settlement that may ultimately be owing with respect to tax years 1995–1996.
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Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
IMS has alleged various breaches of our obligations under the Tax Sharing Agreements related to our management and attempted settlement of this matter. In addition to “reserving its rights” against D&B, IMS has urged NMR to:
| • | | challenge our application of the Royalty Expense Indemnity & Defense Provisions of the Tax Sharing Agreements (namely, that NMR must now lead the defense and that NMR and IMS indemnify us for any financial outcome that is less advantageous to us than the final settlement); and |
| • | | assert breaches of contract and to terminate the obligations of IMS and NMR under the Tax Sharing Agreements generally. |
We believe that neither NMR nor IMS have any right or the legal basis to terminate their obligations under the Tax Sharing Agreements and that any attempt to do so will be found to be without merit.
We anticipate commencing arbitration proceedings to enforce our rights under the Royalty Expense Indemnity & Defense Provisions should the negotiation process required by the Tax Sharing Agreements fail to resolve the parties’ dispute. While we believe that we should prevail in such arbitration, and thereby effectively cap our exposure with respect to tax years 1995–1996 at the levels described above, we cannot predict with certainty that we will ultimately achieve that outcome.
As noted above, the IRS has withdrawn its settlement offer with respect to tax years 1995–1996 and, accordingly, may issue notices preliminary to making assessments at any time. If we, on behalf of Donnelley/D&B1 and Moody’s/D&B2, were to challenge at any time, any of the IRS positions for years other than 1993 and 1994 described above in U.S. District Court or the U.S. Court of Federal Claims, rather than in U.S. Tax Court, the disputed amounts for each applicable year would need to be paid in advance for the Court to have jurisdiction over the case. It is possible that the IRS may seek to issue such notices with respect to each of the inconsistent positions noted above.
Amortization and Royalty Expense Deductions/Royalty Income — 1997–2004
In the fourth quarter of 2003, we received on behalf of Donnelley/D&B1 and Moody’s/D&B2, IRS Notices of Proposed Adjustment with respect to a partnership transaction entered into in 1997. In addition, we received, on behalf of the partnership, various IRS materials further explaining the examining agent’s position with respect to the activities of the partnership in 1997–1998.
In April 2004, we received on behalf of Donnelley/D&B1 and Moody’s/D&B2 proposed notices of deficiency from the IRS, proposing adjustments with respect to the 1997 partnership transaction. The adjustments proposed in the notices reflect the notices of proposed adjustment and other IRS materials referred to above.
Specifically, the IRS asserted that certain amortization expense deductions claimed by Donnelley/D&Bl and Moody’s/D&B2 on their 1997–1998 tax returns should be disallowed. We estimate that the net impact to cash flow as a result of the disallowance of the 1997 and 1998 amortization deductions and the disallowance of such deductions claimed from 1999 to date could be up to $59.9 million (tax, interest and penalties, net of tax benefits but not taking into account the Moody’s/D&B2 repayment to us of $37.2 million described below). This transaction is scheduled to expire in 2012 and, unless terminated by us, the net impact to cash flow, based on current interest rates and tax rates would increase at a rate of approximately $2.1 million per quarter (including potential penalties) as future amortization expenses are deducted. At the 2000 Distribution date, we paid Moody’s/D&B2 approximately $55 million in cash representing the discounted value of future tax benefits associated with this transaction. However, pursuant to the terms of the distribution agreement for the 2000 Distribution, should the transaction be terminated, Moody’s/D&B2 would be required to repay us an amount equal to the discounted value of its 50% share of the related future tax benefits. If the transaction was terminated at December 31, 2004, the amount of such repayment from Moody’s/D&B2 to us would be approximately $37.2 million and would decrease by approximately $4.0 million to $5.0 million per year.
99
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
In addition, the IRS has asserted that royalty expense deductions, claimed by Donnelley/D&B1 and Moody’s/D&B2 on their tax returns for 1997–1998, for royalties paid to the partnership, should be disallowed. Relatedly, the IRS has asserted that the receipt of these same royalties by the partnership should be reallocated to and reported as royalty income by Donnelley/D&Bl and Moody’s/D&B2, including the portions of the royalties that were allocated to third-party partners in the partnership, and, thus, included in their taxable income. We believe that the IRS’ stated positions with respect to the treatment of the royalty expense and royalty income are mutually inconsistent. If the IRS prevails on one of the positions with respect to the royalty expense and royalty income, we believe that it is unlikely that it will prevail on the other position. As a result, we believe that after taking into account certain other tax benefits resulting from the IRS’ position on the partnership it is unlikely that there will be any net impact to cash flow in addition to the amounts noted above related to the amortization expense deduction.
In the unlikely event the IRS were to prevail on both positions with respect to the royalty expense/income, we estimate that the net impact to cash flow as a result of the disallowance of the 1997–1998 royalty expense deductions, the disallowance of such deductions claimed from 1999 to date and the inclusion of the reallocated royalty income for all relevant years could be up to $140.7 million (tax, interest, and penalties, net of tax benefits). This $140.7 million would be in addition to the $59.9 million noted above related to the amortization expense deduction.
We have filed protests relating to this matter with the IRS Office of Appeals. During the third quarter of 2004, we were informed by the IRS Office of Appeals that this matter was being returned to the Examination Division of the IRS for further development of the issues. We are attempting to resolve this matter with the IRS before proceeding to litigation, if necessary. If we, on behalf of Donnelley/D&B1 and Moody’s/D&B2, were to challenge, at any time, any of these IRS positions for years 1997 and 1998 in U.S. District Court or the U.S. Court of Federal Claims, rather than in U.S. Tax Court, the disputed amounts for each applicable year would need to be paid in advance for the Court to have jurisdiction over the case. It is possible that the IRS may seek to issue such notices with respect to each of the inconsistent positions noted above.
We have considered the foregoing Legacy Tax Matters and the merits of the legal defenses and the various contractual obligations in our overall assessment of potential tax liabilities. We have net $108 million recorded in the consolidated financial statements, made up of the following components: $17 million of reserves in Accrued Income Tax and $91 million in Other Non-Current Liabilities. We believe that these reserves are adequate for our share of the liabilities in these Legacy Tax Matters. Any payments that would be made for these exposures could be significant to our cash from operations in the period a cash payment took place, including any payments for the purpose of obtaining jurisdiction in U.S. District Court or the U.S. Court of Federal Claims to challenge any of the IRS’s positions.
Legal Proceedings
Information Resources, Inc.
Introduction
The following is a description of an antitrust lawsuit filed in 1996 by Information Resources, Inc. (“IRI”). As more fully described below, VNU N.V., a publicly traded Dutch company (“VNU”), and its U.S. subsidiaries VNU, Inc., ACNielsen, AC Nielsen (US), Inc. (“ACN (US)”), and Nielsen Media Research (“NMR”) (collectively, the “VNU Parties”), have assumed exclusive joint and several liability for any judgment or settlement of this antitrust lawsuit. As a result of the indemnity obligation, D&B does not have any exposure to a judgment or settlement of this lawsuit unless the VNU Parties default on their obligations. In the event of such default, contractual commitments undertaken by D&B in connection with various corporate reorganizations since 1996, including our spin-off from Moody’s/D&B2 in 2000, require us to bear a portion of any amount not paid by the VNU Parties. See below “D&B’s Potential Exposure in the Lawsuit.”
100
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
Moreover, as described below, on February 1, 2005, the U.S. District Court for the Southern District of New York entered a final judgment against IRI dismissing IRI’s claims. IRI filed a notice of appeal to the Second Circuit Court of Appeals on February 2, 2005. The Court of Appeals for the Second Circuit has ordered that the appeal be argued no earlier than the week of June 13, 2005.
Overview of the Lawsuit
In July 1996, IRI filed a complaint, subsequently amended in 1997, in the U.S. District Court for the Southern District of New York, naming as defendants a company then known as The Dun & Bradstreet Corporation and now known as R.H. Donnelley (referred to in this Form 10-K as Donnelley/D&B1), A.C. Nielsen Company (a subsidiary of ACNielsen) and IMS International, Inc. (a subsidiary of the company then known as Cognizant Corporation). At the time of the filing of the complaint, each of the other defendants was a wholly-owned subsidiary of Donnelley/D&B1.
The amended complaint alleges various violations of United States antitrust laws under Sections 1 and 2 of the Sherman Antitrust Act. IRI’s antitrust claims allege that defendants developed and implemented a plan to undermine IRI’s ability to compete within the United States and foreign markets in North America, Latin America, Asia, Europe and Australia/New Zealand through a series of anti-competitive practices, including: unlawfully tying/bundling services in the markets in which defendants allegedly had monopoly power with services in markets in which ACNielsen competed with IRI; entering into exclusionary contracts with retailers in certain countries to deny IRI’s access to sales data necessary to provide retail tracking services or to artificially raise the cost of that data; predatory pricing; acquiring foreign market competitors with the intent of impeding IRI’s efforts to expand; disparaging IRI to financial analysts and clients; and denying IRI access to capital necessary for it to compete.
IRI is seeking damages in excess of $650 million, which IRI also asked to be trebled. IRI has filed with the court the report of its expert who has opined that IRI suffered damages of between $582 million and $652 million from the defendants’ alleged practices. IRI also sought punitive damages in an unspecified amount, which the Company believes are precluded as a result of the dismissal of one of IRI’s claims.
On December 3, 2004, the Court entered In limine Order No. 1, which bars IRI from “arguing that Nielsen’s pricing practices or discounts were illegal or anti-competitive unless it can prove they involved prices below short-run average variable cost, calculated without the inclusion of Nielsen’s ‘Fixed Operations’ costs.” On December 17, 2004, IRI issued a press release, which said, in relevant part, “Without this evidence, IRI believes that little would be left of IRI’s case to take to trial.” IRI has asked the Court to enter a final judgment against it so that it can take an immediate appeal to the Second Circuit. The defendants did not object to this request. On February 1, 2005, the Court entered a final judgment dismissing IRI’s claims and on February 2, 2005, the Court entered IRI’s notice of appeal to the Court of Appeals for the Second Circuit. The Court of Appeals for the Second Circuit has ordered that the appeal be argued no earlier than the week of June 13, 2005.
The Indemnity and Joint Defense Agreement
In connection with the 1996 Distribution, Cognizant (now NMR), ACNielsen and Donnelley/D&B1 entered into an Indemnity and Joint Defense Agreement (the “Original JDA”), pursuant to which they agreed to:
| • | | allocate potential liabilities that may relate to, arise out of or result from the IRI lawsuit (“IRI Liabilities”); and |
| • | | conduct a joint defense of such action. |
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Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
VNU’s and D&B’s Involvement in the Lawsuit
In 2001, ACNielsen was acquired by VNU. VNU assumed ACNielsen’s obligations under the Original JDA.
Under the terms of the 1998 Distribution, D&B2 assumed all potential liabilities of Donnelley/D&B1 arising from the IRI action and agreed to indemnify Donnelly/D&B1 in connection with such potential liabilities. Under the terms of the 2000 Distribution, D&B undertook to be jointly and severally liable with Moody’s/D&B2 for D&B2’s obligations to Donnelley/D&B1 under the 1998 Distribution, including for any liabilities arising under the Original JDA and arising from the IRI action itself. However, as between us and Moody’s/D&B2, we agreed that under the 2000 Distribution, each of us and Moody’s/D&B2 will be responsible for 50% of any payments required to be made by Moody’s/D&B2 with respect to the IRI action under the terms of the 1998 Distribution, including legal fees or expenses related to the IRI action.
The Amended and Restated JDA
On July 30, 2004, the VNU Parties, Donnelley/D&B1, D&B, Moody’s/D&B2 and IMS, entered into an Amended and Restated Indemnity and Joint Defense Agreement (the “Amended JDA”).
Pursuant to the Amended JDA, any and all IRI Liabilities incurred by Donnelley/D&B1, D&B, Moody’s/D&B2 or IMS relating to a judgment (even if not final) or any settlement being entered into in the IRI action will be jointly and severally assumed and fully discharged exclusively by the VNU Parties. Under the Amended JDA, the VNU Parties have agreed to, jointly and severally, indemnify Donnelley/D&B1, D&B, Moody’s/D&B2 and IMS from and against all IRI Liabilities to which they become subject. As a result, the cap on ACNielsen’s liability for the IRI Liabilities, which the Original JDA provided for, no longer exists, and all such liabilities are the responsibility of the VNU Parties pursuant to the Amended JDA.
In addition, the Amended JDA provides that if it becomes necessary to post any bond pending an appeal of an adverse judgment, then the VNU Parties shall obtain the bond required for the appeal and shall pay the full cost of such bond.
In connection with entering into the Amended JDA, Donnelley/D&B1, D&B, Moody’s/D&B2 and IMS agreed to amend certain covenants of the Original JDA to provide operational flexibility for ACNielsen going forward. In addition, the Amended JDA includes certain amendments to the covenants of ACNielsen (which, under the Amended JDA, are now also applicable to ACN (US), which we understand holds ACNielsen’s operating assets), which are designed to preserve such parties’ claim-paying ability and protect Donnelley/D&B1, D&B, Moody’s/D&B2 and IMS. Among other covenants, ACNielsen and ACN (US) agreed that neither they nor any of their respective subsidiaries will incur any indebtedness to any affiliated person, except indebtedness which its payment will, after a payment obligation under the Amended JDA comes due, be conditioned on, and subordinated to, the payment and performance of the obligations of such parties under the Amended JDA. VNU has agreed to have a process agent in New York receive on its behalf service of any process concerning the Amended JDA.
D&B’s Potential Exposure in the Lawsuit
As described above, the VNU Parties have assumed exclusive responsibility for the payment of all IRI Liabilities. However, because liability for violations of the antitrust laws is joint and several and because the rights and obligations relating to the Amended JDA are based on contractual relationships, the failure of the VNU Parties to fulfill their obligations under the Amended JDA could result in the other parties bearing all or a share of the IRI Liabilities.
Joint and several liability for the IRI action means that even where more than one defendant is determined to have been responsible for an alleged wrongdoing, the plaintiff can collect all or part of the judgment from just one of the defendants. This is true regardless of whatever contractual allocation of responsibility the defendants and any other indemnifying parties may have made, including the allocations described above between the VNU Parties, Donnelly/D&B1, D&B, Moody’s/D&B2 and IMS.
102
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
Accordingly, and as a result of the allocations of liability described above, in the event the VNU Parties default on their obligations under the Amended JDA, each of Moody’s/D&B2 and D&B will be responsible for the payment of 50% of the portion of any judgment or settlement ultimately paid by Donnelley/D&B1 (which is a defendant in the IRI action), which can be as high as all the IRI Liabilities.
While, as described above, the IRI lawsuit has been dismissed, IRI has filed an appeal. Accordingly, we are unable to predict the outcome of the IRI action (including the appeal) or the financial condition of any of the VNU Parties or the other defendants at the time of any such outcome (and hence we cannot estimate their ability to pay the IRI Liabilities pursuant to the Amended JDA or the judgment or settlement in the IRI action). However, provided that the VNU Parties fulfill their obligations under the Amended JDA, we believe that the resolution of this matter would not materially affect our results of operations, cash flows and financial position. Accordingly, no amount in respect of this matter has been accrued in our consolidated financial statements. If, however, IRI were to prevail in whole or in part in this action and if D&B is required to pay, notwithstanding such contractual obligations, a portion of any significant settlement or judgment, the outcome of this matter could have a material adverse effect on D&B’s financial position, results of operations and cash flows.
Hoover’s — Initial Public Offering Litigation
On November 15, 2001, a putative shareholder class action lawsuit was filed against Hoover’s, certain of its then current and former officers and directors (the “Individual Defendants”), and one of the investment banks that was an underwriter of Hoover’s July 1999 initial public offering (“IPO”). The lawsuit was filed in the United States District Court for the Southern District of New York and purports to be a class action filed on behalf of purchasers of the stock of Hoover’s during the period from July 20, 1999 through December 6, 2000.
A Consolidated Amended Complaint, which is now the operative complaint, was filed on April 19, 2002. The purported class action alleges violations of Sections 11 and 15 of the Securities Act of 1933, as amended, (the “1933 Act”) and Sections 10(b), Rule 10b-5 and 20(a) of the Securities Exchange Act of 1934, as amended, against Hoover’s and Individual Defendants. Plaintiffs allege that the underwriter defendant agreed to allocate stock in Hoover’s IPO to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at predetermined prices above the IPO price. Plaintiffs allege that the Prospectus for Hoover’s IPO was false and misleading in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. The defense of the action is being coordinated with more than 300 other nearly identical actions filed against other companies. On July 15, 2002, Hoover’s moved to dismiss all claims against it and the Individual Defendants. On October 9, 2002, the Court dismissed the Individual Defendants from the case based upon Stipulations of Dismissal filed by the plaintiffs and the Individual Defendants. On February 19, 2003, the Court denied the motion to dismiss the complaint against Hoover’s. On October 13, 2004, the Court certified a class in six of the approximately 300 other nearly identical actions and noted that the decision is intended to provide strong guidance to all parties regarding class certification in the remaining cases. Plaintiffs have not yet moved to certify a class in the case involving Hoover’s.
Hoover’s has approved a settlement agreement and related agreements that set forth the terms of a settlement between Hoover’s, the plaintiff class and the vast majority of the other approximately 300 issuer defendants. Among other provisions, the settlement provides for a release of Hoover’s and the individual defendants for the conduct alleged in the action to be wrongful. Hoover’s would agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims Hoover’s may have against its underwriters. The settlement agreement also provides a guaranteed recovery of $1 billion to plaintiffs for the cases relating to all of the approximately 300 issuers. To the extent that the underwriter defendants settle all of the cases for at least $1 billion, no payment will be required under the issuers’ settlement agreement. To the extent that the underwriter defendants settle for less than $1 billion, the issuers are required to make up the difference. It is anticipated that any potential financial obligation of Hoover’s to plaintiffs pursuant to the terms of the settlement agreement and related agreements will be covered by existing
103
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
insurance. Hoover’s currently is not aware of any material limitations on the expected recovery of any potential financial obligation to plaintiffs from its insurance carriers. Its carriers are solvent, and Hoover’s is not aware of any uncertainties as to the legal sufficiency of an insurance claim with respect to any recovery by plaintiffs. Therefore, we do not expect that the settlement will involve any payment by Hoover’s. If material limitations on the expected recovery of any potential financial obligation to the plaintiffs from Hoover’s insurance carriers should arise, Hoover’s maximum financial obligation to plaintiffs pursuant to the settlement agreement is less than $3.4 million. On February 15, 2005, the Court granted preliminary approval of the settlement agreement, subject to certain modifications consistent with its opinion. The Court ruled that the issuer defendants and the plaintiffs must submit a revised settlement agreement that provides for a mutual bar of all contribution claims by the settling and non-settling parties and does not bar the parties from pursuing other claims. There is a conference scheduled with the judge on March 18, 2005 to discuss the status of the revised settlement agreement. The underwriter defendants will have an opportunity to object to the revised settlement agreement. There is no assurance that the parties to the settlement will be able to agree to a revised settlement agreement consistent with the court’s opinion, or that the court will grant final approval to the settlement to the extent the parties reach agreement.As previously noted, if the settlement is ultimately approved and implemented in its current form, Hoover’s reasonably foreseeable exposure in this matter, if any, would be limited to amounts that would be covered by existing insurance. If the settlement is not approved in its current form, we cannot predict the final outcome of this matter or whether such outcome or ultimate resolution of this matter could materially affect our results of operations, cash flows or financial position. No amount in respect of any potential judgment in this matter has been accrued in our consolidated financial statements.
Pension Plan Litigation
In March 2003, a lawsuit seeking class action status was filed against us in federal court in Connecticut on behalf of 46 specified former employees relating to our retirement plans. As noted below, during the fourth quarter of 2004 most of the counts in the complaint were dismissed. The complaint, as amended in July 2003 (the “Amended Complaint”), sets forth the following putative class:
| • | | current D&B employees who are participants in The Dun & Bradstreet Corporation Retirement Account and were previously participants in its predecessor plan, The Dun & Bradstreet Master Retirement Plan; |
| • | | current employees of Receivable Management Services Corporation (“RMSC”) who are participants in The Dun & Bradstreet Corporation Retirement Account and were previously participants in its predecessor plan, The Dun & Bradstreet Master Retirement Plan; |
| • | | former employees of D&B or D&B’s Receivable Management Services (“RMS”) operations who received a deferred vested retirement benefit under either The Dun & Bradstreet Corporation Retirement Account or The Dun & Bradstreet Master Retirement Plan; and |
| • | | former employees of D&B’s RMS operations whose employment with D&B terminated after the sale of the RMS operations but who are not employees of RMSC and who, during their employment with D&B, were “Eligible Employees” for purposes of The Dun & Bradstreet Career Transition Plan. |
The Amended Complaint estimates that the proposed class covers over 5,000 individuals.
There are four counts in the Amended Complaint. Count 1 claims that we violated ERISA by not paying severance benefits to plaintiffs under our Career Transition Plan. Count 2 claims a violation of ERISA in that our sale of the RMS business to RMSC and the resulting termination of our employees constituted a prohibited discharge of the plaintiffs and/or discrimination against the plaintiffs for the “intentional purpose of interfering with their employment and/or attainment of employee benefit rights which they might otherwise have attained.” Count 3 claims that the plaintiffs were materially harmed by our alleged violation of ERISA’s
104
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
requirements that a summary plan description reasonably apprise participants and beneficiaries of their rights and obligations under the plans and that, therefore, undisclosed plan provisions (in this case, the actuarial deduction beneficiaries incur when they leave D&B before age 55 and elect to retire early) cannot be enforced against them. Count 4 claims that the 6-3/5% interest rate (the rate is actually 6-3/4%) used to actuarially reduce early retirement benefits is unreasonable and, therefore, results in a prohibited forfeiture of benefits under ERISA.
In the Amended Complaint, the plaintiffs sought payment of severance benefits; equitable relief in the form of either reinstatement of employment with D&B or restoration of employee benefits (including stock options); invalidation of the actuarial reductions applied to deferred vested early retirement benefits, including invalidation of the plan rate of 6-3/5% (the actual rate is 6-3/4%) used to actuarially reduce former employees’ early retirement benefits; attorneys’ fees and such other relief as the court may deem just.
We deny all allegations of wrongdoing and are aggressively defending the case. In September 2003, we filed a motion to dismiss Counts 1, 3 and 4 of the Amended Complaint on the ground that plaintiffs cannot prevail on those claims under any set of facts, and in February 2004, the Court heard oral argument on our motion. With respect to Count 4, the Court requested that the parties conduct limited expert discovery and submit further briefing. In November 2004, after completion of expert discovery on Count 4, we moved for summary judgment on Count 4 on the ground that an interest rate of 6.75% is reasonable as a matter of law. Briefing on that motion is being completed. Meanwhile, on November 30, 2004 the Court issued a ruling granting our motion to dismiss Counts 1 and 3. Shortly after that ruling, plaintiffs’ counsel stipulated to dismiss Count 2 (which challenged the sale of the RMS business as an intentional interference with employee benefit rights, but which the motion to dismiss did not address). Plaintiffs’ counsel also stipulated to a dismissal of Count 1, the severance pay claim, agreeing to forego any appeal of the Court’s dismissal of that claim. Plaintiffs’ counsel did file a motion to join party plaintiffs and to amend the amended complaint to add a new count challenging the adequacy of the retirement plan’s mortality tables. The court granted the motion and we have filed our objections.
We are unable to predict at this time the final outcome of this matter or whether the resolution of this matter could materially affect our results of operations, cash flows or financial position. No amount in respect of this matter has been accrued in our consolidated financial statements.
Other Matters
In the normal course of business, D&B indemnifies other parties, including customers, lessors and parties to other transactions with D&B, with respect to certain matters. D&B has agreed to hold the other parties harmless against losses arising from a breach of representations or covenants, or out of other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. D&B has also entered into indemnity obligations with its officers and directors of the Company. Additionally, in certain circumstances, D&B issues guarantee letters on behalf of our wholly owned subsidiaries for specific situations. It is not possible to determine the maximum potential amount of future payments under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by D&B under these agreements have not had a material impact on our consolidated financial statements.
105
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
| Note 14. | | Segment Information |
The segments reported below are our segments for which separate financial information is available and upon which operating results are evaluated on a timely basis to assess performance and to allocate resources. We manage our business on a geographical basis — with two segments, North America and International. Our customer solution sets are Risk Management Solutions, Sales & Marketing Solutions, Supply Management Solutions and E-Business Solutions. Inter-segment sales are immaterial and no single customer accounted for 10% or more of our total revenues. For management reporting purposes, we evaluate business segment performance before restructuring charges because they are not a component of our ongoing income or expenses and may have a disproportionate positive or negative impact on the results of our ongoing underlying business (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “How We Manage Our Business” for further details). Additionally, transition costs, which are period costs such as consulting fees, costs of temporary employees, relocation costs and stay bonuses incurred to implement our Financial Flexibility Program, are not allocated to our business segments.
| | | | Year Ended December 31,
| |
|---|
| | | | 2004
| | 2003
| | 2002
|
|---|
Operating Revenues:
| | | | | | | | | | | | | | |
| North America | | | | $ | 1,038.3 | | | $ | 960.1 | | | $ | 912.1 | |
| International | | | | | 375.7 | | | | 426.3 | | | | 363.5 | |
| Consolidated Total | | | | $ | 1,414.0 | | | $ | 1,386.4 | | | $ | 1,275.6 | |
Operating Income (Loss):
| | | | | | | | | | | | | | |
| North America | | | | $ | 365.3 | | | $ | 329.9 | | | $ | 313.1 | |
| International | | | | | 64.3 | | | | 59.9 | | | | 43.5 | |
| Total Divisions | | | | | 429.6 | | | | 389.8 | | | | 356.6 | |
| All Other(1) | | | | | (110.8 | ) | | | (98.0 | ) | | | (100.7 | ) |
| Consolidated Total | | | | | 318.8 | | | | 291.8 | | | | 255.9 | |
| Non-Operating Income (Expense) — Net | | | | | 22.0 | | | | (11.4 | ) | | | (16.7 | ) |
| Income before Provision for Income Taxes | | | | $ | 340.8 | | | $ | 280.4 | | | $ | 239.2 | |
Depreciation and Amortization:(2)
| | | | | | | | | | | | | | |
| North America | | | | $ | 35.7 | | | $ | 41.1 | | | $ | 57.7 | |
| International | | | | | 10.9 | | | | 19.6 | | | | 23.9 | |
| Total Divisions | | | | | 46.6 | | | | 60.7 | | | | 81.6 | |
| All Other | | | | | 0.7 | | | | 3.3 | | | | 2.6 | |
| Consolidated Total | | | | $ | 47.3 | | | $ | 64.0 | | | $ | 84.2 | |
Capital Expenditures:
| | | | | | | | | | | | | | |
| North America | | | | $ | 7.3 | | | $ | 7.7 | | | $ | 10.6 | |
| International | | | | | 4.6 | | | | 3.3 | | | | 5.2 | |
| Total Divisions | | | | | 11.9 | | | | 11.0 | | | | 15.8 | |
| All Other | | | | | 0.2 | | | | — | | | | — | |
| Consolidated Total | | | | $ | 12.1 | | | $ | 11.0 | | | $ | 15.8 | |
106
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
| | | | Year Ended December 31,
| |
|---|
| | | | 2004
| | 2003
| | 2002
|
|---|
Additions to Computer Software and Other Intangibles:
| | | | | | | | | | | | | | |
| North America | | | | $ | 14.0 | | | $ | 16.5 | | | $ | 29.8 | |
| International | | | | | 2.6 | | | | 2.8 | | | | 7.7 | |
| Total Divisions | | | | | 16.6 | | | | 19.3 | | | | 37.5 | |
| All Other | | | | | 0.1 | | | | — | | | | 0.2 | |
| Consolidated Total | | | | $ | 16.7 | | | $ | 19.3 | | | $ | 37.7 | |
Assets:
| | | | | | | | | | | | | | |
| North America | | | | $ | 467.3 | | | $ | 456.8 | | | $ | 366.0 | |
| International | | | | | 455.5 | | | | 541.1 | | | | 493.1 | |
| Total Divisions | | | | | 922.8 | | | | 997.9 | | | | 859.1 | |
| All Other (primarily domestic pensions and taxes) | | | | | 712.7 | | | | 626.8 | | | | 668.6 | |
| Consolidated Total | | | | $ | 1,635.5 | | | $ | 1,624.7 | | | $ | 1,527.7 | |
Goodwill: (3)
| | | | | | | | | | | | | | |
| North America | | | | $ | 110.9 | | | $ | 118.0 | | | $ | 51.6 | |
| International | | | | | 106.1 | | | | 138.9 | | | | 131.7 | |
| Consolidated Total | | | | $ | 217.0 | | | $ | 256.9 | | | $ | 183.3 | |
Supplemental Geographic and Customer Solution
Set Information:
| | | | | | | | | | | | | | |
Long-Lived Assets:
| | | | | | | | | | | | | | |
| North America | | | | $ | 580.6 | | | $ | 642.8 | | | $ | 534.8 | |
| International | | | | | 136.7 | | | | 167.5 | | | | 267.8 | |
| Consolidated Total | | | | $ | 717.3 | | | $ | 810.3 | | | $ | 802.6 | |
Customer Solution Set Revenues:
| | | | | | | | | | | | | | |
North America:
| | | | | | | | | | | | | | |
| Risk Management Solutions | | | | $ | 639.7 | | | $ | 603.6 | | | $ | 594.3 | |
| Sales & Marketing Solutions | | | | | 318.9 | | | | 294.1 | | | | 289.1 | |
| Supply Management Solutions | | | | | 29.8 | | | | 33.4 | | | | 28.7 | |
| E-Business Solutions | | | | | 49.9 | | | | 29.0 | | | | — | |
| Total North America Core | | | | | 1,038.3 | | | | 960.1 | | | | 912.1 | |
| Other Divested Businesses | | | | | — | | | | — | | | | — | |
| Total North America | | | | | 1,038.3 | | | | 960.1 | | | | 912.1 | |
International:
| | | | | | | | | | | | | | |
| Risk Management Solutions | | | | | 242.3 | | | | 200.7 | | | | 160.3 | |
| Sales & Marketing Solutions | | | | | 49.3 | | | | 48.3 | | | | 42.0 | |
| Supply Management Solutions | | | | | 4.5 | | | | 4.6 | | | | 2.7 | |
| E-Business Solutions | | | | | 0.1 | | | | — | | | | — | |
| Total International Core | | | | | 296.2 | | | | 253.6 | | | | 205.0 | |
107
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
| | | | Year Ended December 31,
| |
|---|
| | | | 2004
| | 2003
| | 2002
|
|---|
| Other Divested Businesses | | | | | 79.5 | | | | 172.7 | | | | 158.5 | |
| Total International | | | | | 375.7 | | | | 426.3 | | | | 363.5 | |
Consolidated Total:
| | | | | | | | | | | | | | |
| Risk Management Solutions | | | | | 882.0 | | | | 804.3 | | | | 754.6 | |
| Sales & Marketing Solutions | | | | | 368.2 | | | | 342.4 | | | | 331.1 | |
| Supply Management Solutions | | | | | 34.3 | | | | 38.0 | | | | 31.4 | |
| E-Business Solutions | | | | | 50.0 | | | | 29.0 | | | | — | |
| Consolidated Total Core | | | | | 1,334.5 | | | | 1,213.7 | | | | 1,117.1 | |
| Other Divested Businesses | | | | | 79.5 | | | | 172.7 | | | | 158.5 | |
| Consolidated Total | | | | $ | 1,414.0 | | | $ | 1,386.4 | | | $ | 1,275.6 | |
| (1) | | The following table itemizes “All Other”: |
| | | | Year Ended December 31,
| |
|---|
| | | | 2004
| | 2003
| | 2002
|
|---|
Operating Income (Loss):
| | | | | | | | | | | | | | |
| Corporate Costs | | | | $ | (58.2 | ) | | $ | (44.5 | ) | | $ | (38.4 | ) |
Transition Costs (Costs to implement our Financial
Flexibility Program) | | | | | (20.6 | ) | | | (22.3 | ) | | | (31.4 | ) |
| Restructuring Expense | | | | | (32.0 | ) | | | (17.4 | ) | | | (30.9 | ) |
| Loss on High Wycombe Building Sale | | | | | — | | | | (13.8 | ) | | | — | |
| Total “All Other” | | | | $ | (110.8 | ) | | $ | (98.0 | ) | | $ | (100.7 | ) |
| (2) | | Includes depreciation and amortization of Property, Plant and Equipment, Computer Software, Goodwill and Other Intangibles. |
| (3) | | The decrease in goodwill in North America from $118.0 million at December 31, 2003 to $110.9 million at December 31, 2004 is primarily attributed to an adjustment for additional net operating loss carryovers from the Hoover’s acquisition that resulted from an Internal Revenue Service pronouncement. The decrease in goodwill in International from $138.9 million at December 31, 2003 to $106.1 million at December 31, 2004 is primarily attributed to the sales of operations in Iberia, France, Central Europe, the Nordic region and, India (see Note 3 for more detail), partially offset by the positive effect of foreign currency translation and the acquisition of a controlling interest in RIBES S.p.A (see Note 4 for more detail).
The increase in goodwill in North America from $51.6 million at December 31, 2002 to $118.0 million at December 31, 2003 is primarily attributed to the acquisition of Hoover’s. The increase in goodwill in International from $131.7 million at December 31, 2002 to $138.9 million at December 31, 2003 is primarily attributed to the acquisition of Data House. (See Note 4 for more detail). |
108
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
Note 15. Supplemental Financial Data
Other Accrued and Current Liabilities:
| | | | At December 31,
| |
|---|
| | | | 2004
| | 2003
|
|---|
| Restructuring Accruals | | | | $ | 9.3 | | | $ | 2.7 | |
| Professional Fees | | | | | 27.5 | | | | 29.5 | |
| Operating Expenses | | | | | 31.5 | | | | 37.0 | |
| Spin-Off Obligation(1) | | | | | 21.3 | | | | — | |
| Other Accrued Liabilities | | | | | 51.2 | | | | 60.1 | |
| | | | | $ | 140.8 | | | $ | 129.3 | |
| (1) | | As part of our spin-off from Moody’s/D&B2 in 2000, Moody’s and D&B entered into a Tax Allocation Agreement dated as of September 30, 2000 (the “TAA”). Under the TAA, Moody’s/D&B2 and D&B agreed that Moody’s/D&B2 would be entitled to deduct compensation expense associated with the exercise of Moody’s/D&B2 stock options (including Moody’s/D&B2 options exercised by D&B employees), and D&B would be entitled to deduct the compensation expense associated with the exercise of D&B stock options (including D&B options exercised by employees of Moody’s/D&B2). Put simply, the tax deduction goes to the issuing company of the stock option. The TAA provides, however, that if the IRS issues rules, regulations or other authority contrary to the agreed upon treatment of the tax deductions thereunder, then the party that becomes then entitled to take the deduction may be required to indemnify the other party for the loss of such deduction. The IRS issued rulings discussing an employer’s entitlement to stock option deductions after a spin-off or liquidation that appears to require that the tax deduction belongs to the employer of the optionee and not the issuer of the option. Accordingly, under the TAA, we received the benefit of additional tax deductions and under the TAA we may be required to reimburse Moody’s/D&B2 for the loss of income tax deductions relating to 2003 and 2004 of approximately $21 million in the aggregate for such years. This potential reimbursement is a reduction to Shareholders’ Equity and has no impact on EPS. |
Property, Plant and Equipment — Net, carried at cost:
| | | | At December 31,
| |
|---|
| | | | 2004
| | 2003
|
|---|
| Land | | | | $ | 4.7 | | | $ | 4.7 | |
| Buildings | | | | | 29.1 | | | | 28.9 | |
| Machinery and Equipment | | | | | 196.3 | | | | 221.0 | |
| | | | | | 230.1 | | | | 254.6 | |
| Less: Accumulated Depreciation | | | | | 186.9 | | | | 209.7 | |
| | | | | | 43.2 | | | | 44.9 | |
Leasehold Improvements, less:
| | | | | | | | | | |
| Accumulated Amortization of $15.6 and $20.4 | | | | | 8.0 | | | | 10.2 | |
| | | | | $ | 51.2 | | | $ | 55.1 | |
109
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
Other Income (Expense) — Net:
| | | | Year Ended December 31,
| |
|---|
| | | | 2004
| | 2003
| | 2002
|
|---|
| Miscellaneous Other Income (Expense) — Net | | | | $ | 1.0 | | | $ | (1.9 | ) | | $ | (2.3 | ) |
| Gains (Losses) on Sales of Businesses(2) | | | | | 30.3 | | | | (2.5 | ) | | | 5.0 | |
| Gain on Sale of Investment | | | | | 1.2 | | | | 0.4 | | | | — | |
| Write-off of Non-Recoverable Investments(2) | | | | | — | | | | — | | | | (2.9 | ) |
| Insurance Recovery | | | | | — | | | | 7.0 | | | | — | |
| | | | | $ | 32.5 | | | $ | 3.0 | | | $ | (0.2 | ) |
| (2) | | See Note 3 to these consolidated financial statements. |
Computer Software and Goodwill:
| | | | Computer
Software
| | Goodwill
|
|---|
| January 1, 2003 | | | | $ | 69.5 | | | $ | 183.3 | |
| Additions at cost | | | | | 19.3 | | | | — | |
| Amortization | | | | | (40.9 | ) | | | — | |
| Divestitures | | | | | — | | | | (2.3 | ) |
| Assets Held for Sale | | | | | — | | | | (20.9 | ) |
| Acquisitions | | | | | 0.2 | | | | 71.3 | |
| Other(3) | | | | | (0.9 | ) | | | 25.5 | |
| December 31, 2003 | | | | | 47.2 | | | | 256.9 | |
| Additions at cost | | | | | 16.4 | | | | — | |
| Amortization | | | | | (31.4 | ) | | | — | |
| Divestitures | | | | | (0.1 | ) | | | (44.0 | ) |
| Acquisitions | | | | | 0.9 | | | | (3.8 | ) |
| Other(3) | | | | | (0.6 | ) | | | 7.9 | |
December 31, 2004 | | | | $ | 32.4 | | | $ | 217.0 | |
| (3) | | Impact of foreign currency fluctuations. |
110
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
Other Intangibles:
| | | | Customer
Lists
| | Trademarks,
Patents
and Other
| | Total
|
|---|
| January 1, 2003 | | | | $ | 7.6 | | | $ | 0.1 | | | $ | 7.7 | |
| Additions at cost | | | | | 9.4 | | | | 5.1 | | | | 14.5 | |
| Operating Amortization | | | | | (3.1 | ) | | | — | | | | (3.1 | ) |
| Other(4) | | | | | (6.3 | ) | | | — | | | | (6.3 | ) |
| December 31, 2003 | | | | | 7.6 | | | | 5.2 | | | | 12.8 | |
| Additions at cost | | | | | 3.1 | | | | — | | | | 3.1 | |
| Operating Amortization | | | | | (2.5 | ) | | | — | | | | (2.5 | ) |
| Disposals | | | | | — | | | | 1.4 | | | | 1.4 | |
| Other(5) | | | | | 0.2 | | | | 0.3 | | | | 0.5 | |
December 31, 2004 | | | | $ | 8.4 | | | $ | 6.9 | | | $ | 15.3 | |
| (4) | | Due to assets held for sale. |
| (5) | | Impact of foreign currency fluctuations. |
Allowance for Doubtful Accounts:
| | | | | | |
| January 1, 2002 | | | | $ | 21.0 | |
| Additions charged to costs and expenses | | | | | 15.3 | |
| Write-offs | | | | | (13.3 | ) |
| December 31, 2002 | | | | | 23.0 | |
| Additions charged to costs and expenses | | | | | 4.1 | |
| Write-offs | | | | | (5.3 | ) |
| December 31, 2003 | | | | | 21.8 | |
| Additions charged to costs and expenses | | | | | 6.5 | |
| Write-offs | | | | | (7.9 | ) |
| Divestitures | | | | | (1.9 | ) |
| Other | | | | | 0.9 | |
| December 31, 2004 | | | | $ | 19.4 | |
Deferred Tax Asset Valuation Allowance:
| | | | | | |
| January 1, 2002 | | | | $ | 70.2 | |
| Additions charged (credited) to costs and expenses | | | | | (13.4 | ) |
| December 31, 2002 | | | | | 56.8 | |
| Additions charged (credited) to costs and expenses | | | | | 21.9 | |
| Additions charged (credited) to other accounts(6) | | | | | (2.3 | ) |
| December 31, 2003 | | | | | 76.4 | |
| Additions charged (credited) to costs and expenses | | | | | 9.3 | |
| Additions charged (credited) due to divestitures | | | | | (29.1 | ) |
| Additions charged (credited) to other accounts(6) | | | | | (0.7 | ) |
December 31, 2004 | | | | $ | 55.9 | |
| (6) | | Amount represents a decrease to goodwill associated with the Data House acquisition. See Note 4 “Acquisitions and Other Investments” to these consolidated financial statements. |
111
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
| Note 16. | | Quarterly Financial Data (Unaudited) |
| | | | Three-Months Ended
| |
|---|
| | | | March 31
| | June 30
| | September 30
| | December 31
| | Year
|
|---|
2004 Operating Revenues:
| | | | | | | | | | | | | | | | | | | | | | |
| North America | | | | $ | 250.5 | | | $ | 245.4 | | | | $247.8 | | | | $294.6 | | | $ | 1,038.3 | |
| International | | | | | 92.9 | | | | 104.5 | | | | 85.4 | | | | 92.9 | | | | 375.7 | |
| Consolidated Operating Revenues | | | | $ | 343.4 | | | $ | 349.9 | | | | $333.2 | | | | $387.5 | | | $ | 1,414.0 | |
Operating Income (Loss):
| | | | | | | | | | | | | | | | | | | | | | |
| North America | | | | $ | 87.5 | | | $ | 73.0 | | | | $ 82.4 | | | | $122.4 | | | $ | 365.3 | |
| International | | | | | 7.1 | | | | 20.2 | | | | 12.1 | | | | 24.9 | | | | 64.3 | |
| Total Divisions | | | | | 94.6 | | | | 93.2 | | | | 94.5 | | | | 147.3 | | | | 429.6 | |
| All Other(1) | | | | | (29.1 | ) | | | (28.6 | ) | | | (21.6 | ) | | | (31.5 | ) | | | (110.8 | ) |
| Consolidated Operating Income | | | | $ | 65.5 | | | $ | 64.6 | | | | $ 72.9 | | | | $115.8 | | | $ | 318.8 | |
| Net Income | | | | $ | 49.8 | | | $ | 39.5 | | | | $ 47.5 | | | | $ 75.0 | | | $ | 211.8 | |
Basic Earnings Per Share of Common
Stock(2) | | | | $ | .69 | | | $ | .56 | | | | $ .68 | | | | $ 1.09 | | | $ | 3.01 | |
Diluted Earnings Per Share of Common
Stock(2) | | | | $ | .66 | | | $ | .54 | | | | $ .65 | | | | $ 1.04 | | | $ | 2.90 | |
2003 Operating Revenues:
| | | | | | | | | | | | | | | | | | | | | | |
| North America | | | | $ | 226.5 | | | $ | 229.3 | | | | $229.2 | | | | $275.1 | | | $ | 960.1 | |
| International | | | | | 88.2 | | | | 105.7 | | | | 103.1 | | | | 129.3 | | | | 426.3 | |
| Consolidated Operating Revenues | | | | $ | 314.7 | | | $ | 335.0 | | | | $332.3 | | | | $404.4 | | | $ | 1,386.4 | |
Operating Income (Loss):
| | | | | | | | | | | | | | | | | | | | | | |
| North America | | | | $ | 80.3 | | | $ | 68.4 | | | | $ 75.3 | | | | $105.9 | | | $ | 329.9 | |
| International | | | | | 1.3 | | | | 16.4 | | | | 10.8 | | | | 31.4 | | | | 59.9 | |
| Total Divisions | | | | | 81.6 | | | | 84.8 | | | | 86.1 | | | | 137.3 | | | | 389.8 | |
| All Other(1) | | | | | (26.0 | ) | | | (23.7 | ) | | | (32.0 | ) | | | (16.3 | ) | | | (98.0 | ) |
| Consolidated Operating Income | | | | $ | 55.6 | | | $ | 61.1 | | | | $ 54.1 | | | | $121.0 | | | $ | 291.8 | |
| Net Income | | | | $ | 37.1 | | | $ | 35.1 | | | | $ 28.8 | | | | $ 73.5 | | | $ | 174.5 | |
Basic Earnings Per Share of Common
Stock(2) | | | | $ | .50 | | | $ | .47 | | | | $ .39 | | | | $ 1.01 | | | $ | 2.37 | |
Diluted Earnings Per Share of Common
Stock(2) | | | | $ | .48 | | | $ | .46 | | | | $ .38 | | | | $ .98 | | | $ | 2.30 | |
| (1) | | The following table itemizes the components of the “All Other” category of Operating Income (Loss) (see Note 3 to these consolidated financial statements): |
112
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
| | | | Three Months Ended
| |
|---|
| | | | March 31
| | June 30
| | September 30
| | December 31
| | Year
|
|---|
Operating Income (Loss):
| | | | | | | | | | | | | | | | | | | | | | |
2004:
| | | | | | | | | | | | | | | | | | | | | | |
| Corporate Costs | | | | $ | (14.8 | ) | | $ | (14.6 | ) | | | $(14.9 | ) | | | $(13.9 | ) | | $ | (58.2 | ) |
| Restructuring Expense | | | | | (10.2 | ) | | | (8.0 | ) | | | (2.7 | ) | | | (11.1 | ) | | | (32.0 | ) |
Transition Costs (Costs to implement
our Financial Flexibility Program) | | | | | (4.1 | ) | | | (6.0 | ) | | | (4.0 | ) | | | (6.5 | ) | | | (20.6 | ) |
| Total | | | | $ | (29.1 | ) | | $ | (28.6 | ) | | | $(21.6 | ) | | | $(31.5 | ) | | $ | (110.8 | ) |
2003:
| | | | | | | | | | | | | | | | | | | | | | |
| Corporate Costs | | | | $ | (9.7 | ) | | $ | (11.3 | ) | | | $ (9.9 | ) | | | $(13.6 | ) | | $ | (44.5 | ) |
| Restructuring Expense | | | | | (10.9 | ) | | | (4.9 | ) | | | (1.6 | ) | | | — | | | | (17.4 | ) |
| Loss on High Wycombe, England, Building Sale | | | | | — | | | | — | | | | (13.8 | ) | | | — | | | | (13.8 | ) |
Transition Costs (Costs to implement
our Financial Flexibility Program) | | | | | (5.4 | ) | | | (7.5 | ) | | | (6.7 | ) | | | (2.7 | ) | | | (22.3 | ) |
| Total | | | | $ | (26.0 | ) | | $ | (23.7 | ) | | | $(32.0 | ) | | | $(16.3 | ) | | $ | (98.0 | ) |
| (2) | | The number of weighted average shares outstanding changes as common shares are issued for employee benefit plans and other purposes or as shares are repurchased. For this reason, the sum of quarterly earnings per share may not be the same as earnings per share for the year. |
| Note 17. | | Subsequent Events |
Share Repurchase Program
In February 2005, we announced that our Board of Directors authorized a new $400 million two-year share repurchase program. This program is in addition to our existing repurchase program to offset the dilutive effect of shares issued under employee benefit plans. We expect that the share repurchase program will be funded from cash on hand and executed evenly over the two-year period. Through February 28, 2005, we repurchased 168,000 shares at an aggregate cost of $10.0 million.
Financial Flexibility Program
On January 31, 2005, the Board of Directors of D&B approved our 2005 Financial Flexibility Program. The actions associated with this 2005 Financial Flexibility Program, which will be implemented throughout 2005, include:
| • | | Improving operating efficiency with a focus on evaluating opportunities in our International segment, and |
| • | | Leveraging current outsourcing partners and vendors to drive quality and cost efficiencies primarily in the area of technology. |
We expect to complete all actions under the 2005 initiative by December 2005. On an annualized basis, these actions are expected to create $70 million to $80 million of financial flexibility (approximately $50 million in 2005), before any restructuring charges and transition costs and before any reallocation of spending. To implement these measures and complete our 2004 Program, we expect to incur transition costs of approximately $20 million to $22 million. In addition, we expect to incur non-core restructuring charges totaling approximately $30 million to $35 million pre-tax, of which $28 million to $32 million relate to
113
Notes to Consolidated Financial Statements—(continued)
(Tabular dollar amounts in millions, except per share data)
severance and termination costs and $2 million to $3 million relate to lease termination obligations and other exit costs, in 2005. The $30 million to $35 million pre-tax charge includes approximately $10 million of restructuring charges to complete the IBM outsourcing. Approximately $60 million to $65 million of these transition costs and restructuring charges are expected to result in cash expenditures.Medicare Prescription Drug, Improvement, and Modernization Act of 2003
On January 21, 2005, the Centers for Medicare and Medicaid Services (“CMS”) released final regulations implementing major provisions of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. The regulations address key concepts, such as defining a plan, as well as the actuarial equivalence test for purposes of obtaining a government subsidy. Pursuant to the guidance in FSP No. FAS 106-2, we have assessed the financial impact of the regulations and estimated that our postretirement benefit plan will be qualified for the direct subsidies for an additional seven years and our APBO (as defined in notes to these consolidated financial statements) is expected to decrease by an approximately additional $10 million. We also expect this additional APBO reduction will result in a reduction of approximately $0.9 million in our 2005 postretirement benefit cost. Together with the impacts already included in our December 31, 2004 results, the APBO is expected to decrease by a total of $41 million and our plan will be actuarially equivalent beginning in 2006 until 2023. Our plan will be remeasured in the first quarter of 2005 and the financial impact will be recorded at that time.
Italy
On February 1, 2005, regulations implementing new tax legislation became effective in Italy that is expected to significantly increase the cost of conducting our Italian real estate information business in 2005. Specifically, the regulations increase data acquisition costs for Italian real estate information and require that we pay a fee each time we resell or license that data.
Our plan is to fully address these incremental costs through price increases to our customers to mitigate the impact to our operating income in Italy. Accordingly, we began implementing these price increases in February 2005.
At this time, we cannot predict with certainty the final impact that this tax legislation and related regulations will have on our 2005 reported results because we cannot forecast:
| 1. | | customer acceptance of the price increases, |
| 2. | | the impact that such price increases may have on customers’ utilization of our real estate and other products during the year, |
| 3. | | the full nature and impact of actions that we may take to mitigate the operating income impact of the legislation, and |
| 4. | | the actions of our competitors. |
114
Item 9. Changes in and Disagreements with Accountants on Auditing and Financial Disclosure
Not Applicable.
Item 9a. Controls and Procedures
Evaluation of Disclosure Controls
We evaluated the effectiveness of our disclosure controls and procedures (“Disclosure Controls”) as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”) as of the end of the period covered by this report. This evaluation (“Controls Evaluation”) was done with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).
Disclosure Controls are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Our management also evaluated, with the participation of our CEO and CFO, any change in our Disclosure Controls and determined that there were no changes in our Disclosure Controls during the quarter ended December 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, does not expect that our Disclosure Controls or our internal control over financial reporting (“Internal Control”) will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, but not absolute, assurance that the objectives of a control system are met. Further, any control system reflects limitations on resources, and the benefits of a control system must be considered relative to its costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within D&B have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of a control. A design of a control system is also based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
Conclusions regarding Disclosure Controls
Based upon our Controls Evaluation, our CEO and CFO have concluded that as of the end of the fourth quarter of our fiscal year ended December 31, 2004, the Disclosure Controls are effective in providing reasonable assurance that material information relating to D&B is made known to management on a timely basis during the period when our periodic reports are being prepared.
Management’s Report on Internal Control over Financial Reporting
Management’s report on Internal Control for Financial Reporting is incorporated herein by reference to page 62 of this Form 10-K
115
Change in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fourth quarter of 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9b. Other Information
Not applicable.
116
PART III
Item 10. Directors and Executive Officers of the Registrant*
Information concerning our executive officers is included in this report after Item 4, under the caption “Executive Officers of the Registrant.”
Code of Ethics and Corporate Governance
Our Corporate Governance Principles, Code of Conduct and the charters of our Audit, Board Affairs and Compensation & Benefits committees are available on our Web site and are available in print, without charge, to any shareholder upon request by contacting our Corporate Secretary, c/o The Dun & Bradstreet Corporation 103 JFK Parkway, Short Hills, New Jersey 07078-2708. Our website address is http://www.dnb.com.
We have adopted a Code of Conduct that applies to all of our directors, officers and employees (including our chief executive officer, chief financial officer and corporate controller) and have posted the Code of Conduct on our Web site. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K relating to amendments to or waivers from any provision of our Code of Conduct applicable to our chief executive officer, chief financial officer and corporate controller by posting this information on our Web site. Our Web site address is listed above.
The information on our Web site is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the SEC.
Because our common stock is listed on the New York Stock Exchange (“NYSE”), our chief executive officer is required to make, and he has made, an annual certification to the NYSE stating that he was not aware of any violation by us of the corporate governance listing standards of the NYSE. Mr. Allan Z. Loren who was our chief executive officer through December 31, 2004, made his annual certification to that effect to the NYSE as of May 25, 2004. In addition, we have filed, as exhibits to this Form 10-K, the certifications of our principal executive officer and principal financial officer required under Sections 906 and 302 of the Sarbanes Oxley Act of 2002 to be filed with the Securities and Exchange Commission regarding the quality of our public disclosure.
Item 11. Executive Compensation*
| Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters* |
The following table provides information as of December 31, 2004 regarding shares of our common stock that may be issued under our existing equity compensation plans.
Equity Compensation Plan Information
| | | | (A)
| | (B)
| | (C)
|
|---|
Plan Category
| | | | Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
| | Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
| | Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (A))
|
|---|
Equity compensation plans approved by
security holders(1) | | | | | 8,352,348(2 | ) | | $ | 28.03 | | | | 4,647,158(3 | ) |
| (1) | | This table includes information for two equity compensation plans adopted in connection with our separation from Moody’s. As of December 31, 2004, a total of 2,466,154 shares of D&B common stock were issuable upon exercise of outstanding options and other rights under those two plans. The weighted average exercise price of those outstanding options and other rights is $14.62 per share. No additional options or other rights may be granted under those two plans. |
117
| (2) | | Includes options for 8,300,473 shares of D&B common stock, restricted stock units for 45,129 shares of D&B common stock and deferred performance shares for 6,746 shares of D&B common stock. This amount does not include outstanding shares of restricted common stock of 122,150. |
| (3) | | Includes shares available for future purchases under our 2000 Employee Stock Purchase Plan (the “ESPP”). As of December 31, 2004, an aggregate of 1,000,275 shares of D&B common stock were available for purchase under the ESPP. |
Item 13. Certain Relationships and Related Transactions*
Item 14. Principal Accountant Fees and Services*
* Information regarding our Corporate Governance Principles, Code of Conduct and Committee Charters is set forth in Item 10 of this Form 10-K. Information regarding our equity compensation plans is set forth under Item 12. All other information called for by Items 10-14 will be contained in our definitive proxy statement for use in connection with our annual meeting of shareholders scheduled to be held on May 3, 2005. Such information is incorporated into this Form 10-K by reference. Such incorporation by reference shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a)(8) of Regulation S-K.
118
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) List of documents filed as part of this report.
| | See Index to Financial Statements and Schedules in Part II, Item 8 of this Form 10-K. |
| | (2)Financial Statement Schedules.
|
(b) Exhibits.
See Index to Exhibits on pages 121 to 125 of this Form 10-K.
119
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 11, 2005.
| | | THE DUN & BRADSTREET CORPORATION
(Registrant)
|
| | By: | /s/ STEVEN W. ALESIO |
| | | STEVEN W. ALESIO
President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on March 11, 2005.
| /s/ ALLAN Z. LOREN | | Director and Chairman of the Board |
| Allan Z. Loren | |
| | | |
| /s/ STEVEN W. ALESIO | | Director, President and Chief Executive Officer (principal executive officer) |
| Steven W. Alesio | |
| | | |
| /s/ MARY JANE RAYMOND | | Corporate Controller (principal accounting officer) |
| Mary Jane Raymond | |
| | | |
| /s/ SARA MATHEW | | Chief Financial Officer (principal financial officer) |
| Sara Mathew | |
| | | |
| /s/ JOHN W. ALDEN | | Director |
| John W. Alden | |
| | | |
| /s/ CHRISTOPHER J. COUGHLIN | | Director |
| Christopher J. Coughlin | |
| | | |
| /s/ JAMES N. FERNANDEZ | | Director |
| James N. Fernandez | |
| | | |
| /s/ RONALD L. KUEHN, JR. | | Director |
| Ronald L. Kuehn, Jr. | |
| | | |
| /s/ VICTOR A. PELSON | | Director |
| Victor A. Pelson | |
| | | |
| /s/ SANDRA E. PETERSON | | Director |
| Sandra E. Peterson | |
| | | |
| /s/ MICHAEL R. QUINLAN | | Director |
| Michael R. Quinlan | |
| | | |
| /s/ NAOMI O. SELIGMAN | | Director |
| Naomi O. Seligman | |
120
INDEX TO EXHIBITS
Regulation
S-K
Exhibit
Number
| | | |
|---|
| 3. | | | | Articles of Incorporation and By-laws |
| 3.1 | | | | Restated Certificate of Incorporation of the Registrant, as amended effective October 1, 2000 (incorporated by reference to Exhibit 3.1 to Registrant’s Report on Form 8-K, file number 1-15967, filed October 4, 2000). |
| 3.2 | | | | Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to Registrant’s Registration Statement on Form 10, file number 1-15967, filed June 27, 2000). |
| 4. | | | | Instruments Defining the Rights of Security Holders, Including Indentures |
| 4.1 | | | | Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form 10, file number 1-15967, filed September 11, 2000). |
| 4.2 | | | | Rights Agreement, dated as of August 15, 2000, between the Registrant (f.k.a. The New D&B Corporation) and EquiServe Trust Company, N.A., as Rights Agent, which includes the Certificate of Designation for the Series A Junior Participating Preferred Stock as Exhibit A thereto, the Form of Right Certificate as Exhibit B thereto and the Summary of Rights to Purchase Preferred Shares as Exhibit C thereto (incorporated by reference to Exhibit 1 to the Registrant’s Registration Statement on Form 8-A, file number 1-15967, filed September 15, 2000). |
| 4.3 | | | | Five-Year Credit Agreement, dated September 1, 2004, among The Dun & Bradstreet Corporation, the Borrowing Subsidiaries Party thereto, JPMorgan Chase Bank, as Administrative Agent, Bank of Tokyo-Mitsubishi Trust Company and Citicorp USA, Inc., as Syndication Agents, The Bank of New York and Suntrust Bank, as Documentation Agents and the Lenders Party thereto (incorporated by reference to Exhibit 4.1 to Registrant’s Report on Form 8-K, file number 1-15967, filed September 3, 2004). |
| 4.4 | | | | Indenture dated as of March 22, 2001 by and between the Registrant and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4.1 to Registrant’s Quarterly Report on Form 10-Q, file number 1-15967, filed May 15, 2001). |
| 4.5 | | | | Forms of 6.625% Senior Notes due 2006 (incorporated by reference to Exhibit 4.2 to Registrant’s Quarterly Report on Form 10-Q, file number 1-15967, filed May 15, 2001). |
| 10. | | | | Material Contracts |
| 10.1 | | | | Distribution Agreement, dated as of September 30, 2000, between Moody’s Corporation (f.k.a. The Dun & Bradstreet Corporation) and the Registrant (f.k.a. The New D&B Corporation) (incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 8-K, file number 1-15967, filed October 4, 2000). |
| 10.2 | | | | Tax Allocation Agreement, dated as of September 30, 2000, between Moody’s Corporation (f.k.a. The Dun & Bradstreet Corporation) and the Registrant (f.k.a. The New D&B Corporation) (incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 8-K, file number 1-15967, filed October 4, 2000). |
| 10.3 | | | | Employee Benefits Agreement, dated as of September 30, 2000, between Moody’s Corporation (f.k.a. The Dun & Bradstreet Corporation) and the Registrant (f.k.a. The New D&B Corporation) (incorporated by reference to Exhibit 10.3 to the Registrant’s Report on Form 8-K, file number 1-15967, filed October 4, 2000). |
| 10.4 | | | | Undertaking of the Registrant (f.k.a. The New D&B Corporation), dated September 30, 2000, to Cognizant Corporation and ACNielsen Corporation (incorporated by reference to Exhibit 10.9 to the Registrant’s Report on Form 8-K, file number 1-15967, filed October 4, 2000). |
121
Regulation
S-K
Exhibit
Number
| | | |
|---|
| 10.5 | | | | Undertaking of the Registrant (f.k.a. The New D&B Corporation), dated September 30, 2000, to R.H. Donnelley Corporation (incorporated by reference to Exhibit 10.10 to the Registrant’s Report on Form 8-K, file number 1-15967, filed October 4, 2000). |
| 10.6 | | | | Distribution Agreement, dated as of June 30, 1998, between R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation) and Moody’s Corporation (f.k.a. The New Dun & Bradstreet Corporation) (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of Moody’s Corporation, file number 1-14037, filed August 14, 1998). |
| 10.7 | | | | Tax Allocation Agreement, dated as of June 30, 1998, between R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation) and Moody’s Corporation (f.k.a. The New Dun & Bradstreet Corporation) (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q of Moody’s Corporation, file number 1-14037, filed August 14, 1998). |
| 10.8 | | | | Employee Benefits Agreement, dated as of June 30, 1998, between R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation) and Moody’s Corporation (f.k.a. The New Dun & Bradstreet Corporation) (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q of Moody’s Corporation, file number 1-14037, filed August 14, 1998). |
| 10.9 | | | | Distribution Agreement, dated as of October 28, 1996, among R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation), Cognizant Corporation and ACNielsen Corporation (incorporated by reference to Exhibit 10(x) to the Annual Report on Form 10-K of R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation) for the year ended December 31, 1996, file number 1-7155, filed March 27, 1997). |
| 10.10 | | | | Tax Allocation Agreement, dated as of October 28, 1996, among R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation), Cognizant Corporation and ACNielsen Corporation (incorporated by reference to Exhibit 10(y) to the Annual Report on Form 10-K of R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation) for the year ended December 31, 1996, file number 1-7155, filed March 27, 1997). |
| 10.11 | | | | Employee Benefits Agreement, dated as of October 28, 1996, among R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation), Cognizant Corporation and ACNielsen Corporation (incorporated by reference to Exhibit 10(z) to the Annual Report on Form 10-K of R.H. Donnelley Corporation (f.k.a. The Dun & Bradstreet Corporation) for the year ended December 31, 1996, file number 1-7155, filed March 27, 1997). |
| 10.12 | | | | Amended and Restated Indemnity and Joint Defense Agreement among the Registrant, VNU, N.V., VNU, Inc. ACNielsen Corporation, AC Nielsen (US), Inc., Nielsen Media Research, Inc., R.H. Donnelley Corporation, Moody’s Corporation and IMS Health Incorporated (incorporated by reference to Exhibit 10.12 to the Registrant’s Quarterly Report on Form 10-Q, file number 1-15967, filed August 4, 2004). |
| 10.13 | | | | Amended and Restated Agreement of Limited Partnership of D&B Investors L.P., dated April 1, 1997 (incorporated by reference to Exhibit 10.14 to the Quarterly Report on Form 10-Q of Moody’s Corporation, file number 1-14037, filed August 14, 1998). |
| 10.14 | | | | D&B Guaranty, dated as of April 1, 1997, given by The Dun & Bradstreet Corporation in favor of Utrecht-America Finance Co. and Leiden Inc. (as assumed by the Registrant) (incorporated by reference to Exhibit 10.19 to the Registrant’s Quarterly Report on Form 10-Q, file number 1-15967, filed November 14, 2000). |
| 10.15† | | | | The Dun & Bradstreet Executive Transition Plan (incorporated herein by reference to Exhibit 10.20 to the Registrant’s Quarterly Report on Form 10-Q, file number 1-15967, filed November 14, 2000) (incorporated by reference to Exhibit 10.20 to the Registrant’s Quarterly Report on Form 10-Q, file number 1-15967, filed November 14, 2000). |
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| 10.16† | | | | Forms of Change in Control Severance Agreements (incorporated by reference to Exhibit 10.21 to the Registrant’s Quarterly Report on Form 10-Q, file number 1-15967, filed November 14, 2000). |
| 10.17† | | | | Pension Benefit Equalization Plan of The Dun & Bradstreet Corporation (incorporated by reference to Exhibit 10.22 to the Registrant’s Quarterly Report on Form l0-Q, file number 1-15967, filed November 14, 2000). |
| 10.18† | | | | Supplemental Executive Benefit Plan of The Dun & Bradstreet Corporation (incorporated by reference to Exhibit 10.23 to the Registrant’s Quarterly Report on Form 10-Q, file number 1-15967, filed November 14, 2000). |
| 10.19† | | | | Profit Participation Benefit Equalization Plan of The Dun & Bradstreet Corporation (incorporated by reference to Exhibit 10.24 to the Registrant’s Quarterly Report on Form 10-Q, file number 1-15967, filed November 14, 2000). |
| 10.20† | | | | Employment Agreement, dated May 15, 2000, by and between Moody’s Corporation (f.k.a. The Dun & Bradstreet Corporation) and Allan Z. Loren (as assumed by the Registrant) (incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form 10/A-3, file number 1-15967, filed September 14, 2000). |
| 10.21† | | | | The Dun & Bradstreet Career Transition Plan (incorporated by reference to Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K, file number 1-15967, filed March 4, 2002). |
| 10.22† | | | | 2000 Dun & Bradstreet Corporation Replacement Plan for Certain Directors Holding Dun & Bradstreet Corporation Equity-Based Awards (incorporated by reference to Exhibit 10.27 to the Registrant’s Quarterly Report on Form 10-Q, file number 1-15967, filed November 14, 2000). |
| 10.23† | | | | 2000 Dun & Bradstreet Corporation Replacement Plan for Certain Employees Holding Dun & Bradstreet Corporation Equity-Based Awards (incorporated by reference to Exhibit 10.28 to the Registrant’s Quarterly Report on Form 10-Q, file number 1-15967, filed November 14, 2000). |
| 10.24† | | | | The Dun & Bradstreet Corporation 2000 Stock Incentive Plan (as amended and restated June 20, 2001) (incorporated by reference to Exhibit 10.29 to the Registrant’s Quarterly Report on Form 10-Q, file number 1-15967, filed August 1, 2001). |
| 10.25† | | | | 2000 Dun & Bradstreet Corporation Non-Employee Directors’ Stock Incentive Plan (incorporated by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K, file number 1-15967, filed February 21, 2001). |
| 10.26† | | | | The Dun & Bradstreet Corporation Nonfunded Deferred Compensation Plan for Non-Employee Directors (as assumed by the Registrant) (incorporated by reference to Exhibit 10.18 to Moody’s Corporation Quarterly Report on Form 10-Q, file number 1-14037, filed October 20, 1999). |
| 10.27† | | | | Form of Limited Stock Appreciation Rights Agreement (incorporated by reference to Exhibit 10.25 to Moody’s Corporation Quarterly Report on Form 10-Q, file number 1-14037, filed August 14, 1998). |
| 10.28† | | | | The Dun & Bradstreet Corporation Covered Employee Cash Incentive Plan (incorporated by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K, file number 1-15967, filed February 21, 2001). |
| 10.29† | | | | The Dun & Bradstreet Corporation Cash Incentive Plan (incorporated by reference to the Registrant’s Annual Report on Form 10-K, file number 1-15967, filed February 21, 2001). |
| 10.30† | | | | Form of Detrimental Conduct Agreement (incorporated by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K, file number 1-15967, filed March 4, 2002). |
| 10.31† | | | | Amendment to Employment Agreement, dated December 31, 2004, between Allan Z. Loren and the Company (incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 8-K, file number 1-15967, filed January 4, 2005). |
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| 10.32† | | | | Key Employees’ Non-Qualified Deferred Compensation Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q, file number 1-15967, filed May 6, 2002). |
| 10.33† | | | | Employment Agreement, dated December 31, 2004, between Steven W. Alesio and the Company (incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 8-K, file number 1-15967, filed January 4, 2005). |
| 10.34 | | | | Technology Services Agreement between the Registrant and Computer Sciences Corporation, dated June 27, 2002 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, file number 1-15967, filed August 13, 2002). |
| 10.35† | | | | 2005 and 2004 Non-Employee Director Compensation Program (incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 8-K, file number 1-15967, filed December 8, 2004). |
| 10.36† | | | | Form of Restricted Share Unit Award Agreement under the 2000 Non-employee Directors’ Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 8-K, file number 1-15967, filed December 8, 2004). |
| 10.37† | | | | The Dun & Bradstreet Corporation 2000 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K, file number 1-15967, filed March 28, 2003). |
| 10.38† | | | | Form of Restricted Stock Award Agreement under the 2000 Employee Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Report on Form 8-K, file number 1-15967, filed March 2, 2005). |
| 10.39† | | | | Form of Stock Option Award Agreement under the 2000 Employee Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Report on Form 8-K, file number 1-15967, filed March 2, 2005). |
| 10.40† | | | | Form of Restricted Stock Unit Award Agreement under the 2000 Employee Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Report on Form 8-K, file number 1-15967, filed March 2, 2005). |
| 10.41† | | | | Form of Stock Option Award Agreement under the 2000 Non-employee Directors’ Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Report on Form 8-K, file number 1-15967, filed March 2, 2005). |
| 10.42† | | | | Form of Restricted Stock Unit Award Agreement under the 2000 Non-employee Directors’ Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Report on Form 8-K, file number 1-15967, filed March 2, 2005). |
| 10.43* | | | | Business Process Services Agreement made and effective as of October 15, 2004 by and between the Company and International Business Machines Corporation. This Exhibit has been redacted pursuant to a confidentially request under Rule 24(b)-2 of the Securities Exchange Act of 1934, as amended. |
| 21. | | | | Subsidiaries of the Registrant |
| 21.1* | | | | List of Active Subsidiaries as of December 31, 2004. |
| 23. | | | | Consents of Experts and Counsel |
| 23.1* | | | | Consent of PricewaterhouseCoopers LLP. |
| 31. | | | | Rule 13a-14(a)/ 15(d)-14(a) Certifications |
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| 31.1* | | | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31.2* | | | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32. | | | | Section 1350 Certifications |
| 32.1* | | | | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2* | | | | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| † | | Represents a management contract or compensatory plan. |
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